Adam Smith's economic theory states that a group of people each working towards their own selfish ends will create a greater good for the whole. This may seem like a dubious proposition, but the evolution of social structures seems to support this idea. If nature's merciless hand determined that teamwork was the way to go, in the name of spreading each individual's genes, then cooperation probably has some merits. The problem is, historically, the Victorians tried pure capitalism, or at least got as close to it as anyone ever has, and it failed spectacularly. Why? Was nature wrong, or was Adam Smith? Or did the English just not know what they were doing?
While natural selection is not a perfect mechanism, and while the English certainly did not do everything right, ultimately the flaw does lie in capitalistic theory. The problem is that Adam Smith's theory relies on people having more than just self-interest. It relies on them having enlightened self-interest, which as previously mentioned, is a myth.
So what is enlightened self-interest, and why is it a myth? Enlightened self-interest, simply put, is always doing what's best for you. For this to work, you need to know what's best for you, and you need to always be right. This requires perfect knowledge of every situation, every rule, every loophole, every detail, and most importantly, what everyone else knows. For example, if you're an underpaid factory worker, you would benefit immensely from an organized labor protest in order to raise wages. If all the workers band together, the company can't help but cede to your demands. The problem is, if you protest by yourself, you're likely to get fired, or at least waste time you could have spent earning money. So all your coworkers need to understand that it's in their best interest to help you. And they have to know that they all understand that, or it might not be in their best interest in the first place. And you have to know that they know that. If any significant portion of the workers don't understand their best interest, or don't know that everyone else understands, then the whole plan falls apart. You all remain underpaid, because some of you didn't act with enlightened self-interest. And herein lies the problem.
You see, in a perfect world, big business CEOs would live in fear of their employees banding together at the slightest infringement of their rights or their worth. Employees, similarly, would understand that the company has to make a profit or it goes belly-up and everyone loses their jobs. Consumers might even buy more expensive local products just to keep the economy up. But people aren't good at that. It's hard to have a perfect understanding of the situation, and it's hard to see the big picture when you're struggling to get by. It's unreasonable to expect anyone to be truly enlightened in their self-interest, much less the critical mass of people necessary to make pure capitalism work.
Note: This rant does not mean I'm a socialist. Socialism is just as fundamentally flawed as capitalism, if not more so. I'm just really tired of people talking about capitalism like it's Jesus and blaming everyone wrong with it on government legislation. The system is inherently flawed, and although many of the legislative "fixes" do more harm than good, the solution is not to throw out all regulation in favor of the original flawed system.