ThinkSet Podcast: Anniversary of the New Enlightenment Conference

David Teece joins Michael Whalen to discuss the first anniversary of 2019’s New Enlightenment conference held at Adam Smith’s Panmure House in Edinburgh, Scotland. Dr. Teece reviews the history of Adam Smith, also known as the father of capitalism and economics, and how Smith’s paradigms of international economics are directly challenged with the surge to prominence of a very different model pursued by China.

TRANSCRIPT

MW [00:00]        We’re recording this episode of the ThinkSet Podcast close to the anniversary of an extraordinary event held in Edinburgh, Scotland, at Panmure House, Adam Smith’s final residence. There were quite a number of BRG experts present and active, including Harry Broadman and Tri MacDonald and Charles Cicchetti.

Adam Smith of course is called the father of capitalism and economics as a field of study through his seminal works, The Theory of Moral Sentiments and The Wealth of Nations. He was a key figure in the late eighteenth century Scottish Enlightenment, the hallmarks of which were primacy of human reason, rejection of authority not governed by reason, empiricism, and practicality. Adam Smith’s observations and conclusions provided a holistic theoretical underpinning of the industrial revolution and the world economy.

The conference was conceived of and organized by David Teece, the chairman and principal executive officer of Berkeley Research Group. It was a call to action for thought leaders across disciplines, geographies, and perspectives at a time in which so many of Adam Smith’s ideas seem under threat worldwide.

Smith’s paradigms of international economics are directly challenged with the surge to prominence of a very different model pursued by China. David is with us now to discuss the new enlightenment at the one-year anniversary of the gathering in Edinburgh, Scotland, hints and at a time in which the testing of Adam Smith’s ideas may seem even more severe.

So, David, welcome to the ThinkSet Podcast.

DT [01:07]           I’m pleased to be here.

MW [01:08]        So David, the New Enlightenment Conference closing plenary session seemed to end on a fairly positive note in 2019. the vast majority of the participants seem to be fairly optimistic and sided with two outlooks that were outlined by you. The first was that the Western rules-based nations would be able to organically address their problems. And secondly, that China’s expansion will be accommodated if messily, within the global order.  So, do you think that the consensus of the thought leaders you assembled would be any different if they were measured today?

DT [01:40]           Unfortunately it would be a bit different. I think, what’s happened in the meantime is that by now it’s not at all clear that China can be accommodated in a “rule of law” type system. There were serious concerns about that, quite frankly, in Edinburgh. What we’ve seen in the last year has I think, led to a high degree of skepticism that China can be integrated because it wants to play by a different set of rules for which there is no “due process.”

In short, China doesn’t want to play by the rule of law; it wants to play by the rule of rulers. So, we’re going to have to, create a whole new system of global governance, hopefully one that enables some amount of positive exchange between China and the rest of the world. It’s critical that we keep trading with China although perhaps not in the way we have in the past.

I think, what is different one year later is the United States and Europe and the rest of Asia, more or less, see China the same way. A year ago, that wasn’t true. I think only the US was deeply concerned about China. You know, seven US presidents were really supportive of one after the other with the idea of trading with China, and peaceful engagement with China and governance.

People are a bit more realistic now about how we have to do that and how difficult that’s going to be and how we need certain safeguards so that it can be done in a way that’s mutually beneficial.

MW [03:21]        David, what do you see as the platform for this new means of “engagement” then with China?

DT [03:25]           Well, a part of the problem is we haven’t worked it out? In fact, one of the initiatives that I’ve been leading since our event in Edinburgh a year ago is to look at the global science and technology system. And, really, whoever leads, whether it’s Western democracies or whether it’s China and the world’s autocracies is going to end up essentially controlling the global economic system and being the dominant global force. So, what we need is some kind of new rules for coexistence. I’ve actually coined the terms of a new “Bretton Woods for science and technology.” So, that’s what we have to work out with China. It’s not clear we can, but I think there’s an emerging consensus, in the Western nations that we’ve got to double down on science and technology, and we’ve got to figure out how to make the global system of innovation work for everybody, including the Western nations.

