Wednesday, January 30, 2008

Adam Smith On Bargaining to Mediate the Self Interests of the Parties

Vuyo Jack in Business Report 27 Jan (here): writes, “Balancing self-interests of all parties is the key to success”:

In business there are the interests of the different stakeholders to be taken into account: employees, shareholders, the government, suppliers, customers, organised labour and society at large. It is very challenging to find a balance of self-interests among all these stakeholders.

Adam Smith, the de facto father of capitalism, had views on this issue. In Wealth of Nations, he states: "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 necessities but of their advantages."

He argues that the principle of a market driven by an invisible hand is the solution of finding a point where everyone's self-interest can converge.

Finding that tangential point in all the self-interests faced by a company on a day-to-day basis is very difficult.

When it comes to deals, especially black economic empowerment (BEE) deals, a number of interests need to be addressed. Unfortunately, it is not always a transparent process because people veil their self-interests when they go to the negotiating table.

In the most ideal scenarios, all parties to BEE deals would clearly state their motives and preferred outcomes from the transaction in order to find the key points where they are aligned. On those points where they diverge they can then negotiate and have trade-offs. This would enhance the transparency of BEE deals, which would prevent such deals from breaking apart later on.

The bottom line is that the successful economies find a way of balancing the self-interests of the different economic stakeholders in a delicate manner.”


Comment
Where exactly in Wealth Of Nations does Adam Smith argue that the principle of a market driven by an invisible hand is the solution of finding a point where everyone's self-interest can converge.’?

Vuyo Jack conflates Adam Smith on the bargaining process in which differing self-interests are mediated by the bargainers (WN I.ii.3 p 25) with a popular 18th-century metaphor that was not about markets at all (it was about risk aversion: WN IV.9.p 456).

He asserts that in an ‘ideal’ situation the parties to a ‘black economic empowerment’ process the participants would reveal ‘their motives and preferred outcomes from the transaction in order to find the key points where they are aligned’.

But ‘Unfortunately, it is not always a transparent process because people veil their self-interests when they go to the negotiating table’.

Too true, but negotiating relationships can be built up over time, particularly in open and free competitive markets, and in the absence of monopoly and state-sponsored coercion, where parties learn to trade for what they want from others by offering others what they want from them.

In other words, Smithian bargaining, which does not need 'transaparency' (self-revealed interests are open to manipulation), and can funtion well enough without concentrating on one's own self interest (Adam Smith's specific admonition!) but focusing on the other party's self interests.

There is a sense here that an outside party is present at these BEE activities and it is hardly free bargaining if they intervene in this manner.

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