The year marking the 250th anniversary of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations invites reflection not only on the origins of modern political economy but also on the institutional evolution of capitalism since Smith’s time. Smith wrote in an era dominated by small proprietors whose ownership of productive assets linked effort, prudence, and reward.
Modern capitalism operates very differently. Production is increasingly concentrated in large corporations whose scale and complexity Smith could scarcely have imagined. Yet the core insight that animated his work—that economic systems function best when incentives are aligned with responsibility and ownership—remains central to contemporary debates about corporate governance and economic legitimacy.
This article argues that the next institutional evolution of capitalism may lie in broadening capital ownership within the corporate form itself. By expanding employee ownership without undermining shareholder governance, modern corporations can reconnect the incentives of those who create value with the rewards of capital ownership.
In doing so, they may revive, in updated institutional form, the alignment between prudence, enterprise, and ownership that Smith observed two and a half centuries ago.
In 1776, Adam Smith published The Wealth of Nations, laying the intellectual foundations of modern political economy. Smith described a commercial society populated largely by small proprietors whose ownership of productive assets aligned incentives with outcomes. The butcher, brewer, and baker in Smith’s famous example were not merely workers; they were owners whose livelihoods depended directly on the success of their enterprises. Smith captured this dynamic in one of the most widely quoted passages in economics:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. (Book I, Chapter II)
Two hundred fifty years later, the institutional structure of capitalism has changed dramatically. Production is now organized primarily through large corporations that coordinate global supply chains and employ tens or hundreds of thousands of workers. The alignment between ownership, incentives, and effort that Smith observed in eighteenth-century markets has weakened. In the modern corporation, those who contribute most directly to value creation—employees—often hold little ownership stake in the enterprises they sustain.
The challenge for contemporary capitalism is therefore not the one Smith confronted. The question is no longer how markets coordinate small proprietors. Instead, the challenge is how large-scale enterprises can maintain the incentive structures and social legitimacy that once arose naturally from widespread ownership.
Adam Smith, Prudence, and the Moral Foundations of Markets
A persistent misunderstanding in modern economics is the belief that Smith’s economic framework was based purely on self-interest in the narrow utilitarian sense. In fact, Smith’s economic analysis cannot be separated from the moral philosophy he developed in The Theory of Moral Sentiments. Also helpful, How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness.
Smith’s moral philosophy was rooted in virtue ethics. Central to that framework was the virtue of prudence. Prudence represented the disciplined pursuit of one’s own well-being and the responsible management of one’s resources. According to Smith, prudence formed the foundation upon which other virtues—such as justice, temperance, and benevolence—could be exercised.
Individuals must first secure their own stability and resources before they can extend generosity to others. Benevolence, therefore, follows prudence rather than replacing it. Without the economic surplus created by prudent conduct, individuals cannot sustain charitable or socially beneficial actions. (Part VII)
Modern utilitarian interpretations of Smith often obscure this moral structure. By treating Smith as an early theorist of pure utility maximization, later economists detached his economic analysis from the ethical framework within which it was originally embedded. Smith’s conception of self-interest therefore referred not to selfishness but to prudent conduct embedded within social norms and justice. (Adam Smith Was Consistent in Both the Theory of Moral Sentiments and the Wealth of Nations on the Role of the Concept of Self Interest)
Understanding Smith in this way is particularly important at the 250th anniversary of The Wealth of Nations. Smith’s vision of market society was grounded in a world of small proprietors whose ownership of productive assets aligned incentives with enterprise outcomes. Modern capitalism has moved far from that structure.
Corporate Concentration and Diffuse Ownership
Recent research highlights a striking transformation in the structure of modern capitalism. Production has become increasingly concentrated within large firms, even as ownership has become more widely dispersed. Studies by Yueran Ma and collaborators document a long-term rise in corporate concentration across advanced economies. Large firms now account for a growing share of revenues, assets, and employment across many sectors. (100 Years of Rising Corporate Concentration)
Technological scale economies, network effects, and the growing importance of intangible capital have enabled dominant firms to expand dramatically relative to the broader economy. Yet ownership has moved in the opposite direction. Public equity markets have spread corporate ownership across millions of investors through pension funds, retirement accounts, and mutual funds.
This dual transformation—concentrated production combined with diffuse ownership—was recognized nearly a century ago by Adolf Berle and Gardiner Means. In The Modern Corporation and Private Property, they observed that modern corporations separate ownership from managerial control, creating governance challenges that require institutional safeguards such as fiduciary duties and shareholder voting rights.⁵
The paradox of contemporary capitalism is therefore that economic power is centralized while capital ownership is dispersed.
Adam Smith himself anticipated governance concerns that arise when managers control other people’s capital. Reflecting on early joint-stock companies, he wrote that directors managing “other people’s money” could not be expected to watch over it with the same vigilance as owners managing their own resources. (Wealth, Book V, Chapter 1) Modern corporate governance institutions/mechanisms—boards, fiduciary duties, disclosure regimes, and shareholder voting—represent attempts to manage this separation between ownership and control. All have fallen short of the ideal, especially fiduciary duty, which, as noted by Marc Steinberg, might better be labeled “discretionary” duty. (
Yet another dimension of the problem remains underexplored: the distribution of capital ownership itself.
