Plenary 1 - John Kay on Capabilities and the Wealth of Nations

[Music] you [Music] Adam Smith believed in an open and just society and in an open and just world order he helped explicate how a decentralized market system would flourish and how nations could become wealthy he explained also that individuals had a moral compass and that they set their moral compass according to how an impartial spectator would view one's actions he believed that empathy or what he called sympathy was an innate part of human beings people cared about each other and wanted to be admired and respected by others but today the market system from which global prosperity has emerged over two centuries is now under attack from all sides it's basic legitimacy is questioned from the left and also from the right Adam Smith through his writings provided the initial explication of the benefits of an open liberal market system but we now have to reassess and recalibrate based on where we are we are here to take inspiration from Adam Smith as we endeavor to tackle very serious issues which in my view are existential threats to a market-based open liberal order that he extolled 250 years ago some of those threats are internal to us in fact most of them are and some of them are external but these threats are interdependent both threats must be contained either one in my view can lead to economic and political disruption possibly the demise of liberal democracies throughout the world so what are these internal threats they come from the manner in which in my view we are not tending to the requirements of a robust caring society of the kind that Adam Smith himself extolled in which the impartial spectator that I mentioned before is sufficiently present to cause us to pay attention to the plight of others this risks the breakdown of the social contract the impartial spectator is a fictional device created by Adam Smith to help us harness sympathy for the predicament of others as Adam Smith said everyone has this sympathy I know everybody in the room does but as Adam Smith pointed out even the greatest ruffian the most hardened violator of the laws of society is not altogether without it the Enlightenment that he had so much to do with was based on reason intellectual Liberty and personal freedom but it also assumed and implicitly required the moral underpinnings that Smith outlined in the theory of the Moral Sentiments and indeed as most of you know he insisted that his students read first the theory of the Moral Sentiments before they read The Wealth of Nations and so even though the two books don't talk directly to each other they do so indirectly and he clearly saw them as two peas in a pod prior generations of ours generally assumed that self sacrifice was called for and it even made sense if you served your organization or your family or your country you'd be served back US President John Kennedy suggested that we ask not what your country can do for you ask what you could do for your country many people responded in the core of our civic society today still lives through this ideal now serving others is sometimes considered a sucker's game even though it clearly isn't in the 19th century de Tocqueville admired the number and variety of civic associations many of them quite small which he saw as vital to democracy today both young and old feel detached sometimes disgusted by politics and the current dysfunction that exists in some of the institutions of public life many people have lost purpose church attendances decline community groups like the Lions Clubs of failing many of lost faith and country individualism has given way to tribalism Facebook and Instagram technologies Adam Smith and de Tocqueville couldn't have imagined have fractured communities by allowing people to engage in virtual relationships that displace in-person contact and reinforce narrow views let's talk a little bit about the market that Adam Smith's so excellently extolled although many economists forget it we know it's the ability to innovate that really is the hallmark of the market system and the driver of prosperity it's not just exchange or trading that enabled prosperity it's really innovation that's how the West grew rich if you read Smith carefully he was on to this theme as he points out by means of the plow two men assisted by three horses will cultivate more ground than twenty could do with a spade but while Smith is not explicit about it the clear messages that humans striving to save costs and make more profits stimulate innovation indeed on closer inspection it's apparent that Adam Smith's belief in free markets was based as much on on dynamic efficiency as it was on allocate of efficiency with free markets people can be creative and introduced novelty this was one of the greatest insights of all time but in today's world our ability to sustain high rates of innovation is threatened by weaknesses at all levels of society and families and communities in education and in the corporation itself the problems are amplified in my view by the manner in which capital markets today put pressure on the management of business firms for short-term financial performance this guts the capacity of business firms to innovate one wonders if the Boeing 737 max shortcuts were the result of a relentless focus on short-term profitability the causes of short termism run far deeper than issues related to the time horizon of managers issues of corporate governance and securities regulation are deeply implicated these self-inflicted wounds are repairable in my view although Adam Smith didn't provide a clear pathway he did leave us signposts it's time to to re-examine how public policy and the individual actions of investment managers executives and government officials can be guided by moral principles a deep awareness of one's place in society at large and the geopolitical consequences of short-term profit pressure undermining innovation investment and thereby a just society let's talk a little bit about external threats former US Secretary of State George Shultz recently noted we created a secure global economic Commons which is now coming apart the capitalist system of which Adam Smith remains one of the most celebrated observers is being challenged by China with a hybrid market economy one of Western capitalism's strengths its openness is being used against it and its weakness is exploited The Economist's notes that the world trade organization is not stop nation states from flaunting the spirit if not the letter of the law of the WTO so where do we go from here how can we fix our own problems and create a new system of global governance well this conference is designed to bring together thought leaders like yourselves and practitioners at which there are some amongst us in an effort to bust out of disciplinary boundaries by bringing knowledgeable experts together to explore today's challenges in a man and not dissimilar to the far-ranging approach used by Adam Smith himself and his circle of friends in panmure house 250 years ago our two plenary speakers like many of the attendees a very broad eclectic and insightful these efforts must aim our collective as much aim to build national competitiveness for the long term by prioritizing innovation strengthening the effectiveness of existing markets creating new markets and softening income distribution issues getting this right in my view will increase prosperity and generate the new resources that can be used to address complex global problems the logo for our conference shows Adam Smith looking backwards and forwards that design is deliberate and hopefully that is the posture we can adopt here today by design we have both historians and amongst us we assemble here in Edinburgh to talk about very serious issues with respect to the global economy I know of no other group that has been formed with our particular focus perhaps together we can initiate the development of a plan of action to preserve democracy and advance the many innovative and beneficial elements of the private enterprise system let the conversation begin with with John Kay my good friend of many years who has been one of the few economists who has looked deeply both into the functioning of the economic system and into the functioning of the business enterprise and he is known not only for his multi-stakeholder view of the corporation but of his many informed public policy recommendations John the platform is yours let me point out of course that John is also a Scotsman as is Neil Ferguson and is a Gordon Brown so we're here to be led by their Scots to the new enlightenment [Applause] thank you David and I'm not sure I can quite live up to that but I'm sure we will do our best as you all know Adam Smith begins his great work with a description of a pin factory there's some controversy over whether other ever was a pin factory or whether the great man actually visited it I'll come back to that a bit later but the economic historians are John Clapham chided Smith and said instead of going to his silly pin Factory Smith ought to have got out more and visited the keren ironworks the current Iron Works were 20 miles west of here they was certainly will that is what Karen were Iron Works looked like and David Hume was certainly well aware of the keren ironworks in 1772 with a wealth of nations in gestation all right the human wrote to wrote to Smith the Caron company is really there had been this economic crisis in 1772 causes financial chromic crisis so often are by foolish