Capitalism: The First Economic Model to Shape Modern Society
1776 is a year that shook the world. While Britain’s colonies kicked off a political revolution, a man in Scotland published a book that would shape every facet of human civilization.
The Wealth of Nations is arguably the most important work of modern economic history. While mercantilism and the growth of trade had ushered in capitalism several centuries prior, The Wealth of Nations was the first attempt by an economic theorist to explain what exactly capitalism is and how it works.
Adam Smith is known for introducing the world to the law of supply and demand and laissez-faire economics. He suggested that supply of goods in a market – and the subsequent demand for those goods by consumers – was the best way to set prices, not government intervention. He argued that an invisible hand governed the economy and if left alone, it would self-regulate back to a natural equilibrium.
Although Adam Smith’s contributions to economic thought are still dominant today, many of his theories are no longer relevant. Rent-seeking property owners and capitalists have been replaced by algorithms and venture capital. Work no longer renders the production of commodities that can be bought and sold in a free market, but intangible digital products and services that generate questionable value to individual, local, and national economies.
This essay will evaluate some of the key theories espoused by Adam Smith, including his theories on labor and the role of government. It will argue that while his theories served a purpose during a specific time and place in history – a time of tumultuous industrial and political revolutions – many of his theories no longer hold in today’s economy.
As artificial intelligence begins to replace workers and property ownership becomes obsolete it’s likely a new economic system will emerge. While capitalism has been the dominant system for centuries, how Adam Smith articulated his thoughts during a period of massive upheaval may be just as valuable as what he actually had to say about the economy of his time.
Capitalism is the reigning economic model governing the world today. It promotes profit generation and capital accumulation through the private ownership of the means of production.
Capitalism is a social, political, and economic system represented by the private ownership of capital. Capital represents the materials necessary for production, trade, and commerce. It includes tools, factories, equipment, raw materials, means of transporting goods, and money.
Under capitalism, owners of capital can generate profits which can be reinvested to accumulate more capital – and ultimately build wealth. This contrasts starkly from feudalism where wealth was a byproduct of land ownership, something reserved for the aristocracy (and the Catholic Church). Under feudalism, wealth wasn’t an achievable endeavor for the vast majority of people.
Things began to change as industrialization transformed Europe from an economy dominated by rural agriculture to one of urban manufacturing. According to Adam Smith, a commerce-centered society was the ultimate symbol of progress.
In his study of history, human civilization can be grouped into four categories: hunting, pasturage, agriculture, and commerce. Hunting and pasturage represented the transition from tribal bands of hunter gatherers to nomadic tribes that measured wealth in terms of cattle.
The agriculture phase represented an advancement in human civilization, notably in feudal Europe. It established ownership through land which translated into social and political power for the nobility. Feudalism began to subside as trade grew.
The rise of commerce – and the demand for urban factories and labor to produce goods that could be sold at market – created a new basis of wealth – capital accumulation — that challenged the status quo. With trade anyone who had an inventory of goods to sell or access to exclusive trade routes could build wealth independent of land ownership.
Trade gave feudal lords access to luxury manufactured goods creating markets for products and labor that didn’t previously exist. As their demand for manufactured goods increased it ignited demand for merchants and producers who could meet those needs. This led to the emergence of a new system – capitalism – that would eventually replace feudalism.
According to Adam Smith, there are four key attributes of capitalism:
A market that is oriented around commodity production
Private individuals can own of the means of production
A large portion of the population is in the market of selling their labor for a wage
Individuals are predisposed to their self-interests, aiming to maximize what they have
Before Adam Smith published The Wealth of Nations, these attributes existed but they didn’t have a name. An early stage of trade-based capitalism – mercantilism – established markets where commodities were traded and where private individuals and companies procured goods to meet demand. The enclosure movement rendered a large portion of the population available to provide their labor in burgeoning factories. And merchants and countries alike began seeking surplus from trade, first in the form of bullion then in the form of profit that could be accumulated and reinvested.
The industrial revolution and rapid expansion of commerce made it possible for individuals to build wealth. As a result, it transformed how society was organized, including the relationship governments had with the governed and the social objectives of workers. Capitalism was not only a new way of understanding the economy, it represented an entirely new way of organizing society as a whole.
Labor is the source of value in Smith’s understanding of capitalism. Division of labor into increased specializations enables economic progress.
