The Wealth of Nations in the 21st Century Launched

During the 18th Century, the Scottish Enlightenment put the Glasgow at the heart of world thinking. Today, as the world comes to Glasgow for the COP26, we ask what we can learn from one of the great pioneers of the Scottish Enlightenment: the renowned economist and former lecturer at the University of Glasgow, Adam Smith.

As part of the Adam Smith at the COP workstream of our Path to COP26 campaign, we have prepared a unique essay series entitled The Wealth of Nations in the 21st Century, looking at the climate crisis through the eyes of Smith. Click here to read the series, see below for a summary or read coverage of the series in Bloomberg.

This work updates Smith’s famous Wealth of Nations for the climate era. Expert authors from the fields of finance, economics, politics, development and central banking have taken the 5 ‘books’ of the original and written 5 essays drawing on Smith’s themes and reflecting on the climate crisis. They consider both how Smith’s thinking can guide our approach to climate action, and what he himself might have thought about the climate crisis.

We are extremely grateful to Lord Meghnad Desai, David Pitt-Watson, Usha Rao-Monari, Prof. Sir Anton Muscatelli, Tan Sri Dr Zeti Aziz, George Gray Molina, Dr Michele Battisti & Dr Craig Smith for sharing their fascinating insights. They have provided a truly remarkably review of the on-going relevance of Smith’s work, applying the Wealth of Nations, as well as drawing on the Theory of Moral Sentiments, to contemporary climate issues.

The essay series, supported by Royal London, will be launched at the University of Glasgow, where Smith once taught, during our Adam Smith at the COP evening lecture series on the 8^th, 9^th & 10^th of December. Sign up now to join us online. Our wish is that the essay series encourages and inspires creative thinking and practical action to leave a small and enduring legacy after this crucial summit.

Foreword

In the foreword, Nicola Sturgeon, First Minister of Scotland, reflects on the importance of Smith to Scotland, and what he might think of the modern economy. “We cannot know exactly how Smith would have responded to the climate emergency, but given his support for reasonable protections against, for example, abuse of monopolies it seems likely that he would have supported regulation to guard against the destruction of the planet,” she wrote, adding that “It is the perfect time to reach back into our past as we look ahead to a future that is cleaner, greener and more just.”

Book I: ‘Of the Causes of Improvement in the productive Powers of Labour’

Lord Desai begins the reimagining of The Wealth of Nations and inspired, or perhaps dismayed, by the contents of Book I, challenges whether Smith has mis-defined the concept of value. Proposing that the conception of value outlined by Smith is a gross simplification of reality which has led future economic thinkers to adopt a theory of value so reductionist in outlook that all free inputs or negative impacts are ignored, as they had no monetary value.

Lord Desai reminds the reader of the flaws of such a reductionist approach, “between sowing and harvesting, there is a time gap where Nature performs the difficult task of ripening seed into crop. The time that creates value is unpaid for.” This critique of reductionism and misinterpretation of value translates equally well to time spent working in the home or caring for family.

Thus, asserts Lord Desi, the definition of ‘value’ remains the key to rethinking 21st century economic calculus, where an approach that applies the principles of cost accounting to including the ‘free’ goods Nature provides us offers a conservative and yet radical pathway to valuing all that is valuable.

Book II: ‘Of the Nature, Accumulation, and Employment of Stock’

David Pitt-Watson guides the reader through Book II which concerns the nature, accumulation, and employment of stock. He begins by broadening the conception of capital to include the services provided by nature, reminding us that Smith never considered that the services of nature as we know them might come to an end. And would surely have noted that if that money is applied in a way which destroys natural capital, it will reduce the prosperity of the world, potentially catastrophically.

He reminds us that for Smith, political economy was a practical question of how to “provide a plentiful revenue or subsistence for the people, or more properly to allow them to provide such a revenue for themselves”. In presiding over the decline of the benign stable conditions which underpin the growth of our civilisations we become responsible for navigating the pathway to net zero. And for those who say achieving net zero is too difficult and too expensive, he hypothesizes of what Adam Smith, the father of modern economics might say. Ultimately wealth depends on the accumulation of capital to make workers productive – if nature withdraws its capital, no prosperous future can await our children – and the economic gains of the last 250 years will all be lost.

Book III: ‘Of the different Progress of Opulence in different Nations’

In revisiting Book III, Usha Rao-Monari explains how the Industrial Revolution catalyzed a dramatic shift in the “opulence of nations”. In a similar way, the rise of the need for net zero economies is changing which development pathways are open to countries. The emission-intensive economies of today will become the “least sustainable countries” of the 2050s, she argues.

Alongside these deeper processes, we are likely to see a ratcheting up of regulatory policies regarding carbon pricing and disclosure standards. This leads us back where we started: research and development, technology, innovation and productivity as drivers of future growth –as they were in the 1770s boundaries.

