Real Estate

When you think about investing, the first thing that comes to mind is probably the stock market. It’s the traditional and most popular choice when thinking about ways to invest money. But you may not know about another investment opportunity: real estate. Yes, real estate is an investment just like buying stocks and bonds. And in fact, when approached correctly, it can be a great low-risk, high-yield, highly diversified investing alternative to the stock market.

Everyone needs a financial plan and an investment strategy. We all have things we’re saving for, whether they’re long term goals like retirement or shorter term like increasing our income or saving up for a big purchase. Let’s explore how real estate investments, as compared to stocks, might help you achieve your goals.

In this article, we’ll talk about why you might want to invest in real estate depending on your personal situation and preferences, as well as the differences between real estate and stocks in risk, return, choices, time frame, liquidity, and more. In general, real estate will require a larger investment up front and requires time and patience, while stocks are far simpler to buy and sell without spending large sums, but tend to be more volatile.

The Basics

More people invest in the stock market because it has a lower barrier of entry. It’s easy to buy stocks, and it doesn’t require large sums of money to get started. Real estate requires down payments that can be substantial. So choosing real estate investments over stocks will depend on your personal preferences and financial situation.

The stock market allows you to buy and own pieces of companies called shares. When the share price increases after you’ve bought them, your investment is worth more. Some stocks also pay out dividends.

Buying real estate is easy to understand, because land and buildings are physical, tangible things that you own. Much like a stock’s share price, when the value of real estate goes up, your investment is worth more. You can also make money by collecting rent on properties. And even if you can’t afford to buy a property outright, most real estate purchases can be leveraged, so owning more real estate is possible.

Real estate can be used to diversify your investment portfolio, as well as owning something real and tangible. Although some real estate investments can resemble stock market investments as well. Real estate investment trusts (REITs) are an alternative way to invest in real estate that work similarly to buying and selling stocks.

Let’s dive into some of the other differentiators between real estate and stock market investing and why you might choose one over the other.

Returns

There are certain times when choosing the stock market over real estate make more sense, like when you’re increasing your returns through benefits like a company match 401(k). But you won’t always have those benefits at your disposal, and when you invest in the market without them, it’s hard to predict what will happen with your money and you may not get the returns you hoped for.

When it comes to return on investment (ROI), it’s impossible to directly compare the stock market with real estate. The things that determine return in each are completely separate. But they are often affected similarly by large changes in the economy, like the COVID-19 pandemic and the 2008 recession. One way to get a general idea of how their ROIs compare is by looking at the S&P 500 ETF (SPY) and the Vanguard Real Estate ETF Total Return (VNQ).

Risks

Despite seeing similar effects from the havoc wreaked by the 2008 housing and bank crises and the more recent COVID-19 pandemic in 2020, the day-to-day risk factors for real estate and stocks are quite different, as well shall see.

Let’s take a look at some risk factors for real estate investing.

For one thing, you can’t dive into real estate without being armed with knowledge and research. There’s no way to be a casual real estate investor, hoping to make a quick buck while putting in little thought and effort. Not to mention, liquidity can be an issue for real estate. If an investment is not working out or needs to be unloaded, it’s not easily or quickly done. There are no convenient, quick exits when it comes to real estate.

When it comes to owning property that you don’t live in, it’s a very hands-on affair. Whether you’re renovating to flip a house, maintaining and repairing rental units, or dealing with the many aspects of having tenants, there is always something to be thinking about—and paying for—when you own real estate. Not to mention, when renters’ well-being is involved, some expenses simply can’t wait when there’s an urgent need.

The more property you own, the more likely you’ll need to hire people to help you, whether they’re property managers who can deal with tenants and rental property maintenance or professional contractors who can oversee upgrades to homes you’re renovating. Of course, hiring people costs money, and that eats into your return on investment. But as they say, time is money, and the less time you have to spend dealing with the details, the better. Especially if you own multiple properties.

