Introductory Paper for a Programme on The Wealth of Nations Revisited

1. Introduction
Civilization is an instrument fashioned by human beings to improve the welfare and well-being of our race through a wide range of institutions — political, social, economic, educational, scientific and cultural. When Adam Smith published the Wealth of Nations at the onset of the Industrial Revolution, it appeared as if a solution had finally been found to the age-old problem of scarcity. This was also a time when physical science began to uncover the laws governing the marvels of nature. It was natural and, perhaps, inevitable that early economic thinkers looked for similar laws governing society and gave inordinate importance to the system of industrial economy, since it appeared to offer enormous promise at the time. In the process they lost sight of the greater truth that, unlike the systems governing the physical universe, social systems are created by human beings for the benefit of humanity and their validity must be judged solely on the basis of their contribution to human welfare and well-being.
Current economic theory has been constructed on a foundation laid more than 200 years ago. Since then, and especially in the past half century, monumental changes have radically altered the structure and functioning of economies, to such an extent that they call into question many of the valid premises on which earlier theory was based. Among these, the evolution from a production to a service-based economic system, the growing predominance of public policy in economy, the globalization of production and markets, dramatic changes in the nature and role of money and financial markets, and fundamental changes in social aspirations and social values are especially relevant. It is now evident that economic theory cannot be separated or divorced from other aspects of human existence — political, social, ecological, technological, cultural, etc. — and that none can be validly considered without giving central importance to their impact on human welfare and well-being.
In recognition of these facts, the idea of rethinking economics has been gaining support. Late last year, a small, multidisciplinary group of individuals with membership in the World Academy of Art & Science and the Club of Rome began a fresh examination of current economic theory to examine why the basic premises of classical theory were adopted in the first place, to understand where and why they have failed or are no longer adequate to meet the needs of the 21st century, and to consider the feasibility of evolving a more effective theoretical basis for the future.
This article sets forth the rationale and justification for a re-evaluation of the fundamental concepts and premises of modern economic theory with the goal of evolving a truly human-centered theory and practice.