and rapacious bankers and as a result of that Hume wrote the Caron company is reeling which is one of the greatest calamities of a whole as they give a gave employment to near 10,000 people do these events er Smith any wise affect your theory or will it occasion the revisal of any of the chapters the Karen errand work certainly didn't employ 10,000 people it's possible I suppose that human was thinking about the supply chain but I think Hume great though his erudition was was probably not a very strong empirical economists another rather more careful observer who actually went to the keren ironworks reckon they employed about twelve hundred people and they were then the largest industrial plant in Europe which actually seems quite likely and if they were the largest industrial plant in Europe they were probably the largest industrial plant in the world at the time the great Scottish poet of the time Robert Burns certainly did visit the Karen ironworks he didn't like it very much and this is what he wrote oh I think we've got my truck yes I've translated berms out of the Lawrence Scott in which he wrote in deference to our international audience we came here to see your works in hooks to be mere wise but only should we go to hell it would be no surprise you will notice in this implicit reference as there actually is in a great deal of Burns work to predestination the doctrine that we were destined from birth either from heaven or hell which formed a central part of vapours argument as to why Scotland and other Protestant areas of northern Europe played a central part in the evolution of capitalism and the Industrial Revolution but that's a set of issues which I think we will postpone for another day anywhere today we have moved far beyond the pin Factory and the Arden Works the Airbus 380 is one of the largest and most complex manufactured products of the present era it's an extraordinary complex construction parts of it are built in different parts of Europe forward fuselage in France the wings are built in Britain and Wales the rear fuselage in Spain the tail comes from Germany the engines can come from either rolls-royce or be the landing gears made in England and all of these things are taken in a wildly complex logistics operation for final assembly and Toulouse at which point the completed fuselage is flown to Germany for final fitting art it's an immensely complicated product and there is no one literally no one no individual who knows how to build an Airbus but ten thousand people taken together do know how to build an Airbus that's the power of what has been achieved over these two centuries since Adam Smith the power essentially of collective knowledge and then with the aid of thousands of other people that plane can fly for 17 hours it can fly from Britain to Australia and non-stop it can do so but today and Adam Smith wrote 10 years before even the first fleet set sail from England to Australia that's where manufactured processes have developed in the 200 years since Adam Smith wrote about in factory but the pin Factory was a linear repetitive process as Smith described it one man draws out the wire another straights it a third cuts it a fourth points it and so on and every pin was intended to be like every other pin the process of pin manufacturer was linear and it was repetitive and that was what manufacturing production was like in Smith's time and through the through the 19th and 20th centuries but for at the beginning of the 20th century we had the idea of Taylorism or scientific management the idea that you could study every individual part of that process time it record it stylize it and then construct a scientific process on the base of that that saw the the Ford assembly line and of course the Ford assembly line was imitated even more successfully by what was to become the iconic manufacturing company of the 20th century which was General Motors and indeed for people writing about business in the mid 20th and mid late twentieth century business was for practical purposes General Motors Peter Drucker wrote the first great modern management book and it was about General Motors Alfred Chandler founded effectively the modern subject of business history and it was in large part about General Motors Ronald cows and late 1930s defined the theorem modern theory of the firm he would win the Nobel Prize for that followed in due course by Oliver Williamson elaborating Kouzes theory into markets and hierarchies and cones his description of business in his theory of the firm article is a lightly disguised description of General Motors business was General Motors the ultimate in the rationalized rationalist model of production the linear repetitive process was actually not so much at General Motors in the late 20th century as at Ford whether Wizkid's were led by Tex Thornton and Robert McNamara were recruited by Henry Ford jr. to run the Ford Motor Company after the Second World War McNamara and notoriously would go on to become Kennedy's defense secretary and apply these kind of principles with great lack of says to the Vietnam War Tex Thornton would leave and build Ling Temko vault which founded the modern conglomerate theory with the idea that the were management techniques that could be applied to any business regardless of the product and regardless of the individuals in the corporation the one piece which remain to be fitted into the rationalists framework was provided in a relatively popular way by Milton Friedman and his famous stroke notorious 1970 article the social responsibility of business is to maximize its profits and by Jensen and mecklen who very few years later would write a description of the mmmm modern management problem as essentially a principal-agent problem in which shareholders too busy and dispersed to actually run the business themselves would hire the agent the executives to run the business for them that's where we were in thinking about business towards the end of the twentieth century but actually modern business is really very different from that I want the second part of what I have to say today to look at that modern business and how it differs and I want to begin as is only fitting on these kind of occasions to begin with a trailer for a new book which I've just completed with Mervyn King the subject is radical uncertainty and it will be published in the UK by little brown in the US by Norton in March 2020 having got that of that out of the way let me tell you a little bit about what it's about the water distinction between risk and uncertainty which people used to make controversy in the 1920s about risk and uncertainty in which Frank Knight talked about uncertainty as the driver of innovation and the source of profit in which Keynes similarly attacked the logical foundations of classical probability interestingly a lot of these foundations were developed precisely for the repetitive manufacturing processes which I've described one of the founders of modern classical statistics was a man who wrote under the pseudonym student those of you who've done any course in elementary statistics will be familiar for example with students T we now know who student was he was employee of the Guinness brewery company who worked for Guinness first in Ireland improving brewing processes and actually went on to become managing director of guinnesses first English operations in park Lyle Gossett was student and with other people like Roy Minh and Fisher he developed classical statistics and what Keynes was doing was attacking the logical foundations of that theory but there's classical statistical techniques which were applicable to these linear repetitive processes essentially ends essentially stationary processes in which the distinction between risk as it had been which could be described probabilistically and uncertainty which could not was alighted because in a stationary repetitive world everything could be talked about probabilistically and that was taken up in the 20th century by motorola and finally and famously by General Electric talking about Six Sigma Six Sigma tolerating very low errors in repetitive manufacturing processes was relevant to GES businesses in aero engine it's businesses in health care wasn't however very relevant to its businesses in financial services and of course that kind of thinking the idea that uncertainty could be represented by known probability distributions because they were underlying stationary unchanging linear repetitive processes which was quite false in its application to financial services Wars and is the basis of valuer risk modeling which is used with marked lack of success to control risk in the financial sector G like other large manufacturing corporations were struggling towards the end of the 20th century but his struggles were concealed by the apparent success for two to three decades of its financial services activities activities which as we now know would collapse in 2008 and the weaknesses of GE are today evident to us all the de cámara decline of GE is part of the process at the end of that kind of Russian was story of manufacturing business begin will process that I regard at the end of the 20th century as the decline of the icons GE was really GE and General Motors were the iconic manufacturing corporations of the 20th century if I move over to Britain even in the early 1990s the two leading industrial companies in the UK were I see I the chemical company GC the electrical company today neither of these companies exist anymore