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Adam Smith and Karl Marx's basic and monumental (in consequences) error


Tags Capital and Interest TheoryMonetary TheoryValue and Exchange


What could these two thinkers, considered to be opposites, have in common? It turns out that Karl Marx inherits from Adam Smith a very basic error, one which has monumental consequences and has changed the world forever.

Adam Smith tells us in his famous treatise on the wealth of nations that in primitive conditions or small towns, those who would go to the market to sell their produce, cattle or manufacturing obtained salaries (wages) from their neighbors in the process. Salaries? Grave error.What is obtained by someone who moves from agricultural self-sufficiency to the market is not a salary but rather a gain or a loss. Gains and losses are obtained by entrepreneurs. By definition, then, this could be a farmer or any independent professional in a city.

A salary does not make an appearance until the role of the capitalist also appears. The capitalist is the person which takes previously produced resources and risks them. He is the one who buys or pays for a good or service to later sell something that is greater than the sum of the parts. And this can only be determined if the product is sold: this is the only signal, a signal that is lacking in totalitarian countries, that society is creating aggregate value. Smith errs greatly when he calls salaries that which entrepreneurs obtain when they trade in the city plaza. It is not until one person hires another, at a fixed, regular rate, that a salary exists. We can call this the pact of capitalism because it implies that the employee is now part of the capitalist's entrepreneurial risk. In exchange, the employee receives a fixed income (daily, monthly, etc.), a salary.

Salaried employees have no possibility of gains, but — most importantly — are free from losses. Indeed, they have a better chance of receiving income than the capitalist. The farmer, for example, must pay the salaries of his workers even if there has been a frost the day before harvest. He cannot burden them with a loss. Nor can he, to be fair, share with them the gains. A pharmaceutical company will sell its products four or five years after the initial idea of creating a new product. In the meantime, it will have to pay salaries to hundreds, even thousands, of people. That the salary is payed now is not contingent on future sales.

Thus, the problem, brilliantly taught to us by Prof. George Reisman, is that the error shared by Smith and Marx permitted the idea that to obtain gains — the famous exploitative "surplus" — capitalists had to keep a bit of each employee's salary. In reality, value is created by whomever imparts vision, risks resources and recognizes opportunities, all while creating regular income to others in the process. Capitalism creates a worldwide middle class. Before capitalists, everyone had to fully assume all of the risk of a given activity. Now, however, we can delegate risk to those who are more ambitious and capable in the entrepreneurial game and at the end of the month, we all receive a paycheck. This is infinitely more productive and effective and, ultimately, eliminates poverty.

Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University, senior fellow of the Mises Institute, and regular columnist for LewRockwell.com.

Click here to see an extensive online compendium of Dr. Block's publications.

Click here for a complete list of Dr. Block's books.

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