2. Theoretical Discontent

The recent global financial crisis is only the latest in a host of significant factors that call into question the efficacy and sufficiency of contemporary economic theory. That so many distinguished economists, central bankers and policy-makers wielding sophisticated concepts and models failed to anticipate impending catastrophe is characteristic of mass hypnosis. How else to explain such a broad-based failure to comprehend issues so vital to the security, stability and progress of human civilization?
A single crisis might be an error or statistical aberration, but the events of the past few years are part of a larger trend. Since the early 1970s, national and global markets have become increasingly unstable. Beginning in Latin America, an accelerating succession of financial crises have plagued developing countries (1982), Mexico (1984), the USA (1985), Japan (1988), Western Europe (1992), Asia (1987), Russia (1998), and now the entire global system.
Nor is financial instability the only problem. Simultaneously, the world economy has been unable to generate sufficient employment opportunities to meet the needs of a burgeoning population, leaving a record 212 million people without jobs according to official ILO figures1, which grossly underestimate actual unemployment and underemployment worldwide. During the same period, growth rates in OECD countries have declined dramatically. Meanwhile, in spite of decades of economic development, today the poorest 40% of the world’s population accounts for a mere 5% of global income, while the richest 20% accounts for three-quarters of world income.2 More than three billion people live on incomes of less than $2.50 a day. More than 80% of the world’s population lives in countries where income differentials are widening.3 Global financial assets of the wealthy have multiplied exponentially, from $12 trillion in 1980 to $167 trillion in 2006. Income inequality continues to grow, frustrating the rising expectations of the world’s poor, and increasing the propensity for social unrest, crime and violence.
Why blame economic theory for the world’s myriad disorders? The very purpose of social theory is to provide us with the knowledge and capacity to solve problems and optimize the well-being of the human race. A theory that fails to predict or provide a clear path for meeting human needs has to be considered either inadequate or failed.
There are other reasons for positing the need for new economic theory. Economic science has evolved since the time of Adam Smith, but it is still largely predicated on concepts and assumptions more relevant to 1776, the year Wealth of Nations was first published, than today. Smith wrote at the very onset of the Industrial Revolution, when scarcity and limited production capacity were still the dominant characteristics of human life and increasing production of manufactured goods was largely synonymous with improvements in the wealth of nations. When Smith wrote, 80% of the world’s population lived at subsistence levels. Agriculture was still the dominant sector of the economy, providing employment to at least 80% of workers globally. It was also a time when money itself played a far less significant role. At least two-thirds of the work was done in self-production systems and almost all work was remunerated in kind.4
The economic theory and measures of value posited by classical and neo-classical economists were bound to the premise that manufacturing systems would be the dominant source of future wealth creation. Measuring increases in the monetary value of output was deemed an adequate measure of increasing wealth. Since then there has been a fundamental change in the way wealth is produced. In the 20th century the manufacture of tools and products was gradually supplanted by an economic system increasingly dependent on scientific research, technological advancement and education, giving rise eventually to the modern service economy in which services account for 64% of global output and more than 70% of employment in OECD countries.5 These figures underestimate the contribution of services since in many cases they fail to take into account service functions and employment within manufacturing industries, because of the explosion of services required to raise productivity, such as storage, distribution, publicity, logistics, marketing, organization, financial systems, and recycling. For example, the cost of producing a banana represents only five percent of its sale price. For an automobile, it represents 20 to 25%. This shift to a service economy necessitates a fundamental change in the way value is measured. In addition, today the world suffers from excess production capacity backed by insufficient purchasing power. Increasing production capacity is no longer a sufficient premise for wealth generation.
Smith wrote in an age of nationalism and his economic conception is based on a competitive model of how one nation can gain advantage and dominance over others. The nation-state is only a part of global society. What works for the part does not necessarily work for the world economy as a whole, e.g. the export-driven strategy of East Asian economies and now China cannot be replicated by all nations globally. In spite of the fact that we live in an increasingly globalized economy where exports represent 20-25% of global world product, modern economic theory is still modeled on the premise of the nation-state as the basic unit and on concepts designed to maintain competitive advantage over other nations, to maximize domestic rather than global employment and domestic rather than global prosperity. Yet, according to the US intelligence community, by 2025 a single international community composed of nation-states will no longer exist.6 Larger agglomerations are in the offing. We urgently require an inclusive theory that is valid for the whole world economy and will maximize benefits for all humanity. No longer can we justify economic principles that support the success of the few over the many. There is need for new theory that achieves maximum economic security, wealth and welfare for all.
Economy exists on a substratum of ecology and as an integral part of a wider social context. The failure of contemporary economics to adequately account for ecological factors is well-known. Current measures of wealth creation such as gross national product fail to distinguish between activities that drastically deplete natural capital and those which protect or enhance the environment. In addition, recent actions of national governments to stem the global financial crisis reinforce the obvious fact that economics is inseparable from politics and that both are inseparable from social and psychological processes. Political Economy, which was born as a subset of Political Science, acquired its present shape during a century in which social science was compartmentalized and fragmented into so many different airtight compartments that are inadequate to accurately represent the complex interactions and integration which constitutes the united social life of humanity. New economic theory in particular and social theory in general are needed to bridge these gaps and arrive at a more synthetic conception.
In view of these various factors, it is not surprising to find an increasing number of economists and others calling for radically new thinking in economics. Last year Nobel laureates Joseph Stiglitz and George Akerlof published an article calling for “A New Economics in an Imperfect World”.7 George Soros established an Initiative for New Economic Thinking (Inet) at the Central European University in Budapest. David Korten of the Club of Rome published a book entitled Agenda for a New Economy: From Phantom Wealth to Real Wealth and founded a new economy working group. Physicist J. P. Bouchaud challenged dogma regarding the efficacy of free markets, calling for a scientific revolution in Economics.8 Of course, fundamental challenges to the principles and perspectives of modern economics are not new. In the 1970s, Nicholas Georgescu-Roegen, a Romanian-born economist, began to remodel economy as a living system.9 Even prior to the Great Crash and Depression, Nobel laureate chemist Frederick Soddy roundly criticized prevailing theory and called for a radical restructuring of global monetary relationships.10 In this article, the authors examine some of the central issues in economics which require rethinking and pose a number of fundamental questions for further consideration.