The risks of stock investments are quite different. Stocks are beholden to the market, and the ups and downs of the market will translate to ups and downs in stock prices. Recessions and inflation are always things to keep an eye on. And it’s not just the U.S. economy that influences the market. Many large companies have an international presence, so the economies of other countries will also have an effect on stock prices. That means foreign political unrest can mean a change in the value of your investments. Government policies in any country can also be a factor, including interest rates, regulations, tax laws, and more.

Not all risk factors are out of your control. You may have heard people talk about how important diversification is. If you choose not to have a diverse portfolio, you will run a much higher risk if your stocks don’t perform. Diversifying can help mitigate your risk as an investor.
You may think that dividends are the answer when it comes to stock investing, and indeed they can be consistent and predictable. However, for them to be a significant source of income, you’d need to invest a large amount of money into stocks that have high-yield dividends. And while this can be a great addition to your income, high-yield dividends often mean less growth potential in the long term.

Comparing Disadvantages and Advantages of Real Estate and Stocks

There are pros and cons to both real estate and stock investing. Let’s take a look at both, starting with real estate.

Advantages of real estate:

• Leveraging allows you to buy property that you can’t pay for in cash up front. – Many real estate purchases come with significant tax benefits.
• Can provide long-term passive income.
• Real estate values tend to appreciate over time.
• Locking in payments now can be protection against inflation over time.

Disadvantages of real estate:

• Not as liquid as stocks, so not a reliable way to get quick cash when it’s needed.
• Usually requires large sums of money up front, even when leveraging.
• Must be able to secure financing.
• Time and money spent on property management, maintenance, upgrades, repairs, and dealing with tenants and renters.
• Requires more research, time, and effort than stock investing. – Not all real estate investments appreciate in value.

Now, let’s look at advantages and disadvantages of stocks. Advantages of stocks:

• Does not require a large investment up front to get started in stock market investing.
• Very liquid, easy to quickly buy and sell when you need to (like in the case of emergencies). – Easy to reduce risk and diversify with so many options for stocks and ETFs to invest in.
• Transaction fees are affordable.
• Excellent for tax-advantaged retirement investing.

Disadvantages of stocks:

• Volatile and sometimes unpredictable, depending on the market, economy, inflation, international events, policy, etc.
• Ease of selling means it’s easy to sell in a panic rather than staying the course, resulting in losing money.
• Capital gains tax can eat into your earnings if you sell stock.
• May take a long time for some stocks to increase in value.
• While it’s easy to get started, if you don’t have a significant investment, your growth may be limited.

There are a few other things worth considering when deciding between stocks and real estate investments.

While it’s true that real estate requires a larger up front investment than stocks, mutual funds, and REITs, it’s important to remember that you are able to use leverage to purchase assets that are more valuable than if they had invested the same up front sum into stocks. For example, if you invest $30,000 in the stock market, generally the initial value of your investment is $30,000. But investing $30,000 as a 20% down payment on property will get you a $150,000 asset (with a mortgage and tax-deductible interest).

A mortgage, insurance, taxes, and maintenance may be effectively zeroed out by rental income from tenants. But when done right, this income can also come out to a profit rather than simply breaking even and letting the property appreciate in value. Other things to take into consideration are depreciation and other tax write-offs.

Additionally, property with rental income can increase in value with inflation. This applies even if the real estate is rent controlled. And don’t forget that real estate capital gains can avoid taxation if they are used to buy another property, whereas stock sales can incur capital gains taxes. This tax deferral tax code is 1031.

It’s also worth noting that mortgage lending discrimination is a crime. It is illegal to discriminate on a mortgage based on religion, race, gender, nationality, disability, age, marital status, or the use of public assistance. If you believe this has happened to you, you can file a report with the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau.

Conclusion

There are many pros and cons to investing in real estate vs. investing in the stock market, and your preference will come down to your own priorities, abilities, and financial plans. When talking about investing, most people think about the stock market first, particularly their own 401(k) or IRA (individual retirement account). But real estate can help with the ever-important diversification of your investment portfolio and is often an excellent long-term investing decision.

