To begin with, Smith came up with the concept of the ‘invisible hand’ (Communist (1848)). This concept was to explain that seeking self interest is not necessarily bad but it sought to explain the reality that people tend to act in their own self-interests. When individuals pursue their self interests, they promote without their knowledge the good of the community at large and so it can be said that an individual who wants to maximize their revenue maximizes the revenue of the society too.
This liberty to customers to buy freely what they want and for the producers to produce what they want without any pressure enables the market to settle on a product distribution and prices that are beneficial to all individual members of the community. This liberty to both producers and consumers and the greed to maximize their interests, drives them into a behavior that is beneficial to all in that particular community. Due to this, producers are forced to employ methods of production that are efficient with an aim o maximize their profits.
This leads to low prices that are meant to out do their competitors and this forces investors to go for firms that wants to maximize their profits and hence this works as mechanism of balancing.
The invisible hand concept acts as the root of modern economics. A good example is the general equilibrium which states that if the economic forces are balanced in the absence of external influences, then the economic variables will not change. This requires that everything in the market beginning with pricing to production be controlled by the players in the market but not by other forces.
These external forces may include among others the regulations that are imposed by the government or other organizations that may have a say on the market. According to the general equilibrium, when the prices are very low, then there is surplus supply and when the prices are very low, then there’s a shortage in supply. As a result of this, the situations tend to control themselves without the need for any regulator from outside. These outside forces in the market slow the rate at which the economy grows and they also lead to infancy in the division of labor. As a result of that need for self improvement, efficient division of labor is realized as well as improved efficiency in the economy. This concept is very much in use even in today’s economy .
The modern market structure borrows greatly from the earlier ideas of natural monopoly by Adam Smith.( The Poverty of Philosophy >human nature)
The division of labor
Division of labor is a clear indication of qualitative step towards increased productivity and so it acts as an engine that drives towards realization of economic progress. Smith realized that labor division and for that matter labor specialization would improve greatly on the concentration of workers on the duties they perform. This concentration would come as a result of doing a single task many times or repetitively.
The need for improvements in productivity of the work force is said to be the root cause for labor division. According to Smith, labor division can lead to increased productivity. This productivity from the workers can be attributed to specialization in one task since specialization leads to greater skill on their particular subtasks compared to what would be accomplished by the same number of workers performing a broad task. For maximum productivity from workers, skills that they have should be matched with the corresponding equipments. Most of today’s increase in productivity can be attributed to the matching of technological, human and physical capital and mostly in the manner in which they are organized. This means that laborers need to be equipped with the right skills so as to be effective in what they do compared to when there would be no job specialization and hence anybody could perform any job.
Todays economics has borrowed greatly from these ideas from Adam smith. Many organization have realized the need to equip their employees and some even hire unskilled ones but pay for their acquisition of skills. Another outcome of labor division according to Adam smith is minimization of time that is wasted by employees when moving from one task to the other. A lot of time is wasted when people keep on relocating and this proves expensive to the company in the long run because they have to pay the employees. Through labor division, this time wastage is minimized .
The modern concept of scientific management borrows greatly from Adam Smiths ideas .Scientific management emphasizes on the connection between activities and the transformation that occurs within the process. This is also supported by William Petty who notes and demonstrates its importance in the construction of Dutch ships.
He admits that people with a particular task to perform had discovered new ways of doing their work which were later observed and justified by political writers on economy. (An Inquiry into the Nature and Causes of the Wealth of Nations (1776)> specialisation)
The wages of labor
Wages of labor are dictated by mostly by the availability of job vacancies and also by the availability of workforce. When there are many workers and the available vacancies are few, the amount of money the workers are paid usually fall. Likewise, when employers compete against one another and the labor supply is limited, the wages paid to the employees usually rises but its worthy noting that this process is made possible by unity among laborers and masters. This kind of unity enables laborers to come together and stop biding for jobs against each other hence making the employers increase the wages paid to them.
Likewise when employers come together in unity and stop binding against each other, the wages fall. However, in places where the amount of labor is more compared to the amount of the amount of revenue that can used to pay for waged labor, the competition among the employees in greater than the competition between the employers. Smith argues that the amount of revenue must keep on increasing constantly compared to the amount of labor so that wages may remain high. Profits of stock too have an impact on the wages because the more money is spent on compensating labor; little is left for personal profit. This is clearly shown in countries where competition amongst employees is great compared to competition among employers, profits will be much higher.
Due to these views, Smith attacks people who are politically aligned and try to use their political influence to manipulate the government and other powers into their bidding. Smith feared that people of this class could form a powerful block and take advantage of their closeness with the authorities into manipulating the state into enforcing certain regulations meant to serve their interests against the general interests. These would maker other players vulnerable and have no say in the way businesses were being conducted. According to other people the level of specialization brought about by division of labor was externally determined but in the contrary, Smith argued that it was the dynamic engine towards economic progress.