MW [04:23]        Well, that’s interesting. And, in your preparatory remarks for the New Enlightenment conference, if there was any element that perhaps you faulted Adam for it was the understatement of the role of innovation in his theory of wealth creation and productivity growth.

In these days, how has innovation succeeded or failed, particularly in the extraordinary circumstances that face business leaders in the current environment?

DT [04:51]           Well, that’s a very good question. So, let’s think about the world of Adam Smith 250 years ago.  There wasn’t a global R&D system. Certainly, ideas traveled globally, but somewhat slowly. Skills moved with the movement of people, but they didn’t move on an internet because there wasn’t one. Transportation was very slow, but there was a loosely connected global system of idea sharing and innovation. But science and technology was certainly not central to Adam Smith’s thesis.

Adam Smith was looking primarily at trade in goods, and to some extent, trade in services; but almost entirely trade in physical goods and physical commodities, which was starting to get underway at that time. So, it was not surprising that he didn’t focus as much as on innovation as we need to focus on. Innovation was certainly part of his mindset. I mean, he talked about the invention of the plow. He talked about agricultural innovation. He knew innovation was important, to the market system.  But he didn’t see it, because it didn’t exist until 200 plus years later, a system of global division of labor, around science and technology and innovation. He certainly had the concept of the division of labor worked out, but I think he didn’t necessarily see it as a global division of labor, which is what it is today.

That doesn’t mean that Adam Smith is irrelevant. Nor does it mean that he doesn’t have anything to say about what this global system should look like. The principles that he expounds, were ones of fair dealing and transparency, rule of law engagement and moral and ethically sound business dealings. I think all of that still stands. So, we have the opportunity to employ his moral philosophy, his understanding of the importance of the division of labor, to actually help us think through what a new global system of governance for science and technology would look like.

There’s a lot of details to be worked out, and a lot of complex, phenomena to be understood before we can really begin to shape that new policy environment. We can certainly get a lift from Adam Smith; but there’s a lot of work for us to do.

MW [07:17]        And you, of course, allude to the lesser known of Adam Smith seminal works, The Theory of Moral Sentiments. I mean, business leaders certainly feel they abide by, or at least operate in the free markets that were described in The Wealth of Nations. But what should they take away from Smith’s work on the theory of moral sentiments. Have the shared norms of right and wrong been eroded to the extent that Smith’s concept of an unwritten moral code to underpin productive economic and commercial activity evaporated? Are Smith’s moral principles still viable for firm-level leaders in today’s environment?

DT [07:51]           Well, I believe Smith’s moral code is necessary. I’m not sure if it’s doable, but you make an extremely good point. Adam Smith is kind of better known for his second book, The Wealth of Nations than for his first book, which was The Theory of Moral Sentiments, but scholars of Adam Smith are all clear that you really need to read these two books together to understand what a proper system of market exchange is all about.

And in fact, for his own students, I believe he started them off on The Theory of Moral Sentiments, and then they might graduate to issues relating to The Wealth of Nations. In my view, Smith is very clear that there’s certain ethical norms which must be infused through a market economy for it to be successful.

In fact, he had this concept of what he called the Impartial Spectator. In making our business decisions, we should always assume that somebody’s looking over our shoulder, with a moral compass, and with strong ethical norms that would tell us whether we’re dealing with other parties fairly. So, I think there’s a lot of relevance to what Adam had to say in both books. And, I think, you know, in the better business schools we actually teach The Theory of Moral Sentiments, and lay it alongside The Wealth of Nations and we get our students to understand that there has to be a strong, ethical code associated with business. And that’s often forgotten, or it’s often not practiced. And I think, we now see some of the negative consequences of that and some of the trust in the market system gets undermined when people don’t behave in a proper and ethical fashion.

MW [09:37]  And of course, Adam Smith is often identified with a principle of laissez-faire in the advancement of public interests through the application of self-interest in free and competitive markets. But that really took a pretty big knock during the global financial crisis from 2008 to 2012. And, in these current times, the idea that a firm’s prime duty is to its providers of capital has certainly been under attack in the Anglosphere, not just from politicians, but also from academics, investment managers, corporate leaders. And I think most of the presenters at the New Enlightenment Conference.

