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Where is the wealth of nations in the 21st century?

In the 21st century, as the globe faces the threat of climate change, an understanding of the wealth of a nation needs to extend beyond measures of income to include natural capital and biodiversity.

Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations – published in 1776 – was an inspirational treatise that set the foundation for modern economic theory. This year, the tercentenary of Smith’s birth, is a timely moment to return to his famous work and consider what the wealth of nations might mean in the 21st century.

While there have been many discussions about Smith over the decades, his core message of the importance of capital for economic development has tended to be sidelined. Many representations of his legacy have highlighted growth in income, but not necessarily growth in wealth.

Drawing inspiration from Smith, the 2006 report Where is the Wealth of Nations? was a landmark publication from the World Bank. It attempted to shift the focus away from measuring a nation’s income towards measuring its wealth.

This was followed by updates, entitled Changing Wealth of Nations, in 2011, 2018 and 2021. These concentrated on sustainable development, with the 2021 report arguing that focusing on the change in wealth per capita could help to manage risk and uncertainty, especially in the light of climate change.

Yet while there is conceptual agreement about the importance of wealth between Smith and modern practitioners, there is a difference in practical application. Smith famously wrote: ‘I have no great faith in political arithmetic, computations’ (book IV, c. v). The World Bank view is more empirical, stressing that ‘how we measure development will drive how we do development’ (World Bank, 2011).

This article considers how Smith’s thinking aligns with economists’ approach to the concept of wealth in the 21st century.

Capital is wealth and wealth is capital

While it may seem obvious that wealth should be at the centre of political and economic discourse, this is not the case. In fact, it is a measure of income – gross domestic product (GDP) – that tends to dominate discussions around the economy.

While GDP is related to wealth, it is a return on wealth but not wealth per se. Specifically, GDP is a flow (measured over a period of time), whereas wealth is a stock (accumulated over time). Many continue to confuse stocks and flows (see Hamilton and Hepburn, 2014; and Hamilton and Hepburn, 2017). Crucially, it is possible to increase our income by running down our wealth (Dasgupta and Levin, 2023).

Smith was also keen to emphasise this distinction. He specified that although money (gold and silver) ‘in common language frequently signifies wealth’, it was not; instead, a nation’s wealth comprised ‘its lands, houses, and consumable goods of all different kinds’.

For Smith, capital – to which the second book of The Wealth of Nations is dedicated – is the wealth of nations. As he outlines:

‘To maintain and augment the stock which may be reserved for immediate consumption is the sole end and purpose both of the fixed and circulating capitals. It is this stock which feeds, clothes, and lodges the people. Their riches or poverty depends upon the abundant or sparing supplies which those two capitals can afford to the stock reserved for immediate consumption’ (book II, c. i).

A key facet of Smith’s analysis was his emphasis on net capital not gross capital. In this, he meant that the net income of a country – after deducting various expenses involved in maintaining its capital stock – was what people could save ‘or spend upon their subsistence, conveniences, and amusements’.

Further that ‘real wealth’ was in proportion to net income not gross income. Again, this is a distinction with convention today. We currently focus on GDP, which measures the total value of all goods and services produced by a country, and not net domestic product, which takes account of the depreciation in the value of fixed assets.

This is similar, in principle, to ideas proposed on net income, which look at what the maximum attainable level of consumption is for a society without running down its capital stock, broadly defined (Weitzman, 1976). The idea of net income is also what underpins approaches such as ‘green GDP’, which adjust GDP for pollution damages associated with economic activity (see, for example, Muller et al, 2011).

Among environmental economists, there is a consensus view that wealth is capital. This wealth is defined in broad terms, comprising all capital assets – physical assets, such as cash, property and equipment; human capital – for example, skills, education and knowledge; natural capital, including water, land and organisms; and technology, such as servers (Dasgupta, 2001; and Weitzman, 2003). As a result, we have a much broader definition of capital today (see Figure 1).

The key insight is that a country could see an increase in its income (GDP), but this might not be sustainable because the perceived economic growth might be reducing the country’s wealth and thus its capacity to generate future income (Dasgupta and Levin, 2023).

Figure 1: Portfolio of wealth

Source: Barbier, 2019

Looking at how the composition of capital has developed over time, research shows how human capital – the skills and knowledge that an individual invests in and acquires – has been one of the most important forms of capital in UK economic history (McLaughlin et al, 2014 and 2017).

Figure 2: The composition of wealth, 1770-2000

Source: McLaughlin et al, 2014 and 2017

How does Smith’s vision of capital compare with modern interpretations?