When reducing your investment risk, maximizing your returns, and diversifying your portfolio, a variety of assets should be the primary goal. Considering the different advantages and disadvantages to both stocks and real estate, it makes the most sense to include both in your investment plan. In fact, this is the strategy for many successful investors. If you’re still hesitant about managing property in real estate, at least consider adding an REIT to your portfolio.

When it comes to investing, real estate is a popular option for an investment that generally appreciates over time and can increase your wealth. Real estate investments can include rental properties, vacation getaways, even your own home. If you have enough money for it, luxury real estate can be another great option to add to your assets. Let’s discuss some of your choices when it comes to investing in the world of luxury real estate.

First, it’s important to establish what luxury real estate is in the first place. You might think it just refers to real estate that is particularly expensive, but that’s only part of the story. There are other factors that make a real estate property truly a luxury option. For example, it should have some sort of unique features that make it stand out from other options and make it seem better by comparison. There has to be some kind of exclusivity to it. This is all part of the world of the wealthy, where high price tags are worth the cost when what you’re getting is the best option possible.

Some features don’t have anything to do with the building itself. As the old saying goes: location, location, location. If a property is near luxury shopping, high-end dining experiences, and arts and culture, those are luxury perks. Being near other luxury homes doesn’t hurt, either! Even the address itself can bump real estate into the luxury category. Or a location with a view; oceans and rivers and lakes, incredible mountain ranges, or breathtaking natural country landscapes.

When consider luxury, think big. As in, all the things you’d want out of any home, but more epic and pronounced. Custom architectural details and luxurious flourishes, beautiful to look at from the outside and the inside, privacy to the extreme from the outside world. Not just a kitchen, but multiple kitchens fit for a Michelin star chef. A pool and hot tub worthy of having an amazing outdoor party. Plenty of outside amenities like barbecues and lounge areas. Advanced car garages, automated home systems, high end speaker setups, wine cellars with temperature controls, and of course a generous amount of square footage.

When it comes to luxury properties, the biggest factors to consider are the ones you can’t alter or renovate if you don’t like them. The view from the bedroom, what direction the big living room window faces, where the ocean is, the noise caused by road and air traffic. These are things that can affect the quality of living but can’t be easily changed. Any features that can be altered to your liking are far less impactful.

The Cost of Luxury

So now you know what to look for in a luxury property. But what kind of money can you expect to pay? The answer depends heavily on the location of the real estate. In some areas a mere $500,000 will get you what you need. But in most major cities you’ll need to spend a minimum of $1,000,000, and in many cases much more. Take New York City for examples. The average luxury home price in 2022 was nearly $9 million, and that’s only scratching the surface. There is a pair of condos in Manhattan that sold for nearly $160 million!

So depending on what you’re after, paying cash my not be an option for you. In that case, you might need to get a jumbo loan, which would require a significant down payment and fantastic credit. You’ll also need to prove how much money you make, how much money you have saved, and what other assets you own in order to get a jumbo loan.

Investment Options

You’re ready to dive into the luxury real estate world and you have the financial resources to do so. What are some of your options for getting started? Luckily, you have quite a few at your disposal. Let’s take a look at a few.

One option is to flip a luxury home. You’ve probably heard of house flipping, where investors buy a property, renovate and upgrade it, then sell it at a profit. The same can be done with mansions and luxury properties, with an even higher profit return potential. A luxury home typically doesn’t qualify as a “fixer-upper,” so renovation costs may not be as high. But your options overall may be limited considering trends, location, and style. Still, the competition for luxury flipping is far less fierce than in the non-luxury market, because buying a luxury property requires more cash, assets, credit, and general experience. Something which most real estate flippers don’t have.

