Friday, March 09, 2007

Adam Smith and Modern Research on the Benefits of Trade

The Economist carries an interesting article on the demise of the Neanderthals possibly caused by the Home sapien migration into Europe, circuitously from North and East Africa, beginning about 40,000 years ago. In evolutionary terms, a slight advantage between two groups is sufficient to cause a wide gap in their performance (living long enough to breed; off-spring living to breeding age) in a few millennia, with the advantaged group displacing even a slightly disadvantaged group.

The research that sparked the Economist’s article was by Richard D. Horan, Erwin Bulte and Jason F. Shogren: “How trade saved humanity from biological exclusion: an economic theory of Neanderthal extinction” (Journal of Economic Behavior & Organization, Volume 58, Issue 1 , September 2005, Pages 1-29).

The Economist paraphrases the thesis:

One thing Homo sapiens does that Homo neanderthalensis shows no sign of having done is trade. The evidence suggests that such trade was going on even 40,000 years ago. Stone tools made of non-local materials, and sea-shell jewellery found far from the coast, are witnesses to long-distance exchanges. That Homo sapiens also practised division of labour and specialisation is suggested not only by the skilled nature of his craft work, but also by the fact that his dwellings had spaces apparently set aside for different uses.

And adds what I can only describe as a ‘strange’ assertion, though whether the Economist’s author is giving her own views or is reporting the researchers’ (Messrs. Horan, Bulte and Shogren) is not clear.

“SINCE the days of Adam Smith and David Ricardo, advocates of free trade and the division of labour, including this newspaper, have lauded the advantages of those economic principles. Until now, though, no one has suggested that they might be responsible for the very existence of humanity.”

Really? The researchers’ abstract states:

We show how the endogenous division of labor and subsequent trading among early modern humans could have helped them to overcome potential biological deficiencies. We discuss the relation between economics and natural selection, and show how trade may partially offset natural selection.”

I cannot speak for David Ricardo, but I can for Adam Smith, and he makes it clear from the start of Wealth Of Nations that he understood the significance of the division of labour and the propensity of humans to trade (a behaviour ‘to be found in no other race of animals’ [WN I.ii.2: p 25] and he saw clearly that it was the distinguishing feature of humanity, and, in that sense, it was “responsible for the very existence of humanity”.

Smith was way ahead of his time (natural selection had not yet been defined by anybody – Darwin’s “Origin of Species” was published in 1859, a hundred years after Smith’s “Moral Sentiments”) and I view with dismay the assertion of the great Joseph Schumpeter, in his magisterial History of Economic Analysis, 1954, and echoed by the much less great, Murray Rothbard, that ‘nobody, either before or after Adam Smith, ever thought of putting such a burden upon the division of labour’ (HEA, p 187). More fool them.

Smith wrote:

The division of labour, from which so many advantages are derived, is not originally the effect of human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Whether this propensity be one of those original principles of human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire.
’ [WN I.ii.2: p 25]

I consider this the key stone, the foundation of all that was to follow in Smith’s analysis of how economies originated and evolved, and it was much misunderstood by generations of readers, including the giants of our discipline. These two paragraphs deserve what today we would expect a Nobel Prize to be awarded.

From what I understand, I may disagree with what the researchers, Horan, Bulte and Shogren, report in their paper (I shall visit the University library on Monday and check it out), that the Neanderthals had no division of labour and no experience of trade. Two hundred years on from Smith we know a great deal more about ‘truck, barter, and exchange’ in prehistory (I have a near completed, but now neglected for three years, unpublished manuscript of mine: ‘The Prehistory of the Deal’ that details my deeper hypotheses in this subject). I suggest two necessary amendments to Smith, and to the three researchers.

First, exchange behaviour is much more widespread in nature and is not exclusively confined to humans, particularly in areas of what I call ‘quasi-bargaining’. Secondly, different hominid species (pre-cursors of the human lineage) practiced quasi-bargaining to varying degrees throughout their existences as separates species for millions of years. The researchers’ computer model appears to have taken a fairly blunt separation for this trait, which may have overstated its speed of change. It could have taken much longer and still had its effects, if Homo Sapiens had even a very slight advantage as practicisng exchangers.

Thirdly, Smith correctly asserts that the propensity to truck, barter, and exchange, preceded the division of labour (WN I.ii.3: p 27) and this places it firmly back into the Hominid lineages, prior to Homo sapiens, perhaps by millions of years. Smith showed insights in this area not appreciated by many of his critics.

These are part of his legacy too.


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