I could go on if I look at Britain's iconic non manufacturing corporations I point to Marks & Spencer which in the 1990s decided to focus more on growing its earnings than on maintaining it's almost extraordinary reputation in the retail sector in 1998 it succeeded in achieving its highest-ever profits of a billion pounds following that its profits fell off a cliff and Marks & Spencer has never regained remotely that level of profitability ever since I can go on with example after example of the decline of these great manufacturing and other corporations of the 20th century and I've done that with barely mentioning the financial services sector which is the most extreme of all we've seen the collapse of these icons and if I look back at the fortune 500 list of 50 years ago and look at the firm's at the top of that list I find three automobile companies I find three steel companies I find armored foods I actually had to go and look up who armored foods actually are or work which is rather more to the point and if I look at the top of that list today the names I come up with of course are Microsoft Google I can find three manufacturing companies towards the top of the list they're all rather odd manufacturing companies they're Apple they're Berkshire Hathaway they're Johnson & Johnson and of course all of them have the characteristic that manufacturing as such is a relatively small part of a total value-added of these businesses that is the modern Western business world is one that has moved away from being characterized by these linear repetitive manufacturing processes it's a world and the terms in which we describe it in our book a world of radical answer - in which we don't know looking at the future we don't know just the particular things that are going to happen but there's a great deal of uncertainty even around the kind of things that are going to happen so that's the challenge for us intellectually the challenge for us to make what David calls an a new enlightenment to find techniques and ways of thoughts that are relevant to this very different world of very different types of business and together a very different kind of economy the world in which these new economy companies are characteristic of modern business and the modern economy what I want to do in the remains of my talk is to list some themes that I think are relevant to that kind of new enlightenment thought the first of these themes is the contrast between what I call axiomatic rationality and evolutionary rationality axiomatic rationality is that about the kind of modes of thought that have been characteristic of economics through most of the through really all the second half of the 20th century and indeed today axiomatic rationality is the idea that we ought to behave in accordance with certain simple behavioral axioms the kind of economics that was formulated in the nineteen that late 1930s 1940s and has been the basis of the analysis of economic rationality ever since I want to contrast that with evolutionary rationality what do I mean by that way back going two centuries back again Bishop Paley famously wrote about the man who discovered the watch on the heath and the point of discovering the watch on the heath was you saw this and realized that it could only have been created by some intelligent designer Paley argued that the world was so complex that that in effect was itself proof of the existence of God the existence of someone were designed the totality and of course in the mid 19th century Darwin and others will throw that argument back in his face by showing that actually evolutionary processes of adaptation could produce outcomes that were far more complex than any human design could actually conceive of applied to social institutions that was actually an insight which had been formed at least a century earlier by those thinkers of the Scottish enlightenment if David Hume and Smith how the names that are best known to us today probably the third of these great names is Adam Ferguson Adam Ferguson David tried to persuade me that our I ought to wear a kilt the reception this evening I explained to him that I was quite sure Adam Smith had never worn a kilt in his life or indeed dreamt of wearing a kilt in his life and in Ferguson actually came from about 50 60 miles north of here from the edge of the Highland line I ought to explain for those of you who are unfamiliar with Scotland the Highland line divides the historically extremely poor primitive hyb are very beautiful Highlands of Scotland from the rather more boring and by Adam Smith's time increasingly industrialized south southern scotland spoke lambs as Bern stood in the poem I recited earlier only north of a Highland line did anyone speak Gaelic Adam Ferguson unlike Smith and Hume actually spoke Gaelic Adam Smith was a Adam Ferguson was in fact for a time chaplain to the Black Watch the Black Watch was a regiment raised after 1745 by the British government it was a regiment raised by the British government from Highlanders to pacify and subdue the highlands and the still some disagreement about whether the black in Black Watch refers to the hearts of Highlanders who were willing to sign up for this venture or to the played the precursor of the modern kilt sold to American tourists the played was the wrap of cloth thrown round the body which was of what these rather poor primitive Islanders wore in order to keep out the elements which are singularly unpleasant in much of the Scottish Highlands so Ferguson was chaplain to the Black Watch but actually Ferguson's most famous contribution was not anything to do with his military prowess but to do with his essay on the history of civil society published in 1767 almost 10 years before Smith's Wealth of Nations that's rather important because Smith and Ferguson fell out and what Smith and Ferguson fell out over was the pin factory at Ferguson in his essay on the history of civil society as an extended description of a pin factory which looks remarkably like Smith's description of the pin factory which begins The Wealth of Nations ten years later it may surprise you to know that it was Smith who accused Ferguson of plagiarism in all of this because Smith had given lectures before 1767 in which he referred to the pin Factory and Smith claimed that Ferguson had listened to these lectures or seen transcripts of them and used that in his essay on civil society Ferguson made the rather devastating response to this but actually neither of them had been to a pin Factory and the whole story of the pin factory had been copied out of a French book which had be published in the early 1760s I won't try to adjudicate on that particular controversy I will have a suggest that it might will be better if economists got out more and actually did indeed visit some of the businesses about which they they write one who did whom I know who should be in the audience today but can't actually see is dick Rowe melt who wrote famously about going to interview Steve Jobs after Jobs went back to Apple in 1997 hoping to hear jobs vision for Apple and the evolution of the personal computer industry and Jobs famously said to room ELLs I'm going to wait for the next big thing that was job strategy for Apple in 1997 of course the next big thing actually turned out to be digital downloads of music which led four years later to the iPod thousand songs in your pocket as jobs described it and of course in due course was reunited with the other big thing of that time which was the development of social media so that the combination of the music store with the apps created the smartphone which everyone of us today has in our pocket this is an example essentially of evolutionary rationality of a kind of rationality which exists when we don't know and can't know what it is the future holds or even the types of things that the futures will that the future will hold it's a matter of understanding what the capabilities of the business are and adapting these capabilities effectively to the changing economic environment that is the kind of thing which Ferguson had in mind in his essay that essay on the history of civil society in which he wrote nation's StumbleUpon establishments which are indeed the result of human action but not the execution of any human design that was Ferguson in 1767 that was a formulation essentially of this idea of evolutionary rationality in the development of institutions and Ferguson was deeply skeptical about the idea that institutions were the product of individual design we ascribe he wrote to a previous design what came to be known only by experience what no human would wisdom could foresee and what without a Couric concurring humor and disposition of his age no authority could enable an individual to execute the prescience of that is obvious when we realize that was not actually true of the pin factory it was perfectly possible for any individual to design a pin for e or indeed a keren ironworks the keren ironworks were based essentially on designs which instructors of the keren ironworks had stolen from the Colebrook de Dale works in England at the time that wasn't true of the pin factory or the current ironworks it wasn't even true of the rationalist models of production which I've been describing but it was true in the context of the air bus so the first thing we need to understand in looking for ideas for this new enlightenment is the importance of evolutionary rationality the second thing I think we need to realize is to do with the economics