Hi all--before getting to part 2, a couple of things:

First, about what Rhuu was saying--imagine, in your group of friends, that one person who somehow never pays for drinks/is always there when the collective bill at the restaurant is a little short/bought something for the group and collected £15 for it but only paid £12...or even that person who has never actually cheated the group but has proved untrustworthy in some other way (e.g. blabbing secrets or creating relationship chaos).  Because that person is a friend, they often get a 'free ride' for a little while (which we also find in the cryptocapitalist economy--it's hard to fire your relatives) but that can't last forever--these people will eventually find that they no longer get the benefit of the doubt, and are shut out of the group's transactions.  This kind of cheating or untrustworthy behaviour is, when you think about it, a huge risk to take--gaining a little here and there in the short term vs losing out entirely on the advantages of belonging to the group.  If your livelihood is on the line, you would probably prefer not to take it.  You might think 'I could gain a little by doing x, but it puts my connection with the community I need to be connected to to keep my family fed at risk, so maybe I'd better not.'  This is what Smith means when he talks about the invisible hand, and on not relying on the altruism of the butcher and baker--the baker doesn't HAVE to be a good person to not sell you short, he just has to be sensible enough of his own self-interest that he won't jeopardise his business by becoming known as a cheater.  This idea bears a passing resemblance to the libertarian talking point 'a business won't sell you stuff that hurts you/kills you because you'll sue them/they'll go out of business (eventually)--so we don't need laws'--but for that to work you need a) the encompassing social structure and personal relationships of the cryptocapitalist economy and b) the business owner to be cognizant of that (and c) the business to be a sole proprietor or partnership and not a joint-stock company--but we'll get to that in the next, and hopefully last, installment).

And about Alan's points--my students have pointed out that the economic structure I describe does still exist, both at the 'highest' and at the 'lowest' levels.  We do naturally still prefer our economic interactions to be directly with other people that we have some social connection to--at the farmers' market, through Etsy, or in the boardroom--and we have good reasons for that, both social and economic.

OK--I did want to write some more about Adam Smith, because a) it makes me sad that Dr Smith, by all reports a quiet, pleasant, thoughtful and generous man with a strong sense of moral obligation to his fellow humans, is now largely known as a mouthpiece for greedheads, and b) although the Wealth of Nations is a significant historical work with a lot of important insights for its time, I don't think it has much to offer us now in terms of understanding how the world works, Smith's other book, the Theory of Moral Sentiments, can still provide some insight into the mess we're in now.

So--I mentioned before that as far as I know no one has really considered Smith's work in its economic context; before anyone challenges this I should mention that plenty of people have written about Smith's work in its political and diplomatic context (with respect to e.g. tariffs and arbitrage of precious metals)--but not in the context of day to day economic interactions relating to the production, distribution, sale and consumption of goods.  (As I've also mentioned, I think one reason for that is that scholars have only relatively recently started to understand how this economy actually worked.)  Aside from the social nature of interaction that I've already described, another thing to be aware of (and Smith himself was very aware of it) is that this social network facilitated an astonishingly complex chain of production processes.  As I mentioned, most people who know anything about Smith's work know his description of pin manufacture--he writes that if ten men each did one task, instead of one man doing ten tasks, production of pins could increase a thousandfold.  A lot of people don't realise that when Smith described this particular type of 'division of labour' it was purely a thought experiment--this kind of manufacture didn't happen in England until Marc Isambard Brunel, father of the Great Isambard Kingdom Brunel, developed this technique for the manufacture of pulley blocks for Royal Navy ships, a couple of decades after Smith's death. But the larger national economy did actually work this way--goods in production travelled from place to place, where small businesses each added their piece to a developing object until it was ready for sale and use.  The archetypal example of this kind of manufacturing process in Smith's time was the production of wool cloth, which involved workers and workshops all over England. Sheep were raised all over the country; wholesalers in London purchased their fleeces and distributed them to workshops where they were passed from place to place as they were cleaned, combed, spun into yarn, bleached and dyed. Some of these processes, such as fulling and dyeing, were done in large facilities, but others, such as spinning and combing, were typically done in small workshops or homes. The finished yarn was sent back to London for wholesale purchase and distribution to various parts of the country where different types of cloth were woven, again mostly in small workshops or homes. After several more stages of production, the cloth was again sent to London for both retail purchase and wholesale purchase and distribution to manufacturers of such products as clothing and furnishings.

The difference between this kind of division of labour and the pin-making thought experiment, or the assembly line in Ford Motors or Modern Times, is that the former was not under a single owner's control--it really was a kind of anarchist cooperative mutual-aid system in which everyone interacted on a more or less equal basis.  How could such a hugely spread out and distributed system of manufacture actually work without central management?  Trust, cooperation and credit.  That's capitalism.  And you can imagine how such a system would work best when left alone--any 'interference' or attempt at control from above or outside would disrupt this carefully constructed and carefully balanced web of interaction.

If anyone had asked Adam Smith what he was, he would have said he was a moral philosopher.  He was interested in what held this system together and made it work, and his answer, in The Theory of Moral Sentiments, was what we'd call 'empathy'.  As one of the first thinkers to consider humans collectively as a unit of study, Smith is sometimes considered the first sociologist.  Smith wrote about how we learn to 'see ourselves as others see us', and attempt to create an image of ourselves that we want others to respect and admire.  He writes:

For to what purpose is all the toil and bustle of this world? what is the end of avarice and ambition, of the pursuit of wealth, of power, and preheminence? Is it to supply the necessities of nature? The wages of the meanest labourer can supply them. ...What then is the cause of our aversion to his situation, and why should those who have been educated in the higher ranks of life, regard it as worse than death, to be reduced to live, even without labour, upon the same simple fare with him, to dwell under the same lowly roof, and to be clothed in the same humble attire? Do they imagine that their stomach is better, or their sleep sounder in a palace than in a cottage? The contrary has been so often observed, and, indeed, is so very obvious, though it had never been observed, that there is nobody ignorant of it.

From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. …The rich man glories in his riches, because he feels that they naturally draw upon him the attention of the world, and that mankind are disposed to go along with him in all those agreeable emotions with which the advantages of his situation so readily inspire him. … The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel. … The man of rank and distinction, on the contrary, is observed by all the world. Every body is eager to look at him, and to conceive, at least by sympathy, that joy and exultation with which his circumstances naturally inspire him. His actions are the objects of the public care.

We strive to achieve not because we want stuff, but because we want other people to think we're great--we act in certain ways so that other people whose opinions matter to us will approve of us, consider us important, listen to and support us, value us and our opinions, identify with us.  So, since we don't actually want stuff, there can never be enough stuff.  We see this effect particularly in the behaviour of the super-rich--they are clearly not working to meet any individual need, or even want—despite controlling literally unimaginable wealth, they continue to lie, cheat and steal to maintain and increase this wealth in order to signal belonging (to the elite) and gain approval not just from their peers but from all of society.

I'll finish this bit with an idea from G. K. Chesterton--some of us think we and our culture are too 'materialist'--but (as Chesterton says when he wants to mess with our heads) we actually have it exactly backwards.  Materialists care about material things--we value sensual pleasure, good food, pretty clothes, soft beds.  The super-rich are exactly the opposite.  They don't care about material things at all--they care about what other people think of them, and about winning the game.  Their greed is completely divorced from the material world.  They don't want a thing because it would be great to have it, and they would gain pleasure from using it; they want a thing because a) someone else has a thing and they want a bigger thing, and if they have the biggest thing they win or b) having a thing will cause other people to respect and defer to them and think they're important, and that's what truly matters.  Thanks Adam Smith!