 Good evening, ladies and gentlemen and welcome to this evening's lecture of the Royal Philosophical Society. I'm Richard Service. At the lecture of fortnight ago, we were told that medics don't wear ties. And so, not so as some accountants. So yes, as it happens, I'm the society's treasure with a tie. Three brief admin remarks. First, if there are some spare seats at the edge, it might help if you could move along a wee bit to let the late comers come in. Secondly, if the fire alarm sounds, get out and remember, as they say in all the best aircraft, the nearest available exit may be behind you. And thirdly, a mobile phones, please, please, please, please either switch them off or turn them to silent. I don't think you'd like to have the embarrassment of being the person whose phone suddenly goes off halfway through the lecture. And if you're unsure if your phones off and now is your chance to check it. This evening. It's the Adam Smith lecture, and I'm delighted to introduce Professor Sir John Kay, one of Britain's leading economists. He's worked in academia, think tanks, business schools has held company directorships consultancies and has advised investment companies. He was a member of the first ministers standing Council on Europe from its inception in 2016 till its demise in 2020. Interesting Scottish connection. I was first aware of John Kay in the 1980s in reading his book he co authored with Mervyn King, the British tax system, and I still have my yellowed copy here. It's a page Turner, at least in my humble opinion, and in the wealth of nations, Adam Smith sets out for criteria for a good tax system. One, it should be imposed in accordance with ability to pay to the amount must be certain, objectively quantified and thirdly, the cost of tax collection should be as low as possible. And fourthly, the method of collecting tax should be as simple as possible. In preparation for this evening I got out my original copy of the third edition of K and King on the British tax system, and I searched your book for reference to Adam Smith. I was listlessly I'm sad to say so failed in that. But however I did see that John Kay and Mervyn King's conclusion was that the British tax system is a mess. No one would design such a system in purpose. And in fact, no one has designed it. Thus, although they don't refer to Adam Smith criteria, I reckon they had Dr Smith in mind, and they had tested our stack system against his criteria. At that time in the 1980s it was a comprehensive fail. Perhaps it's a lot worse now. The book published in 2020 co authored with Paul Collier, who gave the Bowman lecture to us a year ago is titled greed is dead. Adam Smith's writing I am pleased to say are considered by Paul Collier and John Kay. And in a very surprising and intriguing way. I don't know about why you'll have to buy the book, because it's time for me to sit down and to invite Professor Kay to in to speak to us on from the pinned factory to the iPhone, the complete history of capitalism. Well thank you Richard, and thank you all for braving this freezing Glasgow night to be here with us tonight to talk about Adam Smith. And that's why you asked me to come and talk about Adam Smith. There is only one known likeness of the great man, and it is this one. It is a caricature by John Kay. John Kay of Edinburgh, and drew many of the great figures of the Scottish enlightenment at the end of the 18th century, when Adam Smith was in his a day. This is growing of Smith with aid of our modern artificial intelligence tools. I'm hoping next year to be able to come and put myself where I should be in this particular in this particular sketch. Actually, John Kay caricatured Adam Smith was not the only John Kay of the 18th century, who played a major part in the reform and industrialization and development of modern economies. And also John Kay inventor of the flying shuttle. John Kay inventor of the flying shuttle. There are lots of doubtful things about this particular painting, which hangs in Manchester town hall. John Kay being forced to flee for his life after being pursued by a variety of handloom weavers who feared correctly that they would be put out of work by John Kay's invention. That's an event that has resonance for our times as well. So also does the story of the other John another John Kay of the 18th century. John Kay was inventor of the spinning Jenny. However, I don't have a picture of the spinning Jenny or that John Kay to show to you, because John Kay was upstaged in that by a man called Richard Arkwright. Richard Arkwright looks like a picture of the bloated capitalist. There is something to be said for that description. He was a major Milona. He was by the end of the 18th century, one of the richest men in England, possibly the richest man in England. But Richard Arkwright was not a capitalist of the, or did not begin as a capitalist of the Marxist kind. Arkwright after he becomes a Richard supposedly in a conversation with Lord so and so, in which Lord so and so began by saying, is it true Sir Richard that you began your working life as a barber. Sir Richard supposedly replied, yes indeed Lord so and so. And if you had started the barber. I think you might be a barber still. The thing about Sir Richard Arkwright was I don't think he was a very nice man. He stole John Kay's invention, but Sir Richard Arkwright was someone who put together the bits of accumulating capital, practical knowledge about to run a business, and to make people to make the spinning jennies, which John Kay had invented. So Richard Arkwright was in that sense, genuinely an entrepreneur, and we'll come back to that kind of entrepreneurship later in this talk this evening. Let's begin where Adam Smith begins, which is of course in the pin factory. We all know that Adam that Smith began the wealth of nations with a description of pin factory. And what he wrote was, I can get the right quote, that one man draws out the wire, another man cuts it, a fourth point set of if grinds it at the top for receiving the head. All three distinct operations are required to put on the head of the pin. It is a trade in itself to put them into the paper, and so on, and so on. That was Adam talking about the pin factory. Where Smith describes his visit to a pin factory. There's just one problem with all this story and Adam Smith's beginning with a pin factory, is it doesn't seem likely that Smith actually ever went to a pin factory. The description which he makes of the pin factory comes rather close to what is in this diagram here. And this diagram here is from Diderot's French encyclopedia published shortly before the wealth of nations. But if you visit Glasgow University Library, where Smith was a professor at the time, you will discover Smith withdrawing and returning a record of his withdrawal and return of Diderot's encyclopedia. And worse than that, Smith was actually accused by Adam Ferguson, another great figure of the Scottish Enlightenment, of having plagiarized the story of the pin factory, and because Ferguson apparently had talked about the division of Labour and the pin factory in a lecture before the publication of the wealth of nations. And Diderot, Ferguson confessed that he, Ferguson, had actually stolen the story of the pin factory from Diderot. Smith had not been to a pin factory. Smith, curiously, almost suddenly had been to a nail factory, because nails were a product of Cacodile, where of course Smith was born and