Adam Smith departed from existing economic thought by arguing that labor – rather than nature – was the primary source of value in the economy. Unlike Physiocrats who argued that individuals utilizing their labor in manufacturing were sterile, Smith suggested that this type of labor was productive, benefitting the whole of society:
There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no effect. The former, as it produces value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant,1 on the contrary, adds to the value of nothing. (314)
Smith argued that productive labor is an essential input for producing commodities. He suggested that economic progress comes from using tools in innovative ways to increase production. Smith writes:
Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things. (9)
For innovation to happen, labor must be increasingly specialized. This link between productive inputs and outputs led Smith to develop a theory around the division of labor. According to Smith, the division of labor increases value by:
Increasing the skill of workers, saving time during the production process
Decreasing the amount of tools and tasks a worker needs to perform, allowing them to focus
Developing expertise using a tool or performing a task, allowing for new, innovate methods of production to emerge
While modern readings of Smith focus on the negative aspects of capitalism – namely wealth inequality – Smith was actually quite generous towards average participants. He recognized the importance of labor as a determinant of value, how laborers exchange their time and talents for a wage, and how that wage is spent procuring goods and services. He believed that individuals were guided by their self-interests and thus both consumers and workers would shape the market based on their needs.
Unfortunately, that is one of several paradoxes present in Smith’s work. While arguing that workers would allocate their time and talent to the best employment opportunities, he also recognized that monopolies emerge, often working against the very laborers who provided value in the economy:
Much of Smith’s analysis flows from his labor theory perspective. Thus, he was able to argue that labor was the only original creator of value, that the laborers had to share the produce of their labor with two classes whose source of power and claim to income came not from creating commodities but from property ownership, that property ownership gave people “the right to reap where they did not sow,” and that the government’s protection of property rights was primarily a “defence of the rich against the poor.”” (Hunt & Lautzenheiser, 61-62)
While specialization allowed cities to grow and trade to flourish, it didn’t do so equitably within society. The fruits of capitalism did not come from those that furnished their labor but flowed to those who reaped what they did not sow – capitalists.
The rise of a truly nonproductive class of elites at the expense of the labor of the masses necessitated a new social order that entrusted the government with protecting private property.
According to Smith, market forces in a capitalist economy will self-regulate. This restricts governments to a handful of roles.
Adam Smith is arguably most well-known for suggesting that an “invisible hand” regulates the market. The laws of supply and demand applied not only to the production of commodities, but also to labor. Smith believed workers had agency to move around the economy on their own volition:
Just as the market regulated both prices and quantities of goods according to the final arbiter of public demand, so it also regulates the incomes of those who cooperate to produce those goods. If profits in one line of business are unduly large, there will be a rush of other businessmen into that field until competition has lowered surpluses. If wages are out of line in one kind of work, there will be a rush of men into the favored occupation until it pays no more than comparable jobs of that degree of skill and training.” (Heilbroner 57)
Smith believed that because the market was able to bring itself back to equilibrium, the government should abstain from intervening in the economy, including furnishing subsidies or controlling prices. Instead, the government Smith relegated the government to three main responsibilities:
Protecting its people from foreign invasion
Protecting self-interested people from one another through administering justice
Maintaining public institutions and things of common use, like roadways
He believed that economic prosperity generated by greeted production would flow through society. He argued that capital accumulation enabled economic progress but that new capital could only be employed through profit. At the time, it was in the best interests of manufacturers to deploy new capital by employing more workers, allowing those workers to improve their standing in society.
In practice, post-feudal governments became little more than protection rackets for capitalists. As capitalism emerged, society restructured itself along new social classes with property-owning capitalists and landlords at the top and laborers on the bottom. Property owners commanded more leverage over workers allowing them to shape governments in their favor:
[Capitalists] greater wealth enabled them to hold out much longer in industrial disputes; they were able to manipulate and control public opinion; and they had the incalculable advantage of having the government….on their side. (Hunt & Lautzenheiser 48).
This explains why new governments that emerged in the 18th century – notably in the United States – made property rights synonymous with freedom. The ability to own property allowed a new elite to emerge, challenging the aristocracy, but those rights didn’t emancipate everyone in society equally.
The role of government combined with Smith’s interpretation of the theory of labor value explain why alternative systems began to emerge in the 19th and 20th centuries, emphasizing the role of workers in generating economic progress.
