The foundation of Smith’s economic theory is the concept of spontaneous order, or the notion that individual self-interest works to achieve socially agreeable ends. People work hard to ultimately benefit themselves, though in the process they produce goods and services that other people want and will pay for. This is known as the “invisible hand” of capitalism; selfish pursuits in a competitive market system achieve mutual social benefits even though the individual is not motivated by benevolence. It is because of these fundamental causal relationships that the market can be self-regulating. Prices and quantities of goods are constrained by society's demand and producers' production capabilities, preventing both exorbitant inflation and an unsustainable deficit. As a classical economist, Smith supports capitalism for its ability to sustain equilibrium between aggregate supply and demand. Individual market failure is still possible, but on the whole producers and consumers can fulfill their needs and systemic market failure is avoided. Capitalism is also a self-supporting economic system because it promotes the specialization and division of labor. When tasks are specialized, workers can increase production efficiency by reducing wasted time switching between different work, becoming better at their jobs, and making better use of machinery. The division of labor is limited by the scope of the market. People cannot dedicate themselves to a task for which there is too little demand to be profitable. Overall, the division of labor benefits society by employing more workers and demanding a variety of different skills, allowing greater distribution of the economic gains of production.

For Smith, history means economic progress and capitalism is a driving force in the advancement of living standards. The economic system of feudalism exemplifies the early or “rude” state of society where only people’s basic needs, such as food, clothing, and shelter, were met. The development of production technology ushered in the era of a free market system. The market system brings humanity from early society to its current state where both basic and artificial needs are met. People have the freedom and autonomy to make choices about the goods and services they consume and enjoy higher standards of living. Capitalism promotes this societal progress through the growth of capital. The owners of capital have the greatest incentive to reinvest their capital and the best knowledge of where to do so for it to generate the most revenue. With the growth of aggregate capital comes the increased "civilization" of society that is distinguished by a more material lifestyle. Under primitive economic systems such as mercantilism, there was a slow growth of aggregate capital as a result of the government reinvesting capital into industries where it was not the most profitable. The self-interested behavior of capitalists leads to the expansion of firms with more workers and advanced technology that in turn causes society to progress. In Smith's view, societal advancement is directly related to the increases in wealth. His labor theory of value delineates labor as the origin of wealth with more labor time used to produce a good correlating to its higher value. The division of labor increases quantitative and qualitative levels of production, thus increasing the individual wealth of people and firms. Defined as the qualitative differences in lifestyle, the wealth of a country is the sum of the wealth of its population. Therefore as the division of labor and technology increases, standards of living increase to benefit a country’s inhabitants and the country’s wealth grows.