Adam Smith cannot be said to have constructed the capitalist system. What he did was provide the logic of a level ground of economic rights upon which free enterprise could be built more easily. And he suggested to the builders that they use the wheelbarrow of free trade, the plumb bob of self-interest, and all the specialised tools of specialisation.

However, when Smith undertook to consider how free enterprise allocates what it produces - "the order according to which its produce is naturally distributed" - he hit capitalism hard enough to make its boiled shirtfront roll up like a window shade.

Some acolytes of Smith might be surprised if they ever read him. He wrote that "the oppression of the poor must establish the monopoly of the rich", and that profit is "always highest in the countries which are going fastest to ruin". About concepts such as "full employment" Smith could sound like a John Kenneth Galbraith: "If the society were annually to employ all the labour which it can annually purchase the produce of every succeeding year would be of vastly greater value than that of the foregoing."

Adam Smith was tough on the landed gentry: "As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed." He would have been amused to see the dukes and duchesses of England reduced to keeping circus animals and other attractions on their great estates and letting fat daytrippers waddle through their stately homes, camcording the noble ancestors on the walls.

Smith was tougher yet on the very people who, in his time, were beginning to generate the wealth of nations that he proposed to increase. Despite his friendship with merchants and manufacturers in Edinburgh and Glasgow, Smith had a cool loathing for the class: "Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour.

"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent and regard to the pernicious effects of their own gains. They complain only of those of other people.

"The interest of the dealers in any particular branch and trade or manufactures, is always in some respects different from and even opposite to, that of the public."

Smith was not a fan of what would come to be called lobbying: "The proposal of any new law or regulation of commerce which comes from merchants and manufacturers should always be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined with the most suspicious attention."

And Smith was no enthusiast for the privatisation of government functions. Concerning the East India Company and its rule of Bengal, Smith wrote: "The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever."

But what made Adam Smith different from the later and more foolish critics of capitalism was that he never reasoned backward about the cause of economic disparity. "It is not," Smith wrote, "because one man keeps a coach while his neighbour walks a-foot, that one is rich and the other poor." Wealth is not a pizza. If I have too many slices, you don't have to eat the Domino's box.

Smith also possessed none of the moral contempt for profit itself that would become the laurel wreath crowning every philosophical pretension from the poet Shelley to Pol Pot.

Smith wanted "the establishment of a government which afforded to industry the only encouragement which it requires, some tolerable security that it shall enjoy the fruits of its own labour". Smith did not consider profits to be the same as "pernicious gains". He held that excessive profits were the results of laws that limited or guaranteed trade. A "violent police" was the term he used for such legislative interference in free enterprise.

And even with a brutal constabulary of trade regulations, pernicious gains are to be preferred to pernicious losses. Imagine a world where we went about our daily activities deliberately intending not to profit by them.

Smith saw an ordinary rate of profit not as what it ideologically is to the ideological, but as what it actually is to the profit- maker, "his revenue, the proper fund of his subsistence". The freedoms of competition force the price the profit-maker charges for his goods to "the lowest at which he is likely to sell them at least where there is perfect liberty". The italics are added and the phrase cannot be underscored too heavily. Smith was fostering free enterprise, and he was also nurturing - just in time - resistance to socialism. "Nothing can be more absurd," he wrote, "than to imagine that men in general should work less when they work for themselves, than when they work for other people." And when other people are "The People" - not individuals but an abstraction - the absurdity becomes an insanity.

Adam Smith was not a modern libertarian, but he was a libertarian critic of capitalism. Problems of equality were not to be solved with more laws. In a free market, wages may be too low, but Smith wrote "law can never regulate them properly, though it has often pretended to do so". Greater capitalist equality was to be achieved with greater equity capital, so that "in consequence of the flourishing circumstances of the society, the real price of labour should rise very considerably".

Likewise the problems of free markets were not to be solved by increased regulation of those markets, but by increased freedom in them: "To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it." Every law concerning commerce - even the most beneficent - contains an element of narrowing the competition and should be "examined with the most suspicious attention".

Another reason that Adam Smith defended economic freedom, and all the unpleasant questions of money that come with economic freedom, was that he understood the money.

The rich may be piggish, but money does not transform them into creatures with bigger gullets than we have. "The rich man consumes no more food than his poor neighbour," Smith wrote, referring to the reasonable prosperity of his time and place. In the unreasonable prosperity of our time and place it's the other way around. The larger the pie wagon the more likely that he or she is living below the government's officially decreed poverty level.

The economic benefits of wealth in a free market quickly overflow the humble vessel that is Paris Hilton, and they do not trickle down, they pour.

Smith understood the money that people have, and he understood people. Living before the social sciences had split into warring camps (or had claimed the dignity of being sciences) Smith was free to be a psychologist as well as an economist.

Smith was the therapist of capitalism. He understood how the desire for power pushes a man, he wrote "to the highest degree of arrogance to erect his own judgement into the supreme standard of right and wrong to fancy himself the only wise and worthy man in the commonwealth".

There is no toil and trouble as bad as politics. The freedom of the market, though of an uncertain fairness, is better than the shackle of government, where unfairness is perfectly certain. And there's an additional factor that makes business superior to politics. Smith saw that a free society tends to disconnect power from booty. Referring to the great Britain of his era, Smith wrote that money does not automatically buy power, either civil or military power. And no amount of current grovelling for US election campaign contributions makes this less true. Politics may be terribly influenced by money, but political power cannot simply be purchased in the marketplace. Ross Perot and Steve Forbes proved this.

Another reason that political powers are different from free market goods has to do with the nature of markets. Unfettered private exchange cannot be limited - as the Chinese government thinks it can - to things. Material items are indivisible from the knowledge of how to make them and the ideas upon which that knowledge is based. All the more so, now, in an "information age". Free markets lead to thinking, that eternal enemy of politicians.

The Wealth Of Nations is an analysis of the means by which we pursue self-interest and a critique of that pursuit. It is also a warning against pursuing what is worse. Adam Smith did not want us to be like "the common people of England", whom he saw as "so jealous of their liberty, but . never rightly understanding wherein it consists".

PJ O'Rourke on The Wealth Of Nations, part of the Books That Shook The World series, is published in paperback by Atlantic Books on March 15, priced £8.99 The NAPF conference is at the Edinburgh International Conference Centre, Wednesday to Friday