DT [10:13]           Well, I think the fundamental problem is that the textbooks quote only about a half a dozen sentences from Adam Smith. That’s true and even for my fellow brethren economists. Most of them have never read The Wealth of Nations, let alone The Theory of Moral Sentiments. So, Adam Smith gets taken out of context and is often read as simply saying the pursuit of self-interest is consistent with the pursuit of the common good.

I think it’s better to say that Adam Smith believed in a decentralized economic system. However, he did not necessarily believe that pure selfishness was the compass that should guide everybody. In fact, it’s very clear that people in businesses, as well as society at large need a moral compass and have to deal fairly and properly with others. A lot of people have misunderstood the type of laissez-faire that Adam Smith was actually promoting. It wasn’t a complete free for all. There was a role for the state, albeit a minimalist role; but more importantly, individual actors, business people, traders needed to be infused with a certain level of ethical responsibility, to themselves and to others, although he recognized that our sense of community wouldn’t necessarily be global. He actually has a wonderful section in there where he says if there’s some kind of disaster in China, a plague in China, are we going to care very much? And, he kind of concludes that, well, probably not. Of course, he didn’t think about international transmission.

So, we have to care for our own, I suppose, first is really what Adam Smith was saying. He was not, however, pushing a selfish agenda at all. In fact, the whole moral concept of the Impartial Spectator, always required you in making decisions to think about what somebody else looking over your shoulder would say. If the goal is just merely self-interest, then you don’t need to have somebody looking over your shoulder. But the fact that there’s somebody looking over your shoulder to me underscores the fact that Smith always thought there was a greater level of responsibility than simply pursuing one’s self-interest.

MW [12:26]        In that environment there is this ongoing discussion about the role of broader groups of stakeholders having an impact on the decisions made by corporate leaders.  How do you sort out what potentially are the conflicting demands from various stakeholders?

DT [12:44]           Yes, well, that is a very, very good question. And this brings us right to the heart of the current debates about corporate governance, and what should be the role of the corporation in modern society. And, if you actually look at corporate law, there’s a fairly broad mandate. CEOs have a lot of flexibility with respect to how they run businesses. They are free to adopt longer term goals and show concern for the greater good. But what happened beginning sort of in the late seventies and eighties is, a number of folks in the economics profession and, in the finance profession, suggested that the singular pursuit of shareholder rights was consistent with the greater good. And I actually think that a focus on long-term shareholder rights is something that indeed is a powerful tool that should animate business and is consistent with some type of multi stake-holder approach.

But what happened is that, unwittingly and unknowingly, we’ve built a system that doesn’t favor long-term shareholder rights. It favors short-termism and it favors stock market traders. If you focus on long-term shareholder rights, then you’ve got to think about a broader set of constituencies. So, there is an active movement, a multi-stakeholder view of the business enterprise and John Kay, one of our speakers in Edinburgh was one of the pioneers of that perspective. And I do believe that executives need to think of stakeholders beyond the scope of short-term shareholders who are best thought of as transaction-oriented traders.  Not just employees, not just other suppliers, but the community at large needs to be part of what corporate CEOs and boards are thinking about if they focus on long term shareholder wealth.

But the way to get there, in my view, is to focus on the long term. If you focus on long-term stewardship for the shareholder, you inevitably end up recognizing that other constituencies in society are important for the long-term stewardship of the business enterprise and that way you get to a comfortable place.

One of the problems with an unfocused multi-stakeholder view is there’s no guiding compass. There’s no limit to the range of initiatives that managers and executives and boards should be advancing. And I think this is wrong as we then lose the very purpose of the corporation, as executives lose focus. A corporation is not a social machine, it’s an economic machine, but it has to be socially responsible.

