A closer look at the work of the Adam Smith
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Last week, the 19th Congress of the World Association of Political Economy (WAPE) took place at the University of Greenwich, London. WAPE is a Chinese-run academic economics organisation, linking up with Marxist economists globally. “Even though that might seem like bias, the WAPE forums and journals still provide an important outlet to discuss all the developments in the world capitalist economy from a Marxist perspective. Marxist economists from all over the world are welcome to join WAPE and attend WAPE forums.” (WAPE mission statement).
The theme of this conference was the contribution of Adam Smith to political economy, because it is 250 years since Smith published his An Inquiry Into the Nature and Causes of the Wealth of Nations – and in effect, pioneered political economy (now called economics by the mainstream).
The Chair of WAPE, Chen Enfu, from the Chinese Academy of Social Sciences, in addressing the conference on Adam Smith’s theory of national wealth said that, while Smith has become the guru of ‘laisser-faire’, free market economics, in reality, he did not merely advocate free markets but also explained the development of modern economies within the framework of the social division of labour, moral norms and the role of the state.
In Wealth of Nations, Adam Smith argues that, as each individual pursues his or her own economic activity, the individual is unaware that the combination of all these individual actions produces a market for production and consumption that is not under his or her control but leads ‘invisibly’ to a better outcome for all. Behind this was Smith’s great insight that modern industry is based on a division of labour: when the production of commodity is broken down into discrete parts where human labour specializes instead of workers doing every part of the process, productivity rises and costs and prices fall.
But as Dogan Gocmen of Dokuz Eylut University explained in his keynote address to the conference, there is the apparent contradiction in Smith’s views. In his earlier work, The Theory of Moral Sentiments (1759), Smith articulated an ethical critique of the commercial society as analysed in the” Wealth of Nations”. So Gocmen argued it would be wrong to think that Adam Smith’s view consisted merely that the ‘invisible hand’ of the market should rule.
There were many sessions during the conference on Smith’s contribution to political economy and many presentations aimed to ‘save Smith from neoliberalism’, as Stavros Mavroudeas put it in his presentation. Adam Smith became the man that Chicago University economists like George Stigler and Milton Friedman turned to as their theoretical mentor for the ‘free market’; and was lauded by right-wing free market politicians like Margaret Thatcher, inspiring them to adopt policies to reduce the size of government and state and ‘let the market rule’ in all aspects of social organization. And global free market economists like Friedrich Hayek and the Austrian school of free market economics look to Smith for their basic approach. There is even a ‘think-tank’ based in the UK named after him that claims to develop economic policy based on clear ‘free market’ principles. Its slogan is “Using free markets to create a richer, freer, happier world.” But Smith was not some raging free market evangelist that denied the role of government or for that matter considered that human behaviour was driven by material self-interest and nothing else. That is a myth created by today’s free marketeers that Smith was opposed to government and to moral behaviour over material interest.
However, as Cheng Enfu said, while Marx recognised Adam Smith’s theoretical acheivements, in particular, his identification of labour as the fundamental source of the creation of wealth, Smith’s version of the labour theory of value was contradictory. He adhered to the view that labour created value, but also Smith reverted to a theory of value based on ‘factors of production’ ie rent from landlords, profits from capitalists and wages from labour, rather than all value being created by labour and then appropriated by landlords, bankers and capitalists.
Smith’s’ ‘factors of production’ theory now dominates modern mainstream economics and his labour theory of value has been put in the bin. As Marx said: “Adam Smith’s ‘contradictions are of significance because they contain problems which it is true he does not solve, but which he reveals by contradicting himself. His correct instinct in this connection is best shown by the fact that his successors take opposing stands based on one aspect of his teaching or the other.” Theories of Surplus Value I, 151. Marx also criticised Smith for treating the capitalist mode of production as a utopia, an eternal and natural order, denying its historic transitory chraracter as in Marx’s materialist conception of history.
While the ideas of Adam Smith were the theme of this year’s conference, the over 150 attendees from all parts of the world and the over 100 papers presented discussed many other subjects, including the nature of knowledge, imperialism, AI and technological innovation, value theory, and of course, China.
