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Adam Smith, Karl Marx and Friedrich Hayek on

Economic Systems
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Here is a handy summary of the thinking of Adam Smith, Karl Marx and Friedrich Hayek on
Economic Systems.

A-Level Economics
Economic Systems

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Adam Smith on economic systems

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In his 1776 book ‘Wealth of Nations’, Adam Smith (amongst many other things!) wrote about
the ‘invisible hand’ of resource allocation, and the role of ‘self-interest’, in an early reference
to free-market economies. The key quotes from Wealth of Nations on this topic are:

“[Every individual] generally, indeed, neither intends to promote the public interest, nor
knows how much he is promoting it. By preferring the support of domestic to that of foreign
industry, he intends only his own security; and by directing that industry in such a manner as
its produce may be of the greatest value, he intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it was no part of it. By pursuing his
own interest, he frequently promotes that of the society more effectually than when he really
intends to promote it. I have never known much good done by those who affected to trade
for the public good.”

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our
dinner, but from their regard to their own interest. We address ourselves, not to their
humanity but to their self-love, and never talk to them of our own necessities but of their
advantages.”

At the same time, however, Adam Smith warned that we should be wary of businesses that
become too large (i.e. monopolies) because of their tendency to raise prices. He recognised
that the government should keep an eye on their activities, but believed it was dangerous for
large businesses to influence politics and legislation.

Smith also recognised that in a free market economy, some people would be rich ‘property
owners’ i.e. owners of the factors of production, and there would be far fewer of these people
than labourers. He said that one important role of government in this type of economic
system would be to maintain law and order, because the many poor would want to take over
the property of the rich.

Other roles for the government, identified by Smith, include the issuing of patents and
copyright (to protect invention), providing national defence, regulating the banking sector,
building infrastructure, and public goods.

Smith is now regarded as the founder of free market (or laissez-faire) economics, despite
recognising the need for some government intervention.

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The Invisible Hand - 60 Second Adventures in Economics

Karl Marx and economic systems

Marx developed many of Adam Smith’s ideas on capitalism / free-market economics, but
mostly considered the negative consequences.

He agreed that free markets would lead to large increases in productivity and output, but
also thought that the impact on labourers would be terrible.

Marx believed that the drive for profit by business owners in the capitalist system would
push worker wages to ‘subsistence’ levels and that they would be exploited. He said that,
ultimately, exploited workers would work together and overthrow capitalism in a revolution.
Capitalism would be replaced by socialism.

In this system, production would be coordinated centrally, and distribution of the goods
made would be “to each according to his contribution”. Beyond this, though, Max gave little
indication of how he thought a centrally planned command economy would operate in
practice.

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Friedrich Hayek and economic systems

Hayek is probably the best-known member of what is known as the Austrian School of
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JOB BOARD

Lecturer in A-Level Business Studies

Hartpury College of Further Education, Gloucestershire

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Economics Study notes Adam Smith Invisible Hand Capitalism

Responsible capitalism Friedrich Hayek Austrian economies Karl Marx

Marxist economics

Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over
twenty years experience as Head of Economics at leading schools. He writes
extensively and is a contributor and presenter on CPD conferences in the UK and
overseas.

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Hayek is probably the best known member of what is known as the Austrian School of
economics, in which there is a strong belief in the role and importance of the individual in the
economy, rather than any collective group or government.

During the 1930s, he engaged in lively debate with the economist Keynes – Keynes
supported significant government intervention in the economy to stimulate growth whereas
Hayek did not.

Whereas Adam Smith saw a role for government intervention in money markets and financial
markets, Hayek disagreed, arguing that intervention in money markets was one of the main
causes of economic instability (the pattern of booms and recessions).

In other words, Hayek saw less of a role for governments in an economy than even Smith.
For Hayek, the only possible role for a government was to maintain law and order. Later in
life, he did suggest that the state could provide a small ‘safety net’ for those who found
themselves unable to work.

Hayek also argued strongly against command economies, noting that a small group of
individuals would be entirely responsible for determining the allocation and distribution of
resources; in his view, it would be completely impossible for them to ever have enough
information to do this properly to meet people’s needs.

Hayek believed that markets alone would have the information needed to make these
decisions, because markets coordinate the views and information held by everyone, in a
‘spontaneous’ way.

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