Rao-Monari argues that Amartya Sen shifted the conversation on progress and development in the 1990s with the concept of human development, or “development as freedom”. This was the idea that progress was not defined not by the accumulation of assets, income or wealth, nor the achievement of a steady state goal, but the capability of each human being to choose both the ends and means of their daily lives.

While Smith is often revered as the Father of Economics, his other distinguished role is being part of the Scottish Enlightenment. The 21st century is once again faced with a period in history where scepticism to authority of all types and the power of reason is in question. Once again, argues Rao-Monari, we are tasked with a simple but powerful challenge: to use evidence, truth and reason to address the problems of our times.

Book IV: ‘Of Systems of political Economy’

In revisiting Book IV, Sir Muscatelli proposes that proposes that Smith’s core insight holds true: “that the system of political economy which is established is dependent on how trade impacts on domestic interests. As trade creates winners and losers, the political economic effects of trade openness and its acceptance among most people will be crucially affected by the success of other policies, including industrial policies and the ability to find employment for those who may be negatively affected, as well as on the role of the welfare state and redistributive policies at large.”

Muscatelli reminds us that Smith saw a close and enduring link between politics and economics, which benefited from analysis that is based on a case-by-case analysis of the impact on incentives and the unintended consequences of the policy. This point, famously illustrated by the metaphor of the invisible hand, is that policies have unintended consequences, and these consequences can be negative as well as positive.

Muscatelli asserts that even an effective and open trade policy is not sustainable in an environment in which some or all of the redistributive policies of welfare states do not generate improving living standards for the poorer sections of the population. Noting that the rise in global trade has contributed to a rise in inequality within individual nations; the potential for social dislocation caused by the rapid decline of specific industries and the added complexity when including environmental factors.

In closing Muscatelli draws on the arguments of Smith to offer three recommendations as we seek to address the climate challenge at COP26. That we consider trade policy in the context of societal and environmental challenges; we recognizing the impact on different groups in society and we revitalise international multilateral institutions to ensure they can handle the challenges ahead.

Book V: ‘Of the Revenue of the Sovereign or Commonwealth’

In reviewing Book V Dr Zeti Aziz, revisits the question of whether there is an optimal arrangement in which the private sector can participate collaboratively with the government in the provision of the public goods.  The duties of a sovereign; to protect society from danger, from oppression and injustice and to provide the supporting infrastructure and public works that were considered as vital for the well-being of the society, remain uncontested.

However, the unheeded warning that proliferation of public companies and the separation of ownership and management would lead to negligence has indeed come to fruition and delivered the anticipated destructive consequences. In response, he proposes that the decades of negligence and plundering of the nature, confer an additional responsibility and accountability on the owners of capital - to ensure the sustainability of our planet.

In closing Dr Zeti Aziz proposes a vision of a 21^st century Adam Smith as a strong voice and advocate for the protection of the environment, including to the risks that may have intergenerational implications leading to higher overall costs to our planet and humanity.  In this case, the call would be for urgent action from both the state and the market to deliver an outcome that would allow our progress and prosperity to be enjoyed by future generations.

The Theory of Moral Sentiments

CLosing out the series, Royal London Climate Change Lead, Kaisie Rayner, introduces Smith's earlier and less famous (but no less important) work, The Theory of Moral Sentiments. She argues that this provides a guide for reading The Wealth of Nations, and more clearly brings out the socially-minded Smith.

by GEFI

The Wealth of Nations in the 21st Century launching next week

During the 18th Century, the Scottish Enlightenment put the Glasgow at the heart of world thinking. Today, as the world comes to Glasgow for the COP26, we ask what we can learn from one of the great pioneers of the Scottish Enlightenment: the renowned economist and former lecturer at the University of Glasgow, Adam Smith.

As part of the Adam Smith at the COP workstream of our Path to COP26 campaign, we have prepared this unique essay series entitled The Wealth of Nations in the 21st Century, looking at the climate crisis through the eyes of Smith.

This work updates Smith’s Wealth of Nations for the climate era. Expert authors from the fields of finance, economics, politics, development and central banking have taken the 5 ‘books’ of the original and written 5 essays drawing on Smith’s themes and reflecting on the climate crisis. They consider both how Smith’s thinking can guide our approach to climate action, and what he himself might have thought about the climate crisis.

We are extremely grateful to Lord Meghnad Desai, David Pitt-Watson, Usha Rao-Monari, Prof. Sir Anton Muscatelli, Tan Sri Dr Zeti Aziz, George Gray Molina, Dr Michele Battisti & Dr Craig Smith for sharing their fascinating insights. They have provided a truly remarkably review of the on-going relevance of Smith’s work, applying the Wealth of Nations, as well as drawing on the Theory of Moral Sentiments, to contemporary climate issues.

The essay series, supported by Royal London, will be launched at the University of Glasgow, where Smith once taught, during our Adam Smith at the COP evening lecture series on the 8^th, 9^th & 10^th of December. Sign up now to join us in person or online. Our wish is that the essay series encourages and inspires creative thinking and practical action to leave a small and enduring legacy after this crucial summit.

by GEFI