brought up. But making nails is very different from making pins. Making nails then was an artisanal activity undertaken by blacksmiths. They had records of not a Cacodile nail factory, but an American nail factory, because Thomas Jefferson, among many other things, operated a nail factory. And this is a report to Jefferson on the proceedings in the nail factory. And you can see that, far from it being the kind of organization that Diderot had described, there were individuals making nails. And actually, the Jefferson's house at Monticello, the people who run that have produced, if you're interested, and I very much doubt it, but you have access if you want it to a video that explains how nails were made in the 18th century. And they were made individually by one person who took a nail from raw material and fashioned it into a nail. And you'll see that Jim makes 15 pounds, about 20 pence for it. Barnum 8 makes only 10 pounds and only got 10 pence. And four boys make eight pounds, and between them they only collected six pence for it. It's possible that in writing about the pin factory, Smith was actually contrasting the mass production of nails and the mass production of pins with the artisanal production of nails. But we will never know. And does it matter? You will know that Harvard Business School teaches predominantly by reference to cases, who told some story of business in the past, and the class are supposed to discuss this and learn from it. From time to time is discovered that the facts in these cases are wrong. People at Harvard wonder from time to time what they should do about this. There are three options. One is to forget about whether it's right or wrong and carry on anyway. And other is to substitute the correct facts or the wrong ones. And a third option is to find some other way of teaching, whatever the point of the exercise is. And they continue to argue about that. But actually all that argument seems to be beside the point. When I talk about the division of labour and the pin factory, my students do not need to know how nails or pins were made in the 19th century. What they do need to know is the importance of the division of labour, which is the point Smith was making when he told that particular story about the pin factory. So what we need to think about is not the details of pin or nail manufacture two centuries ago. We need to try and look at the lessons which Smith grew from the pin factory and ask to what extent they're still valid and relevant today. And Smith drew, I think three interrelated lessons from his description of the pin factory. The first was the importance of the division of labour. That is the separation of a production process into multiple different tasks in which people could be specialized. So the division of labour and the division of labour was only possible by virtue of a business organization which assure combination and coordination. So combination and coordination went with the division of labour. And the third was the effectiveness of collective intelligence. And what I want to do in this talk today is to talk about these lessons that Smith drew from the pin factory, the division of labour, the importance of combination and coordination and the effectiveness of collective intelligence. And these things are as important today, though in somewhat different respects as they were two and a half centuries ago, Smith wrote about it. So let me begin by talking a little about the third of these, which is collective intelligence. The term collective intelligence has been popularized by an American Canadian evolutionary anthropologist called Joseph Henry. I'm glad to say that he has just been awarded by, in Edinburgh, the Pan-Mier-Praves Prize for his work, and particularly for his work on a book called The Secret of Our Success. You might think that's a self-help manual. I have to say it's not. It is quite a lot better than that. And it really says that the development of collective intelligence has been the source of our economic development, our economic success, our current prosperity. One of the things I like about Henry, in some ways it's the most important book in economics, I think I've read in the last decade, interestingly, not written by an economist. I've written that the lesson of that book is the importance of collective intelligence, and it brings of the kind of broad scholarship that was characteristic of the work of Adam Smith two and a half centuries ago. What do I mean by collective intelligence? What does Henry mean in talking about the progress of collective intelligence? It's quite useful, I think, to distinguish collective intelligence from collective knowledge. Collective knowledge is the point that all of us taken together in this room, no more than any of us individually know. But collective knowledge is what we have in Wikipedia, the totality of all the things that people have found out in the last two millennia of philosophizing and scholarship. That's collective knowledge. But collective knowledge intelligence is the business of turning that into problem-solving capabilities. That's what we mean by collective intelligence. And let me take an example to illustrate from what is perhaps the most banal and certainly most extraordinary phenomenon of this kind, which is running. You probably didn't come here tonight expecting to hear a lecture about running, and I have to confess I don't know very much about running myself, but I hope I know enough to keep my head above water for a few minutes longer. Running is one of the things that we've got better at in the 20th and 21st century. And that's pretty extraordinary because people have been running for thousands of years. But yet, many of you will have watched the film Chariots of Fire. If you did, you might or might not remember that Harold Abrams won the 100 meters of the 1926 Olympics in a time of 10.6 seconds. Today, the world record for the 100 meters is held by, say, boat in 9.58 seconds. You might notice firstly that the time is better, and secondly that the time is better as well, that we've improved both at running and we've improved chronography in chronometry. And actually, sprinting is relatively disappointing compared with other running. The longer the distance, the better, relatively better we have got at it. The first marathon, Olympic marathon, was held in 1896 at the very first Greek Olympics, and it was one gold medal in that marathon was won in a time of just under three minutes, at three hours. Back in 2019, Eli Kipchogi, the Ethiopian, ran, for the first time, a marathon in less than two minutes, than two hours. That is, we're down from three hours to two hours. That's a dramatic improvement in timing. And if you took the New York marathon, which was run recently around the five boroughs of New York, then 2,000 people in that marathon clocked up times, which would have won them gold medals in that 1896 Olympic. We're a lot better at doing that kind of thing. Have we done it? Well, we've done it by a combination of learning about nutrition, of learning about sports technique of, and most of all, of cooperation and competition. I can currently think of anything that illustrates the combination of cooperation and competition better than 2,000 people running very fast marathons around the five boroughs of New York. And that, in Henry's terms, is the secret of our success. In order to do that, we need to turn this collective knowledge, which we've been