13.3: Capitalism and Communism

The Economics of the Hunt

In the words of economic historian Roger Backhouse, “Economics does not have a beginning or a ‘founder’; people have always thought about questions that we now consider part of economics.” For example, the earliest humans spent lots of energy tracking and killing large game, which would need to be distributed. Then, each individual would decide to conserve or use. Even without developed cultural, commercial, or legal systems, effective economic decision-making was often imperative for survival.

As hunter-gatherer groups coalesced into more organized societies, decisions about distributing resources and designating jobs became more complex. For many thousands of years, people worked according to “custom” (doing work that was passed down from previous generations) or “command” (working to avoid violence or other retribution). The blacksmith in medieval Europe, the farmer in India, and the pyramid-building slave in Egypt did not work to advance their own goals, dreams, or prosperity.

Early economies were also marked by an ambivalent attitude toward money and the pursuit of wealth for its own sake. Those who worked with money (merchants, lenders, and even craftsmen with specialized skills) were often viewed suspiciously and sometimes even punished for innovating within their trades. Consequently, skills and technology advanced gradually and similar jobs and standards extended across many generations.

Around 1500 CE, several drastic changes were set in motion. Overseas trade established new networks and boosted collective learning and commercialization. Globally traded currency created an easily recognizable and transferrable store of wealth and medium for exchange. Individual markets, once physical places for the simple exchange of goods, began merging to create the market system. By the 1600s and 1700s, custom and command ceased to exert as much influence as the pursuit of wealth. Rather than survival, obedience, or tradition, it was “the lure of gain...[that] steered the great majority to his or her task” (Heilbroner, p. 21). It was in this era, on the verge of the Industrial Revolution, that Adam Smith lived and worked.

Adam Smith

When Adam Smith (1723–1790) was born in Scotland, industrialization and a profit-driven market system were replacing custom and command-driven economic systems across Europe. These changes reflected the intellectual shift toward rationality, progress, liberty, and secularism, generally referred to as the Enlightenment.

An undated etching of Adam Smith, public domain.

As a professor and lecturer, private tutor to the children of European royalty, government economic adviser, and a customs commissioner for Scotland, Smith had a comprehensive understanding of economics, which was captured most powerfully in An Inquiry Into the Nature and Causes of the Wealth of Nations, better known (and referred to hereafter) as The Wealth of Nations.

Composed at the dawn of the Industrial Revolution, The Wealth of Nations describes a world increasingly dominated by commerce and capitalism. Here, Smith gives his observations of a visit to a pin-making factory:

One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations.... [An average factory of ten workers] could make among them upwards of forty-eight thousand pins in a day. Each person, therefore...might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day. (The Wealth of Nations, p. 10)

In other words, the division of labor enabled one man to be as much as 4,800 times more productive than if he worked alone! In addition, Smith argued that people have a natural drive to improve their own lives. This self-interest propels markets to satisfy individual demands by producing the goods and services people want. He called this the “invisible hand”.

He suggested that competition between businesses prevents the exploitation of consumers by ensuring fair prices and quality products, encouraging constant economic innovation, and satisfying consumer demand. In short, competition keeps everyone honest, because customers treated unfairly by one business can always patronize another instead.

Adam Smith was the 'forefather' of capitalist thinking. Simply put, capitalism is an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state. His remarkable insights not only captured his own time accurately; they also foresaw much of the economic future. Free-market capitalism has been the world’s foremost economic model for the last 200-plus years.

Though Smith predicted many of the successes of industrial capitalism, he lived too early in the Industrial Revolution to see its worst excesses. It would take several more decades to produce a critic whose cynicism toward capitalism matched Smith’s optimism. That critic was Karl Marx.

Karl Marx

Karl Marx (1818–1883) was born in the midst of the Industrial Revolution, into a middle-class family in Prussia (a former German kingdom straddling parts of present-day Germany and Poland). For most of his professional life, Marx was a writer for a variety of liberal, radical, and foreign newspapers, moving between Prussia, France, Belgium, and England because he was continually blacklisted or deported for his radical views.

Karl Marx, January 1870 © adoc-photos/CORBIS

Marx’s attitude toward capitalism was scathing. In an age when “the Industrial Revolution had changed the process of production into a factory system and created a new ruling class of factory owners”, Marx perceived injustice, inequality, and the inevitability of change. Marx and his frequent co-author, Friedrich Engels were outraged at the hardships faced by the working classes of industrial European cities, and they channeled this anger into two monumental written works that formed the basis of modern communism: The Communist Manifesto (1848) and Das Kapital (1867).

Marx’s analysis sees the “history of all...societies [as] the history of class struggle.” In his interpretation, human history is a series of eras, each defined by systems for producing goods, which created classes of rulers and the ruled. This process had already progressed from slavery to feudalism to capitalism and, in Marx’s view, would eventually lead to a classless society called communism.

Why did Marx object to capitalism? He believed that “capitalists” (the owners of the machines, property, and infrastructure used to produce things) were a separate class from the “proletariat” (workers) who own nothing but the right to sell their labor in exchange for wages. Marx theorized that capitalists, in competition with each other for profits, would squeeze as much work as possible out of the proletariat at the lowest possible price. Furthermore, competition would cause some capitalists’ firms to fail, increasing unemployment, misery, and poverty among the proletariat. Technological innovations were not necessarily positive. New machines would add to unemployment by rendering human labor increasingly inefficient and obsolete, while also making work dull, repetitive, and alienating.

Yet Marx was not altogether dismissive of capitalism. He saw it as a necessary stage for building a society’s standard of living. But in his view, the proletariat’s discontent would inevitably lead it to an overthrow of the ruling classes. Then, a more equitable society would be created. First, socialist (wherein the state would control the economy and distribute resources more evenly) and then purely communist (a stateless, classless, egalitarian society without private property or nationality).

Marx’s beliefs, theories, and predictions represent a school of thought called Marxism. It was most influential in the 20th century, when it inspired various brands of revolutionary activity, including the Russian Revolution in 1917 and the rise of communist governments in China, Vietnam, and Cuba, as well as in many Eastern European and African nations. It has since fizzled out, with the U.S.S.R. collapsing in the early 1990s, China shifting toward a market-friendly economy, and smaller communist countries that depended on them adopting more market-oriented systems. How these things happened will be reviewed in the World History B course.

Attribution: Material modified from CK-12