Tackling the UK’s productivity problem will require long-term public investment in quality education aimed at closing the skills gap and boosting equality – a plan the 18th-century economist Adam Smith would certainly have agreed with.
Smith – whose tercentenary we celebrate this year – was a pioneer of economics. He was one of the greatest thinkers the world has seen and an alumnus of the University of Glasgow. He was tied to education throughout his life; first, as a student at Glasgow aged 14, and later as a teacher, professor, Praeses (unofficial vice-rector) and rector of the university.
Smith’s first great work, the Theory of Modern Sentiments (1759), sets the philosophical foundations for his magnum opus, The Wealth of Nations (1776). Although it is sometimes incorrectly characterised as arguing that markets should operate in an unfettered manner, it is a much more subtle contribution to economic thinking.
It emphasises how the specialisation of labour – when a worker focuses on developing a core skill – was key to driving what we now understand as “productivity” and industrial prosperity. It explains how self-interested behaviour can lead to the effective operation of markets from society’s perspective. It also discusses how constraints to free trade, such as tariffs and other trade barriers, benefit merchants but not consumers.
Despite the very different realities of 18th-century education, Smith would probably have much to say about today’s education system and how universities could tackle issues from accessibility, public provision and the skills gap, to the wider economic challenge of poor productivity.
Take accessibility to education. Smith’s mentor Francis Hutcheson lobbied for classes at the University of Glasgow to be taught in English instead of Latin. And the general consensus among Smith scholars is that Smith was in favour of a public contribution towards education, although in the 18th century this related to the provision of primary school education.
Smith also argued for universal education. He believed that, to offset the harmful effects of the alienation caused by the division of labour, education had to be accessible to all workers.
During his life, Smith saw reforms to university education in Glasgow: new professorships in law, new medical schools and an expansion into new subjects like chemistry and botany. This ignited the Scottish Enlightenment, laying the foundations for some of the greatest inventions humankind has ever seen.
Smith understood the importance of technological innovation in driving this economic improvement. He was a contemporary of James Watt, an instrument maker at the University of Glasgow, whose improvement to the steam engine was a key factor in driving the Industrial Revolution.
Joseph Black, latterly professor of medicine in Glasgow, was another contemporary and friend of Smith and Watt. He developed the concept of latent heat. This was key to understanding thermodynamics, and he also advanced our understanding of the properties of gases in chemistry.
Nowadays, much of the knowledge transferred from universities to industry still happens via graduates. While tricky to measure, this is key to supporting the innovation activities of businesses.
The recent sluggishness in productivity growth in the UK and some other advanced economies has complex causes. But most economists agree that developing human capital is part of the solution.
Demand for labour is above pre-pandemic levels, according to the Bank of England’s August 2022 Monetary Policy Report , but supply is below pre-pandemic levels. The government is all too aware of this skills gap, but closing it will require long-term thinking and sustained public investment in education. Success will hinge not only on the quantity of education provision, but the quality too.
This is emphasised in more recent studies on economic growth. For example, Harvard economist Robert Barro published a study in 2013 using data on the test scores of students from “rich” and “poor” OECD countries to evaluate the links between economic growth and education. He found science test scores are positively related to economic growth. Also, the quality of education is quantitatively much more important than the quantity of education for sustained economic growth.
In this context, preparing the workforce for new technologies matters. Workers need to be informed and equipped with all the necessary skills, as well as the opportunity to build on these skills throughout their working lives. Smith recognised the importance of this as a driver of social unity and cohesionduring the Scottish Enlightenment. In the 21st century, new technologies continue to emerge with the potential to transform the world of work: from AI to medtech and quantum computing.
Working with technology
How these technologies mix with labour inputs also matters to productivity and equality. MIT economists Daron Acemoğlu and Simon Johnson discuss this in their new book Power & Progress: The Thousand-Year Struggle Over Technology and Prosperity. While Smith believed capital investment (better machines) would automatically lead to higher real wages through productivity, Acemoğlu and Johnson suggest the current era of technological advancements might not see the same benign correlation. They argue robust institutions are needed to ensure equitable distribution of wealth.
Universities can also play a role as key institutions. They can help to steer technological development towards what Acemoğlu and Johnson call “machine usefulness”. In essence, this means ensuring that new technologies like AI do not substitute people, but complement labour to boost productivity.
And as these technologies drive skills-biased technological change, rather than relying on private contributions, public investment in education and skills is needed. Otherwise, any growth will cause greater income inequality.
Smith was also a philosopher who developed moral reasoning for universal and public education. Like Smith, championing education and lifelong learning will help facilitate social mobility. As a scholar, a citizen and an educator, Smith’s views reverberate through the centuries. His fundamental belief in the value of education to society will continue to stand the test of time.