accumulating, about running, about sports nutrition, about everything else. We need to turn it into a combination. But also, we might notice, and Smith had a lot to say as we recognize about the division of labor and the division of labor is being limited by the extent of the market. That's as relevant to running as it is to economics. Because if you go back to that film, The Chariots of Fire, it will not have escaped your notice that all of the participants in these events were white men who had been to elite universities in Britain or the United States. Eli Kipchogi does not come to that category, nor does Hussein Bolt. Actually, the people who win sprints nowadays are almost without exception. People who have some genetic West African connection, but who have been brought up culturally, either in the United States or the Caribbean, and have the benefits of the nutrition and sporting knowledge. That is, is there. Interestingly, while people of West African genetic origin dominate the sprints, people of East African genetic origin dominate the marathons. In the last 30 years, all marathons get gold medals in long distance running, have been won by people from Kenya, or from Kenya, or Ethiopia, or other countries in East Africa. So broadened the extent of the market has improved our ability to run fast distances as well as everything else. So the division of labor and the extent of the market are important. The division of labor works, however, only if we can operate them in competition. And I introduced you a few moments ago to Sir Richard Arkwright, whose achievement was actually to make the combination of factors which made the spinning Jenny one of the things that contributed greatly to the industrial revolution. I've always enjoyed this story, unfortunately, it's apocryphal. The George Bush told Tony Blair, the trouble with the French is they don't have a word for entrepreneur. It's worth taking a moment to think back to the original French meaning of entrepreneur, because an entrepreneur is someone who puts things together. Entrepreneur means French, originally means take between. And that's what what we've historically meant by entrepreneurship. In German, the word is undeniable, which has the same origin, the person who takes from one place to another. The essential characteristic of entrepreneurship is this ability to combine. And it's the division of labor and specialization together with the ability to create combinations that is a source of so much of our economic success. And that's why I titled this talk group of pin factory to the iPhone. Because the iPhone, as we'll see in many ways, is a combination of things. And most of all, if you think about the things that you can do on the smartphone, you will realize that there's nothing you can do on that phone, which you couldn't do in some way already. We had phones, of course, we had messaging systems, we had maps, we had, you can ring, you could telephone and get a taxi, you could watch the news and get the weather, everything that is on your smartphone, you could do in some other way than before. The extraordinary thing about the smartphone is that you can do them all with one single device, which you can put in your pocket. And most of the iPhone, in a sense, is a combination. And we'll see in due course that Apple, the pioneer and dominant producer of smartphones is characterized by this kind of combination of activities. And that's true throughout modern production system. Probably the most complex mass manufactured product, which we have today, is the civil aircraft. And as you know, the world aircraft market is dominated now by two producers, Boeing and the United States, and Airbus in Europe. Airbus epitomizes the idea of combination of this kind. The wings of an Airbus are made at Broughton in North Wales. The fuselages of an Airbus are made in Gaddafi, Gaddafi in Spain. And this is called the Beluga, the Airbus whale, which is a gigantic aircraft, which is dedicated yet to the idea of picking up parts from all around Europe and taking them for final assembly in the Airbus factory you were to lose. And the whole set of complicated logistics would enable the bits of the Airbus to come together in some one single operation in an assembly in to lose. And that's the nature of this kind of mass production. Generally, nobody in the world knows how to build an Airbus. But 10,000 people around Europe taken together do. It's a specialization division of labor and combination, which enables us to produce these extraordinary complex products linked with the development of collective intelligence. Because it's barely more than 100 years since the first manned flight actually took place. But if we think about the developments of collective knowledge and collective intelligence, which have happened across that, across that century, you can see how the modern civil aircraft is not the product of any individuals genius. So amazing breakthrough is the product of a creation of little bits of knowledge, which have enabled us to produce this extraordinary complex product, which does so much today. So the Airbus is in this fundamental sense about combination and cooperation. The underlying division of labor. What happens to that Airbus once it's come off the production line in to lose? Well, all of you will have been, and all of you will have been in an aircraft operated by some airline. You may think that when you see the logo of an airline in the fuselage, that the aircraft you're flying in is owned by the airline which was whose name you've seen. It's very unlikely that that is the case. The largest owner of aircraft in the world is a company called air cap headquarters in Dublin. It is a say the largest owner of aircraft in the world. It does not employ any pilots, any at all, but it does employ quite a large number of accountants, information technology people and tax advisors. Air cap. It goes, becomes more extreme than that. They can't may own the planes. But the engines on the plane will not be owned by a car. When an airline buys or buys an inverted commas and aircraft, it actually leases that that a crop from a business like a cop. And there are many other opportunities like that. If any of you in this room want to, you can actually buy a share in an aircraft. I actually own a tiny share of a, of an Airbus. It's a very small bit of an Airbus 380. But I don't, I was going to say I don't really know what it is. I do know that it's a tiny fraction of an Airbus. Some of the nature of capital ownership. And as I said, the aero engines are not owned by the airline either. What an airline trying to operate an Airbus or any other similar crop to this is it buys a 10 year contract for engine services from a producer of engines like Rolls Royce or Pratt & Whitney in the US or General Electric. These are the three major manufacturers of aircraft engines to the same world. So the airline will decide to buy engine services from from these burns, and it will sign a 10 year contract with Rolls Royce as it were to buy engine services. That may mean different engines over the 10 years of contract. It's up to Rolls Royce can decide if it wants to replace the engine and put another one. We'll do that. However, you might think Rolls Royce was the engine. It doesn't Rolls Royce will typically pass the engine ownership on to another to another firm. The largest supplier of Rolls Royce engines is actually a firm called or the largest owner