Saturday, October 08, 2005

Guest Contribution from Nicholas Gruen

Nicholas Gruen (see his bio in his contributions to the Article button on the Lost Legacy’s main blog page) composes a piece, “Outline of points on Adam Smith” for a radio interview for an Australian Broadcasting Corporation series, “All in the mind”.

I reproduce it in full , with permission, because it summarises the most correct expression of Adam Smith’s true Legacy that I have seen for many a year. Any differences I might have are mere quibbles (e.g., I think calling markets ‘miraculous’ is an exaggeration, etc.; I prefer Smith's description of regarding them with 'Admiration', as explained in his "History of Astronomy") when set against the general perspectives Nicholas Gruen demonstrates:

“Looking Out for No.1, that they keep an idea sort of for the invisible hand of the
market place that will somehow take your own self interest and turn it into good.
That is you know from Adam Smith’s famous theory of moral sentiments. So there’s
this notion that if I’m just looking out for myself, for my own individual self interest,
that everything will work out well in the end for all concerned. And of course we know
that that market, free market ideology has proven to be incorrect, false, completely
mistaken.”

"Q: How does that popular summary of Adam Smith strike you as a summary of his thought?
R: The common understanding of Smith is quite wrong. Certainly Smith saw self-interest as an important motivator in human affairs. He opposed a lot of Christian political and economic thought which simply exhorted people to be less selfish and more benevolent. Smith wanted to take the world as it was. So he was interested in how in the actual world the evils of self interest – or what he called self love – were tamed in real life and how they might be tamed better.

Q: He had a theory of society that some people say comes before his economics. How did self interest fit in to his theory of society?
R: Smith’s most famous book in his own lifetime was his Theory of Moral Sentiments. It asks a question. He begins with a picture of a baby or a young child not unlike Freud as a ball of pure egotism – of self love. And he asks “how is it that this self love” becomes a law abiding, other regarding citizen. Smith’s answer is simple but also deep. He says that the child encounters approval and disapproval and likes the one and hates the other. This leads to the development of a conscience which Smith likened to an ‘impartial spectator’. As the child grows to adulthood they also learn that tricking people into approval is unsatisfying – they crave deserved approbation. And the craving for deserved approbation is the social foundation of the rise towards virtue.
Another way of explaining it is to explain another misconception about Smith – that he was a crude individualist. Smith’s theory says that people acquire quite central ingredients of their character, indeed their minds, from society.
Smith says it’s impossible for a human to grow up outside of society, but if it were, he couldn’t even think of his own conduct any more than he could think of the appearance of his face without a mirror.
Bring him into society, and he is immediately provided with the mirror which he wanted before. . . .Bring him into society, and . . . he will observe that mankind approve of some of [his passions], and are disgusted by others. He will be elevated in the one case, and cast down in the other his desires and aversions, his joys and sorrows, will now often become the causes of new desires and new aversions, new joys and new sorrows: they will now, therefore, interest him deeply, and often call upon his most attentive consideration.

Q: You argue that there’s new experimental evidence that Smith was right.
R: Yes. One of the implications of Smith’s system is that children start selfish and that socialisation makes them less so. Economists have quite recently done experiments which provide with some hard data on this.
They look at how people respond to specific games in which there is a tension between possible social obligations and naked self interest. One game is the Ultimatum Game. It’s simple. Two players get a pool of money – say ten coins. One player is invited to split the money between themselves and the other player. If the offer is accepted the two players split the money between them as proposed. If the offer is rejected the players get nothing.
The experiments I’ve seen showed around thirty percent of grade two children offering their partners three coins out of ten or less. This was down to about 10% three years later, five percent in grade nine and next to nothing in grade 12.

