Adam Smith (1723-1790) Laissez-faire capitalism Adam Smith wrote The Wealth of Nations in 1776. He is known as “the father of capitalism”. Smith felt that capitalism was the best economic system because everyone follows their selfinterest – choosing their jobs, which products they buy, and how to run their own businesses. He agreed with the theory of laissez-faire. Laissez-faire means that the government should not make regulations (laws) for how businesses treat workers or make goods. Smith thought that if capitalism caused problems, they would be fixed by supply and demand. For example: Problem Consumers demand a product that does not exist A business sells a product that makes consumers sick or hurt A business pays low wages and workers don’t have enough money Workers get hurt by machines in a factory Capitalist solution A capitalist will open a business to make that product Consumers will stop buying the product, and the business will lose money and be forced to fix the problem Workers will quit that job and find a business that does pay them higher wages, so the first business will be forced to change in order to have enough workers The capitalist who owns the business will lose money since his workers are hurt and cannot work, so he will decide to make it safer Adam Smith thought that government should only be responsible for the following things: The first duty of the sovereign [government] is protecting the society from the violence and invasion of other independent societies by means of a military force…The second duty of the sovereign [government] is protecting every member of the society from the injustice or oppression of every other member of it…The third and last duty of the sovereign [government] is that of creating and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual, or small number of individuals; and which it, therefore, cannot be expected that any individual, or small number of individuals, should erect or maintain (fire departments, police, the post office, building roads and bridges and tunnels). Source: Adam Smith. The Wealth of Nations. 1776 (adapted) But Adam Smith died in 1790. He did not see many of the negative effects that resulted because of the Industrial Revolution through extreme crowding in cities (urbanization), pollution in the air or water, child labor, and piles of waste or garbage. Many people today use Adam Smith’s ideas to prove that the government should lower taxes and not pay for public services, not pay for any welfare, and have fewer rules for businesses because all those rules make it hard to run a business. Karl Marx (1818-1883) Socialism/Communism Karl Marx wrote The Communist Manifesto (with Friedrich Engels) and Das Capital (by himself). He criticized capitalism because it allowed the rich to harm the poor. He called the rich the bourgeoisie and he called the lower classed the proletariat. He also used the terms “haves” and “have-nots” for the rich and the poor. The bourgeoisie harmed the proletariat in many ways: ● Businesses don’t pay workers enough money. They often replace workers with machines. They have unsafe factories, because safety features cost a lot of money. ● Businesses create products that consumers don’t need, but consumers still buy them and waste their money. “In place of the old wants, that were supported by the production of your town, we find new wants, that require products from distant lands and climates.” – Karl Marx. Das Capital, 1867 (adapted) ● Businesses force workers to move to neighborhoods and cities that become so crowded that people are living in horrible conditions: “As a result of capitalism, the housing of an industrial town may today be ok, but tomorrow could be horrible. Laborers live everywhere, even basements and attics, and they become degraded, they get sick, and they die because of their housing.” – Karl Marx. Das Capital, 1867 (adapted) ● Businesses put garbage and waste from factories into the land, rivers, and oceans because it’s cheaper than paying to recycle garbage or make a factory cleaner. “Capitalism changes the interaction between man and the earth, because the elements we extract from the earth are never returned to the soil; so capitalism encourages man to destroy the earth so that it cannot continue to survive” – Karl Marx, Das Capital, 1867 (adapted) Marx thought that the best economic system was called “socialism” where the government makes laws to control businesses and stop them from hurting workers and consumers. In socialism, the government also helps unemployed and poor people with welfare and medical care. Marx believed that laws for businesses were necessary to prevent big crashes and recessions and also take care of people who were harmed by businesses by giving them welfare. Marx believed that socialism would eventually develop into an economy called communism when the proletariat (workers) united to overthrow the bourgeoisie and control the economy themselves through their government. In a communist economy, the government would: 1) Own all the land and rent it to individuals 2) Charge higher taxes if you’re rich and less taxes if you’re poor 3) Take people’s money when they die so they can’t give it to their children 4) Take people’s property if they move out of the country or rebel against the government 5) Be the only bank, so people and businesses have to borrow from the government 6) Control all the transportation (railroads) and communication (post offices) in the nation 7) Own many of the factories and make laws for how farmers should grow food 8) Make laws that protect everyone equally in their jobs 9) Force people to move so they are not crowded into cities 10) Provide free public education to all children and not allow child labor Study Questions 1. From Adam Smith’s perspective, why was capitalism the most effective economic system? 2. How is self-interest related to capitalism? 3. How does the theory of laissez-faire work? 4. Write three sentences in your own words to explain how and why capitalists believe their economic system benefits society. 5. What are 3 things that Adam Smith thought the government should be responsible for? 6. In what ways did Karl Marx think that the bourgeoisie (upper class, business owners, rich people) mistreated the proletariat (lower class, workers, poor people)? 7. How did Marx believe that the ways capitalism and businesses operated affected living conditions or quality of life for workers? 8. What did Marx say the effects of capitalism were on the natural environment (oceans, land, rivers)? 9. Why did Marx think that the government should create and enforce laws over how businesses function? 10. Write three sentences in your own words to explain how and why socialists believe their economic system benefits society. 11. Based on the bottom section of page two, chose three of the ten things Marx thought a communist should do to control the economy. Explain why you think these actions would be good or bad for a society and how so. 12. Which of the three economic systems mentioned above (capitalism, socialism, communism) would you most prefer to live within? Why?
