First Minister Alex Salmond
Stevenson and Adam Smith Research Foundation Lecture
University of Glasgow
Thursday, March 5, 2009
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It is a great pleasure to be here with you to close this series of Stevenson and Adam Smith Research Foundation Lectures, held in honour of two of Glasgow's most outstanding professors.
One, Adam Smith, who died in 1790 - the father of classical economics, a towering figure in the Enlightenment, and Chair of Moral Philosophy at this University.
The other, Daniel Macaulay Stevenson, who died in 1944 - a successful industrialist, a politician, a noted social reformer, and Chancellor, Principal and benefactor of the University of Glasgow.
This year's lecture series celebrates in particular the 250th anniversary of the publication of Adam Smith's first great work, the Theory of Moral Sentiments. A book which Adam Smith revised continuously throughout his life.
Smith published his most famous book some seventeen years later, An Inquiry into the Nature and Causes of the Wealth of Nations.
Tonight I want to talk about both works. They are major milestones in the progress of the Scottish Enlightenment. And they retain their value today.
Followers of Scottish letters will know that in addition to that of Adam Smith, this year brings another notable celebration - the 250th anniversary of the birth of Robert Burns, marked by the Year of Homecoming.
This year we celebrate, in Adam Smith and Robert Burns two Scots of outstanding creativity and talent.
Figures who stand tall today, and in any era. And who mark our celebrations here in Scotland as not just a Year of Homecoming, but a Year of Inspiration.
We already know that 2009 will be a landmark year. Worldwide, in economics and in politics, it is proving to be a year of uncertainty and extraordinary turbulence.
But there are signs it may be also - with the election of President Obama in America - a year of hope and renewal.
Outline
Tonight I want to speak the contribution of Adam Smith, and of Robert Burns, in articulating values that are at once recognisably Scottish, and also universal.
I want to reflect on how the economic legacy of Adam Smith has shaped the modern world.
I want to consider the economic challenges we face today - some where Adam Smith can guide us, and some that he could not possibly have foreseen.
Last, I want to talk about the course that Scotland must follow to rise to these economic challenges, and to grow and succeed as a nation.
Adam Smith and Scottish values
The Year of Homecoming began on 25 January, Burns Day. So far it has been very much the year of Burns.
There are countless reasons why we celebrate Burns - whether Scots here, Scots abroad, or friends of Scotland worldwide.
For me, a defining characteristic of Burns - the source of his emotional power - is his instinct for empathy; the ability to see the world from the other person's point of view.
As an artist, Burns is hard-wired for emotion, for the immediate, for impulse, for passion, for love.
By contrast, Adam Smith is the man of sympathy. A man of observation, of reflection, of analysis, of abstraction, and finally of supreme insight.
In the Theory of Moral Sentiments, Smith's central insight concerns the role of sympathy.
A quality which, properly educated, becomes a powerful, positive internal voice. In our words, the "good angel". In Smith's terms, the "impartial spectator".
It is sympathy, in Smith's consideration, which explains why human societies and market economies can function - and not only function, but thrive.
And it is this same sympathy which puts the heart in the homo economicus - the essentially self-interested citizen Smith describes in the Wealth of Nations.
Adam Smith himself certainly did not conform neatly to the template of 'economic man'.
He was an outstanding scholar - but was in every measure as dedicated to the welfare of his students as he was to his own success.
And, though he was well rewarded, Smith quietly gave most of his earnings to charity - such that at his death, Adam Smith's estate amounted to only a few months' earnings.
If Smith believed it was sympathy which was the foundation of our morality, he also prized justice as the quality above all others.
He said: "The general rules of almost all the virtues... of prudence, of charity, of generosity, of gratitude, of friendship, are in many respects loose and inaccurate. There is, however, one virtue of which the general rules determine with the greatest exactness every external action which it requires. This virtue is justice."
That is a profound insight.
Today we regard justice as the hallmark of civilised, decent society. We regard it is a founding democratic principle.
And we also see, more than two centuries after Adam Smith, the power of justice to transform lives and transform whole nations. Because it is the countries that most respect the rule of law - the rights of individuals, property and contract - which have truly prospered in the modern era.
Adam Smith put liberty and justice at a premium, and still retained a strong social core.
In his work, and in his own life, Adam Smith embodied the most noble of values.
Along with Burns, Adam Smith is a figure in Scottish history who best exemplifies the basic values of our nation.
Values that are engraved in four plain words on the Scottish Mace. Justice. Wisdom. Integrity. Compassion.