of Rolls Royce engines is actually a firm called GATX, which also owns many of the many much of the rolling stock that operates. For example, you may remember the beginning of this year. There was a collision and Rolls rolling stock came off the rails and Palestine, not Palestine and at least Palestine and perhaps was Indiana and anyway that which spread toxic waste around an area of the United States that rolling stock was actually owned, not by the railroad, it was owned by GATX. And this goes on. If you drive past an Amazon warehouse, which has Amazon painted in large letters on the side, you may think that Amazon owns that warehouse. It almost certainly doesn't. You may think when the Amazon van drives up to your front door, and that Amazon owns that, but that might be that it does. Amazon doesn't in fact own anything except the rather large amount of cash, which actually is actually accumulated from successfully operating that business. And it becomes more bizarre than that. The main profit driver of Amazon is not as you might think the business of selling retail goods to you online. The major profits of Amazon actually come from activity called Amazon Web Services, which is actually selling computer services to other major companies around the world. Amazon's strength lies not in retailing in the way you traditionally sear strengths or mark's and Spencer's strengths lay in being good retailer. It lies in the information technology capabilities, which enables it to maintain that stock and to deliver them so efficiently to you. And these information technology capabilities are sold to other firms. That means, of course, that Amazon has requires very large amounts of computer power and computer services. Amazon owns these data centers, but you'll see where this argument is going. It doesn't, of course, the data services are largely owned by distinct data center providers, the largest supplier to Amazon as a company called equinex, and so on. Now, you can begin to see firstly, how extensive that division of labor that Adam Smith and talked about has now become these modern businesses have taken the division of labor to a degree that no one could really have conceived of way back in even in the 20th century. Henry Ford had the idea that he needed to control every aspect of the prediction process, which which produced a Ford car. There's even an area of Brazil called still called for land here. That is where Ford created a rubber plantation in the belief that only Ford rubber would be appropriate for manufacturer of ties before cars. They've never gone completely the opposite direction. So that the manufacturer of that iPhone, what should I say manufacturer that that iPhone has Apple on its name Apple box and on the phone. It's not made by app. Nothing's made by app. If you look at the box, it will say designed in California, and it is. That's what Apple does. It creates the combination that puts together the smart phone. The largest assembler of our vifers is actually a company called Foxcon, which is a subsidiary of a time when he's company, which operates on the Chinese mainland. That's who assembles. But actually the cost of assembling an iPhone is a trivial part of the total cost of the iPhone. The iPhone is built from parts, which are brought in from a variety of parts, which are brought in from various suppliers. And paradoxically, the largest supplier of components for the iPhone is actually Samsung. Who of course are apples major competitors in the in the smart phone, but in the smart. This is what is now often called the hollow corporation, the business which is simply engaged in a combination. And that is that it has no other activities other than company activity of combination. That's the nature of Amazon. That's the nature of Apple. That's a nation. The nature of so many modern for those. This is the era of the hollow corporation, which called far from the integrated process of the pin factory or Henry Ford's automobile plants. Every aspect of the production process is separated to some specialist provider. The hollow corporation can be of the form that Apple and Amazon have. But there are other forms of cooperation of this kind. Franchising is another example, but McDonald's is stores that have golden archies on them are not in the main owned by McDonald's. They are not owned operated by franchisees who benefit from McDonald's branding. They benefit from the McDonald's manuals that tell them how to make these these kind of things. And the towels, for example, are the same. It's unlikely that a Marriott hotel is actually owned by Marriott will be owned by some consortium of investors who benefit from the operations of the chain. We also have many platforms. We have companies like Google or Facebook, where the consumers of the product are also the suppliers of the product. And in that kind of platform, it is a service that Facebook provides. You have companies that are pure intermediaries, organizations like Uber and Airbnb, which do nothing themselves, but simply put suppliers in touch with customers. This is the hollow corporation. This is the world that has taken the division of labor to strengths and lengths that no one could previously have a budget. So what does this mean if we have one now capital as a service provided by companies like a cap. This is a company like prologous, which is the supplier of warehouse services to Amazon company like equinex, which on the one hand provides the data center capacity to Amazon, and Amazon Web Services, which provides the computing capabilities to a whole variety of corporations around the world. Let's go back to Adam Smith from the pin factory. And in the years 50 years about publication of the wealth of nations. In, in 1928, the economic historians to John Clapham wrote, it is a pity, he said, but Adam Smith did not go a few miles from Kikordi to see the Karen works to see them turning and boring their canon aids. Instead of his to his silly pin factory, which is only a factory in the sense of the word. The Karen works were at Stena's mule outside Falkirk. The Karen works was certainly the largest industrial plant in Scotland, probably in Britain, quite possibly in the world. In the time Adam Smith was writing. And the Adams, the Karen works were established were were an iron works and Clapham erroneously talked about canon aids, or actually the famous product of the Karen works were called Karen aids. And Napoleon actually blames his defeat at the Battle of Trafalgar on the efficacy of the Karen aids with which Nelson ships were ours, which enabled enabled Nelson to fire effectively and secure that victory. Karen aids were a major product of the Karen works. The Karen works were established. And this was the model of how the industrial revolution, typically evolved by two families called the Cardinals and the Garbets. These were people who had made money, who had original wealth derived from agricultural land. And in that in various business activities, and some of these business activities were quite successful in these cases, and that is enabled them to establish this very large plant of the time in in Falkirk. And it was an iron works in Fedon, a collective intelligence which had then been developed, so that it was based on the same techniques that have been used in the Midlands of England by the of the Cold Brook Dale works. So they took the collective intelligence and invested their capital, and they recruited