Another option is to invest in international property. This can have perks you wouldn’t come across in the United States. In some foreign locations, there are no annual property taxes or capital gains taxes on transferred property. This is the case in the British territory Turks and Caicos, where the U.S. dollar is the currency and property ownership is protected by a land registry. So the barrier of entry is low, and purchases are easy and in your own currency.

International purchases have the added benefit of being rental properties if you don’t live there full time (or at all). As the real estate appreciates in value, you can also make a profit of passive income through renting it out. It’s easy to hire a property management company to take care of the day-to-day, so you don’t even have to worry about who is renting your home. You can just let the rental income roll in.

Then again, investing in luxury real estate in another country can present its own problems, and you should always be aware of local laws that may affect your purchase. If you buy real estate in a country where the government can seize it back for example, you may be in for a bigger headache than you bargained for. Always go through an international real estate attorney and other professionals who can help guide you in the right direction and inform you of any risks or concerns.

Buying mansions and foreign properties aren’t your only luxury options, though. You could also consider buying a luxury condominium. When going this route, the location is an even bigger consideration than when buying a house or mansion. A nice condo in a nice building isn’t enough to be considered a luxury purchase. It should be in a great location, near shopping and dining and culture, and also close to transportation options. Otherwise you’ll find yourself with an expensive non-luxury condo.

And don’t forget the rest of the building’s features. Doormen, fitness centers, maid services, pools and hot tubs, dining, private rooftop spaces, recreational areas, unique architectural features, balconies and terraces, great views; all of these can help distinguish a luxury condo— and a higher potential for return on investment (ROI)—from a luxury-wannabe. These features help future-proof the value of your investment over time, no matter what is built around the building.

Another option for luxury real estate investment: think vacation. High-end vacation rental properties in ski resort towns, tropical paradises, golfer’s delights, and tourist traps can be a great choice for luxury property purchases because they generally appreciate in value and may include tax benefits and networking opportunities. Another strategy is to invest in a location that is family-friendly, because it will bring a higher volume of renters (and therefore income) to your property. The best part? You’ll own real estate in a fun, desirable vacation spot that you can take full advantage of whenever you want. These investments can bring in a good amount of passive income, particularly during tourist-heavy seasons. It’s important to note, however, that this can ebb and flow with the market, thriving during the good times but being susceptible to recessions and down markets.

Then again, you’ve probably heard the saying “buy low and sell high.” A recession can be an excellent opportunity to invest in a luxury vacation home for a more reasonable cost.

Yet another option is building a custom home from scratch. This can lead to some of the highest return on investment because it’s modern, brand new, in style, on trend, and full of up- to-date amenities, although it also often requires the highest upfront costs and longer time frames to complete.

Just remember when designing the home that it should appeal to other buyers in the luxury segment to help its resale value and ensure that you can sell it in a timely manner. It should feel like a home that can be lived in, warm and inviting, functional and natural, private and secure, and anything else luxury residents would desire and require in a home. Still, you want it to stand out and be unique. So you’ll want to balance these approaches to maximize the property’s appeal.

So a custom luxury home should be livable but one-of-a-kind. If it doesn’t look and feel like a cookie-cutter property that blends in with every other luxury home, yet has a familiarity and “like home” feel to it, you’re more likely to get a great return. It’s simple supply and demand: if your luxury real estate doesn’t have distinct features that make it stand out from everyone else trying to lure the same potential buyers, it won’t inspire those buyers to spend their hard- earned money when a more interesting and notable option exists.

A Few More Tips

So we’ve gone over several options for investing in luxury real estate, along with the details on what it takes to get started in this investment strategy. If this sounds like something you’d like to pursue, here are some tips to keep in mind as you enter this new world.

You’ll want to have a plan going in. When investing in luxury real estate—or any real estate for that matter—you need a clear set of goals for what you want to get out of your purchase. Are you hoping to flip property for a quick profit? Create long term passive income streams from vacation rentals? What is your end game?
It’s not just the location of your property that you have to consider; it’s also the state of the current market. Economic factors will greatly affect your purchase and ROI. Things like the local cost of living and median income, the job market, and whether you’ll be able to create year-round income or will have seasonal peaks should be taken into consideration when making decisions to invest.