Values that find their home and find their expression in the civic institutions of Scotland. Our universities and our schools. Our legal system. Our trade unions. Our charities. Our charities and faiths.
These institutions form the bonds that join us to one another - that embody the moral purpose and the heart of civic Scotland.
And the government which I lead profoundly respects these vital institutions and their place in Scottish society.
The economic legacy of Adam Smith
Let us move on to consider the Adam Smith's economic legacy. The extraordinary impact of the Wealth of Nations.
To be clear, this success was no accident.
Adam Smith was a man whose intellectual ambition knew no bounds. Whose field of enquiry encompassed the philosophy, astronomy, economics, the arts, and more.
The Wealth of Nations was his attempt not just to explain but to shape the development of the whole industrial world.
On his deathbed, Adam Smith said "But I meant to have done more". Today we cannot imagine how he possibly have done more.
At the end of the eighteenth century, Adam Smith could probably not have anticipated he would become the father of political economy.
He could not have foreseen the huge influence that economics would come to wield in everyday life.
He certainly could not have expected that markets and economies, guided by his work, would grow by such an extraordinary margin during the past two centuries.
And perhaps above all, Adam Smith could not have foreseen that he would be first Scot to grace a Bank of England banknote!
It is only right that we honour these achievements. That is why in May of this year I will be inviting top economists from around the world to join with Scotland's Council of Economic Advisers and celebrate the work and the legacy of Adam Smith.
It is a remarkable fact that the author of the Wealth of Nations was sceptical of commerce and the pursuit of material advance.
He wrote in his Lectures that "By having their minds constantly employed on the arts of luxury, [men] grow effeminate and dastardly."
Yet, the industrial world today is a reasonably civilised place - albeit with occasional dastardly transgressions!
Society and indeed morality have survived the spread of wealth and material comfort.
Economic growth has also helped to build the institutions and the public services necessary to maintain a just society. We see for example how, one century ago, Glasgow's growing wealth and industrial success was accompanied by notable flourishing in its civic institutions.
And perhaps to Adam Smith's surprise, government has proved itself often to be a positive force - not least at this time of crisis in the global economy and financial markets.
Adam Smith would also take heart from knowing that the impact of his ideas is not yet exhausted.
To take one example, last month the Financial Times interviewed China's Prime Minister, Wen Jiabao. Premier Wen carries with him everywhere a copy of the Theory of Moral Sentiments. And he believes, as I do, that it is a book still worthy of considerable attention.
Next month I travel to China to strengthen Scotland's ties with the new land of Adam Smith. An economy that, even amid a global financial crisis, grew last year by a more than respectable 9 per cent.
Responding to the global economic challenge
The economic crisis that we face today is the most serious in decades. And the scale of that crisis is all the more alarming for governments and regulators who have become used to steady growth and incremental policy changes.
This is, in truth, a particular type of downturn for which Adam Smith, writing in the eighteenth century, would not have had an immediate solution.
Adam Smith held that "what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."
That view is intuitively appealing. Indeed, it remained economic orthodoxy until the last century, when John Maynard Keynes showed it could be incorrect.
Because in a deep recession, where businesses and households are cutting their spending, government must fill the gap. Government must borrow and invest to reflate the economy. To boost demand and confidence. To protect jobs and businesses.
While I was in the United States last week, I learned that more than two-thirds - 69 per cent - of President Obama's $787 billion stimulus plan would be delivered at state level.
That is the right way to deliver a stimulus - getting closer to the needs of businesses and citizens.
We know that a major reflation is needed, here and internationally. And - as we see from Japan during the 1990s - fiscal policy must remain supportive until a strong recovery is established.
That is a further reason why my government is so concerned about the billion pounds of spending cuts that the UK Government plans to impose on Scotland between 2010-11 and 2011-12.
Stronger financial regulation
Looking to the financial sector, the recapitalisation of the banks and moves to guarantee deposits were vital. And all necessary steps must be taken to uphold the functioning of the banking sector.
Work must also begin to deliver stronger regulation of financial services.
Such a call would not have surprised or offended Adam Smith. He did not have anything like a blind faith in the abilities of bankers. He had witnessed first-hand the British banking crisis of 1772 - an episode that informs Book Two of the Wealth of Nations.
And Adam Smith chose an interesting parallel in arguing for banking regulation: "The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed."
In other words, Adam Smith saw, like fire, the huge damage a banking failure could create. He saw the grave potential for crisis to spread. And he viewed the restriction on commercial freedom as a price clearly worth paying.
