by Tabitha Hergest

Created on: March 27, 2009   Last Updated: April 28, 2009

The reputation of Scotland for being a very good guardian if the exchequer has passed into folklore.

Some say that it's fiscal prudence, some say it's canny cleverness, and yet more just call it good-old-fashioned tightness - but it's legendary whatever it is, notwithstanding the current Laurel and Hardy routine played between the Scottish occupants of numbers ten and eleven Downing Street. It may have its roots in Adam Smith, to some the father of the Industrial revolution and free market economics, or it may be that Smith was merely a conduit of that spirit. Whichever, nobody can question the contribution Smith has made to economic thought.

One of these is the understanding of markets. All other things being equal, there is a propensity for markets to find an equilibrium, says Smith, because the economic agents acting on and within the market are acting in their own self interest. So, an item which is at the wrong price, let's say, will not sell as well as an item which has been priced correctly, be it because the perception of the good doesn't match the price asked, or that there are similar products priced more competitively. Ergo, it is incumbent on the seller to sell at a price which will maximise revenue through the optimisation of sales, and incumbent on the buyer to source the best deal possible, both in terms of price, prestige and whatever else is important to him.

Of course, economics as a subject is notoriously difficult get right, because it is dependent on so many different factors which, essentially, can skew the results expected in theory out of all compass. Hence the weasel words "ceteris paribus" - all other things being equal. But as this equilibrium can best be described as an ideal state, it is very difficult - if not downright impossible - to achieve; but as a point of reference to which all states can be connected, it is vital nevertheless. And as we have seen over the past year, the equilibrium that exists through the invisible hand of self interest can be shattered beyond the bounds of reason when unreasonable conditions are brought into play. The balance of the markets, currently, is upset because the banks are loathe to let the money flow - so self interest dictates that all the agents of the economy dictates now that all shall pull in their horns, meaning there is no trade. And where there is no trade there is no market, and everybody loses out.

Essentially, however, normal conditions of trust and money supply will usually, under the invisible hand theory, produce market equilibrium. All other things being equal, of course.

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