labor from the fields of Scotland to man the works. And they also built housing for this newly newly industrialized labor force, so that there's still the houses Karen works in and have been shuttered for some time, but the houses, some of the houses that they built still exist. What happened then, so they took the wealth which they've established from agricultural and early early work in business, they invested it in these productions. And they controlled what went on in these factories. That was what I call have called the tripart structure, which is the world that it was how real business existed, as far as it did exist in the time of Smith. And you know what the organization, the pin factory was. It's not surprising that Smith didn't tell us about that, since he think never actually went. It's interesting if you had gone to pin factory, the center of pin for production in Europe was actually in Normandy. This is an interesting example of collective intelligence, because there was a cluster of pin making firms in Normandy. Just as today there's a cluster of technology companies in Silicon Valley. There was actually a cluster of nail makers. This clustering phenomenon has been a feature of the development of collective intelligence across the century. And it's still a feature today. If you go to Northern Italy, you will see it very well to it. Yeah, you will see in various places, these kind of clusters. Silk ties come from Coma. Tailoring, if you have, or you know someone who has an Italian suit. It probably comes from Preto in Tuscany. And actually Preto is a center of Italian tailoring. And interestingly, if you buy a suit from Preto today, it will certainly have a label saying made in Italy. But it's quite likely that it's never been touched by any Italian, because a high proportion of the population of Preto today are Chinese who have immigrated legally or illegally to Italy, and both learnt the techniques of Italian tailoring and are still applied in that particular cluster. The collective intelligence in our organization of industry is reflected in the way in which we have these cluster phenomena. And we can see these cluster phenomenon, all kinds of areas. The cluster of nail makers in Cacodii, which was prepared when Smith was growing up, was a phenomenon at that time. It may be that what he was writing about when he talked about the pin factory and put that emphasis on it was the way in which that cluster was being displaced by these kind of new techniques of mass production. So that we have this kind of cluster phenomenon, and that was only part of what the collective intelligence in clusters is part of what happened here. In terms of that tripartite structure, we had this historic movement of wealth to tangible capital to control the business, which was a kind of organization of industry that Marx and others who were critics of the industrial revolution, were writing about through the 20th century. In effect, the division of the inequality of wealth was translated into the class structure of business. So we had the capitalist and the proletariat, the capitalist and accumulated wealth. And they translated that wealth into tangible physical investment, and they took control of business, and they bossed the proletariat around in the light of that. But business isn't like that in war. Firstly, tangible capital does not have the same significance that it once did. And that is the most important point perhaps in all of this, to see that we now have capital as a strut, as a service. Amazon and Apple and all the other companies I've been talking about, buy-in capital services in very much the same way that they buy in water or electricity or accounting. Amazon buys wealth services, Amazon's customers buy cloud computing services, and so on. Capital is in our service, rather than being the centerpiece of the organization of production. So there's no longer true that we have this tripartite structure running from personal wealth through to tangible capital to control business. Tangible capital has dropped out of the middle of this, and this is what things look quite now. We still have a link between control of business and personal wealth, but it runs not from personal wealth to control of business. It runs from control of business to personal wealth. And who provides the tangible capital or the Amazon warehouse, the aircraft planes and the like. Well the answer on this certainly is all of you in this room do that. That is where your pension fund savings go. That is where if you buy diversified index funds, or like the money you invest there goes, it goes from dispersed savings to providing the tangible capital of the warehouses, the planes and the like. What you can see from this is that the traditional categories of bourgeoisie and proletariat of capitalists and workers that were characteristic of business in the early days of the industrial revolution. When Smith was failing to describe a phenomenon that's just emerging, these kind of Marxist categories no longer help us at all in understanding either the business of the cap of the politics of the modern environment. It's just not like that anymore. And what does that make us to in terms of how our business operates? Well, the control of business to personal wealth is the phenomenon which we can't underestimate. I've never gotten an occasion on which I took to talk to a class of mine at London Business School, a retired chief executive from a large British company. He was retired from that business in the late, in the late, in the late 1980s, after his spending his life in that particular business. And at the end of the class, he said to me having fielded questions and discussion from these MBA students. You know, he said, these kids regard being a chief executive as a prize, not a responsibility. And it seemed to me he put his finger on a key way in which business is developed and not developed for the better in the course of the 20th century. And a large part of what goes in business is the degree to which professional managers have risen to the top of these businesses and use them to enrich themselves. That's the way in which control of business now runs to personalised wealth and not the other way round. Some of you will have come across the widely quoted work of Thomas Begatig, which reports to show that inequality is steadily increasing, inequality of wealth is steadily increasing, because of what he calls the iron law of capitalism, which means that the rate of return on existing wealth exceeds the rate of growth in the economy. This to my mind is a complete misunderstanding of why it is that we have a wealth inequalities, which we do have in the modern economy. We have that as a result, and it's easy enough to look if you simply look down the forms richness to see who the people at the top of these lists are. There are people who have either created businesses or they have run businesses. All of them are essentially rich by virtue of wealth that has been created during their lifetime and has been created through the control of business. That's the new order runs from control of business to personalised wealth, and it runs from the dispersed savings, your pensions, your savings, the tangible capital of the businesses like Amazon, Apple, and so on. So I began tonight's evening with Smith in the pin factory. And Clapham was right to point out that when Smith was writing the pin factory was being overtaken as a description