For Smith, there were three portions of capital with distinct functions: immediate consumption; fixed capital; and circulating capital (book II, c. i). Smith’s fixed capital comprised four features:

  • ‘all useful machines and instruments of trade which facilitate and abridge labour’
  • ‘all those profitable buildings which are the means of procuring a revenue’
  • the improvement of land
  • ‘the acquired and useful abilities of all the inhabitants or members of the society’.

The first two points here are similar to how we see capital today, as ‘produced assets’, while the third relates to ‘non-produced assets’ (OECD, 2009). But Smith’s view of capital was also broader as he saw human capital as part of the capital stock.

His influence can also be seen in others’ work – for example, in the early 1900s, when the schema of wealth below was developed by Irving Fisher.

Figure 3: Schema of wealth

Source: Fisher, 1906

Here we see some aspects of wealth that were prominent in Smith’s times, but have changed significantly over time, notably slavery. So, while the concepts are similar over time, there are distinct differences.

What about natural capital?

What’s relevant here is how Smith saw capital accumulating. Capital constantly flowed between the three purposes of capital described above, and it was replenished from three sources: ‘the produce of land, of mines, and of fisheries’. In turn, the productivity of land was determined by how capital was applied to it.

Here we can make a comparison to what is known as the Hartwick Rule (1977), which is one of the key models underpinning the wealth approach. The Hartwick Rule states that if the net returns from natural resource extraction are reinvested in other forms of capital, then economic growth can be sustainable across generations.. This is similar to what Smith alludes to.

Historical data show that some form of a Hartwick Rule has been in practice, whereby resource rents from natural capital were being reinvested into other forms of capital. This is done by looking at changes in wealth – that is, investment/savings rates – and at a variable known as adjusted net savings or ‘genuine savings’, which tracks the change in all forms of wealth (see Table 1). Similar data are now available for a variety of countries over time (McLaughlin et al, 2023 and Our World in Data).

Table 1: Mean net investment, mineral extraction and adjusted net savings rates (% of GDP), 1761-1860 (decade averages)

 Net investmentMineral extractionAdjusted net savings
Source: McLaughlin et al, 2014 and 2017

How did Smith think about productivity and other forms of capital?

Another aspect of Smith’s work that remains relevant is the emphasis on productivity. For Smith, the main goal of fixed capital was to ‘increase the productive powers of labour, or to enable the same number of labourers to perform a much greater quantity of work’.

Economists have interpreted productivity as either labour productivity (output per worker) or ‘total factor productivity’ (output taking account of both labour and capital). The latter has been seen as an important driver of long-run economic growth, and it has been interpreted as a measure of technological change (for example, Solow, 1957).

Recent work has placed particular emphasis on US total factor productivity growth as a proxy for technological change in a study of the rise and fall of economic growth in the United States (Gordon, 2016).

The role of technology in wealth accounting has been a key feature of debates around the sustainability of economic growth. Research has emphasised the role of technological progress, as represented by total factor productivity, in assessing an economy’s sustainability (Weitzman, 1997 and 1999). This takes on greater importance in light of the current slowdown in productivity growth (see Figure 4; and Coyle and Mei, 2022, for a discussion of the causes of the recent UK productivity slowdown).

Figure 4: Trend growth in the UK’s total factor productivity, 1766-2020 (% per annum).


This modern conceptualisation of wealth is what underpins the analysis of the 2021 Dasgupta Review of the economics of biodiversity, namely the need to manage and maintain our wealth. It also emphasises the importance of not neglecting one particular form of capital, particular natural capital on which all life depends, at the expense of the others if we are to sustain the wealth of nations into the future.

This raises questions about how to protect and grow capital in various forms – and whether the state should have a role in this. For Smith, property rights (or rather ‘tolerable security’) were key to encouraging growth of the capital. While he is admired as a liberal and an advocate of free markets, he also supported a clearly defined role for the state.

Smith believed that people were free to pursue their interests as long as they did not ‘violate the laws of justice’. The role of the sovereign was therefore proscribed to three duties: to protect citizens from violence; to protect every member of society from injustice; and for creating public institutions to protect the interest of society (book IV, c. IX).

Expanding the concept of justice to incorporate environmental and climate justice – as outlined by Schlosberg and Collins, 2014 – aligns Smith, the observer of market interactions, with modern notions of maintaining wealth for the benefit of society.

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Author: Eoin McLaughlin
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