of teams now way back when I was a graduate student in the early 70s Marsh Rick and Radner wrote a book on the economics of teams I thought others thought that this was going to be a great theme in economics actually it wasn't because economics then went down the route which I've described earlier in terms of axiomatic rationality in terms of the shareholder value ideas the principal agent models that were central to that Chicago in view of the world still I came back to the the idea of the economics of teams in some work I did in the early 1990s when I first became interested in business issues move on this was for a few years one of those news slides in my slide library that I resurrected it for purposes of this conference it some slightly requires a little bit of explanation I think what we did was we collected data for 20 years about the performance of English league football clubs relative to how much they had spent on players so we had this large database that her how much clubs had spent on players wages and transfer fees to buy players and their performance over that 20-year period and what you can see from that line is that roughly speaking what you see is what you get the more you spend on players the better the team performance however there was one the work was too large outliers for this the first if you look down the bottom left is Nottingham Forest's which we turn we believed was explained by what we called the Brian Clough effect those of you who familiar with history of English soccer will know that Brian Clough was one of the great controversial managers and it turned out that every single club that Crawford managed was off the line in terms of performance however interestingly despite the emphasis that clubs and team owners give to coaches and managers there was no evidence of any other manager had any effect at all on the performance of team but Clough did but the really interesting story is to go to the far right of the screen and see em at the bottom and a lie at the top because the two top performing clubs in the league over that period had been Manchester and Manchester United and Liverpool and Manchester United and Liverpool had won almost the same number of league championships same number of overall wins the same number of goals over the period but Manchester United had spent far more on players than Liverpool had with Manchester United you got what you expected from what you've spent on players from Liverpool with Liverpool you got far more than you expected given what they had spent on players Liverpool in short functioned as a team Manchester United did not Manchester United was little more the sum the aggregate of the performance of the individual players I then formulated a simple model of a football which I must say didn't endear me to my football supporting friends which said if you're a footballer and you get the ball there are two things you can do with it you can kick it towards the goal or you can pass it to someone who's better place to kick it towards the goal than you are and the strength of a team depends on how willing you are to pass it to a better place player rather than to kick it towards the goal yourself that they as I say my soccer playing friends didn't find that a very satisfactory description of the game they found so exciting but I still find it if not in that particular case at least by an analogy a way of understanding what it is we mean by team and of course the exciting story which everyone who knows anything about English soccer knows is the performance in 2016 of Leicester City which was a club which was entirely mediocre in terms of the players which it had had and employed but which won the league champion the Premier League championship in 2016 had odds of five thousand to one against at the beginning of the season it also brings home the issue of what business strategists have called uncertain imitability which is that not only could no other club imitate Leicester city's extraordinary team performance in that particular year but even Leicester City could not imitate it itself because the following year Leicester city's team performance fell apart and Leicester has never come even close to replace the replay the forum which had achieved in 2016 so we need to think about the product of teams we achieve a team the value of a team in business by creating an organization which is worth more than the sum of its parts individually that's what we mean by a team that's what is achieved by this complex production process which I described earlier in terms of Airbus the third concept which I want to emphasize is factor heterogeneity and differential capabilities because that's what we're talking about when we talk about football teams that's what we're talking about when we talk about the differential performance of different organizations doing the same thing factor it originality leaves us into the theory of economic rent which of course was is generally attributed to David Ricardo in the early 19th century however I can reveal today that Ricardo's theory of rent was actually almost completely anticipated by another Scottish enlightenment figure of the name of James Anderson he was a part-time gentleman farmer part-time philosopher part-time economist who wrote a simultaneous with Adam Smith an exposition of the differences between rent of land in Eastern and Western Scotland in terms which more or less exactly anticipate what Ricardo would write about 40 years later and Ricardo explained in his 1817 I think it was publication how the Bob our land varied from by the bad best to the worst how there was the margin of cultivation the pointed which was just worth bringing land into production and how the rent of land was essentially a linear function of the superiority of of better land relative to to worse and of course we can apply that that kind of analysis to the differential performance of firms we can range firms or football league clubs or anything else we want from best to worst in the same activity the benchmark firm is the industrial equivalent of the margin of cultivation and economic rent is what is earned by people by firms Wharton's inside that that also introduces the very important concept in thinking about this of what I call competitive leverage which is how does superior land quality or superior performance translates into superior economic return you can have very dramatic competitive leverage for example the and the difference between Olympic gold medalist Runner and an average Club runner is perhaps 5% animart which could not be detected by anyone even quite an experienced observer except with the aid of a stopwatch but it is the difference between winning an Olympic gold medal and achieving absolutely nothing so the profitability of an industry and activity whether it's football league clubs whether it's business industry activity so that pharmacology for example in which one is willing to pay quite a lot more for the best drug than the second best drug is in these terms an industry with large competitive leverage and of course extreme competitive leverage leads to what people have identified as winner-takes-all markets so this analysis of determinants of rent and the nature of competitive leverage is I think fundamental to understanding these kinds of modern economic organizations my my fourth theme is a firm as a collection of capabilities which links with a concept of competitive knowledge we have collective knowledge of course in what has taken us from 1776 when people couldn't even think of flying except a few years later with the aid of balloons to 1903 when the Wright brothers first took to the air to 2019 when we can build that Airbus and we have that right across the board if we take if we stick with running for a moment people have been running for thousands of years we know that the Greeks even engaged in and valued competitive running but actually if you look at times for 100 meters the Olympic mayor gold medal of Harold Abraham's famously in the Chariots of Fire for one in 1924 he won in at ten point six seconds ten point six seconds wouldn't remotely qualify you for the Olympics anymore the world record for the hundred meters is held by Usain Bolt who can run it in nine point five eight seconds the first Olympic marathon was won in just under three hours in 1896 today the fastest marathon ever run is two hours and 20 seconds and people are currently betting on whether the first sub two hour marathon will actually be run this year or next that's a pretty dramatic improvement in this rather elderly sport over a hundred of years and what I've done it two things one is what I describe as collective knowledge that's the accumulation of knowledge about training about sports psychology and physiology about nutrition and diet about pacing yourself over two or three are marathon which is accumulated over that past century and the second is the widening of the talent pool which which is available for these again victim it is so if you go back to that 1924 Chariots of Fire film you will see that all the competitors in that hundred meters another short distance race were white men educated at leading universities in Britain and the United States whereas the people who were winning these marathons and 100-meter sprint now are actually very different in fact interestingly and significantly the people who win the very long distance races are typically people who are genetically African and the people who win the Sprint's are people who are