of business by the ironworks of the cartels and garbage and the textile mills of Richard Rockwright. And in the century that followed, these kind of industrial activities would be supplemented and superseded by steel mills, automobile assembly lines, meat packing plants, and the like. And if you go back to look at the leading companies of the world in the 1950s, that's who they were. They were automobile companies, they were steel companies, and some were food and meat packing companies. But because they're not in the list of the world's largest companies anymore, if you look down that list, you come up with Apple and Amazon and these very different kinds of modern corporation. And rather oddly, we're now back closer to that pin factory, and this coordinating activity between, as it was specialist activities, as the description of our business works. It's closer in a sense to the worldview of business than the categorization of Marx. The business environment which followed the Industrial Revolution came from the combination of physical labor and physical capital. That's what was going on in the current works of St. Louis Mule. And even in the 20th century, it was really what was going on in the great car assembly lines of Michigan, of Halewood, and the like. But this tripartite linkage has gone. The linkage runs no longer from the control of business to personal wealth, and the deployment of capital as a service means the tracing capital is very little to do with understanding the control of business. In our modern businesses, labor of many kinds of labor in combination is the key factor of production. And output results are not from people banging metal on production lines, whether in the pin factory or the iron watch. While the iron works for the car factory, it's from associated sales. The software engineer, product designer, they kind of market the rainmaker and the law firm and consult the deal maker in the city. That's where these are the key factors of production in our modern economy. So the iron works in the automobile assembly line are no longer the commanding heights of the economy. It was the traditional socialist Marxist praise. What are the commanding heights now? They're Apple and Google. Verizon finds the PWC companies like these. The employees of these kind of companies are not proletariat of Marxist story. They have to give to offices rather than factories. In the industrial, before the industrial revolution, people mostly work from home. People stopped working from home when they went to work in factories with large scale equipment and needed the power which was generated centrally by them. 21st century, many of them are struggling yet again, but they can start working from home because they don't need these kind of facilities. They themselves are the key factor of production, rather than requiring access to that kind of company. So the products they produce are smart phones, internet search, bank accounts, connectivity, bills, accounting services, things that fit in your pocket or your head. And with the dematerialization of production has gone the dematerialization of the production process. This is just some examples of the dematerialization production. We took a variety of products and asked what they cost per kilo. You can see how the resource content of products has steadily diminished relative to the intellectual content. The caronade, as I described, was the military technology that Napoleon believed has contributed to his defeat. And it costs adjusted to current prices, which is a difficult thing to do, but it will give you an idea of the order of magnitude. It costs £2 per kilogram. This is the SA8082. I'm not sure exactly what it looks like. But I gather that it's the mainstream rifle of the modern British army, and it costs £200. Actually, the caronades, which were on Nelson's ship at Trafalgar, weighed about the same as the most powerful weapon which has ever been produced, which is the the atom bomb that was dropped on Nagasaki in 1945. Fortunately, we couldn't get a price for the atom bomb. We're unable to put that in the same way on the table. But you get the idea. In terms of vehicles, the Model T Ford, when it came on the market, was the first product of a hospital assembly line. It costs £37 per kilo. The Airbus A380 costs about 50 times that per kilo. Even in terms of buildings, the Empire State Building was the tallest building in the world when it was built. The Burj Khalifa in Dubai, which is the tallest building in the world today, costs about twice as much per kilo to build. In all of these, the value of the product now lies much more in the intellectual processes that go into it than do the resources. And realizing this is an answer to the people who talk, as all the more people do now, about resources and resource limitations and even the need for degrowth. People who say these kind of things have not really understood what growth is about. It is about better stuff rather than more stuff. That's what we can largely be achieving. The first mobile phone came on the market in 1984. It weighed about half a kilo, which is quite a lot. It certainly didn't fit in your pocket. Indeed, it was hard to fit in your briefcase. And it cost £5,000. The iPhone calculated the weight of that, and it's more like 100 grams per kilo. And it costs £5,000 per kilo, and it does really rather a lot more than that first mobile phone did. And of course, we couldn't finish this without looking at the pin. We couldn't go back to Adam Smith's pin factory on grade. But if we got it in the early 19th century, we could get a kilo of pins for about £11. Speculated on what was the most expensive product for kilo on the market today, and came up with a Pfizer COVID vaccine, which costs about £500,000 per kilo. You will realise, of course, that you don't need very much of it to be effective. That's the epitome of the idea that the value of the product lies not in the raw materials that go into it, but in the human capabilities, the collective knowledge that is built into it. So, but labour is the key to, is the key to feeling the work. And two things I hope you will take away. One is that the kind of Marxist dialogue of capital and labour, workers of capitalists, there's very little objective ability or utility in understanding what is going on in modern business. In modern business, the workers are the means of production. That's the reason why we have collective intelligence dominating the cost of these kind of products. We need to think about the firm in terms of collections of capabilities. And if we understand that a firm is a combination of capabilities and entrepreneurship, which is real business is the activity of putting together these combinations of capabilities. We'll start to understand our businesses evolved from the time of Adam Smith in factory, the modern world of the iPad. Well, we've ranged not just over everything from the pin to the iPhone, but I think around the world, several times. And I'm sure that set off various thoughts in your minds as to where does that lead us how does this explain what we see day by day how does it explain what's in the press. How is it that our various commentators seem to have got the wrong end of the stick. Can we understand things a bit more so I'd invite our two microphone rovers to come down and if we can think about what questions you'd like to put to Sir John. Please do take the opportunity to ask a question