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The End of the Wealth of Nations

November 30, 2018

In 1776 the social philosopher and father of economics Adam Smith published The Wealth of Nations. For the next 100 years, this text with its ‘invisible hand’ explained how economies worked and why the Industrial Revolution made northern Europe so much richer than everyone else during the 19th Century.  Over time the interpretations of the ‘invisible hand’ have been many and varied; indeed Adam Smith provided three different interpretations of his own within his published work.  

 

Smith’s ‘invisible hand’ analogy sought to explain how each person’s selfish desires were somehow directed so that inadvertently, society as whole benefited. At that time, it appeared miraculous that individuals applying their labour without any collective interest resulted via markets in a nation of greater wealth. That is, despite themselves; over time everyone was better off.

 

This first take at modern economics defined the production of income as the determining factor for economic prosperity. Importantly, as Smith wrote this seminal text on one side of Scotland, across the other side James Watt invented the modern steam engine – the foundation of the industrial revolution. Smith was not at all an anti-establishmentarian, yet the shift away from land and unskilled labour as the primary input of production to capital and skilled labour was indeed anti-establishment. Inadvertently, Smith had foretold the rise of the capitalists.

 

It is commonly mistaken to consider the period a simpler time without much application to modern thought. Yet, Smith’s time was not without its price bubbles; it was more than a century since Tulip mania, or stock market crashes; the crisis in 1769 in the wake of the collapse in value of the East India Company had been felt personally. It was however devoid of two important modern ills – banking crisis and depression.

 

The year 1825 and throughout the 1930s provided these events and fostered significant advances in economics in the years that followed. The new economics provided that the ‘invisible hand’ needed some help from time to time. This help came mostly in the form of the role of the State in the economy as a provider of demand. That is, Smith’s focus on the supply side of the market defining that ‘if you make it, someone will buy it’ was missing something when too many people wanted to, or had to, save.

 

The result was an economy built to consume what was made. Typified by the designed obsolescent fashioning of cars in the mid-1950s, the United States economy became the standard bearer under the mantra ‘consumption is good’. The past fifty years has seen a shift in power from the State to the individual as the largest demand creator in the economy. This has driven the inclusion of the irrational nature of people into economic theory, yet by and large, post-modern economics promotes no other nature for the economy other than to encourage our disposable society.

 

How odd it is that economics has shifted from a leading light in the late 18th Century to an antiquarian map today. Society no longer targets a consumerist future, yet economics provides no approach for a post-consumerist economy. In the 21st Century the rational actions of individuals collectively is achieving precisely the opposite effect of 200 years past. The global economy is on an unsustainable path that targets a future where everyone is worse off. In the light of the new scarcities in energy, water, clean air and carbon, the invisible hand is now guiding our selfish desires to the end of the wealth of nations.

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