Get your financial plans in line. Will you be paying cash for the property? Will you need to secure special financing? Does it make more sense to finance even if you have the cash to burn? Your payment strategy may change depending on your goals and what kind of property you’re investing in (a flip vs. a luxury vacation rental, for example).

Jumbo loans are a financing option. Jumbo loans are mortgages larger than the conforming loan limits set by Fannie Mae and Freddie Mac. That limit is $647,200 for a single family home in the U.S. as of 2022, although there are some areas that have limits up to $970,800.

When thinking about finances, taxes should also be a concern. Taxes and tax deductions change depending on how much you’re living in your property. You don’t need to report rental income and can’t deduct expenses if renting for fewer than 15 days in a year, though if you’re investing for the purposes of having a rental property you are almost certainly going to rent it out for more than 15 days. Learn more about the tax rules for rentals in Publication 527: Residential Rental Property from the Internal Revenue Service.

Also to be considered are the taxes on income from selling your luxury real estate investment. That income is considered a capital gain, and could be eligible for capital gains taxes if the property was held for a year or more. If it was less than a year that you owned the property, it would be taxed at the higher rate of ordinary income.

The tax rules are different depending on whether a luxury property was your primary residence for a least two years.

Conclusion

Luxury real estate isn’t for everyone, but for those with the means and the desire, it can be an exciting investment world to explore. It also may appeal to those who prefer having a real, tangible asset rather than investing in stocks and securities. It also appeals to those who would like to live in a luxurious home! But living your luxury real estate investment is optional. You can also pursue rental properties, build custom homes to flip, or purchase vacation mansions and condos to renovate. Just remember to have a plan and be well informed of the financial aspects and the trends and desires of other luxury investors.

When you think influential and iconic documents of 1776, you almost certainly think of the Declaration of Independence. Fair enough; that document did have a bit of an influence on America and the rest of the world. But there was another publication from that year that may have had even farther-reaching global consequences: The Wealth of Nations by Adam Smith.

The Wealth of Nations was published on March 9th, 1776, under its full title: An Inquiry into the Nature and Causes of the Wealth of Nations (not quite as catchy in its long form). Adam Smith wrote the book about capitalism, specifically how industrial capitalism was becoming the new, dominant form of economic system over the fading mercantilist system. Smith was a Scottish philosopher who would be widely regarded as incredibly influential throughout the world.

Mercantilism was a flawed form of thinking that saw wealth as a zero-sum game, limited and fixed in its volume. It posited that a country could only prosper by selling its goods to other countries without buying any imports, while hoarding their own wealth and resources and placing heavy tariffs on imported goods. As you might expect, this was not good for international trade when every country wanted to export everything and import nothing (while taxing what little was imported).

But Smith proposed a more individual-based view of economics, one where fulfilling our self- interests is actually a benefit to society as a whole. He famously called the force that drove this the “invisible hand.” He said that embracing self-interest while dividing labor in an economy leads to dependence by all parties that can lead to a stable and profitable market system. Additionally, Smith was against governments getting involved in economic matters, and that the government only existed to protect borders, engage in public works like education, and, of course, enforce laws.

Smith’s take on self-interest formed the key tenet of his proposal in The Wealth of Nations. He saw that self-interest (AKA “looking out for number one”) was a natural human feature, and that embracing it (rather than fighting it) would result in prosperity. The key to embracing self- interest was to allow freedom. Freedom from government interference, freedom to produce and trade goods however they wanted, freedom to incorporate competition both domestic and international into the economic market. With so many players involved, all vouching for their own self-interests, they would work together, balance each other out, and find solutions that worked for everyone’s well-being, without the need for heavy regulations.