genetically West African and if rather interesting to understand why that's happened but let's simply note that globalization has affected running just as globalization has affected absolutely everything else the widening of the talent pool remember Adam Smith wrote that the division of labour is limited by the extent of the market and that applies to every kind of human activity so this combination of broadening the market and accumulating collective knowledge has led to this staggering degree of productivity improvement even an old established activities like running and collective knowledge of course is encapsulated in what has become a fashionable phrase in the last decade the wisdom of crowds but I think it's quite important to say that the wisdom of crowds is not actually the average of what is known by large crowds of people which is what it is represented by in something like the book by Sarah Becky or in people who apply that kind of analysis to the Wiz of financial markets the wisdom of crowds is actually the aggregate of our knowledge it's not the average of our knowledge and like most people I prefer to fly in planes that are flown by trained pilots rather than planes that respond to the average wishes of the passengers or on board that planes is the accumulation of aggregate knowledge which has made successful flight possible I like to say a little as well about rent sharing in teams because of course once you have teams creating surpluses you need to share out the produce of that surplus and that's of course one of the oldest problems in human history it's a problem that was faced when the hunters of a tribe successfully managed to achieve to find some game and kill it and then they were faced with a problem of assuming that there were the game was the production that the activity of hunting was in aggregate value adding that is by hunting in a team people were able to produce game more valuable than each could produce hunting on his own how did you share the surplus between the two and of course the answer was was then established by a combination of social norms and hierarchies as it is today that it's social norms and hierarchies that are behind the ways in which the surplus the value-added of teams is is shared and that could lead me into my final heading which is corporate governments I could write a long essay on the implications of what I've had to say for corporate governance and on futures occasions but not on this occasion I will do so I simply want to leave for the moment the observation that made very clearly by an interesting book by which Wrangham published recently on on primatologists about the alpha male in brain in primatology because he he explains as aggressive Apes have discovered and are say louis xvi discovered that if people used a hierarchy to accumulate all the surplus of the team for themselves in general the team responds by choosing a rather different hierarchical structure and that has implications I think for the way we think about corporate governance and the way we think about a industrial organization today everything I've said in each of these headings I hope leads us to think in a rather different way about the economic organizations of the 21st century than the ways in which we've been used to thinking about them in the 20th century we need to understand that the corporation is a social organization which is a product of the society in which it operates and which responds to the values of the society in which it organizes in which it operates the world in which we need to think about organizations in terms that draw at least as much on psychology and anthropology as they do on models of individual rationality it's a way of thinking that has the tools that enable us enables us to understand the complex organizations which are the teams that dominate modern economic organizations oddly these are insights which were obvious to the scholars of the first enlightenment they were obvious to the scholars of the first enlightenment even though the much simpler production processes of in factory and the Karen and the Curtin ironworks responded much better to this kind of analytic to the that traditional kind of analytics than do the organizations that dominate the economy today but if these kind of insights were obvious to these first enlightened scholars I think they ought also to be obvious to us today thank you [Applause] now we are going to move over to have a panel discussion of some of the issues raised and what I had to say and what David said to say and water will be part of this conference so if I can buy in right onto the panel Barry Eichengreen economic historian Matthew slaughter Business School Dean and lady Linda Ross to forrester de Rothschild of enlightened capitalism I'm going to ask each of our speakers to make a short introduction into the introductory statement and then I hope we can have a discussion first among ourselves and then engaging the audience as we move forward Barry thank you John it is a pleasure a somewhat intimidating won't have this opportunity to comment on on John case remarks a pleasure because they are John's he sent us a longer and even richer version to ruminate upon on on the plane over intimidating because of the the venue were all economists our intellectual children of Adam Smith and of the Scottish enlightenment but some more than others so I myself discovered economics about 30 miles north of here at the University of st. Andrews so I have a intellectual depth to Scotland and its development of economic thought the theory of the twenty twenty first century corporation that I heard John described in the last part of his remarks focused on five characteristics number one the 21st century corporation is a collection of workers with differential capabilities meaning that it's different employees have different different skills that are not easily substituted for one another number two the 21st century corporation is characterized by teamwork meaning that decisions are taken and tasks are executed by groups or collections of employees number three the 21st century corporation is a repository of collective knowledge which is generated by these individuals with different capabilities through their participation in teams number for the 21st century corporation is a repository which is a repository of this collective knowledge is subject to increasing returns or synergies and number number five the 21st century corporation is the result of evolutionary rationality which means that technology and organization evolve in ways that reflect no one's conscious decisions but rather what John calls adaptive capabilities this view then is advanced as an alternative to three rather more conventional theories of the firm where these are first neoclassical theory which sees the firm as a legal entity set up to solve a linear programming problem just like any other linear programming problem number two transactions costs theory which sees the firm as an entity to execute functions that are too difficult to complete at arm's length due to asset specificity and asymmetric information number three as an alternative to agency theory which sees the firm and its governance as solutions as a solution however imperfect to the principal-agent problem facing managers and shareholders so given that I am a student of Richard Nelson and Sidney winter I will call this the evolutionary theory of the firm because I think it bears some considerable balance to that a first question I want to ask then is how many of these characteristics are distinctive to the 21st century corporation that is John's subject Nelson and Witter who similarly emphasized rules of thumb as well as outcomes that did not reflect anyone's conscious design we're writing in the 1960s and 1970s in response to the industrial dynamics really of the first half of the 20 20th century and I think another one of my teachers Alfred Chandler who was writing about the late 19th as well as the 20th 20th Century Business Enterprise had a lot of the same things in mind as well so let me read you and and an extended excerpt from one of Chandler's articles now I'm quoting organizational capabilities provided the dynamic for the continuing growth of such firms Chandler was talking about late 19th and early 20th century industrial firms they were created during the knowledge-acquiring processes processes these capabilities resulted from solving problems of scaling up the process process of production from acquiring knowledge of the customers needs and altering product and process to service needs coming to know the availabilities of supplies and the reliability of suppliers and in becoming knowledgeable in the ways of recruiting and training workers and managers such knowledge and skills were developed by learning through trial and error feedback and evaluation thus the skills of individuals depend on the organizational setting in which they were developed and used such learned skills and knowledge were companies specific and industry specific they were not of course patentable they were difficult to trance what from one industry to another or even from one company to another precisely because they had been learned within a very specific organizational context end quote so if John is describing the 21st century corporation I would argue he is also describing the late 19th century corporation and the 20th century corporation indeed I would argue that one sees many of these same features workers with different