A History of Capitalism: Practical Lessons from The Man with the Invisible Hand

Many today like to comment on the history of capitalism, both from an immoral and impractical standpoint. Politicians, academics, and the layman alike attack the system for its failures and contribution to inequality.

Due to many of these individuals having amplified voices, it seems the foundation of the economic system has been forgotten, diluted by both the opposition and those who champion capitalism but deeply misunderstand the principles of the free markets.

To put it simply, free markets don’t include stimulus packages, bailouts, and over-reaching economic regulations. To say that capitalism includes such tenets is to confuse it with its evil twin of corporatism.

This article is purposed with exploring the foundations of capitalism and one cannot do so without recognizing the father of modern economics, Adam Smith.

Adam Smith was a key influence of the Scottish Enlightenment, who paved the way for free market champions such as Friedrich Hayek and Milton Friedman, who followed later. His ideas also came at a pivotal time in history, as the United States started its push for independence.

Many may believe that Smith was concerned with the wealth of kings and others in power, but this is a common misconception. He knew kings and men of wealth could take care of themselves, he was more concerned with the state of those on the bottom tier, the worst off among us.

He was a moral philosopher who wished to ultimately eliminate poverty, though this was not accomplished in his lifetime, the modern age is close to achieving his goal. The World Bank now suggests that less than 10 percent of the world is living in extreme poverty, an unheard of accomplishment.

So how can we finally accomplish Smith’s grand task of eliminating poverty? How can modern entrepreneurs and politicians embody Smith’s principles to better the lives of the worst off in our global society?

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

First off, I would suggest those among us who have a deep regard for both morality and capitalism to look into conscious capitalism, a growing movement.

Secondly, let us take a few lessons from Smith that we can apply to our modern age, to help you become the modern Adam Smith.

• Understand Smith’s concept – Man of the System:

  • Long before Hayek addressed the “knowledge problem,” Smith recognized the failures of central planning. It was a common belief of men in the age of colonization (and I would argue it is still true today), that they could plan out the perfect society. This society would be planned to perfection, much like a chessboard with human beings as pawns. Smith knew that this is a fallacy, human beings are not pawns, they are individuals with their own morals, beliefs, and desires. These are things the planner can not, and should not control. It is time to realize that you cannot control other people; the quicker you realize this, the happier and more profitable you will be.

• Have Morals:

  • Modern businessmen are depicted as uncaring souls who only donate to charities for the tax write-off. Smith challenges this assumption, suggesting that those who concern themselves with those less fortunate will be better off when it comes to wealth. This is not because they are unselfish, it is instead because they are self-interested. Individuals strive to increase their own wealth, but in order to do so, they must produce something others in society value. In this modern economy, consumers care greatly about company practices and manufacturing. Though it may cost more, having morals guide your business practice will help you in the long run.

• Division of Labor:

  • Many may say that Smith was a supporter for eliminating government, but instead like many today, he believed that a limited government was productive for the markets. He believed that the government should enforce contracts and protect property, even getting involved in providing public education. His reasoning for this was his firm belief that the population should be educated on every facet of society, for the purpose of finding their purpose. This would naturally encourage a division of labor, leading ultimately to exponential productivity. Take stock of the interests of those around you, individuals are more likely to create something of value not only when it is in their self-interest, but when they are interested in the work itself. Again, Smith lays the groundwork for comparative advantage that would later be champion by other economists.

• The Invisible Hand:

  • Perhaps the most famous of Smith’s principles is that of the invisible hand, though he only mentioned it a few times in The Wealth of Nations. Basically, Smith suggested that due to the law of supply and demand, the market would regulate itself, without the need of a governmental appointed central planner. Personally, I believe that Smith was predicting an age of entrepreneurship long before it started. The reason we have ground-breaking businesses such as Uber and Airbnb is because an entrepreneur saw a demand in the market with no current supply. The truly successful businessmen are those who can see these holes in the market and aim to rectify them. Not only should you aim to see the market through this lens, but surround yourself with people who also have this perspective. Encourage your employees, friends, and family to find innovative solutions to the demand currently in the market. Creative destruction is the way to wealth in this modern age.

The purpose of studying history is not only to understand how we got to the current point on which we stand, but also to ensure we do not make the dangerous mistakes of the past. Though Smith may be long gone, his ideas live on and are just as important today as they were in 1776.

If we truly want to eliminate extreme poverty we should consider his advice and engage in a free market that is conscious of the diversity of both morals and individuals.