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Publication - Speech / Ministerial Statement

Institute for New Economic Thinking annual conference: First Minister's speech

Published: 21 Oct 2017
Date of speech: 21 Oct 2017
Delivered by: First Minister
Location: Edinburgh

First Minister speaks about the economy.

Thank you, Lord Turner. And thanks to everyone at the Institute for New Economic Thinking for asking me to address such a distinguished and international gathering. I understand that almost two thirds of today's audience comes from beyond the UK so it is a pleasure to welcome you all to our beautiful capital city Edinburgh.

In many ways, you have chosen a perfect location for a conference of this kind. I know that, although this institute exists to promote New Economic thinking, you have a deep respect and a regard for economic pioneers of the past.

As Adair has just said, your first annual conference was in the Cambridge college where John Maynard Keynes wrote his General Theory. Your second was at Bretton Woods – the site of the conference which did so much to shape the post-war global economy.

So it is fitting that for this conference, you have chosen a city which was the beating heart of the European enlightenment, a city which has contributed hugely to the development of economic thought. It's not surprising that Adam Smith has already been mentioned several times this morning. Adam Smith was of course the founder of modern economic thinking. He lectured at Edinburgh in the 1750s, and then lived and worked for the final years of his life at Panmure House, a mile or so from here. His statue is on Edinburgh's high street, and he's buried slightly further down in Canongate Kirkyard.

I know that you have a very busy agenda - I believe that I am just one of 85 speakers you will hear over the next three days! But if you do have time, I hope you'll be able to explore this beautiful city, and as part of that perhaps visit Adam Smith's statue or his grave.

The origins of the Institute for New Economic Thinking lie in the financial crisis of 2007 and 2008.

And I know one reason behind the setting up of this Institute was a feeling that the crash resulted – in part – from shortcomings in modern economics and the work of economists. I should be very clear here – I know those shortcomings won't have belonged to any of the economists in this room… they of course were the shortcomings of other economists! And it's maybe also worth being clear that since my party was not elected into Government until 2007, those shortcomings weren't ours either!

But my main focus today isn't really on the work of those other economists or politicians. Instead I want to reflect a little about the wider issue of how your work relates to policy making or how it should relate to wider policy making. I know that's a subject Lord Turner has also raised in the past.

It is probably appropriate to start with a reflection about the financial crisis. Looking back, one of the most striking things about that crisis is that it occurred at a time when there was actually overwhelming policy consensus on certain key issues – for example, the question of risk dispersal across the financial system. And therefore, when the crisis struck, seemed to take governments and the wider establishment by surprise.

And yet, when you look a bit closer and scratch the surface, that should not have been the case because the consensus at the time didn't necessarily reflect academic opinion. Some very distinguished economists held dissenting views. But their voices didn't seem to carry any weight as economic thought got translated into public policy.

That's an easier problem to diagnose with hindsight than it was at the time – but it is something which should be very high in the mind-set of any modern politician as we seek to avoid repeating in the future the mistakes of the past.

One of the famous, or it could be more accurately described as infamous, quotes of the EU referendum here in the UK was from a prominent leave campaigner, now a member of the UK government when we said he thought people had had enough of experts. I think that's a quote that will haunt him for the rest of his life.

Of course, politics is about values judgements as much as it is about facts and figures and I accept that and think that's as it should be. But I think the imperative for politicians today is not to think about how we listen less to the views of experts. I think the imperative and the challenge for modern politicians is how we open our thinking to a broader range of expert opinions and in particular, those opinions that challenge our view of the world. Not just opinions that reaffirm our view of the world. And let's be frank about it, that at a human level can be quite a challenging thing to do.

Politicians usually – although you may be sceptical about this – have very clear and strong principles and beliefs. I think that's a strength, but it can mean that we are more likely to be swayed by the evidence which most easily fits with our worldview. Of course if everybody is signed up to the same worldview, it makes decision-making much more straightforward and simple. But the risk is that what develops is a group think and we blind ourselves to real risks and opinions that might alert us to those real risks.

So it's never easy to reconcile diversity, disagreement and complexity, with prompt decision-making and clear communication. But it is essential that we strive to do so. The financial crisis – and the extent to which large elements of policy making were out of kilter with reality in the run up to 2007 – provides overwhelming evidence of the need to listen to opinions that challenge our view of the world, not just those that reinforce and reaffirm that view.

After all, here in the UK we are still living today, ten years on, with the consequences of not doing so in the years before the crash. Just last week, the UK's Office of Budgetary Responsibility produced a report which set out the extent to which the UK's productivity has stalled during the last decade. And of course dissatisfaction with stagnating real wages and rising inequality – partly a result of low productivity – is widely seen, and rightly seen, as a factor in the political shocks we have seen in the recent years, including Brexit.

I won't pretend that the Scottish Government has all of the answers on this – on how we properly use the full range of academic expertise to improve practical policy making while still being guided by principle and values – but I can set out some of the ways in which we are trying to at least to engage with these issues.

I've been First Minister since 2014, but as I mentioned, the party I lead first came into government in 2007, when I was Deputy First Minister. And one of our early moves we made in 2007 was to establish a Council of Economic Advisers. The Council is international, diverse, and is unquestionably expert. Two of its current members, Professor Joseph Stiglitz and Professor Mariana Mazzucato, will participate in this conference. I know that another member, Professor James Mirrlees has spoken at previous conferences.

It is important in our view that we have that range of expert opinion and advice to draw on.

In Scotland we face the same challenges as other developed nations do – how to improve productivity, adapt to an ageing population, make the transition to the low-carbon economy of the future and ensure skilled and well paid job opportunities in an age of automation.

