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I am not going to refer to any existing literature, but draw your attention to an
interesting point.
Smith and Marx both saw the economy as a mechanism, and understood the mechanism as
embodying laws of nature. For Smith, the market mechanism is a self-regulating one. It is
internally self-consistent. The pursuit of self-interest is a metaphor to refer to a
natural propensity of the economic man. Because it is natural, it does not raise a moral
issue.
Smith was a professor of moral philosophy. He understood very well the hue and cry that
the term pursuit of self-interest would generate. So he countered it with a stroke of
genius: the invisible hand makes sure that the interests are reconciled, so that even
though each man pursues his self-interest, he ends up contributing to the greater good of
society. The notion of unintended consequences is central to this. The key is: it is
natural for the mechanism to generate these unintended (beneficial) consequences.
Marx also sees society as a natural phenomena, but reverses the role of human intentions.
In Smith, the human intention is not really subjective, that is, the economic man of Smith
has no real power of agency to upset the equilibrium. But in Marx, the intention of the
capitalist is able to upset the balance. The inherent contradiction in the Marxian market
economy lies in the potency of the capitalist, who can keep the market equilibrium at bay.
That is, Marx is giving human intention a potency that is lacking in Smith.
On the surface, Marx does not see an automatic reconciliation of self-interest, and feels
the need for a deliberate proletarian revolution to rescue it from its inherent inability
to reach a peceful equilibrium. Marx then goes outside the realm of economic analysis and
invites political philosophy.
In my personal view, Smith is a better theorist than Marx. Smith has a consistent
characterization of the market mechanism, but Marx does not. Smith sees the operation of
self-interest in a natural way, but Marx discovers unnatural elements. He wants to see it
as a mechanism, but he does not describe the mechanism properly. In simpler words, Marx
does not have a good description of the process of voluntary exchange. And his description
of the process of creation of value through exchange is not clear. He sees plunder where
there is trade.
The real problem that both Marx and Smith leave undiscovered is the character of two
social institutions and their interaction. The state is an institution deliberately
created by humans to provide collective self-defense against all forms of harm from others
(foreign aggressors, domestic criminals, and even unfavorbale acts of nature). The market
is a separate institution, also deliberately created by humans, to permit them to engage
in mutually beneficial acts of trade. The market is a tool to meet the needs of self-
sustenance while the state is a tool to meet the needs of self-defense.
The state has no obvious economic role as a producer or consumer, seller or buyer. It is
not possible to define the state's economic self-interest. It has a political mandate to
protect the weak from the plunder and fraud of the strong. Marx underrates the market and
Smith underrates the state.
I hope this does not start a controversy.
M Gani
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