capabilities teamwork collective knowledge evolutionary rationality in industrial shops the very small manufacturers that dominated wide swathes of what we would now call the manufacturing sector toward the beginning of the industrial revolution so I think I would characterize the Karen ironworks in somewhat different terms then then then John did in in his talk maybe the difference between the 21st century corporation and these historical antecedents lies not in form but extent maybe the the range or a variety of capabilities is greater today maybe teamwork is even more prevalent today maybe collective knowledge is even more important today maybe synergies are greater today I'm not sure what could John add what could he emphasize more in in my last couple of minutes let me touch on three or four points one connects to John's point on economics of teams which is the importance of physical proximity so John started of course with the example of the keren ironworks a collection of arguably 1,200 workers assembled in one place that example is then carried through Henry Ford's River Rouge plant and General Motors assembly factories in these cases physical proximity has a lot to do with fixed capital and the costs of handling materials but what about the Google Googleplex in Mountain View why do so many of Google's employees work in one place employees presumably work in close proximity to one another because this is integral to the operation of teams a team seems to be more productive with face-to-face interaction I make more progress on my research when I'm in the same room with my co-authors than when corresponding by email we hopefully make more intellectual progress on our questions when assembled at the Balmoral Hotel then corresponding messaging one another from our home office home offices there's a website called pioneer that is currently sponsoring research intended to determine why videoconferencing is such an imperfect substitute for these face-to-face interactions I don't I don't think we know the answer the association of physical proximity and face-to-face contact with the efficiency of teams may have something to do with the importance of nonverbal communication it may have something to do with how physical presence affects concentration and attention span whatever the answer I think it's central to the theory of the firm insofar as the firm like the university is more than a collection of people working from home second and and quite at odds with the previous point is the the rise of the the gig economy about which we didn't hear anything in John's presentation a growing number of cat tasks that once had to be coordinated within the firm can now be reliably outsourced or subcontracted as a result of advances in information technology so Google itself now has more kemp's vendors and contractors than it does full-time employees and it uses them not just to operate it shuttle buses but write code deal with sales staff recruitment even the management of its production development teams it uses information technology to screen these individuals monitor their productivity adjust their terms of employment so as to match supply and demand to the point where as I said before they now outnumber Google's permanent employees I think this too is changing the fundamental nature of work and the nature of the of the firm third the importance of the platform economy insofar as the firm's collective knowledge and organizational capability are acquired through interaction with customers suppliers and and and co-workers all of which appears in the work again of Chandler the the Raisa of platforms is adding something to that it's transforming both the scale and the scope of those interactions so if you market your product through Amazon Marketplace the price of doing business is sharing the most intimate information about that product but also about your customers so platforms today control not only the terms of competition often in ways that are opaque to outsiders but they also have comprehensive knowledge of the market enabling them to compete on advantageous terms with their own customers I'm not sure we've seen anything like this where a firm creates not only its product and the market for it Chandler would have recognized that part but it also controls the marketplace itself and generates and monopolizes the information on the basis of which that market works finally politics and regulation I'm out of time so I will simply close with the observation that the political implications and the regulatory questions surrounding all of the aforementioned are profound thank you thank you thank you thank you John and thank you David and everyone who conceived of this conference it's been a real pleasure for me to go back to the 18th century and get out of the 21st century to think about things and what I want to put into the idea of the conference is that what is the problem that we're solving for that neoliberalism has in many ways hijacked Adam Smith as their patron saint that was until Saint Milton Friedman completely took it over but what we know is that our system has created horrible problems of wealth inequality and nowhere worse than then a few places worse certainly in the g7 nowhere worse than in the United States where the top 1% controls 42% of the national wealth and the bottom 90% controls 4.7 percent we have wage stagnation we have dislocation of jobs and loss of jobs from globalization's and just the economic security from from from technology these are all problems that we're well aware of and are our problem is that our societies are well aware of them and our societies are are acting out against the framework that we have developed for lack of a better term we can call it neoliberalism and I think that is an enormous problem that demands in fact the new enlightenment and it demands not just tinkering at the edges and what I'm thinking about is that in 1945 when we thought that the world was pretty well was being pretty well shaped and we had Keynesian economics and we had government and business you know working together General Motors what's good for General Motors is good for America we had all that going on in our society it would have been and it was in fact a pretty loony idea to think about less regulation less government in individual competition the the basic tenets of the reason for a corporation is to make profit for its shareholders that was not the way people thought in 1945 but in 1947 a group of people who did think like that led by Hayek went to mount pillar and it's not quite as nice as Edinboro but a lot of nights but but not not a bad place in Switzerland and got together and created a society around these new relatively at that time flaky ideas and what I think what I would like to call for is a new Pelerin Society maybe it's the Penn Morehouse Society but that we can't tinker around with trying to fit round pegs of either either government policy or corporate behavior into a square hole of an intellectual framework that that isn't working for people and that's the challenge that I think is before us and I actually think that a lot of what John said begins to get us there first of all the the the idea of evolutionary rationality is the basis for thinking we have to our intellectual framework the one that adapts to the challenges of our society and not just try to like I say tinker at the edges and John's idea of collective knowledge and teams is also something that's very relevant I think to a new way that we can think about the basis John made a decision to leave Weber and the sort of moral basis for all of this out but I can't help thinking that in 1945 when Robert Wood Johnson created Johnson & Johnson and he created a credo that said that his first obligation was to his customers and his second obligation was to the great employees who created the great products for customers and his third obligation was to the community and his fourth was to give a reasonable return to shareholders that actually that was based on that was based if not on religion it was based on the impartial expected it was based on a concept of what we admire in society so I think as we think about about new tools for better corporate governance or new policies for redistributing or or rebalancing the benefits from capital to to labor that we would be better off if we could put that in the context of some poetry we have to have what Bobby Kennedy called moral imagination and one reason I think we have the problems that we have is not because we don't know this Lucian's but it's because people don't believe that we are actually in this together I work on a something called inclusive capitalism I mean and I think everything that we do in policy and in business should be toward making capitalism inclusive inclusive capitalism would have been a redundancy to Adam Smith it is an oxymoron to everyone in the world today and if we don't fix that and fix it at a very fundamental basis where we have we have philosophers and poets and musicians thinking about how we truly convert our greed as good individualism because look at what happened from mountain that teller and they were crazy ideas by 1980 we had Margaret Thatcher and and Ronald Reagan and greed is good was indeed the coin of the realm because we didn't really think I don't think we really thought of it as greed but we didn't think of who we were leaving behind so my my call in fact in your invitation David you asked where can we take this from here I would like 39 