Greatest Ideas

Free market economics

At the advent of the Industrial Revolution, the great 18th-century Scottish philosopher Adam Smith wrote the classic text ‘Wealth of Nations’ – it expressed principles which could help increase economic well-being. Smith expressed the benefits of the invisible hand of the free market and the benefits of free trade. Smith was not uncritical of free markets, for example, pointing out problems of monopoly. But, his theory formed the basis of classical economic theory.

Smith argued that self-interest was the basis of economic transactions, but when individuals act in a purely self-interested way, society as a whole can benefit too. However, Smith did not himself believe that self-interest was the only principle that should govern the economy. He believed that the government should intervene where necessary and he thought that governments should behave morally. The fact is - as the recent economic crisis demonstrates, with governments stepping in to support the banks - a completely free market would destroy society, a fact that Smith himself appreciated.

Although economists differ on the extent to which governments should intervene to overcome problems of the free market, most economists agree the importance of free market principles in certain aspects of economics.