Certainly, after this present financial crisis, the net of regulation will be made longer and finer. And wages in much for the financial sector should revert to sensible levels. But these are small parts of the story.
The social and economic costs of this financial market failure are monumental. The hardship for so many is real and immediate. The costs of repair will last for a generation. We must ensure that the lessons stay with us much longer.
Wider economic reform
One further lesson from this crisis is that in future, monetary policy must find a way to assess and to control inflation in the housing market and financial markets. This is an issue which the outgoing Deputy Governor of the Bank of England, Sir John Gieve, highlighted in a thoughtful lecture last month.
The Federal Reserve, The Bank of England, the European Central Bank - these institutions all saw and worried about the risks arising from housing and financial bubbles. But they were not mandated to control them. So they did not.
Next, looking globally, a further lesson from Keynes.
At the founding of the Bretton Woods system, Keynes had pressed for even stronger global coordination to prevent the build-up of big, sustained trade imbalances. These imbalances helped to sustain the growth of credit here and in America long after it should have been checked.
In the next stage of reforms to the international financial system, preventing these imbalances must be a priority.
Next let us turn closer to home, to Scotland.
The current crisis has shown, in my view, the need for the Scottish Parliament to assume greater responsibility. To demand new tools to promote the health of our economy.
Many theories have been tested in the past few months. One incontrovertible conclusion is the need for fiscal reflation.
It is invidious that Scotland does not have the full range of fiscal powers to deliver this. Indeed, right now the Scottish Government has no inherent ability to reflate the economy.
There is already agreement in the Scottish Parliament - and strong support outside it - in favour of new borrowing powers for Scotland.
That is a valuable step, but by no means the only step required. And I will come back to this point in closing.
Shaping a new direction for our economy
I have spoken about the relevance of Smith and Keynes, even today. There is no doubt that their influence remains substantial.
Nevertheless, we need to look beyond the immediate Keynesian response to support recovery, which itself is no simple matter.
We need to look beyond the current crisis, remembering that the point of crisis is also the point of opportunity - the moment to break a new path and pursue a new, positive direction.
Herbert Stein was a great American economist and historian. He served with distinction on the Council of Economic Advisers for five years until 1974.
In his book, the Triumph of the Adaptive Society, Stein sought to explain the evolution of the U.S. economy. Concerning the aftermath of the Wall Street Crash, he wrote: "Capitalism survived its crisis and went on to great successes. But the capitalism that survived and succeeded was not the capitalism of 1929."
That is a helpful insight today. It reminds us that our economy, our institutions must change, and will change. And that growth and new jobs will surely follow.
We must be clear that, whatever else we do, it is incumbent on governments to keep markets open and resist protectionism.
Beyond that, globally, economic institutions are being examined in so many important areas. In terms of regulation. The role of banks. Monetary policy. Social protection. The role of the state.
These new debates place upon this generation - here, in Europe and America - the responsibility to make the right choices, to set the right course for the long term.
The Scottish constitution
I believe that Scotland's government and Scotland's politicians face a similar responsibility to engage with basic institutional questions about our own economy.
It cannot be right to have the world change around us, to be made painfully aware of the failures of our own framework, and then to fail to develop better institutions for Scotland.
Substantial constitutional reform is required. And the nature of that reform will undoubtedly require debate and decision by the people.
Adam Smith wrote that: "All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end."
Let me note two points of strong agreement here. First, with the implicit notion that a nation's constitution is not a dry legal artefact. That it is fundamental to the happiness of a population.
Second, vitally, that a constitution is only a means to an end - and that end is the welfare of the citizen. Constitutions should meet the needs of our people; and not vice versa.
These should be the basic premises of our approach to constitutional reform.
There should be no doubt that my government seeks to use all the responsibilities currently at our disposal to improve the lives and the opportunities of our citizens. We remain firmly focused on Scotland's national interest.
And at the same time, we believe that the current constitutional framework cannot adequately guarantee Scotland's national interest.
I do not accept the false dichotomy that, in the present circumstances our people and our Parliament can either deal with the immediate challenges or look to the future.
Clearly we must do both. And in facing the future, we must be willing to reflect and to act on the lessons of the present crisis.
That is why the National Conversation on Scotland's future - and other conversations taking place elsewhere - are important.
And that is why it is so important to have an open and inclusive conversation with our vital civic institutions and with the people of Scotland.
It is a vital debate, a vital democratic exercise that should be brought to a conclusion in a referendum that we plan to hold in autumn next year.
This debate is timely. Indeed, it is urgent.
There is no doubt that the world is changing. We must be prepared to change with it.