Surprisingly, Smith himself criticizes the division of labor arguing that it leads to mental mutilation of the workers hence rendering them ignorant and insular because their lives are limited only to doing a single task many times. These ideas by Smith are incorporated into today’s discussions on economic issues. Human capital is one of the discussions in which Adams Smiths ideas are used. Human capital is one of the four types of capital that were identified by Adam as being important for the success of a company. As argued by Smith previously, human capital and the productive ability of the labor force is both dependant on the division of labor. It’s worthy noting that human capital includes skills, dexterity, and the ability to make the right decisions and human capital can be acquired through informal schooling and on the so called on-the-job training. These acquisitions of skills aimed at improving the effectiveness of the workforce are still practiced today by many companies. (An Inquiry into the Nature and Causes of the Wealth of Nations (1776) > productivity)
Adam Smith vs Karl Marx
Both Adam Smith and Karl Marx shared a common idea and this common idea was their praise for capitalism .These two early pioneers of modern economics agreed that capitalism was the key in unleashing the productive powers. This argument stated that for the employees to be more productive, they needed to be subject to their bosses or seniors. If the employees were left to work at their own leisure these two men agreed that their productivity would be minimal and as a result, their employers would incur big losses. This created the need for competition among both the employers and the employees as well since this would keep these two parties on their feet through out. But despite these similarities in their in their views, there was differences in their ideas as well.
Marx and Smith both seem to agree that capitalism is the ultimate driving force in profit maximization .New profits and value added, they seem to agree came as result of the employers paying the workers the exact value that is in the market for their labor capacity. But the sad thing was that in most cases, the market value of the goods which the workers produced exceeded that market value. This clearly means that the employers were making maximum profits while paying little to their workers. Both Marx and Smith agree that there are different types of capital and they play different roles during production.
Production Capitals include things like land, natural resources or raw materials and lastly technology. All the above named different classes of capital were dependant on each other in production. These two men seemed to agree also that social relations of production should not only be made up of relationships between individuals but rather should be between large groups of people or certain classes of people. These two men had the same idea of a free market. They described a free market as a market in which all prices of the goods that are on offer are decided by mutual consent between sellers and buyers and also one that did not mislead both the sellers as well as the buyers.
They both argued that these two major people in the market, the buyer and the seller, should not be forced into making decision by an external party. The relationship between these two players should not be manipulated by any one but to the contrary, it should be left to obey the natural law of supply and demand. The difference between free and controlled markets is that controlled markets are controlled by external forces These forces mostly refers to governments which may directly or indirectly try to have control of prices or the supplies in the market. One area where these two men seem to differ is their idea of job specialization.
Smith advocates for specialization for jobs among workers. He argues that laborers who were assigned too many different duties were less productive than those who were assigned a specific task to perform day in day out. He says that this leads to efficient usage of time and it seeks to save time that is usually wasted by workers when moving from one task to another. But to the contrary, Karl Marx disapproves this idea arguing that job specialization could result to workers with more poor overall skills.
This, as he says would be brought about by tendency of people to resist change. He also says that when people perform one task repeatedly, it may lead to boredom and make them less enthusiastic about their work. He describes this whole process as a kind of alienation. According to him, the more workers become specialized and do the same thing over and over, they later become totally alienated. Marx goes ahead to argue that division of labor brings with it spiritual depression to the workers. This means that the workers perform their duties feeling as if they are being forced other than doing out of their own will .This greatly lowers the morale of the workers and as a result lower their productivity.
Physical tiredness or fatigue can be brought about by job specialization as Marx goes ahead to argue since they no longer feel like human beings but they feel more of machines. Contrary to the idea of Smith, Marx believes that fullness of production is very essential to human liberation goes on to say that he would accept the idea of a strict division of labor as a temporary necessary evil.
These views can be said to be in total contrast to those expressed by Smith. Smith on his part believed that any business was a collection of inter related tasks that were aimed at solving a particular issue. So as to effectively do this, Smith argued that the workload should be divided into simple sets of tasks which could be done effectively by workers who were equipped with special skills for doing that particular job. It’s worthy noting that Smith, despite his advocating for division of labor, he does not advocate for achievement of labor division at all costs. It’s worthy noting that in contrast to Smith’s view which were only limited to functional domain only and were made up of activities that were direct in sequence as far as the manufacturing process is concerned, modern processes are very inclusive. It was as a result of his ideas that labor division was adopted. Today, we can clearly say that much of today’s practices in the job markets have borrowed greatly from the ideas of Smith. In all organization, there is job specialization.
This has led to the rise of departments in many organizations and each department is allocated certain workers who are in most cases equipped with certain skill to enable them perform specific duties .The sense in this whole exercise as argued by Smith is that it saves a great deal of time that could be wasted by employees when moving from one task to another. This proves very essential since no employer will want to waste his money employees without maximizing their productivity.
However, it is good to note that Smith admits that seeking self interests is not always good. All he tried to do was trying to reverse believe that self interest is generally bad. He also intended to bring to the light the idea that wile human motives are selfish and greedy; the out come of these human behaviors would bring benefits to the whole community at large.
This is the direct opposite of the ideas that Marx had .In his arguments; Marx says that the major struggles are always between the producers and those who work in the industries. Another of his greatest contribution to modern economics was his sharp distinction between the two types of division namely social and economic division of labor .If these two labor divisions are conflated, it might look as if labor division is inevitable rather than being constructed socially and influenced by power. (Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776) & Karl Marx, The Poverty of Philosophy).
Edwin G. West, (1976)The Man and His Wor