Fantastic post and I whole heartedly agree.
Now how do we influence the market to avoid the problem you stated. Beyong the problem that has developed in the USA capitalism is still my choice of systems. (capitalism coupled with a limted democracy is my favorite combination.)
I agree: Capitalism, despite its current flaws, is the best system we have. Those flaws are not intrinsic to capitalism itself, but are the results of the way capitalism has been implemented (i.e. haphazardly).
Smith's model was predicated on locally owned businesses engaging in local transactions (even import-export operations would hire sales agents to travel to foreign markets and negotiate with foreign suppliers or resellers), so the first thing that would need to happen would be to create market-based incentives that favor sole proprietors and partnerships. This would have the added benefit of making more business owners legally liable for the actions of their business (another key factor in Smith's model). The fact that corporate income in the US is taxed twice - once as business income, and once whenever it's paid out as dividends - is one such strategy, although thanks to tireless lobbying by corporatist business groups, it's a fairly weak one. Holding the owners (shareholders) of corporations responsible for the actions of their companies would be another strategy, albeit one that's very unlikely to get past the corporate-funded Congress.
Another strategy is to create a system of priorities when approving business licenses: sole proprietorships and partnerships would get an expedited approval process, whereas corporations would only get approved if there were no other business applications pending (and only if they could demonstrate that people actually
need what they plan to supply).
Filing fees for corporations should be much higher than those for small businesses in order to tilt the market in favor of small businesses.
For tax purposes, there's the possibility of creating an "ideal business plan" whereby each business is rated on certain criteria that favor small, locally owned businesses (such as "more than 50% of the owners live in the same county as the business"). For each criterion that a business meets, it receives a reduction in its business tax rate; businesses that meet all of the criteria pay the minimum tax, and those that meet few or none pay the maximum tax rate.
All businesses should be required to consolidate their books, so that all revenue generated in the US is taxable in the US, and only expenses incurred in the US can be used to offset those revenues. For sole proprietorships and partnerships, this happens automatically since they are local businesses; for multinational corporations, this would require additional accounting work and expense. (It would also make outsourcing a lot less desirable.)
On the positive (as opposed to the punitive) side, the federal government can help create the infrastructure needed for long-distance trade, either through direct investment or incentives. Bear in mind that import/export does not necessarily refer to international trade, it could also be a situation where one state has a surplus of apples but no oranges, while another state has a surplus of oranges but no apples, so an exporter in Appleville buys up all the cheap apples and ships them to an importer in Orangetown (who sells them at a nice markup), while an exporter in Orangetown buys up all the cheap oranges and ships them to an importer in Appleville.
Modern communications allow import/export agents to negotiate with each other directly, eliminating the need for traveling sales agents (it also makes it easier for exporters to find local freight carriers to transport their goods), so maintaining an excellent communications infrastructure is important.
Incentives for exporters to use locally based freight carriers when shipping would also help. You do sacrifice economies of scale when using local carriers as opposed to national carriers, however, local carriers actually create more jobs since there is a lot of duplication of functions (i.e. every carrier needs a dispatch center, every carrier needs an accounting department, etc.); national carriers on the other hand consolidate many of their functions into a single central office, and thus employ fewer people. By encouraging exporters to use local carriers, the government would be encouraging the market to create and maintain more jobs.
Good long-distance roads, such as the tax-supported national interstate highway system, and a well-maintained freight rail system are also necessary for efficient long-distance land-based shipping. Support for the highway system and even a national freight rail system (similar to Amtrak for passengers) could be shifted from general taxes to surcharges attached to the bills of lading. These surcharges would be paid by the export company based on the value of the goods shipped and the distance traveled, and the cost would be passed on to the importer (and ultimately to the final customer); thus, the people who purchase imported goods are the people who finance the system, and the people who don't buy imports, pay nothing.
Those are just some of the ways that the market can be shaped by policy to create stronger local economies. It's really all about setting priorities and then adjusting policy until we get the desired outcome.