3. From Newtonian to Human-Centered Economics

Natural scientists since the age of Newton have sought to discover the underlying laws that govern the physical universe. Their phenomenal success over the past few centuries ignited a similar hope among social thinkers of identifying similar principles underlying the governance of human society as well. In doing so, science overlooked an obvious difference between human and physical systems. We may never fully understand how or why the physical universe and its laws came into being, but when it comes to human systems there is no mystery about their origin. Physical nature may be governed by impersonal, immutable formulas and physical constants, but human systems are the product of ideas, aspirations, values, understanding, opinions, decisions, and attitudes which evolve over time. The life of humanity is a product of the social organizations and institutions we have fashioned in the course of social evolution, which in turn have been determined by our limited understanding (ignorance), egoistic attitudes and insufficient will to arrive at a more adequate solution. It is the result of human choices made in the past, choices that can be altered at any time. They are intended to promote human welfare and well-being, whether of a small dominant minority or of humanity as a whole.
As distinct from physical systems, social systems are man-made and purposeful. They are capable of conscious adaptation and evolution. As the Nobel laureate physicist Ilya Prigogine has noted, “to try to combine classical mechanics with human sciences was to attempt an unnatural marriage. Classical science described a static world, while human sciences deal with an ever-changing situation, where the idea of reaching an equilibrium is meaningless.”11
Perhaps because of the uncentralized complexity of economic systems and the myths and mystery surrounding the creation of money, all too often economists have lost sight of the obvious fact that economic systems are created by human beings for the sake of human beings, and sought instead to discover universal, impersonal laws that determine how economic systems function. Today’s economy moves at the speed of thought, but our thoughts about economy are still mired in concepts of a Newtonian world view. A report to the Club of Rome entitled The Employment Dilemma: The Future of Work challenges the classical conception of economics:  as a “system of models in the deterministic tradition of Newton’s world as autonomous, closed, self-regulating universe, running according to predetermined laws, culminating in a static equilibrium…”.12 They argue, classical and neo-classical economic theory incorrectly focus on the central importance of supply and demand, rather than on the central importance of human welfare. In an effort to imitate the impartiality and objectivity of the physical sciences, social scientists have generally chosen to study existing social systems as they are, rather than formulate theories describing what they should be. There may be no place for ethics in physical nature, but a sense of right, truth and justice is the very essence of what makes us human.
The divorce between traditional economic knowledge and evolving human values lies at the heart of the problem with contemporary economic models which regard financial markets as a law unto themselves, without considering their appropriate role in the economic welfare of society. Consequently, financial markets, which were originally established to serve as a stimulus to economic development, have now acquired an independent status of their own and function in a manner that jeopardizes the very economy they were intended to support. They have opened the door to the possibility of indiscriminate money and debt creation unrelated to either the economy or human welfare.
The same error applies to economy. Society is the whole of which economy is a part. Economy is the whole of which money, markets and employment are parts. Economics is one aspect of human life, one contributing factor to human welfare and well-being. When monetary systems are regarded as things in themselves and ends in themselves, they produce aberrations that not only threaten the underlying economy which they are intended to serve, but the entire society of which economy is merely a part.
The need for new theory is self-evident when we recognize that neither classical nor contemporary theory provides an adequate solution to the most central issue of economics. The goal of economic systems is the generation of wealth to promote human welfare, not financial speculation. The assertion that the laws of economics make it necessary for some people to remain unemployed in order to ensure employment for the majority or that gross inequalities in the distribution of incomes and wealth are natural and inevitable is to mistake historical injustice for eternal truth. Just as the world has discarded the exclusive, discriminatory political principles of monarchy and colonialism in favor of democratic principles of freedom and equality, economic systems can and must evolve in conformity with universal human values to meet the needs of the entire human community. We human beings make the laws that govern economy as well as polity. If we do not like them, we have the power to change them. We are in an era in which the challenge is to find the best optimal and complementary combination of private and public. For instance, state intervention in the Swiss pension system, arguably the best in the world, makes possible an active role for complementary private institutions.
New theory needs to address fundamental questions. What theoretical framework will lead to a system that optimizes the generation of real wealth? How will its principles reflect the primacy of human choice and human welfare? How will it effectively and justly reconcile the rights of the individual with the overall welfare of the social collective and humanity as a whole?

Orio Giarini, Director, The Risk Institute, Geneva, Switzerland.
Garry Jacobs, Vice-President, The Mother’s Service Society, Pondicherry, India.
Bernard Lietaer, Research Fellow, Center for Sustainable Resources of the University of California at Berkeley.
Ivo Šlaus, President, South East European Division, World Academy of Art and Science, Zagreb, Croatia.
1  ILO, Global Employment Trends 2010, p. 10.
2  United Nations Development Program, 2007 Human Development Report, November 27, 2007, p.25.
3  Ibid.
4  Giarini, Orio and Patrick Liedtke, The Employment Dilemma: The Future of Work, Report of the Club Of Rome, 1996, p.114.
5 OECD, Enhancing the Performance of the Services Sector,,3343,en_2649_33703_35026178_1_1_1_1,00.html
6 “Although states will not disappear from the international scene, the relative power of various non-state actors—including businesses, tribes, religious organizations, and even criminal networks—will grow as these groups influence decisions on a widening range of social, economic, and political issues.” National Intelligence Council, Global Trends 2025: A Transformed World, US Government, 2008, p.10.
7 Stiglitz, Joseph and George Akerlof, “A New Economics in an Imperfect World”, Guardian, October 28, 2009,
8 Bouchard, J.P., “Economics needs a scientific revolution”, Real-World Economic Review, issue no. 48, Dec 2008, pp. 290-291,
9 Georgescu-Roegen, Nicholas (1970),“The Entropy Law and the Economic Problem”. Distinguished Lecture Series No. 1, University of Alabama, p.7- 8.
10 Zencey, Eric, “Mr. Soddy’s Ecological Economy”, New York Times, April 11, 2009,
11 Giarini, Orio and Walter Stahel, The Limits to Certainty, Kluwer Academic Publishers, Dordrecht/Boston, 1993, xv.
12 Giarini, Orio and Patrick Liedtke, The Employment Dilemma: The Future of Work, Club of Rome, 1997, p.60-61.

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