people to get together well funded by some very good foundations to begin a process of creating I call it almost the poetry the poetry of bringing our our society together through having an economy that works for for everyone and I think that that will lead to a reform of our capital markets but our cut but at our capital markets need to be put in a new context that that is built on different premises and creates new opportunities and new approaches to policy so that would be my hope for what all of us in this room can about in whatever seat we sit in wherever we are and possibly collectively and to John I would like to hear in addition to your 8 your 8 columns your 8 issues of a new way to look forward I would like to hear from you about the Theory of Moral Sentiments about the the your thinking about how we can get to a societally acceptable and embraced moral consciousness about the change in markets and how we create more inclusive and sustainable societies through creating more inclusive economies and David thank you for the invitation and bring us all together here and John for starting the conversation with your code remarks I'm just gonna I'm gonna offer one idea and it is I'm gonna I think it we got offered as a prep sort of a meta theme the terrific list that John you provided us in thinking about what if we take up the charge of Adam Smith and David Hume and in this 21st century for what we should be analyzing I'm gonna suggest everyone in this room I'll come back to Lynn's poetry insight in a second that we it would be greatly valuable if we all spent more time thinking about talent and especially the scalability of talent that I think is unprecedented in human history that we find ourselves into this early part of the 21st century and is driving a lot of the economic and business and social forces that brought us here together so let me start with an example of a particular labor market I'm an economist by training them one of the few Paul Krugman students so yes we need to get out more in the world so let's fix ideas with a particular labor market that to US labor market and if I showed us inflation adjusted earnings in this labor market starting after World War two from 45 into the 50s 60s 70s the mean earnings in the labor market it's a high talent labor market was pretty constant in today's dollars about $100,000 a year was the average earnings of one of those individuals and then like a lot of other things we've seen all of a sudden the average earnings in this labor market is the 80s comes along goes up and up and up and today it's up by about an order of magnitude so the individuals in this labor market today earn an average earnings of slightly over 1 million u.s. dollars now what labor market do we think this is I think a lot of us we might kind of think we'd be like okay it's gotta be investment bankers it's got to be partners in law firms its management consultants so those are all good guesses and it's in the same ballpark but it's wrong and in the spirit of Barry talking about st. Andrews I'm an avid bit mediocre golfer it's golfers on the PGA Tour in the United States so we all kind of chuckle but there's a lot there's a lot of economics linked to unbundle here about talent so what's been going on in the PGA Tour and a lot of other professional sports tours is the scalability of talent that's unprecedented human history and the three forces that drive that John talked about Annika will be talking about a lot in the in the couple of days here it's a combination of globalization technological change and changing social norms so what happened the PGA Tour is playing an observing golf it's kind of a luxury good and the lexicon of microeconomics and as China and India vicita din of the global economy the interest of billions of people on the planet to see what's happening with really good golfers has gone up a lot technology something that we have with information technology that we all have in our in our pockets these days the ability to follow these individuals has gone up dramatically so you go from having kind of local labor markets in the time of Smith and Hume to suddenly the scalability of that town people can observe what's happening and also the quality of play in some sense has gone up when you look at you're able to draw on individuals from all around the planet who might have an aptitude and ability to learn how to play golf and so what's happened and is and when you look at it's the mean earnings have gone up dramatically John talked about teams now golfers it it used to be kind of the social norms lose it was kind of you you were journeyman you had your caddy at the end of the day you'd head to the pub and you'd have you'd have a couple of pops after the round of golf with reporters and things like this now what happens but the immense returns to being in this high talent labor market is there's been actually on a lot of measures a collapse in the in the distribution of talent because you can't afford to be a marginal goal for now so everyone now has their teams and after the round they'll go talk to their psychologist their physio and they'll go back to the driving range little hit balls again and this zone and so forth and what's happened in particular I give us a data on the mean earnings at the upper tail of the distribution there's been an explosion of earnings that in some sense are unprecedented so I've been in st. Andrews not to study but to play golf a lot of times and lose a lot of golf balls and there Heather and gorse but in the spirit of where we are let's look at Rory McIlroy so Rory McIlroy's 30 years old he's been a professional golfer for about 12 years since he was 18 how much do you think Rory McIlroy has earned and play golf a kind of tournament earnings in those 12 years so if you said 47 million nine hundred and twenty three thousand eight hundred forty eight dollars that's right he's eleventh all-time on the golf burnings tour list and what's remarkable is there's a couple people above him get a German named Matt Kuchar has won about fifty million dollars Matt Kuchar was kind of this journeyman golfer he's good enough to be in the PGA Tour he's never won a major tournament but he's just kind of by being talented enough to be in this massively scaled labor market the marginal returns a marginal revenue product of the Alexa kind of economics of a Matt Kuchar is unbelievable compared to what it was a handful of decades ago what's most amazing about Rory is not just what he earns on the tour it's what he earns in his endorsements so two years ago Rory McIlroy this is all in the public domain kind of because of his successes signed contracts with Nike and with one of the club products producers Taylor made the it's a 10-year deal with Nike that's 250 million dollars and with Taylor Made it's a hundred million dollars to wear their logos and swing tailor-made golf clubs and so on and so forth so that's 350 million dollars just for kind of existing and playing golf above me all what he actually does on and on days of the tournament and what's remarkable is relative to the metrics that I think a lot of what Smith and others talked about about output on observable metrics of strokes Parral and earn a number of major championships Roy's an amazing golfer compared to mortals like me but he's not better than the Jack Nicklaus is and they Gary players and the owner Palmer's of a few decades before when the average earnings was flat Rory's won four major tournaments to date he hasn't won a career Grand Slam he hasn't been able in the Masters Jack Nicklaus won 18 major tournaments over his career and which remarkable is Jack Nicklaus came in second place in nineteen times so I use this as an example but just to kind of drug join I'm just watching the time we can then think about what has happened not just on the PGA Tour but with bankers with consultants with just high talent individuals even academics more generally Lynn touched upon this but we all know I think the social context in which we find ourselves is we have massive Rises and income inequality and wealth inequality and a sense of fading hope and opportunity in a lot of the countries in which we live and work and we could go through the statistics Butlins summarize those so I think what would be think a research agenda for a lot of us whether it's a group in a certain place or otherwise is thinking about three dimensions of talent one is how do we create talent in the 21st century and what is talent talk about so John one of the first things you talked about was the notion of rationality but there's I think questions about what does it mean to be a flexible adaptive individual in today's world where the predictability of how economies work is quite different the second is what is the market deployment of talent within and across organizations I think it's very different Barry talked about Google and some of the kind of emerging technology companies the nature of teamwork and talent in those firms and how it's organized is quite different from what a lot of pin factories or care and Iron Works and things were like and I think that's very salient and then the third question I ask is that we should all think about is what should be the public policy response to how talent gets deployed and here it gets to deep ethical issues I think there's the poetry that that Lynn talked about but also provide I think just the prose of kind of more prosaic questions of what's a just marginal income tax rate to pay for things in our