Friday, March 19, 2010

Adam Smith Bargaining

Leslie Budd, Reader in social enterprise at The Open University Business School, writes (18 March) in Open.2 Net HERE

Lap dancing around the regulations”

Like difficult customers, businesses frequently complain about regulation, and point to apparently nonsensical examples. Yet one of the paradoxes is that not only does regulation often sustain the competitive environment, but also allows businesses to follow their own self-interest.

The notion of self-interest is most frequently associated with Adam Smith’s The Wealth of Nations, perhaps one of the most misinterpreted books in history. In his previous work The Theory of Moral Sentiments, he pointed out that if individuals do not have a ‘moral sentiment’ with counterparts in economic exchange then their self-interest will not be realised and just prices will not ensue. Regulation frequently substitutes for moral sentiment in market economies

Adam Smith famously advised those who sought to acquire the ingredients for the menu for their dinners – from the “butcher, the brewer, and the baker” (an 18th-century diet?) – that they should address the self-interests of said “butcher, brewer, and baker” and not their own (WN I.ii). Readers of isolated quotations normally miss this advice.

Leslie Budd puts this well by drawing attention to Smith’s work, Moral Sentiments (1759), which he paraphrases. I offer my own assessment of Smith’s Moral Sentiments on bargaining from my Adam Smith: a moral philosopher and his political economy (Palgrave Macmillan 2008):

“In negotiation, both of us transact not because we like or love each other (though that is not precluded), but because we want something from each other. The negotiated decision settles the terms of exchange. The transaction transforms selfishness into a mutually wilful exchange. Each of us, in the content of our offers, exhibits our unselfish sides.
Even in the many negotiations where a degree of ‘sweetness and light’ is present, different solutions necessarily lie on the table. We bargain because we favour different solutions. We start with our different valuations and we reach for ‘an agreed valuation’ by bargaining towards a different solution. The process highlighted in Moral Sentiments corresponds to what bargainers do.

An ‘agreed valuation’ requires co-operation. Enmity hinders, but does not necessarily preclude, agreement. One-way compromises are seldom acceptable. The movement from their original solutions becomes each party’s contribution to the joint agreement. My approval of your modified opinions is to adopt them; to disapprove is to reject them (TMS17).
Walkouts, denigrating rhetoric and angry threats cloud the air if bargainers let loose their passions which, in the absence of empathy, distort their perceptions. [The bargainer becomes aware that only by ‘lowering his passion to that pitch’ which the other party ‘is capable of going along with’ can he hope for a ‘concord of the affections’ as a prelude to the harmony flowing agreement (TMS22). And that is true for both parties. Smith says that each ‘must flatten the sharpness of his natural tone, in order to reduce it to the harmony and concord with the emotions of those who are about him’. What each feels is never exactly the same because they both view their own interests from different vantages, but by lowering expressions of their self-interests to make them more acceptable and to meet the other side’s movement, both sides review their passionate (often extreme) stances, looking at them in some measure with the eyes of the other party.”

Think BA strike talks these past months. Of course, add political opportunism by the Union leaders – in the past big strikes just before a General Election tend to be ‘settled’ on their perceived affect on the polls.



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