Monday, March 05, 2007

Bargaining Is Not About Greed

In The Discomfort Zone [] 5 March, is posted helpful thoughts on Adam Smith: “Economics and Ethics: What they don’t say about Adam Smith” containing these paragraphs:

“While doing some research, I came across this interesting article (PDF) by Peter Ulrich, professor of business ethics at the University of St. Gallen (HSG) in Switzerland (the premier university for business and management studies in Switzerland). Written as a conversation with Adam Smith, the article brings out fabulously some of the problems with our current thinking of economics and free-market operations.

Adam Smith is, of course, known as the father of modern day economics, and regularly quoted for his words supporting the free-market and “the invisible hand”:
lt 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 selflove, and never talk to them of our own necessities but of their advantages.

However, that quote presents only a part of the whole picture. Adam Smith came to economics as a moral philosopher, with views on political economy. Therefore, large parts of his book - The Theory of Moral Sentiments - deals with ethics, morality, and the role of government. Of course, the neoliberals conveniently leave that out.
The result is an economic theory devoid of any conception of morality, ethics, equality, or justice, something never intended by Adam Smith. The weakness of that mutual exclusion of ethics and economics is discussed in detail by Amartya Sen in his book “Ethics and Economics”. He too, brings out in stark contrast, what Adam Smith originally intended. Yet, rather than address this gap in economics, teachers of economics are content to circumvent the weakness simply by saying economics deals only with the positive, not the normative.

There is a problem with holding this limited view of economics. I may not be greedy but if I believe others I transact with are, then I too must act greedy to ensure my survival. Conversely, if I do not act solely in my self-interest I risk loosing to those that do, and in the evolutionary chain of events will be relegated to irrelevance. In essence, this interpretation of economics - of being based on self-motivated individuals - is a self-fulfilling prophecy. Over time, it would turn a theory of how the world works, into the reality of how the world works.”

Its author is doing just fine until that last paragraph where he or she makes an error of drawing the problematic conclusion from something we observe everyday when people transact.

Human society did not go from violent plunder to spreading the contagion of greed. Bargaining in its several forms emerged as a means of transacting peacefully. The discovery or invention of the conditional proposition which is central to the bargaining process emerged over time to deal with ‘greedy’ bargainers.

The butcher, the brewer, and the baker, quoted in the article from Wealth Of Nations (Book I.ii.2: pp 26-7) is not about two greedy people transacting; it is about each seeking to satisfy their own interests by addressing the interests of each other. Each has to mediate their own wants to reach agreement with the other party who also has to mediate his or her own wants. Two utterly selfish people cannot conclude bargains because neither would move in pursuit of their selfish interests. But move they must to an acceptable price because each has a veto on agreeing.

Smith understood this and taught it in his classrooms at Glasgow from 1751-64 (see his Lectures in Jurisprudence), and wrote it into Wealth Of Nations in 1776.
It is the neoclassical paradigm that preaches self-interest as greed or selfishness.

Even George Stigler (and others) misunderstood Smith’s moral statement of what actually happened; they had to fit behaviour into a set of assumptions about the real world, which did not predict very well what happened in the real world.

And, moreover, individuals bargaining from pre-history onwards discovered (invented) the truth without the benefit of being taught by neoclassical economists how to do it.

It's called 'emergent order'.


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