In the late 20th century people who say that Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, (generally referred to by its shortened title The Wealth of Nations) shows why ‘Capitalism’ works are forgetting the world and culture he was writing was. This is a world where rapid transit was by sea. Most people walked and few ever went more than 7 miles from where they were born. This is a world where most people were farmers and in some nations the middle class was smaller than the nobility.
Most business were ‘small’ like two or three people small. An big business was never over a 100 people. Where money was cold hard cash (coin mind you) that you still had to check out to be sure of it’s purity (monarchs still liked to debase coinage to stretch the budget) and true weight (people like to shave or Knick coins). An people lived in neighborhoods so small everyone knew everyone else and was suspicious of everyone else.
In Great Britain (England, Scotland,and Wales) most towns had just had Church & Chapel if not just Church. If you acted badly in your business everyone would know and best you would have a very hard time of it. If you were very unlucky or very bad, you could even have your “Name read out” on Sunday. Your wife, if wife you had, would could be ostracized from all town social life and finding suitable marriages for you children would be next to impossible. Now I can hear some of you saying, “But what about all those stories I read like “Pride and Prejudice”. First the people in the story are not middle class they are ‘Gentry’ AKA lower upper class. An if you look closely few, if any, of the characters are in “Trade” which is what business was called back then.
So what does this all have to do with Capitalism? Simply that the Capitalism being discussed is small/local Capitalism. Capitalism with few and easily identified entries into starting a business. Just consider this: Why was the silver smith shop of Paul Revere in Boston, a city, and not in a village like Braintree. Several reasons but two of the most important was access to raw materials (shipped in over water to Boston Harbor) and customers. That is the people with both the need to buy silver and the cash gold to buy it. It would do us well to remember that most artisans did their work on consignment. This went for cobblers, cartwrights, blacksmiths as well as silver or gold smiths. Very little would you see a shop filled with goods you could come in and buy.
Also the law was very different back then. Like modern day full partnerships, someone like Paul Revere, or even John Hancock, was personally responsible for all debts and liabilities of the business. It is just about this time you see the first limited/shared liability companies showing up in London (to wit “ lloyds of London”) where an investor was liable only for the amount of money he invested and nothing more. Even then some very interesting cases in commercial law come out of the period that forced Parliament to make new law. Next comes the steam revolution that suddenly made traveling over hundreds of miles in a day something that could be done by most anyone. I shan’t go into more detail on the industrial revolution as there are many many good books and online classes on the subject.
What is important here is that the type and form of capitalism we have now would be totally unrecognizable to Adam Smith. Trying to justify economic activity using his writing makes as much since as starting a business based solely on cold hard cash and selecting your business location on foot traffic of the wealthy.