Modern economics must find better ways of measuring human wellbeing and social capital to create more inclusive and collaborative societies, declared one of Britain’s leading economic practitioners speaking at Heriot-Watt University in Edinburgh last night.
Andrew Haldane, the Chief Economist of The Bank of England, was delivering the inaugural Adam Smith Lecture at Panmure House, the final home of Adam Smith who died in 1790, run and curated by Edinburgh Business School and Heriot-Watt University.
Professor Robert MacIntosh, Head of School of Social Science, at Heriot-Watt, introduced Mr Haldane and later described his 40-minute ‘journey’ through the economic landscape of the past 250 years as a ‘tour de force’.
Mr Haldane, who also sits on the interest-rate setting Monetary Policy Committee of The Bank of England, spoke with great authority about Adam Smith and his pre-eminent position as the founder of modern capitalist economics. He pointed out that both The Wealth of Nations, described as “the book for the 20th century”, and Smith’s earlier work, The Theory of Moral Sentiments, “a book for the 21st century”, should not be viewed in isolation and must be considered together.
He said Moral Sentiments talked less about self-interest and rationality and more about mutual interest, co-operation and human emotion, making it deeply relevant for today’s economic thinking.
He coupled Smith’s famous quotation: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest,’’ with another where Smith points out the perils of inequality and that no society can flourish and truly happy if it does not allow more people to share in its wealth.
In his far-reaching discussion about the global economy since 1776, when the first edition of Wealth was published, and the first Industrial Revolution, Haldane argued that prolonged economic growth was built on six pillars which ‘ushered in a golden era the likes of which human history has never previously seen. This was along every dimension imaginable: wealth, health, and happiness.’’
The inflection point was characterised by an ability to control the previous cycles of boom and bust, which had brought income and wealth stagnation in the previous 1,000 years.
“We moved to a world where each generation is roughly 50% better off than its predecessor, such that rising income and rising wealth have become a well-embedded social norm and the notion of generational progress is now deeply entrenched in the psyche in a way that was not true prior to this,’’ he said.
Prosperity, he argued, was built on six pillars or institutions which led to this 'golden age'. The pillars were: the emergence of the public limited company; limited liability banking; new measurement systems, including the rise of the accounting profession; the rise of public education; the emergence of public infrastructure and the development of civic society, supporting this through the growth of the charitable and third sector.
“I believe they were fundamental for this golden era being ushered in.’’
However, he said that in recent years, each of the six pillars of this golden age has been in decline and the ‘rising tide of wealth, health and happiness for some people at least has gone into retreat.’
Each pillar has started to erode and has been chipped away. He pointed at graphs which showed real wages in the US and the UK have stagnated in the past 50 years and showed the rise of populism on both the right and the left. The unwritten generational social contract which said the next generation would become wealthier than the previous one has been breached.
To regain the wealth, health and wellbeing of nations, he spoke about the importance of the pillars of public, private and third sector being rebuilt to work and complement each other. He said the reconstitution of the six pillars was essential and there would be a challenge to the primacy of the company shareholders. Companies, he said, had to be seen as a social, not a legal, contract and he highlighted the importance of a plural set of stakeholders across society.
He said there was a time now to look beyond P&L and to better quantify wellbeing and social capital, while he spoke about the imperative for lifelong learning, for all ages, making this a reality for the next 50 years.
He also argued that the meaning of work was changing and people around the globe had more leisure time and therefore should be able to make a more significant civic contribution to their communities and societies. While global prosperity has risen in aggregate, this was not enough and wealth needed to be distributed to a wider proportion of human civilisation to deliver this new civic model.
“The way we recognise and reward that civic contribution needs to be rethought, so that civic society plays its rightful role in underpinning our market economy.’’