Self-interest is demonstrated through our economic actions and decisions. Here’s an excerpt from The Wealth of Nations in which Smith talks about the invisible hand:
“He generally, indeed, neither intends to promote the public interest nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

The only way for Smith’s invisible hand to go to work was for there to be a free market with more division of labor that created mutual dependencies in both production and all of society, leading to the benefit of everyone through the individual’s desire for profit. What that means is that people’s specialized skills that they can use to create profits for themselves will all work together in a diversified economy that benefits everyone, even when everyone is working to help themselves. If you’re a tailor who makes clothes, you will be dependent on others to create the other goods you need to live, like food and shelter, while those others will rely on you to make their clothes. Smith’s prosperous economy comes from people providing for their own needs, then needing the skills and services of others to provide what they can’t provide themselves. Everyone wins.

Smith’s invisible hand creates pricing and distribution systems in the economy naturally and automatically, without one person or entity controlling them.

Humanity vs. Policy

The invisible hand is an amalgamation of countless factors that arise in an economy of consumers and producers rather than an actual force that can be identified. Smith, who is now considered the father of modern economics, was instrumental in identifying this important revelation. His influence looms large today as his theories are still a cornerstone in free-market economic thinking.
Today, many believe that the invisible hand results only when production and distribution is owned by private entities and commerce should be unencumbered by any sort of regulation in order for a free-market economy to thrive. Those who follow this interpretation are generally against any kind of government interference in economic matters.

In a macroeconomy, the rules arise naturally through supply and demand, profit and loss, buying and selling. The rules are agreed upon by all involved as they work together to achieve their goals, whereas government is run by a small group of lawmakers and regulators who try to achieve specific goals that may or may not be in the best interests of various economic players. Therefore, the government has the power to exert control over the invisible hand, but the invisible hand does not have power to influence the government.

Government interference can cause shortages and surpluses that wouldn’t have existed if the forces of the invisible hand were left to regulate themselves. Government planning can be complicated by a lack of regulation in the market, but without regulation principles such as supply and demand determine the cost of goods and services, which then leads to resources naturally being put to use toward goods that are valued the highest. This is not so when government steps in.

One example of this is the gas shortages in the U.S. during the ‘70s. At the time, the Nixon and Ford administrations tried to make gas cheaper for the American public after OPEC (Organization of Petroleum Exporting Countries) reduced production and raised prices. Their strategy was to control the price of gas so it wouldn’t be as expensive for the American people.

But the policy backfired. The incentives that arise naturally through a free-market economy for gas stations to be open all day and oil companies to increase domestic production no longer existed, and the new incentive of consumers to hoard as much gas as possible was created. Lines at gas stations went around the block and gas shortages were everywhere. When the policy was backtracked and prices rose, suddenly the long lines disappeared.

So it’s not accurate to say the invisible hand can limit the effectiveness of the government. It’s not the invisible hand that is limiting government, but it is the invisible hand that makes the economy prosperous, and therefore there is limited ability for the government to make policies that improve on a process that works itself out automatically.

The Path to Prosperity

According to Adam Smith, there are three requirements for a nation’s economic prosperity.

The first is enlightened self-interest. This means that working hard and looking out for your own interests will lead naturally to you contributing to the interests of others. In other words, taking care of your own needs will wind up benefitting others as well. This should be a natural instinct for most people, as in the case that Smith presents in the Wealth of Nations of the butcher who supplies meat not as charity but to make a living for himself so he can provide for his family. But because selling a low quality product would mean fewer returning customers, it is in the butcher’s self-interest to sell high quality meat at a price that his customers agree is fair. So because he is selling good meat at a reasonable price, he benefits from having regular customers, and his customers in turn benefit from having access to a quality product at a good price.

So creating the situation where you benefit the most in the long term winds up creating a situation where others benefit as well. And treating your customers well rather than trying to take advantage of them means everybody wins. Only when this principle isn’t followed did Smith allow for government intervention.

