by Tarot

Created on: October 14, 2008

Adam Smith regarded the completely unregulated market as an ideal model for the economy in which he lived, specifically during the industrial revolution in the 18th century, but he always recognized the need for government intervention in the market place and in the need for governments to raise taxes and control non-profitable sections of the economy.

Adam smiths theory, presented in the "Wealth of nations," was based on his observations of the market place at the time, England and Scotland in the 18th century, his observations of human nature and his religious and moral convictions which appear to be drawn from the Puritan movement. He believed that society follows a divine plan which we, as mortals, cannot understand and that any interference in that divine will cause problems and resistance. The law of self interest states that individuals will always seek to make best use of the skills and resources to create the most profit for themselves and society as a whole, this is clearly a combination of observation of human behaviour and his religious beliefs.

In the wealth of nations both these concepts are extended to form the theory that if unregulated everyone in the market will maximise their individual productivity and when this is summed together over industry and agriculture as a whole it increases the overall productivity of the nation. This enables greater specialization and the capacity for a nation to support more specialists, including scholars, scientists and master craftsmen and enables more people to become more wealthy. Those who acquired wealth would then follow the law of self interest and rather than merely spending their money on personal comforts or luxuries they would invest it in the most profitable form of industry, which he assumes to be local industry in the same country as the investor; this is clearly influenced by puritanical religious beliefs of the protestants who believed that it was acceptable for a pious man to gather wealth so long as it was used for the work of god, philanthropic purposes (charity) or invested back into industry and not wasted on luxuries.

Adam Smith also recognised that it would allways be governments responsibility to see to the defence of the realm, maintain law and order and to invest capitol in institutions of benefit to society but which would never be profitable, in other words it was necesary for government to raise taxes and to look after the welfare of its citizens.

The problems with Adam Smiths writings is that they are focused on an era in which the primary methods of making money were agricultural or mining production and manufacturing with only a minimal service industry; he believed that traders should trade across the borders of countries without interference but that investors will choose to invest their profits in their own countries and that individuals will be motivated to improve their own living standards but will also work towards the common good.

For Adam Smiths theory's to be put into practice in the modern world it is essential to regulate the market and for government to ensure the welfare of its citizens because this was part of his plan all along. The invisible hand was intended to be regulated by the morals and religious beliefs of every individual in a way that does not happen in this modern day.

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