Q: But didn’t Smith believe in self interest governing markets?
R: Where the Theory of Moral Sentiments is a sketch of what people and society are like and what holds them together, the Wealth of Nations is a scientific treatise on what makes countries prosperous. Yet at a deeper level the two books are about the same thing – the constraint of self interest.
Smith is attracted to markets because they mediate and thus transform self interest – into something with a passing resemblance to its opposite – cooperation.
In a very famous passage Smith says this – but listen closely to what he says.
It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.
If you listen carefully, what we see is not the assertion of one person’s self-interest over the other but the mediation of that self-interest – by that of the other. In lectures Smith gave which became the Wealth of Nations he was more explicit. The merchant who attends only to his own self-love will get nowhere.
Mere self-love is not sufficient for [his success], till he applies it in some way to your self-love.
Smith sees conduct in a market as the fitting kind of exchange between strangers. It enables them to co-operate without presuming too much on each others’ benevolence. And yet they need only consider their own interest to have it transformed into an interest (not a love mind you, but an interest) in what they can do for others.
I really think it’s hard to understand how remarkable this seemed to Smith or in fact really is in our own world, so pervasive has the market become, so much to we take it for granted. I think of Smith’s economic theory as akin with EM Forster’s great injunction at the end of the novel Howard’s End. “Only connect”. It’s a theory of connection between people. And if we ask about the problems with government, one of the fundamental problems is that, for all the mechanisms of accountability that we try to build in, if we have a problem, if we have a need, it is very hard to find someone to connect with – someone to whom we can turn and try to interest them in addressing our self-interest by making it worth their while in their own self-interest.

Q: Smith argued that markets improved virtue. How?
R: Well, they lead people – even total strangers – to have a certain regard for each other. It’s true that this is not the benevolence of a saint, but it is a start in human interaction. Markets mean that at a fundamental level people engage with each other and their needs.
Markets also reward
· prudence, the habit of thinking and planning ahead.
· probity and a certain honesty of dealing. Because if you get lied to once, you’ll buy your bread or your beer from someone else.
They do something else. Market relations are relations of dignity between two free people. One may be richer than the other, perhaps much richer, but it is nevertheless an exchange which is dignifying because it is an expression of free people’s choice in a situation – and not one of naked power. Immediately after the passage about getting one’s dinner from the butcher, the baker and the brewer, Smith compares this with the way animals and beggars must coax and court and flatter others to get their daily bread.
And Smith saw what he called ruder or more primitive societies as characterised by the exercise of naked power
So in addition to the ways in which commerce ‘softens’ behaviour it also diffuses power throughout the community much more and so there is less exploitation of power.
This is the essence of Smiths’ objection to monopoly. He saw it as inefficient, but more importantly he saw it as immoral, a hankering by the rich for their easier more primitive life of power over others, rather than a shared accountability to consider others needs.

Q: So does a coherent picture emerge of Adam Smith’s picture of humanity from his work on morals and on markets?
I’ve argued that all things considered Smith’s picture of humanity in both of his great books isn’t homo-economicus – the naked and ugly pursuit of self-interest over others’ interests. I call it homo-dialecticus. Smith believed that people were inherently communicative. Their lives are a conversation.
· Internally with their consciences or the impartial spectator who in fact embodies the mores of their society.
· Externally in markets where the mutual self-interest of all is mediated, and each person’s self interest is conditioned, and contained by that of others.
Moreover I think he’s right. Whether you vote for John Howard, Kim Beazley or Bob Brown, markets really are a miracle of modern times. They don’t solve all our problems and there are ways we can help them work, but the way they engage and connect people with each other in solving mutual problems is a remarkable thing and something we tend to take for granted. They’ve not just brought us to the edge of eliminating physical need. They may not lead people to love each other, but they do induce them to help each other.
The society that really embodies naked self interest is not the market society but the anarchic societies within failed states. Where people are murdered and plundered on a daily basis. That’s naked self interest.

Q: And you argue there’s experimental evidence that Smith is right here too. That markets improve morals.
R: The ultimatum game was invented in 1982. Until 1996 it was thought that there were not large cross cultural differences in peoples behaviour. In particular that despite the ideas behind economic theory very few people behaved without some sense of fairness in the game. In 1996 researchers turned up a small scale society which with much less pro-social instincts – at least as demonstrated by the ultimatum game. That led to a very well funded and very sizable cross cultural study of 15 small scale societies looking at societies like the one surveyed in 1996. And guess what?
The researchers found a strong correlation. The greater the level of prosociality expressed in experimental games, the higher the degree of market integration of those communities. So the experimental evidence suggests what Smith argued, that markets induce pro-sociality. They make co-operation between strangers – rather than conflict – the norm. That is surely a miraculous achievement."

© Nicholas Gruen 2005 (All Rights Reserved)

Enquiries and permissions to reproduce to Nicholas Gruen: nicholas@gruen.com.au

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