Can Capitalism Survive?

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itself as the drive for profit and produces that great marvel, the self-regulating market. If consumers are free to spend their money any way they wish, and businessmen can compete uninhibitedly for their favor, then capital and labor will flow "naturally" (a favorite Smithian word) into the uses where they are most needed. If consumers want, say, more bread than is being produced, they will pay high prices and bakers will earn high profits. Those profits will lure investors to build more bakeries. If they wind up turning out more bread than consumers want to buy, prices and profits will fall and capital will shift into making something that consumers need and desire more—shoes, perhaps. Thus the businessman seeking only his own profit is "led by an invisible hand to promote an end which was no part of his intention"—the common good.

Moreover, the process is not merely circular but also dynamic. Competition keeps wiping out the inefficient businessmen, rewarding those who can turn out the most goods at the lowest prices and forcing even them to keep reinvesting their profits in new products or better operating methods if they want to stay ahead of their rivals. As a result, production keeps rising, pulling up wages ("The liberal reward of labor . . . is the natural symptom of increasing national wealth") and distributing to everyone more of "the necessaries, conveniences and amusements of human life."

Smith's system was designed to enthrone not the businessman but the consumer. Far from admiring merchants, he looked upon them as a greedy lot who were forever trying to bypass the market by conspiring to fix prices and hold down wages. But he thought, somewhat naively, that such monopolistic schemes could prosper only with the active aid of government—which, in his day, they often got. So he advocated complete laissez-faire. Government, he said, should stop trying to regulate trade, cease all intervention in the market and let free competition work its wonders.

These ideas were well to the left of the 18th century's mercantilist doctrine, which held that trade should be strictly regulated in order to pile up gold and silver in national treasuries. The ideas also ran counter to the strong feelings among upper-level society that "opulence" for the "lower ranks" would be very dangerous. Smith's revolutionary concepts took some time to catch on. But The Wealth of Nations was read by all the leading intellects of the time and praised by many, including Smith's friends David Hume and Edmund Burke. By the early 19th century, Smith's doctrine had conquered the academic world and began inspiring governments to unchain their economies. In 1846, for example, British reformers quoting The Wealth of Nations repealed the Corn Laws, which had kept food prices high by restricting imports. U.S. state legislatures, influenced by the new vogue of free competition, passed laws permitting any investors who met minimum qualifications to set up a corporation; previously, each corporation had to be chartered separately, and the charters amounted to grants of monopoly power. Almost on cue, some wonders followed—both beneficent and malign.

Entrepreneurs accumulated and reinvested capital on a truly awesome scale. Production multiplied to a degree that is difficult to believe, considering