Smith also encouraged saving money and investing it back into the economy. Investment drives innovation, technological upgrades, and opportunity in industry. That, in turn, increases the returns on investments and, again, everyone wins.

The second requirement is limited government power. In Smith’s opinion, the government only exists to defend a nation, provide education for all of its people, protect its people from crime, enforce property rights and contracts, and provide support for infrastructure and other public works. As far as education goes, he saw it as a key to counteract any negative aspects of the division of labor that is such an important part of this economic system.

The only time a government should be involved in the free market, according to Smith, is when people prioritized their short-term interest rather than the universally beneficial long-term interests. This includes enforcing laws protecting people from crimes like fraud and theft. But a large government would interfere too much with a process best left to its own devices. In The Wealth of Nations, Smith wrote: “there is no art which one government sooner learns of another, than that of draining money from the pockets of the people.”

Finally, a strong currency is the third requirement for free-market economic prosperity, specifically one that is backed by precious metals so that increased printing of money doesn’t devalue the currency. Smith also believed this element could lead to less spending overall, particularly on unpopular or wasteful things like war. Less frivolous spending would allow a government to allow a free market to thrive by keeping low taxes and getting rid of any obstacles to international trade like tariffs, which only served to make trade and business pricier and discourage international dealings.

The benefits of free international trade were clear to Smith, who used an example of winemaking in Scotland. Scotland doesn’t have a natural climate for growing the grapes that make great wine, though they could use heated buildings to simulate that environment. But rather than putting all the time, effort, and money into building an artificial environment to grow grapes, it would make much more sense to import wine from a country like France, where grapes grow in abundance without man-made help. With no tariffs to worry about, Scotland could trade one of their own resources like wool to get wine from France. Everybody wins.

Tariffs that made it hard to import wine from France but easier to make wine in Scotland would only serve to make it unnecessarily expensive. In Smith’s model, the people of both countries benefit.

Criticisms

While The Wealth of Nations remains one of the most influential books ever written, there are still criticisms to be made. It is not a comprehensive guide to free-market economics, without any real descriptions of the mechanisms behind pricing and value. And since the book was written in the 18th century, Smith couldn’t have anticipated many economic trends that would become prominent in the future, such as entrepreneurship and how that can affect and disrupt markets.

So as you would expect for such a historic and well-respected book, there have been changes and additions made throughout history by both supporters and detractors of The Wealth of Nations. Things like monetary theory, comparative advantage, marginal utility, the time- preference theory of interest, and the aforementioned entrepreneurship have been added to The Wealth of Nations over the years. But these amendments have only served to boost its reputation and usefulness rather than disproving or poking holes in its philosophies. Of course, as the global economy evolves and grows ever more complex, new additions will have to be made to keep these free-market pillars up to date and relevant to modern economics.

Conclusion

Scottish philosopher Adam Smith changed the world when he wrote his enduringly influential book An Inquiry into the Nature and Causes of the Death of Nations in 1776. His work became the keystone of modern free market economic philosophies, and claimed that the free trade and enlightened self-interest would benefit not only the individual, but all of society.

Smith referred to the mechanisms which guided free market prosperity as the “invisible hand.” This is the unseen force that arises naturally as people act with self-interest under minimal government participation that leads to overall prosperity for the economy.
The cornerstone of Smith’s theories is a free market system that is not regulated by the government (or minimally regulated to discourage short-term self interest) and not taxed or tariffed for individual or international trade. Goods and services are priced more fairly in this system than one where the government sets prices and values.

The capitalist economy we know so well has its roots directly in The Wealth of Nations and Adam Smith’s philosophies. The invisible hand is still alive and well today, and we see its effects in our everyday lives. Smith foresaw an economy based on freedom for the individual and prosperity for society. It is funny, then, that Smith eventually would find work as an official who enforced tariffs later in life. But his ideas live on, remain influential, and drastically changed the world.