Our modern view on what the wealth of nations is and what causes prosperity is primarily guided by Adam Smith, an 18th century moral philosopher and the founder of modern capitalist theory. He is a prominent figure of the Enlightenment Movement. Smith’s contribution to the modern age is his theory on national wealth, considered as revolutionary at the time. He did not think that real wealth lies in gold, land or commodities. Rather, he believed what causes prosperity in a society is something that traditional religion despises and regards as vice — self-interest. The Investopedia summarized Adam Smith’s main idea:
The core of Smith’s thesis was that humans’ natural tendency toward self-interest (or in modern terms, looking out for yourself) results in prosperity. Smith argued that by giving everyone freedom to produce and exchange goods as they pleased (free trade) and opening the markets up to domestic and foreign competition, people’s natural self-interest would promote greater prosperity than with stringent government regulations.
Although Adam Smith is best known for his theory of capitalism, his biggest impact is in the moral sphere. It was Adam Smith who legitimized self-interest, turning it from a traditional vice into a new virtue. He explained that self-interest is not to be feared because when the self-interests of different individuals compete, they will counter-intuitively benefit society and serve the common good. Looking at our economy today, we can see the folly of such a belief. The self-interests of billionaires do not benefit society and many industries are not conducive to competition in the first place. This is because many industries are capital intensive and there is a substantial amount of entrance barrier. For many industries, 90% of the profit is taken by the top handful of players. They are oligopolies. I know this for a fact. I was a finance professional for some 15 years. If you are a new player in the market, how do you get financing? Even if you manage to get financing, you will have to pay a much higher cost of capital. The financial market favors big players with a long history and deep pockets. Adam Smith did not address these practical issues. Ever since the rise of the Conservative Movement, we have seen the deregulation of many big industries. Where is perfect competition to be found?
Another big flaw in Adam Smith’s theory is that he totally ignored the usage of natural resources. Prior to Adam Smith, there was Bullionism, where national wealth was defined by the amount of precious metals a country held. That line of thinking is part of Mercantilism. Adam Smith’s economic theory changed this old practice. Economics inspired by Adam Smith measures the wealth of nations by the production of goods and services, but without any accounting for the costs to nature. The Adam Smith Institute has the following to say about Adam Smith’s new insight:
Smith’s radical insight was that a nation’s wealth is really the stream of goods and services that it creates. Today, we would call it gross national product. And the way to maximize it, he argued, was not to restrict the nation’s productive capacity, but to set it free.
Today, we are all familiar with the concept of GDP or GNP. Such metric does not take into account the depletion of natural resources or the pollution of the environment. Adam Smith had no notion of the importance of ecology. Today, we know better. To measure a country’s economic well-being solely by the GDP measure is to be totally biased — we are effectively measuring the benefits of industrial production without also measuring its costs. This way of measuring national wealth is not seriously challenged until environmentalist Rachel Carson made the following statement in a 1953 letter written to oppose the government’s assault on science and nature:
The real wealth of the Nation lies in the resources of the earth — soil, water, forests, minerals, and wildlife. To utilize them for present needs while insuring their preservation for future generations requires a delicately balanced and continuing program, based on the most extensive research. Their administration is not properly, and cannot be, a matter of politics.
For the purpose of environmental protection, Rachel Carson challenged the conventional wisdom championed by Adam Smith. What is the real wealth of nations? It has much to do with its repertoire of natural resources — the land, the water, the forests, the animals, the clean air, the entire ecosystem. It is absurd to measure the well-being of a country solely by its industrial production. Without good soil, clean air, clean water and a healthy ecosystem, we can not even survive, save to enjoy various kinds of man-made goods and services. Certainly, natural wealth has to take precedence over industrial wealth, just as our health has to take precedence over our money. Without our health, how can we possibly enjoy anything?
We are already well into the 21st century. It is high time that our consideration of well-being incorporates our current ecological understanding. We owe Rachel Carson a big debt for correcting Adam Smith’s 18th century shortsightedness which drives us into the abyss!