Wealth of the Nations Part 1 of 3

Adam Smith’s pioneering book on economics, The Wealth of Nations (1776), is one of the world’s most important books. I pioneered the concepts of specialization, Natural Price, GDP etc,  new principles that we still use fruitfully today. Smith outlined the concept of gross domestic product as the measurement of national wealth; he identified the huge productivity gains made possible by specialization; he recognized that both sides benefited from trade, not just the seller; he realized that the market was an automatic mechanism that allocated resources with great efficiency; he understood the wide and fertile collaboration between different producers that this mechanism made possible. All these ideas remain part of the basic fabric of economic science, over two centuries later.

According to Smith, a nation’s wealth is its per capita national product – the amount that the average person actually produces for any given mix of natural resources that a country might possess.

If we go one step further and extend the question of the natural price and thereby “natural costs” we need to take into account natural resources that a country might possess, the cost of the natural resource ( for example manufacturing processes using water seldom cost for that water) as well as the opportunity cost of the natural resource. For instance, when we deplete the resource, is it possible to rebuild it and if so what is the cost of that ? And if it is not possible to rebuild it, somewhere that cost, which may be borne later, needs to figure as well.  This would figure in with his earlier writing - The Theory of Moral Sentiments where he mentions something called  ‘prudence’. And he stresses that ‘justice’ – not harming others – is fundamental to a healthy human society. Not harming others can also be viewed as “not harming other generations” as well.

Thus, when we talk of the wealth of the Nations, not as a book but as a concept,  measuring the GDP alone  is not enough.  We have more pressing problems and challenges like socioeconomic and environmental justice.

Development and sustainable development.

In the 18^th , 19^th and 20^th centuries, while the world made great strides in development, the concern is – was our development really sustainable ? Or do we need to change the way we view and measure development.

Sustainable development is now become a catchword. The stakeholder theory also redefines business performance in line with sustainability and justice. The challenge remains on it’s measurement .  Many NGOs and economists including, Amartya Sen worked  hard to develop more holistic, inclusive standards and indicators of overall national health and well-being that consider social, natural resource and ecosystems health in addition to economic growth.

One of the models that seemed practical and holistic is the UN University’s first Inclusive Wealth Indictor (IWI) report,introduced during the June 2012 Rio+20 UN Conference on Sustainable Development. The Inclusive Wealth Report measures the wealth of nations by analyzing a country’s capital assets, including manufactured, human and natural capital, and their corresponding values. Reproduced below, one can see the changes in the ranking and index points in comparison to GDP rankings and ratings.

Credit: UNEP, UNU-IHDP

Despite its predominance and universal use, the limitations of GDP as an overall indicator of health and well-being have long been recognized by those working in a range of fields. As Hunter Lovins is fond of saying, cancer is great for GDP, but it ain’t great for the patient!