system and our societies and things like that so my own country the knighted state right now is very riven with discussions of so the top marginal income tax rate be 70 percent or what should it be and you know we think about Rory as an example the scalability of his talent in the marketplace it's not a judgment against Rory he's he's as good as Arnold Palmer and Gary Player word but he's not like one or two orders of magnitude better in terms of how he swings a golf club but it's the globalist session of China and India it's the creation of the Internet all those things what raised them his marginal revenue product but he personally didn't do anything to create that when you think about claims of distributive justice I think there's some entering questions that we could all be thinking about so I'll just close I just have a couple quotes here actually from Adam Smith to honor the the lovely theme of this conference many of the thinkers that we've talked about him that John and Barry and Lynne so eloquently talked about they knew these issues were salient I just think they're a lot more salient we think about the scalability of talent than they used to be so in the wealth of nations one of the quotes from Adam Smith on the issue of inequality he said quote one improves the circumstances of the greater part can never be regarded as an inconvenience II to the whole no society can surely be flourishing and happy of which the far greater part of its members are poor and miserable and when definitely touched upon that theme and then the question of justice and here I'm thinking about distributive justice in the context of how do we create and deploy and adjust for the vagaries of how talent works and our 21st century in the Theory of Moral Sentiments Smith was had a quote about justice which I think was a little sobering but I think inspiring for all of us as an optimist he said it quote if justice is removed that great an immense fabric of human society then our society a must in a moment crumble into atoms so if we don't have a sense of justice in terms of how our economic system works especially as I've said here around how talent is created and deployed the outcomes we're living with the pressures and a lot of our societies with brexit and so forth but I think the scholarship that brings us all together here for the first couple of days can provide a lot of optimism in progress so thank you thank you Matthew we're running at a time and I just want to take a moment or two to pick up some issues that I want would like to respond to that our panel firstly let me respond in part to Barry by saying that I think Barry is quite right to have observed that Chandler picks up quite a number of the themes which I described when I talked about the 21st century corporation versus the 20th equally I think if I go back and I was very struck recently rereading Drucker's book about General Motors and in the 1930s and 1940s in Drucker's book what Chandler and others and Barry said is true but it's true about the executive team what is a striking theme of that book is the extent to which there is an assumption of gulf between the executive team who are assumed to have some kind of intellectual role and the labor force which is treated as a commodity and indeed it was Drucker's prescient sense that that distinction might not last there was really a large part of the disagreement between Crocker and General Motors which led General Motors to almost come to completely disregard duck Drucker's book and his observations in Mayberry erased very large group of points which are important about the central role of platforms the jig economy and physical proximity etc in this 21st century economy and Niall Ferguson tomorrow will talk to us I don't know what he's going to talk to us about but he's recently written about networks versus hierarchies and I think that networks high versus hierarchy is taxonomy is much more helpful to us from the markets versus hierarchies taxonomy that is the mob that market economies today function essentially through networks and that's behind what is going on in the physical with Fixer physical proximity it is also how there are real really relatively few genuine transactions and the jig economy and the platform economy are really mechanisms which are designed to make transactions between distant agents possible by removing or responding to the anonymity which is posed it's brought home to one if you look at a poster in London transport to sad a that says if you don't book your minicab you were just getting into someone else's car and it's the removal of anonymity which is essentially the contribution of the intermediary in that I'd like to respond slightly to Lynn with a story which she talked correctly about the Johnson and Johnson credo and of course the famous illustration of the power of the Johnson and Johnson credo was the story of tylenol where some crazy guy poisoned tylenol and Johnson & Johnson impressively with people working from the lowest level of the organization are removed tylenol from the shelves of US drug stores within a few hours the contrast to that is the story which some of you may know currently of Arkansas teachers and others versus Goldman Sachs Goldman Sachs like Johnson & Johnson is credo as a statement of business principles and business ethics which begins by with our clients interests we always put our clients interest first Goldman Sachs are being sued by Arkansas teachers and others in this class action who these investors claimed they were induced to buy goldman sachs stock in the belief that it was a reputable company bound by this code of business ethics a goldman sachs defenses to this charge are not that the statement is true indeed goldman has itself produced 36 instances of newspaper reports which appear to describe conflicts of interest within Goldman snacks their argument is that given me that these statements and elaborate event studies show that it had no effect on the stock price the revelation of conflict of interest such statements of ethics of no effect on stock price and Arkansas teachers could have suffered no loss the second strand of argument is that statements of this kind are anew in actionable paths in terms of American laws akin to red bull gives you wings or Heineken refreshes the parts other beers cannot reach and there further is no cause of action I don't think I'm still a bird the story much further so I'll simply end with another story and the case is still continuing it is currently on appeal to the second federal circuit after an unfavorable decision in in the Southern District of New York so we await we are way to did the decision of the US Court I should say that since the courts has already decided that a statement by JP Morgan that we have elaborate and effective risk management procedures in place was an in actionable path I'm not very hopeful that Arkansas teachers will actually will actually prevail in the end I'll tell a final story to end with to contribute continue the sporting theme which is actually quite useful because so many of the issues which we want to talk about business are illustrated in rather stylized form in the supporting cases many people still think that Stanley Matthews was the greatest English soccer player ever I came across a report of a letter which Matthews received from the Football Association after Matthews had scored two goals in what was a critical match in which football was resumed after the Second World War and England defeated Scotland at Hampden Park by four goals - - and the letter said dear Matthews we enclose a cheque for your match fee and your second-class rail fare from Stoke to Glasgow 19 and sixpence however we regret to inform you that the sixpence expenditure on a cup of tea as you change trains at Carlisle station is not refundable by the Football Association and you will yourself have to bear that this expense what has changed several things one is issues of class structure and labor force I'm inclined to believe that the officials of the Football Association probably didn't travel second class to Glasgow for the match but most of all the cartel of owners to repress workers has since has since disappeared and secondly that the globalization has made the broadcasting of soccer and television rights to it enormous ly internationally productive with much of the rents generated by this accruing to accruing to the individuals involved there are two lessons one is that social structures are critical to determining the distribution of rents in the modern economy and that's the kind of thinking we need to answer some limbs points and the second is that globalization effects absolutely everything it's even relevant to the cups of tea at Carlisle station thank you all I think we now have a logistics message David [Applause] I'd like to thank the panel very much this conference is going to be one where we learn various bits of useful information and we're challenged as Adam Smith was to combine it all so by the end I trust you will have a fully articulated view of how our economy and society must move forward in the meantime we're picking it up bit by bit [Music] you [Music]

Channel: New Enlightenment Conference, Edinburgh, 2019

Views: 1,577

Keywords: Adam Smith, The Wealth of Nations, economics, markets, evolutionary rationality, productivity, networks, manufacturing systems, globalization, New Enlightenment, capitalism

Id: k7EydXii4Tc

Length: 103min 49sec (6229 seconds)

Published: Sun Aug 18 2019