: Adam Smith And Karl Mark: Contrasting Views Of Capitalism

The theory of capitalism describes the essential features of capitalism and how it functions. Adam Smith focused his theories on the role of enlightened self-interest "led by an invisible hand" or incorrectly "the invisible guiding hand", and the role of specialisation in promoting the efficiency of capital accumulation. Some proponents of capitalism emphasize the role of free markets, which, they claim, promote freedom and democracy. For many, capitalism hinges on the extension into a global dimension of an economic system in which goods and services are traded with others and capital goods belong to private ownership. To Karl Marx defined capitalism by the creation of a labor market in which most people have to sell their labor in order to make a living. As Marx stated, capitalism also differs from other market economies that feature private ownership through the concentration of the means of production in the hands of a few.

Adam Smith was the first theorist of what we commonly refer to as capitalism. His 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith theorized that within a given stable system of commerce and evaluation, individuals would respond to the incentive of earning more by specializing their production. These people would, without specific state intervention, "direct ... that industry in such a manner as its produce may be of the greatest value." This would enable the whole economy to become more productive, and it would therefore be wealthier. Smith stated that protecting particular producers would lead to inefficient production, and that a national hoarding of cash in the form of coinage would only increase prices.

Smith states that when people make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable item. This notion underlies the concept of mutually-beneficial trade where it is held that both sides tend to benefit by an exchange.

Although Smith is often described as the "father of capitalism" Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty." However, Smith defined "capital" as stock, and "profit" as the just expectation of retaining the revenue from improvements made to that stock. Smith also viewed capital improvement as being the proper central aim of the economic and political system.

A major difference between Adam Smith's view of economics and that of present day capitalist theory is that Adam Smith viewed value as a product of labor, and thus operated under the Labor Theory of Value, which was used by basically all economists until the Labor Theory of Value became central to Marxism.

According to Marx, the treatment of labor as a commodity led to people valuing things more in terms of their price rather than their usefulness, and hence to an expansion of the system of commodities. Marx also observed that some people bought commodities in order to use them, while others bought them in order to sell them on at a profit.

Marx defines "capital" as money and "capitalist production" as the use of money to denominate wealth in money terms; these labels refer to John Stuart Mill's definition of value in a market economy as being the going