And of course, more particular to Scotland and the UK, Brexit – especially if we end up outside the European single market – will cause serious harm to businesses and the overall economy in Scotland. So it is essential as we navigate those challenges that we draw on the best international advice we can.

The Council of Economic Advisers has a real and significant influence on Government thinking. The most recent example of that is the announcement last month that the Scottish Government would establish a National Investment Bank in Scotland. That decision drew on advice from the council which highlighted the role investment banks already play in other European economies and highlighted that, by providing patient capital, the bank could influence areas which are highly relevant to our productivity performance – support for new and growing businesses, and investment in science, research and innovation. Yesterday, we published a consultation paper, seeking views on how an investment bank can best fulfil that role.

The council has also in the past provided us with detailed advice on the economic and social impact of one of our other key policy objectives which is dramatically expanding early years education and childcare provision. Looking at that from an economic perspective, not just a social perspective. It is currently assessing some of the issues that would be associated with the potential of having different top rates of income tax in Scotland compared to the UK – an issue which is very important now because the Scottish government has more extensive tax and social security powers. The advice we get from the Council is very clearly, independent – but it's hugely valuable as a source of outside expertise as we make some pretty fundamental decisions about the direction of the country.

The existence of that council shows that, if it is at all possible, the Scottish Government wants to be engaged with relevant, and at times challenging, expert economists.

For similar very reasons, just yesterday, the Scottish Government convened an international conference on inclusive economic growth. It included experts from the OECD, the IMF, and from a range of countries such as Costa Rica, New Zealand, Sweden and South Africa.

As part of that conference the Wellbeing Alliance met for the first time. That's an alliance which is bringing together nations and regions – and Scotland is playing a leading role in it – looking at how we use wellbeing, and not just GDP, as a measure of our economic performance.

This issue of inclusive growth is central to our economic thinking here in Scotland. When we published our new economic strategy two years ago, we included a major focus on addressing inequality – through a range of measures including tackling poverty, supporting skills, and promoting gender equality. Professor Stiglitz said at the time that "Tackling inequality is the foremost challenge that many governments face. Scotland's economic strategy leads the way in identifying the challenges and provides a strong vision for change."

We see that focus on inclusion as being an essential part in having an innovative, open economy. Firstly – and this is demonstrated by the political shocks I referred to earlier – we must build a fairer and more inclusive society, if we are going to sustain popular support for a dynamic, open and competitive economy.

In addition, we know from a wealth of evidence that inequality actually undermines our efforts to increase productivity, and to prosper through innovation and internationalisation. We do have that wealth of evidence now.

We know that inequality is not simply a price that has to be paid for economic growth. We know that it hampers and constrains economic growth. The OECD estimates that between 1990 and 2010 income inequality in the UK reduced economic output per head by nine percentage points. To put that in context, that amounts to £1,600 for every person in the UK. We've got to act on that evidence. Just as we have to act on the evidence of other forms of inequality that are not just morally wrong, but economically damaging. An issue very close to my heart is gender inequality. Again we know from the evidence, citing OECD research here, that if women participated in the workforce at the same rate as men, the output of OECD countries over the next 20 years would be 12 per cent higher. So this is hard evidence now that we must act on.

In Scotland we have a range of policies to boost innovation, increase our international exports and increase our productivity. But we know all of that will be weakened if inequality is too high. Apart from anything else, we know that many people who could be the researchers, the engineers and the entrepreneurs of the future will not get a fair chance if we allow income inequality, gender inequality to prevail. We need to have an approach to building an economy that allows everyone to contribute their talent, their ideas and their energy.

Inclusive growth is linked to the final point I want to make. When I was looking through your conference programme I was struck by just how relevant the issues you are discussing are – gender equality, the media, immigration, intergenerational issues and, perhaps a bit more alarmingly, "past democratic collapses". It is clear that this is a conference that is deeply engaged, as it has to be, with wider social issues.

That's another factor which links you to the legacy of Adam Smith – someone whose legacy is not always well served by some of his ultra free-market supporters. Adam Smith's economic science was rooted in a clear vision of society – he knew that although self-interest will motivate people, sympathy, empathy and concern for others is also a defining characteristic of being human. As he famously argued in the Wealth of Nations – "No society can be flourishing or happy, of which the greater part of the members are poor and miserable."

Adam Smith knew that ultimately, the major choices we make in economic policy aren't just about what kind of economy we want to create, they are about what kind of society we want to live in. Ultimately, economic policy is a means to an end – it's the means by which we enable people, or don't enable people, to live happy, healthy fulfilling lives.

In Scotland, we are trying to tackle these big economic issues in the right way, as we build – not just a stronger economy, but a better and fairer society. But we know that as we do that, we have a huge amount to learn from expert analysis and international perspectives.

That's why we have our council of economic advisers. It's why we welcome events such as yesterday's conference. And it's why I'm delighted that this conference is taking place in Edinburgh. It's a gathering which is in the best traditions of Scotland's past, but which will also, I hope, deliver some of the fresh thinking which we need as we look to the future.

Lord Turner said that we want Scotland to be an open, outward looking economy and that's the point I want to, as I finish, emphasise. One of the frustrating things for me in the EU referendum was how much that debate was driven by opposition to immigration. So we ended up taking a decision to leave the European Union to try and restrict something – immigration – that actually we need more of in order to thrive as an economy. So being open and outward looking, recognising that we need to use the biggest and brightest brains and talents from across the world is fundamental to our approach, not just to what we do here in Scotland but to the contribution we make to the world.

So have a wonderful time in Edinburgh, and I wish you all well for the remaining 83 speeches of the conference!

Published:
21 Oct 2017
Institute for New Economic Thinking annual conference: First Minister's speech