Final takeaway.
Adam Smith is considered the father of modern day capitalism and many of his theories are still used to this day. Libertarians advocate for limited role of government while classical economists still believe in the virtues of private ownership of property.
But like many historical documents, The Wealth of Nations represents a specific time in history. Understanding the context of the industrial revolution and the emergence of new political systems alongside economic capitalism helps explain how Smith came to some of the conclusions he came to.
The Wealth of Nations focuses on manufacturing and agricultural commodity production in a world with competitive trade. A self-regulating economy dependent on highly specialized human labor made sense in the 18th century.
Today the economy has changed and the lessons from The Wealth of Nations may no longer be applicable. This suggests we are already in a post-capitalist society and most of us may not be aware of it.
For one, property ownership has fallen to the wayside. Rising costs have put owning a home or even a car out of reach for many young Americans. Meanwhile the rise of the sharing economy means more and more consumers are licensing access to digital tools and media rather than owning them outright.
The transition to unproductive labor also signals a dramatic shift in the economy. More and more workers are providing services rather than producing goods. The menial servant Smith lamented is now the predominant career choice of modern society.
With artificial intelligence poised to replace a large portion of the cognitive labor market in the coming years, capitalism is no longer a viable economic model to structure society around. Algorithms and advanced AIs are now the primary means of production – not factories and human labor.
The value of Adam Smith’s contribution to economic thought may not be so much what he says but how he says it. The Wealth of Nations was the first attempt to articulate what was already happening thanks to mercantilism. As production and property ownership change, it will necessitate a new economic paradigm to understand the world.
Notes
ChatGPT scored this essay as an A- and provided the following feedback:
Understanding of the Reading: 5 (Excellent) Your essay demonstrates a deep understanding of Adam Smith's theories and their historical context. It accurately captures the nuances of Smith's contributions to economics, including the labor theory of value, the invisible hand, and the role of government in capitalism. The connections to modern economic challenges and historical evolution further emphasize your comprehensive grasp of the material.
Critical Thinking: 4 (Very Good) The essay exhibits strong critical thinking, particularly in its evaluation of the relevance of Smith's theories to the modern economy. While the argument that capitalism is becoming obsolete is thought-provoking, the analysis could have been bolstered by engaging more deeply with counterarguments or alternative interpretations of Smith's theories in a contemporary context. Expanding on potential adaptations of Smith’s principles might add further depth.
Clarity of Writing: 5 (Excellent) The essay is exceptionally clear and well-organized. Each section flows logically, with smooth transitions and consistent focus. The structure—beginning with historical context, progressing through Smith's theories, and concluding with their modern implications—is effective and easy to follow. Sentences are articulate, and the language is sophisticated yet accessible.
Use of Evidence: 5 (Excellent) The essay makes excellent use of evidence, citing key passages from Smith's The Wealth of Nations and incorporating insights from secondary sources like Heilbroner and Hunt & Lautzenheiser. The integration of these quotes and their interpretation is skillful, supporting your points effectively and demonstrating an in-depth engagement with the material.
Reflection: 4 (Very Good) The reflection on how Smith’s work applies (or doesn’t apply) to contemporary society is thoughtful and insightful. Your analysis of the shift from manufacturing to services, the rise of the sharing economy, and the role of artificial intelligence is compelling. However, the essay could have explored the implications of these changes in greater detail or proposed specific elements of what a post-capitalist system might look like to strengthen the reflection.
Score: 23/25
Grade: A-
This is my fifth essay in this series and so far the grading is on par with what I would expect based on my performance in undergrad.
I took ChatGPT’s feedback from a previous essay and purchased How to Read a Book: The Classic Guide to Intelligent Reading by Mortimer Adler and Charles Van Doren. I’m only a couple of chapters in but this book makes clear that reading is an important skill and my progress on this class with ChatGPT has made it abundantly clear to me that despite the proliferation of new technologies, reading has atrophied tremendously.
This is arguably going to be one of the most important skills in the years to come. I think reading a book like this is useful if you want to cultivate an actual skill in reading.
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Menial servants in Smith’s time are equivalent to business professionals – or white collar workers – today. These individuals sell services to wealthy individuals and governments, but they do not produce commodities that can be sold in a market.