As usual, it is not possible to cover all these papers in this short post. I shall concentrate on the sessions where I made a presentation and others that I attended. There was a session on the Marxist theory of the circuit of capital. Here there was a disagreement between Alan Freeman and Guido de Marco on one side, who reckon Marx had a disequilibrium theory of value morphing into prices of production and into the circulation of capital; and on the other side, Fred Moseley who argues that market prices and the circuit of capital are bound by a long-term equiibrium prices of production. I won’t go into the ins and outs of this debate and its implications in this post. Instead, let me refer readers to a new book edited by Freeman and De Marco entitled Money, Value and Marx’s Circuit of Capital where various authors present their arguments on the circuit of capital.
My own presentation was in a session on imperialist exploitation, in which I argued that under the rule of imperialism, the poor countries of the world would never close the gap with the richer Global North, either in per capita income, productivity or human development. Only China stood a chance of doing so. None of the BRICS will catch up to the current high-income country level in the next 20 years, except China. China would reach that by 2041 and would match the projected level for the high-income countries by 2046.
China will match the current level of ‘human development’ (HDI) in the rich economies by 2039, but it would take until 2046 for China to reach the projected average rich country HDI in that year. Every other BRIC country will fail to meet either of those targets in a generation.
The main reason is that wealth (value) is being persistently transferred from the South to the North; AND profitability in the Global South is falling faster than labour productivity growth is rising, thus lowering investment growth. China may be the exception because its investment growth is less determined by profitability than in any other major Global South economy.
In the same session, Michael Tyrala of Hong Kong University presented some astonishing facts about the level of offshore tax dodging and its impact on the ability of governments, particularly in poor countries, to develop their economies. According to conservative estimates, as of 2015, somewhere between $7.6-36 trillion of untaxed financial wealth has been parked offshore, growing by somewhere between $200-850 billion annually, disproportionately affecting developing countries. This stash represents 8-38% of total global financial wealth and 3-14% of the $250 trillion total global financial and non-financial wealth. That compares with official development assistance (ODA) by the OECD countries of just $153 bn.
It seems that 73% of the Fortune 500 multinationals and 98% of the FTSE 100 operate tax haven subsidiaries. According to research published by the IMF, an estimated “$12 trillion, or almost 40 percent of all foreign direct investment positions globally – are completely artificial”, consisting of “financial investment passing through empty corporate shells with no real activity”, likely for tax purposes, and this “phantom FDI keeps soaring, outpacing the growth of genuine FDI”. (Damgaard, Elkjaer and Johannesen 2018; 2019).
International tax avoidance and evasion by high net worth individuals and multi-nationals ravage potential national government tax revenues, exacerbate income and wealth inequality (around 50% of all wealth in tax havens is owned by the 0.01%, and around 77% by the 0.1%.) and gives an unfair competitive advantage to the wealthiest companies, the tax rates of which are conservatively estimated to be some 4-8.5% lower than those of similar domestic-only operations, SMEs, and startups, stifling innovation. As for regulation, forget it.
In another session on financialisation, I was to present a paper but was unable to do so because of illness. (The slides for my paper are here https://thenextrecession.wordpress.com/wp-content/uploads/2026/08/financialisation-or-profitability.pdf). Financialisation, like neoliberalism, is a buzz word among leftists and heterodox economists. Many argue that ‘financialisation’ has created a new source of income that does not come from the exploitation of labour, but from the rise of finance capital, monopoly control and the gouging money out workers and productive capitalists, in other words, from rent not profit. But despite the claims of the ‘financialisation school’, the empirical evidence is just not there. There is an array of empirical studies that show financial income is not a significant form of corporate income and profits from production remain overwhelmingly dominant.
In contrast, Marxist theory argues that financial investment is a counteracting factor to the tendency for the rate of profit to fall in capitalist accumulation. Marx called this investment in ‘fictitious capital’, which is when capital is accumulated in financial and speculative sectors seeks to reap higher rates of profit compared to productive sectors. where there is a fall in the rate of profit.
In the session, Mavroudeas and Pontis argued that a large part of financialization literature treats fictitious capital as ‘virtual capital’: namely an autonomous sphere that generates profits independently of production and exploits through ‘dispossession’ rather than through the extraction of surplus-value from human labour. But this is a Keynesian view. For Marx, fictitious capital is a specific function of interest-bearing capital. It is a wager on the future extraction of surplus-value and thus remains geared, despite several layers of separation, to the sphere of production. Fictitious does not mean virtual: financial profits remain a redistribution of surplus-value.
To finish, let me tell readers that the WAPE Council this year gave me an award for my ‘significant contribution to Marxian economics’ – with a very heavy bronze globe! I shall be publishing my acceptance speech some time soon.
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