Capital Ownership and Wealth Inequality
The distribution of capital ownership has become central to debates in modern political economy. Thomas Piketty’s research, documented in Capital in the Twenty-First Century, demonstrates that wealth inequality tends to grow when the returns to capital exceed overall economic growth.⁶
Although modern financial markets allow millions of households to hold diversified portfolios through retirement accounts and mutual funds, ownership of productive capital remains unevenly distributed. Employees often participate in corporate success primarily through wages rather than capital gains.
This structural gap matters because modern corporations rely heavily on human capital and organizational knowledge. Workers contribute directly to the value generated by firms. Yet frequently remain marginal participants in the wealth those firms produce. Research on employee equity participation suggests that plan design alone is insufficient; clear communication and transparency significantly increase participation and engagement among employees. (Communication insights for improved employee share plan engagement)
Broadening capital ownership, therefore, represents one potential mechanism for addressing inequality while preserving the efficiency advantages of market institutions. Investor coalitions, such as the Predistribution Initiative, are increasingly exploring predistribution strategies that broaden capital ownership before taxes and transfers become necessary.
Employee Ownership Without Control Capture
Employee ownership offers one promising mechanism for reconnecting labor participation with capital ownership. However, traditional models of employee ownership—particularly worker cooperatives—often require worker control of the firm.
While such structures can succeed in specific contexts, they may face limitations in accessing external capital markets or scaling operations.
The framework proposed here—employee ownership without control capture—offers a different path. (Shared Capitalism: Supercharge Economy and Democracy)
Under this model, employees participate as shareholders within the existing architecture of investor governance. Equity allocated to employees is held in an employee ownership trust, which accumulates shares through compensation programs or corporate contributions.
Crucially, shares held in the trust are voted directly by employee beneficiaries. Employees, therefore, exercise genuine shareholder rights. They participate in director elections, governance proposals, and shareholder votes alongside other investors.
To preserve capital market discipline, liquidity, and investor confidence, employee ownership stakes should be capped—approximately ten to fifteen percent of outstanding equity, for example. That ensures that corporations remain broadly governed by the full shareholder base and are not “captured” by employees. Reducing the attractiveness of shares to outside investors would increase the cost of capital, reduce liquidity and investor confidence.
The goal is not to replace shareholder governance but to broaden participation within it.
Delaware Fiduciary Duty and Legal Compatibility
A key question for governance reform is whether broader employee ownership is compatible with the fiduciary duty framework governing American corporations.
Delaware corporate law places the board of directors at the center of corporate governance. Directors owe fiduciary duties of care and loyalty to the corporation and its stockholders as a whole. Under the business judgment rule, directors retain substantial discretion in pursuing long-term corporate value.
Employee ownership without control capture fits comfortably within this framework. Employees participating through an ownership trust are shareholders rather than a separate governance constituency. Directors, therefore, continue to owe fiduciary duties to the corporation and its stockholders collectively.
The model preserves the traditional shareholder-oriented fiduciary framework while broadening the population of shareholders themselves.
From Adam Smith to Modern Corporate Governance Reform
The effort to broaden capital ownership also reflects a deeper intellectual lineage connecting Adam Smith’s political economy with contemporary corporate governance reform.
Smith’s analysis assumed a society in which many participants in economic activity owned the capital they used. Ownership reinforced prudence, industry, and accountability.
Modern corporations disrupted that alignment by separating ownership from labor participation. Yet the diffusion of share ownership through capital markets now creates an opportunity to restore that alignment in new institutional forms.
Over the past several decades, shareholder advocates have pursued reforms designed to strengthen accountability between corporate managers and investors. Initiatives such as proxy access, majority voting standards, and shareholder proposal rights have sought to reconnect corporate authority with its owners.
Expanding employee ownership represents a natural extension of this trajectory. Rather than redefining fiduciary duties or replacing shareholder governance, the objective is to broaden the shareholder base itself.
In this sense, employee ownership without control capture represents a modern institutional adaptation of Smith’s insight that markets function best when incentives, ownership, and responsibility are aligned.
Accounting Issues
If employee ownership is to become a meaningful component of modern corporate governance, investors must be able to identify companies that invest in their workforce not only through wages but also through equity participation and long-term human capital development. Yet current financial reporting frameworks provide remarkably little visibility into workforce investment. In many public companies, investors cannot even determine the total amount spent on labor.
Under U.S. accounting rules, labor costs are typically embedded within multiple line items—Cost of Goods Sold, Selling, General and Administrative expenses, or Research and Development—making it difficult to assess how firms allocate resources to their employees. As scholars have observed, this absence of standardized disclosure creates a major gap in financial reporting at a time when human capital is increasingly central to firm value.
Modern disclosure rules, therefore, lag the evolution of the economy itself. In industries such as technology, healthcare, and advanced services, firm value increasingly derives from skilled labor and internally developed knowledge rather than from physical capital. Yet while firms disclose investments in physical property, acquisitions, and research and development, investments in employees are often invisible to investors. This asymmetry distorts financial analysis, obscures the drivers of productivity, and weakens markets’ ability to evaluate companies whose business models rely heavily on human capital.