So, there is a complicated set of issues there that we started dealing with in Edinburgh. We’re still dealing with them, and many of the people at Edinburgh are part of a movement to get away from an exclusive focus on shareholder rights; because I think that focus has, in fact, had the unfortunate effect of causing companies to under invest in the future. That means less jobs. That means less economic growth. That means less prosperity for society all for the short-term benefit of market traders and certain hedge funds. So, this is one of the things that, I think, in the United States both Republicans and Democrats are rethinking, as we speak. And worldwide, there’s a recognition that the pursuit of shareholder rights got corrupted into something different and has had certain negative effects on business particularly in the US and the UK.

MW [15:57]        But is that a diminution of all shareholders’ rights … or just the right sort of shareholders in the eyes of corporate managers?

DT [16:03]           Well, the right sort of shareholder focus in my view is on the long-term holders. I underscore, the word “holder” to reference somebody who actually keeps the stock for the longer term. If you actually look at the average time period that people hold stocks, it’s gone from years to months to days to minutes, because of program trading and various other things. To be clear a trader is not a shareholder because they are owners for only a very short period. In my view they shouldn’t have a seat at the table in the corporate governance apparatus. So, the short-term people, who have masqueraded under the title of shareholders, in my view their agendas…including stock buybacks…have had an unfortunate side effects for society. They’ve expropriated wealth that really they didn’t earn in any fundamental sense and that in turn has led to a loss of confidence in capitalism. The good news is these things are relatively easy to fix. I mean one of the ways in which short-termism is manifested itself is through all of these share buybacks. And so, we go into a pandemic where corporate balance sheets aren’t what they could be or should be in part because companies have aggressively been buying back their stock, which, in some cases helped the short-term value of their shares but has left their balance sheets too weak. But it then leads corporations to be more vulnerable to shocks and then government has to come in and bail them out, which is not right.

When you have a combination of corporate bailouts and a shareholder rights movement together you end up with a redistribution of wealth that’s unfortunate and leads to a general erosion of confidence in the system. The good news is I think these things are fixable. These are issues we started to discuss in Edinburgh. There’s a lot of people in a lot of places who are looking at these issues. And I think, there is an emerging consensus that the shareholder rights movement has not been as beneficial as many people thought it would. We need to find a different way to move forward, a way that takes a broader group of constituencies into account and focuses on the longer term.

And of course, the longer term will allow business to invest in R&D for the future. Key private sector initiatives that are necessary to move society forward, whether it’s solving questions of climate change or whether it’s driving economic growth. You know, these are now existential issues. So, what we’re talking about here transcends anything else we could be talking about in terms of the prosperity and survival of a free society.

MW [18:42]        So in Edinburgh last year, there was perhaps a foretaste of the degree of scrutiny to which historical figures such as Adam Smith are put under. And currently in this environment, it’s quite a substantial amount of scrutiny relative to memorials or remembrances of those figures.

Perhaps less of a concern for Adam Smith than his statue would be his ideas. And we live in a world in which the popular right is now advocating mercantilist solutions, which very much prompted Adam Smith’s economic theories. And we have the popular left proposing a deprioritization of market-based outcomes. And then finally you have generationally a number of young people in the workforce who, to a large extent, do not seem to subscribe to classically liberal concepts of reasoned debate, perhaps as the Scottish Enlightenment, emphasized. So how does a New Enlightenment deal with the apparent threat to so many of the principles of the historical Enlightenment?

DT [19:45]           Well, very good question. First of all, I’ll begin by noting as Neil Ferguson did in Edinburgh, that there weren’t any monuments to Adam Smith until very recently. Edinburgh in the last, I think fifteen years put up a statue for Adam Smith. So, while other people are tearing down statues Scots are putting them up. And the restoration of his home, Panmure House is like a monument to Adam Smith.  In fact, you know, some people in various parts of the world are recognizing the importance of Adam Smith and the Scottish Enlightenment. We now need a New Enlightenment. You’re right to observe that the world, is, hopefully temporarily is becoming more mercantilist.

I mean, we’ve had China being incredibly mercantilist and the Western world has been basically open and the response to that has been a call for reciprocity. Reciprocity is the oldest of human norms — so the anthropologists tell us. So, if China’s going to be mercantilist, then we’ll be mercantilist too. Perhaps that’s how we can get back to freer trade. It’s one way to deal with other mercantilist nations. So, what’s happened has been an erosion of the system because of the emergence of China, a new and powerful player operating by a new set of rules. And, we’re woken up to the fact that when you have two players, one with one set of rules and another with a different set of rules, the global system doesn’t work very well.

