What Adam Smith Didn’t Foresee About Capitalism

Smith and many of his followers, such as Friedrich Hayek, who is famously associated with the Chicago school of economics, sidestepped or dismissed the issue of scale for a variety of reasons. Smith thought that large firms would be messy to manage and would collapse. Hayek thought there would be information frictions and corresponding operational challenges that would restrict the capability of large companies. Yet these large companies have survived, and they have prevailed.

Indeed, scale has transformed the nature of capitalism in our world in a paradoxical way that both brings together Smith and Marx and defies them. It’s not full decentralization, as described in The Wealth of Nations, nor the full centralization predicted by Das Kapital. It’s a mix: a kind of centralization in production within a decentralized system.

This mix has interesting features that are important to understand. In particular, there are at least three ways scale has shaped the broad contours of developed market economies: through the steadily increasing prominence of large private enterprises, the diffusion of ownership in these companies, and the considerable turnover among the ranks of that elite group of businesses. By measuring and analyzing these features, we can better understand how capitalism has evolved.

Capitalism and scale

As introductory economics classes emphasize, a foundational principle of the field is that incentives matter for human behavior. For thousands of years of human civilization, incentives for businesses and production were often overshadowed by other pursuits: constructing monuments, waging wars, or launching political campaigns. Commerce existed, but largely as a necessity. Technological progress appeared in short bursts, followed by long periods of stagnation.

With the rise of capitalism, incentives for making money through production are stronger. The modern world now channels the majority of resources to producing everyday goods and services and to advancing technologies that make such production more efficient. Capitalism and profit-driven businesses shifted societies’ focus, and profit motives provide stable incentives for growth and innovation.

As one way to look at the increasingly important role of profit-driven private enterprises in economic activity and development, I took the repository of Wikipedia titles, filtered those titles for technological inventions, and then asked a large language model to summarize the time, location, and the type of inventor—individuals, companies, or governments—for these inventions.

In the first chart below, the light-blue line shows the share of total inventions of a given time period that are produced by private companies as opposed to individuals or governments. The dark-blue line shows estimates of world GDP per capita. The chart illustrates that as the world economy has developed, we have grown increasingly reliant on companies for innovation, which is an integral part of production.

One might wonder whether those two lines just happen to both increase over time. But another takeaway from the data is that the countries with higher GDP per capita also have a higher reliance on companies to generate their innovation.

Yet the success of private enterprises at production and innovation transforms capitalism itself, and brings scale into focus. Businesses that want to make more money often seek to expand. This connection between capitalism and scale somehow escaped The Wealth of Nations, but the world has produced many vivid illustrations of it, including during China’s monumental economic reforms.

When I was growing up in China, we learned in school that there used to be a famous doctrine stipulating that hiring more than eight people made an employer a capitalist, whether the business was frying sunflower seeds or sewing shoes. This threshold was based on some inference from examples in Das Kapital that signified the scale required to seek profits. At the beginning of China’s economic reforms, the country spent several years debating whether private businesses could expand beyond this threshold of scale and eventually allowed it to happen.

This example is an interesting reflection of the observation that profit incentives encourage more scale. As successful firms get larger, capitalism starts to deviate from the Smithian prototype of small and fully decentralized producers.

The trends shaping contemporary economies

As scale has become a key element of economic activity under capitalism, it has fostered the three features of market economies I noted earlier.

The first feature is the pervasive rise of the concentration of production, which my coauthors and I document among many market-based economies around the world for at least the past century. In all such economies for which we can get data, we find that the largest firms by several metrics—sales, net income, and capital (equity or assets)—have become larger and larger relative to the whole size of the economy. To some extent, planning is taking place in the economy, but within firms rather than by governments.

The US provides a good example. In the first chart below, the light-blue line shows the share of total assets owned by the largest 1 percent of US corporations as measured by assets. In the 1930s, the figure was about 70 percent; today, it’s 98 percent. The largest firms now account for almost all of US corporate assets. The growth rate for the top 0.1 percent, in the second chart, is even steeper.

The concentration of sales shows a similar trend, with the top 1 percent of companies as measured by sales growing from a roughly 60 percent share of total sales in the mid-20th century to about 80 percent today.

These broad trends are true at the industry level as well—evident first in those sectors that industrialized earliest, and more recently in services and in retail and wholesale trade, which are going through what my Booth colleague Chang-Tai Hsieh and his coauthor Esteban Rossi-Hansberg of the University of Chicago would call the industrial revolution in services.