A meaningful reform agenda should therefore focus on improving transparency around workforce investment while preserving the core principles of existing accounting standards. Several complementary disclosure reforms would move reporting in that direction. (Wage Wars: The Battle Over Human Capital Accounting, Colleen Honigsberg & Shivaram Rajgopa, 2021)
Disclosure Reform and Legislative Pathways
Labor Costs
First, public companies should disclose total labor costs in a standardized format comparable to existing disclosure of research and development expenditures. Although accounting standards properly treat labor costs as current expenses rather than capitalized assets, investors nevertheless require visibility into the magnitude of these expenditures. Standardized disclosure of aggregate labor costs would allow analysts to evaluate the relative importance of workforce investment across firms and industries and would enable more accurate modeling of firm cost structures.
Human Capital Disclosure Table
Second, companies should provide a standardized human capital disclosure table within the notes to the financial statements. Such a table would report key workforce investment categories in a consistent, comparable format across firms. Relevant categories could include wages and salaries, healthcare and retirement benefits, stock-based compensation, employee training expenditures, and workforce development programs. Additional metrics such as employee turnover rates, average tenure, and participation in equity compensation programs would further illuminate how firms invest in and retain their workforce. These disclosures would not require firms to capitalize human capital on the balance sheet, but they would allow investors to incorporate workforce investment into their own valuation models.
Income Statements
Third, income statements should provide greater transparency regarding how labor costs are distributed across major operating categories. Currently, labor expenses are often embedded within aggregated accounting lines such as Cost of Goods Sold, Selling, General and Administrative expenses, or Research and Development. Disaggregating the labor component of these categories would allow investors to better understand a firm’s cost structure, assess the scalability of its operations, and distinguish between investments in future growth and recurring operating costs. Such transparency would be particularly valuable for high-growth firms whose current losses may reflect substantial investment in workforce capabilities.
Employee Incentives
Fourth, disclosure frameworks should provide greater visibility into employee ownership itself. Companies that allocate equity to employees through stock grants, option programs, or employee ownership trusts should disclose the percentage of outstanding shares held by employees, the distribution of those holdings between executives and rank-and-file workers, and the voting rights attached to employee-held shares. These disclosures would allow investors to evaluate the extent to which firms align employee incentives with long-term enterprise performance.
Materiality
Because existing securities disclosure rules require information to be material to investors broadly rather than to specific governance initiatives, implementing these reforms will likely require regulatory action. The Securities and Exchange Commission could incorporate standardized workforce disclosures into Regulation S-K or coordinate with accounting standard-setters to integrate human capital reporting into the financial statement framework. See the Rulemaking petition to require public companies to disclose public companies’ investments in their workforce from The Working Group on Human Capital Accounting Disclosure. Congress could also encourage such reforms by directing regulators to modernize disclosure standards for an increasingly intangible-asset-driven economy.
Improved human capital disclosure would serve multiple objectives simultaneously. Disclosures would enhance investors’ ability to evaluate firms whose value derives from workforce knowledge and innovation. Boards of directors would have clearer benchmarks for assessing whether firms are investing adequately in their employees. Policymakers would have a more accurate picture of how corporations allocate resources between capital, labor, and long-term enterprise development.
Most importantly, these reforms would begin to close a widening informational gap between the realities of modern production and the reporting structures inherited from an earlier industrial era. As capital markets increasingly depend on firms whose primary assets walk out the door each evening, transparency regarding human capital investment is no longer a peripheral governance concern. It is becoming a prerequisite for understanding corporate value creation itself.
Policy Implications for Boards and Institutional Investors
For corporate boards, the central implication of this analysis is that expanding employee ownership does not require abandoning the fiduciary governance framework that has long structured corporate law. By enabling employees to participate meaningfully in capital ownership through equity programs or employee ownership trusts, boards can strengthen incentive alignment, deepen employee commitment to enterprise performance, and reinforce the legitimacy of corporate decision-making among the firm’s most economically exposed participants.
For institutional investors, the implications are equally significant. Pension funds, sovereign wealth funds, and diversified asset managers increasingly function as universal owners whose long-term returns depend on overall economic performance. Governance structures that improve productivity, workforce stability, and social legitimacy therefore benefit both diversified investors and employees.
Institutional investors are uniquely positioned to encourage such reforms through stewardship initiatives and engagement with corporate boards.
Conclusion: The Next Institutional Evolution of Capitalism
Two hundred fifty years after the publication of The Wealth of Nations, capitalism has evolved far beyond the world Adam Smith described. Yet the institutional evolution of capitalism has preserved one of Smith’s central insights: incentives matter.
Employee ownership without control capture represents a practical step toward restoring the alignment between participation and reward that once arose naturally in a world of small proprietors.
By broadening capital ownership while preserving investor governance and capital market liquidity, hybrid corporate structures can combine the advantages of centralized enterprise with the incentives created by decentralized participation.
Two hundred fifty years after The Wealth of Nations, the next institutional evolution of capitalism may lie in expanding the circle of capital ownership itself.
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