rather than to give another lecture if that's possible. Right, so anybody got a question. Yes, one just there, Graham, on your three doors, four rows back. Hey, thank you very much for a fascinating lecture. A perhaps a question since you started a bit with with tax a how does society tax this change what response is needed to this development. It's a challenging question I should explain when Richard talked about the book I wrote with King way back in the 1980s that we haven't been spending very much of our time and energy on tax since then. If I, if I'm to come back to what is probably the key element in that. I would even then the tax only works fairly well. If you attach a location to the thing which you are taxing and possibly the biggest way in which tax has been affected by the developments describing is that it becomes more and more difficult to to pin down the location of any particular economic activity. The cost of the raw material which which go into that iPhone, a trivial relative to price at which the iPhone is ultimately sold. Where is the value added in that particular chain running from the raw materials to the finished product in your pocket. Where does that value added. Is it in California. Is it is it in mainland China. Is it in Taiwan where TSMC produce the chips which are part of it is in Korea where Samson makes the cameras and so on. Where is the value added if I take we have a visor COVID vaccine at the bottom. If we take the pharmaceutical industries example, you undertake research in some country, you manufacture the product in another, you sell it in the in a third. What, how do you divide the value added, which is creating that production process between the two between the three. That's why I think it's, it's so much more difficult to find stacks regimes that meet Smith criteria in the 21st century, and it wasn't in earlier times. I think people talk about having global wealth taxes and the like are people who have just not thought, even from more than a minute or two about the practical problems in into in implementing tax regimes and worlds, which are as connected and as diverse as they are today. Thanks again. And one of the corollies of the move from Adam Smith's time for personal wealth, leading to gain of control of business to now control of the business being the producer of personal wealth is that even since the mid 20th century, the wealth of the CEO. The company is now hugely multiples of the average worker in that business, much more so than it was 60 70 years ago. Is that a good thing, or a justifiable thing. I don't think it is. And I go back to that exchange I described with retired CEO who said being a CEO is a responsibility, not a prize and that was the beauty took off it. And I think it was absolutely right to say that now these people doing MBA courses are inclined to regard climbing up the corporate ladder as a prize. And he has rather shocked to discover recently that Stanford Business School actually runs a course, which is really on how to become a CEO, how to navigate the corporate ladder. So you will come out at the top of it and be the person who benefits from all the kind of things you've been describing that have changed this world. Your thesis seems to admit a whole area of industry, namely the service industries in which the raw material is the human resources, everything from cleaning hotel rooms to high powered health care. Where does it fit into the, the your thesis of control of capitalism. I think as I'm arguing the world is just not like that anymore. I don't think the term capitalism helps us. The commentator is raised data and saying all businesses need water and electricity, but we don't talk about waterism or electricity isn't as describing how the, how the modern economy works. What I would argue is that in the world of capital as a service, the Amazon warehouse and their van and the data center and the like are really just like electricity and water. And by continuing to use this term capitalism, I would prefer to manage without it. And the last one, just your thing about the division of labor. I'm just wondering in the world's economy, whether we've taken it so far that the world has become a fragile place you've picked up, perhaps one of the prime examples the Taiwan semiconductor manufacturing plant, but I think there are others around it. And if they, for any reason sort of failed that there's a danger of the whole system collapsing and perhaps in a previous era, when there were several people doing the same sort of thing. And there wasn't this division of labor and there was more robustness in the world economy is there a danger with this division of labor that things can be become fragile. There's a danger and we discover that danger during the pandemic, or it was certainly a reminder of that kind of agility. And the Taiwanese dominance of semiconductors is a very good example of that. And is there an answer to it. I think the answer has to be not abandoning the division of labor, but of diversifying sources of supply, so that for example one response has been that apple overwhelming the assemble its products in mainland China. It is now starting to do it in India, as well. And that's, I think a response to the kind of things that are being described described and the sensible response. It's very different from manufacturing in California, which would be costly, probably not done particularly well. It's quite boring. Hi, you talked about the successes arising from this model you presented. What we're worrying about is the failures that we see a society which had increasing number of people who are employed use food banks in order to pay themselves and the children. We see problems with our infrastructure with our NHS system. How do you outline the problems with taxation? How do you how do you find the value added to take tax from it to fund these services? How in this new world order do we provide a society which is successful? I think it's not very difficult to describe a society which is an aggregate in aggregate successful. We have one. It's not to say that people share fairly and equally in that success. They don't. And I think we've hinted at one or two of the sources of problems here. The explosion of executive remuneration, the growth of a large swath of not very productive activities in the financial sector, and so on are things we need to address. Indeed, we need to accept the reality of these changes in the nature of production and the nature of the production process. Before we take one or two at the front, is there anybody in the back half of the hall who would like to ask a question? Campbell, there's somebody, a third row back with the red tool over. Hello from the back. Is AI a rapid route to collective intelligence? It kind of exemplifies collective knowledge. The challenge of AI is the extent to which it can be turned into collective intelligence as distinct from collective knowledge. We have this ability to handle masses of data in a way that we could never have dreamed of before. Turning them into effects of problem solving capabilities is another matter altogether. And the next two or three decades will demonstrate how successful it can be at doing that. But it's a very interesting question and AI raises a whole range of issues about the nature of collective intelligence. I don't feel competent to solve and I don't hear people talking about it. You mentioned a new companies that