And so, I think the world is going through a period of change. And what I hope will happen is that the Western nations and those who care about individual liberty, as Adam Smith did, will double down and create a new system of rules. And there may have to be a different set of rules for dealing with autocratic nations that don’t care about the rule of law and don’t care about the same principles that made the world so free and prosperous, particularly in the last seventy years.

So, I’m not completely pessimistic about where we are. Actually, I’m much more optimistic today than I was in Edinburgh a year ago in part because I see developing in Europe and the United States, an emerging consensus or at least some convergence, and a realization that we have to create a new world order.  There’s no leadership to accomplish that yet. But, even if there was leadership, I don’t think we’ve got it figured out; so, the Berkeley Research Group Institute is active on these issues trying to fill the void.  We continue to be financially supported by Lord David Sainsbury from the UK. And we’re about to get some additional foundation grants. So, while at BRG we’re doing our everyday business of assisting clients, we’re also working on these broader, deeper issues to make sure that fifty and one hundred years from now, we have a prosperous and fair and equitable world order and that’s what the Panmure Declaration was all about. So I think it’s good  for everybody to understand that the Berkeley Research Group, while we are heads down and tails up, every day, trying to, get our work done, we are also deeply engaged in these broader set of issues at a national and international level that will impact the future, not just of the Berkeley Research Group, but of all the communities and constituencies that we deal with.

MW [23:18]        David, I’d like to wrap up with the question on a topic, obviously near and dear to your heart and that’s innovation. And in the context of your comments right now on the pace of globalization slowing, if not going in reverse or even desegregating, how does the pace and impact of innovation change? Does it diminish or does a pause in globalization potentially lead to different paths for innovation?

DT [23:48]           Well, a couple of comments here are relevant. One is that we have a global system of innovation and in the future, we’re going to still continue to need to have a global system of innovation. But as I said earlier on, it’s going to need to have safeguards in it so that intellectual property is protected and those that invest not just in R&D but in other aspects of innovation, they have a good chance of recouping their investment and continuing to innovate. We’ve got a huge literature on how to drive innovation forward, how to make people and organizations more creative and more entrepreneurial and more innovative. But we have to now couple that with how do we capture the benefits from innovation for the societies that are providing the investment that fuels innovation. So, there’s a new focus now on capturing value.

And, innovation is going to be critical to just about everything that matters. It is going be critical to climate change. It’s going to be critical to human health, to public health. I mean, we’re all sitting right now hoping for a vaccine for COVID-19; and the science and technology establishment and new startups globally are working on that. In some cases collectively. There is great promise in what science and technology can deliver; but there’s also significant risks with what you can do with science and technology today.

And so, it all comes back to global governance. We need a new system. Control is too strong a word. It’s a system of regulations, be they informal or formal, and possibly new institutions to make sure that progress from science and technology is properly harnessed, properly rewarded and the gains are properly distributed.

MW [25:47]        Well, luckily for us, David, at least podcast recording is a socially distant activity.  Perhaps you could tell us what the plans are for The New Enlightenment Conference going forward.

DT [26:58]           Yes, well, Panmure House is becoming an icon, and, we’re hoping when the pandemic is behind us, perhaps a year from now, we can actually physically meet again.  In the meantime, we’re going to have an online discussion amongst some of the people that were at Panmure House last year.  We’re not going to have a debate but a discussion about some of these issues that you’ve been putting on the table here today, Michael.  I’m pleased to say that I think there is progress. You don’t pick it up in the everyday media, but as I said earlier, there is a deeper understanding of what we need to do, to clean up the mess, so to speak and to make the global system function in a way that is both positive in terms of being able to generate and support prosperity, and also to deliver benefits to the four corners of the country, as well as the four corners of the globe.

MW [26:56]        Thank you very much, David. And thank you for joining us today on ThinkSet Podcast.

DT [27:00]           My pleasure.