60 second intro

  • Adam Smith didn’t invent Capitalism, he observed it.
  • He helped us understand how the economy works.
  • And that helped the Western world to grow their economies.
  • The problem the UK faced, at the time Smith started his observations, was to improve people’s wellbeing, it was necessary to find a way to feed the population
  • And to pay for important national institutions like education, defense, and a national health service.
  • Since then, things have changed. By almost any standard, the Western world, including the UK, now has plenty of money.
  • So the problem we face us different but we’re still behaving like it’s not – using the sort of Capitalism Adam Smith talked about.
  • We measure GDP to show an improvement in life. In the old days, it was a good corollary for the average wellbeing of the population.
  • But the evidence now is that there is very little association between GDP and human wellbeing in the West.
  • What we probably need to do, if our goal is to improve average wellbeing, is redistribute some of the wealth that’s around.
  • And focus on social programs that matter to people, rather than measuring GDP growth.
  • They get better results per $ spent.

When we started to figure out economics, there was a problem to solve

What I remember from school is that the Scottish economist Adam Smith was credited with observing Capitalism first. He wrote his book ‘An inquiry in to the Nature and Cause Of the Wealth Of Nations’ (Which you can still buy on Amazon – it has 4.5*s!) In 1776, 250 years ago. At the time, average GDP was 0.15% per capita of what it is today.

Even in London, one of the largest, one of the most populous and prosperous cities in the world at the time, street lights were only just being put in place. Authorities had just started numbering houses. There was no social security net or health service. Educational systems for children were in an extremely basic form. Fundamentally, there wasn’t enough money for the government to pay for all this social infrastructure. The lack of money was negatively affecting people’s wellbeing.

Below : The Bank Of England’s Chart Showing Global GDP Growth Over Time

The Bank Of England’s chart shows that when Adam Smith wrote the first book on Economics, poverty was a real issue which needed solving.
For most of history, there was very little economic growth. When we started figuring economics out, poverty was a problem which needed some attention. The BOE.

50% of solving any problem lies in defining it. When Smith observed and reported on economics and Capitalism, people started to realize how they could use it to grow the economy and pay for useful services – things that would improve the average wellbeing of society. As a result, and using, in part, Smith’s work, people focused on growing the pie, in part, to pay for these things. It worked.

Which brings us to today

Most people (in the West, at least,) now have a lot of money. Many of the educational, health, national defense and other problems that we needed to be solved have now been solved. I believe most of us probably have enough ‘stuff’. The benefit we derive from the incomes we have are subject to diminishing marginal returns.

In fact, there’s quite a lot of research out there which says that more money won’t make you happier. Beyond an income of about $100,000 in Australia, getting paid more doesn’t make you feel any better. (There’s a book about this called Affluenza, if you’re interested.)

As the HBR points out, what makes people in the West unhappy now, is not that they don’t have enough. They are upset because others have more than they do. There are a small number of very rich people at the top of the pile, and a large number of people who could do with a bit more.

In short, raising GDP is no longer a good approximation for improving the average wellbeing of society.

If we don’t need Capitalism, what do we need?

We’re trying to use measures of GDP growth to measure the success of our economies in delivering benefit to citizens. But, because of diminishing marginal returns in the value of money and the fact that GDP is distributed inequitably, it’s not a very good measure for what we’re trying to use it.

To improve the situation, I’d suggest we need tempered Capitalism. Using wealth taxes to redistribute money from the relatively rich to the relatively poor would fix some of the problems that remain. Scandinavian countries do this quite well and have happier citizens.

On the other hand, elsewhere, outside the Western world, there are still a lot of people in the world who live on less than $1.90 per day – what the UN say is absolute poverty) deserve a chance. Many of them live in China. That country has a pretty good handle on using a blend of Capitalism and Socialism to improve the lives of their citizens quickly.

Alternatives to GDP growth

The WEF (World Economic Forum) has done some work on this question. It showed that centering government policy around social programs would be 300 to 350% more effective at increasing wellbeing.

In their study, they evaluated ‘well being’ on a self evaluated 10 point t scale. Then they predicted improvements in that well being measure that we’d see first, from GDP growth and second from social programs run by the government.

New Zealand are trying this sort of different approach

It seems like NZ’s recent policy announcements are more in line with what makes sense than what the rest of the world is doing.

For the rest of us, however, in simple terms, improving social fabric like support systems for mental health as the Kiwis are doing seems far more likely to improve peoples lives, as they did following Adam Smith’s original observations.