don't actually produce anything themselves like Apple and Amazon and so on. What is the role for the old fashioned big manufacturing still because we still want to buy a car or for that matter an Airbus or whatever. Where do they fit in now? Yeah. I mean if you look at my list there are still manufactured products on it. But over the volume of the manufacturing, whether it's the Airbus or the Pfizer vaccine or the iPhone. The value of the manufacturing lies not in the physical product but in the collective intelligence that goes into it. You still want to buy a car but an electric car you will buy even now, certainly a decade from now, is an intelligent vehicle in a way that the Model T forward. Or indeed the car you bought 10 years ago never was and never could be. So again and again we see the extent to which the products we buy are the value of the rest much more in the incorporated collective intelligence and less and less in the raw materials and to make it up. What part do you think the intensification of labour has played an economic growth and will play in future economic growth. Sorry the intensification of labour. Intensification of labour. I mean more and more the products of labour are as I was describing the result of labour. I don't think that the code code are in Google or the research scientists developing the Pfizer vaccine are being exploited. I don't think so. I was surprised by the business in a way that was not remotely true of the current the current the current works on the pin factory. I was surprised that you summarise very interestingly current state of the economy. Without mentioning anything about climate change and the incapacity of our current system here to address that. I think we could have a lot of we could have and people do have long sessions talking about climate change. I don't think the issues I've raised tonight have much to contribute to that discussion. Or that this is about changing the nature of business and very much direct relevance to that. Can I just ask a question about the the runaway train that we have here in the economics. Do we have a runaway train that when we look at the economic situation across the UK. Sorry, what is a runaway trade? Well, in terms of, you know, you talk about evolving economics here. We've got to the stage of having iPhones and so forth. But we have inequalities between the labour and between the people who hold the money. But have we not got a runaway trade situation here? There are various versions of that story. One which I hope to slide up their answers is the story that we're exhausting resources. The resource we're using primarily in these products is human ingenuity. And that's not exhaustive. You talk about ever increasing inequality. I wish people would talk about inequality and talk a bit more about inequality of what and where and when. We've had an increase in income inequality in the UK and in the United States over the last 30 to 40 years, which has been driven by two main things. One is the is the growth of executive remuneration and the other is expansion of the financial sector. These are issues which I think we need to address and get under control in terms of the broader income distribution in the UK. It is not in fact widened very much in terms of distribution of wealth. The data is fairly flimsy on that. But what is certainly true is that wealth in Britain is more widely dispersed than it was a century ago, because more people have some wealth than they did a century ago. On the other hand, we do have some very large fortunes at the top of the distribution. If we're talking about global inequality, we get very different figures. Because one of the extraordinary things about what has happened in my lifetime has been the reduction in extreme poverty in particularly in Asia, India, China, and the like. People talk about inequality as if it's an established inevitable fact that has grown and continues to increase. It is not as a more complicated phenomenon, and we need to be more specific about what is meant and by the causes of that. I was at a conference, actually just before the pandemic, so I guess I can place the date in Berlin. And person in the audience speaking talked about inequalities greater than it ever has been in the world. I look around and people were nodding in agreement. I thought, stand back for a moment. Where we were having that conference was in a street called Schlossplatz. It was a street called Schlossplatz, because it was where the Winter Palace of the Hohenzollerns in Berlin was actually built. And that palace was badly damaged by Allied bombing during the Second World War, and was then finally demolished by these German regime. Rather astonishingly, these German regime erected their own sort of palace, the council building of the state building of the DDR on that site. It was the only place in the world where you will see a stained glass window with a hammer and sickle in it. But I promise you that is what most strikes you when you enter that particular building. And bizarrely still, it is now a location of a Berlin business school, which has the hammer and sickle in the front lobby. And that was why the conference was being, well, not the hammer and sickle isn't why the conference is being out there. It was because of the business school today. Is inequality greater than it was in Louis 14th's day? Is the gap between Bernard Arnaud, who's now France's richest man, and the average French person greater than that between Louis 14th and the average French person? I don't even know how you would try to answer that question. Louis 14th never flew in a private jet, never had an antibiotic when he got ill, and so on. People talk about inequality in these rather hand-waving terms, and I wish they would stop and be firstly specific about what it is they mean, and secondly be ready to underlie, to analyse in some specific detail, rather than general terms about iron laws of capitals, the causes of London they're talking about. Wow, well that's quite some thing to note to end on, John, so thank you very much. Can I hand over to Pat, our president, for a quick thank you. I hope you can all hear me. So it falls to me to thank John for giving us the lecture that he's given us, which I don't know about you, but it's made me think about things that I haven't really thought about very much. He's taken on us on a rather, at least I found it a chilling journey from when people made things, and they sold them to people who needed them, and they got the capital to do that from people who had money. Okay, that wasn't a great system necessarily, but now we're faced with this huge rise in the middleman, and the importance of not the people who can make things, but the people who can make things happen. And their capital, if you like, is inside their head. And what I'm finding difficult to answer for myself is, is that a good thing? Does that spread potential? Or does it make the society that we live in all the poorer, because of this huge middle in which people don't really make anything. And I don't know the answer, but I'm going to think about it. And I'd like to thank John for making us and making all of us think about these kinds of things. It was great pleasure on behalf of the Royal Philosophical Society of Glasgow that I present John with the Society's Adam Smith Medal. And of course with the Society paperweight. And please have a glass of wine and continue to think. Thank you.