A second feature of contemporary economies is the way ownership has expanded as the scale of businesses has increased. Even though production has become more concentrated, ownership, at least in countries such as the US, has become more diffuse. In John D. Rockefeller’s time, the biggest companies were closely associated with rich individuals and families; today, the largest shareholders of the largest firms are predominantly investment funds that are investing on behalf of huge groups of people.

We’re not approximating communism or common ownership to a substantial extent, but the diffusion of ownership is considerable still. That’s happening because of the development of capital markets, rather than the elimination of private ownership. Market forces have led the world to mix the visions of Smith and Marx in some funny ways.

Marx pretty much assumed that large firms would be perpetually owned by rich individuals and families, that the benefits and cash flows of large firms would therefore flow predominantly to a small number of tycoons, and with that, inequality would increase substantially. But there’s reason to think that the spreading out of ownership has moderated the degree of wealth inequality, at least relative to the levels in the Marxist foretelling.

Making reasonable assumptions, it’s possible to estimate what happens to wealth inequality if the largest US companies, let’s say the top 1 percent of them, are exclusively owned by the richest 1 percent of households. My informal calculations suggest that those households’ wealth would roughly double, which means wealth inequality would double. The diffusion of ownership is meaningful in this respect.

A third feature of modern market economies—and this one would also have surprised many of the people who gave prophecies about the development of capitalism—is that even though the large firms, as a collective whole, are becoming larger at a given point in time, the individual companies that make up that group are still getting disrupted and unseated all the time. In the data, turnover within the ranks of the largest US firms is substantial, at least on the scale of decades. This further contributes to the hybrid nature of contemporary economies that mix centralization and decentralization.

We can see an example of this churn at the top by looking at the Fortune 500 list. In the table below, we can see the names of the 10 largest US firms in 1955, the first year Fortune published the list, as well as in 1990 and 2025. There is some overlap between 1955 and 1990, but between 1990 and 2025, only one company stayed on among the top 10. The same dynamic is true of the full list of the largest 500 companies as well. Even though the group is getting larger and larger as a share of the economy, the companies that make up the group don’t stay the same over time.

This is not just because of the rise of services and the decline of manufacturing. Within manufacturing, for example, there are similar patterns of turnover as well. We’ve been doing retail for ages, but that, too, has plenty of turnover.

Why would the companies be larger at a given point in time but not necessarily more persistent? My hypothesis is that scale is a double-edged sword. Scaling up requires processes and procedures that support the ability to expand operations reliably. Those processes can be rigid. They can be good and efficient for what they were initially designed for, but when new things come around, they become inefficient.

A hybrid capitalism

What I have seen in the data suggests that the rise of scale is a widespread, long-term trend. It’s not a temporary bug, and it’s not something easy to suppress. Some recent discussions about Big Tech companies and other corporate giants seem to give the impression that regulations can just make them go away. I’m not arguing against regulation, but scale is a part of our economic reality that we need to reckon with and deal with.

Societies need to manage this reality and avoid imbalances. The evolution of capitalism, as we have seen, suggests some counterbalancing forces, through the diffusion of ownership and the disruption of incumbents. Whether these are sufficient remains an open question.

The tendency toward scale has pulled contemporary market economies toward a state of limited centralization, wherein a small set of businesses directs a massive share of economic activity with the visible hand of planning.

And yet, Smith’s insights help to explain why that centralization remains limited. Even if we need some degree of centralization in production given technologies with economies of scale, it exists within a broader ecosystem of decentralization.

Companies come and go. As long as there are mistakes, or even randomness in life, dominance by a single entity will not be permanent. We need a way to select economic winners and losers, and the invisible hand of markets, working through all of us as consumers, is our best-known mechanism for that.

So while the triumph of Marx could be said to be his recognition of the relevance of technology and scale in the evolution of economic activities, the triumph of Smith may be that, ultimately, centralization requires the support and discipline of decentralization.

The Wealth of Nations was a milestone for our understanding of economics. Two hundred and fifty years after its publication, that understanding is still imperfect. But by studying the way economies have evolved—with the unprecedented availability of data and more tools to analyze them—we can uncover new insights about the mechanisms underlying the past, present, and future of capitalism. And in doing so, we aspire to live up to the goals Chad Syverson ascribed to the Chicago school of economics: to learn more about our world and make it a better place.

Yueran Ma is the Carhart Family Professor of Finance at Chicago Booth. This essay is adapted from a talk she gave in November at the Becker Friedman Institute for Economics at the University of Chicago.