Saturday, March 17, 2012

The Damage that Modern Neo-classical Consensus Does to Adam Smith's Reputation

Sanne Taekema and Wouter de Been (Erasmus University, Rotterdam. The Netherlands) have circulated a paper: “What Piece of Work is Man? Frans de Waal and Pragmatist Naturalism”

In his most recent book on the importance of primatology for legal and political theory the focus of De Waal is on the neo-liberal consensus that has dominated economic, political and legal theory in the last three decades. This consensus hinges on a set of basic premises about human nature and human psychology. The basic unit of analysis is the individual. This individual is characterized fundamentally by rationality and by self-interest. In the market, according to mainstream economic theory, we can let this self-interest rip. Private vices are public virtues. If everybody pursues their own self-interest, then this will lead to optimal prosperity for all.”

Unfortunately, this is exactly how modern economists think, and how they disparage those economists who do not conform. They often do this in the name of Adam Smith without knowing, or perhaps ignoring, that he did not hold to such modelling of human behaviour. Their imaginary economy for economics is a mathematical model that requires that important variables are assumed to be well behaved in order to produce firm predictions. Adam Smith acknowledged that we cannot assume that the variables, including real people, are well behaved to suit the “supposed beauty of [our] own ideal plans”. “We [cannot] arrange the different members of a great society with as much ease as the hand arranges the different pieces on a chess board” because “every single [individual] has a principle of motion if its own” (Moral Sentiments, IV.ii.2.18).

In the public sphere, however, people are caught in a prisoner’s dilemma ― pursuit of their own narrow self-interest will lead to suboptimal solutions for all. Hence, in this context self-interest needs to be enlightened. Here, people need to cooperate to reach the most optimal solutions. As a result, it is in everybody’s self-interest to relinquish a bit of their freedom and autonomy to the state, so that the state can provide everybody with the benefits of a secure existence. Hence, the “social contract”, the imaginary bargain struck between free, self-interested individuals that define the conditions under which such a group of self-seeking loners are willing to pool their resources.”

This only resurrects the chessboard metaphor in another guise. So-called “enlightened” self interest is a tidy construct by assumption. Yet Smith spelt out the role of self-interest in Wealth Of Nations, not in a contract with the state, but in the actual day-to-day bargains between any two individuals attempting to bargain a contract for each achieving their own self-interest:

Adam Smith insisted: “But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only.6 He will be more likely to prevail if he can interest their self–love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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” (WN I.ii.2: 26-7).

The key sentence is the last one:

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.”

In short, we achieve our self-interests by addressing the self-interests of those with whom we seek to contract. Two self-interested egoists would end in deadlock; they do not serve their self-interests by failing to address the self-interests of those with whom they would make bargains. The so-called “neo liberal consensus” is a dead-end. It does not describe reality nor any approximation of it. Sadly, modern economics is empty, brilliant as it mathematical models may be.

Frans De Waal is not party to the “neo-liberal consensus, and his work in primatology is outstanding, based as it is, on decades of observation of how chimpanzees behave. His book is worth studying as is Sanne Taekema and Wouter de Been’s critique of aspects of it (download a free copy from:

I am reading widely in social-science subjects at present for my revised 2003 paper, "A Pre-History of Bargaining" on “Exchange: the first 200,000 years”, which I hope to present later this year at a conference on the History of Economic Thought around themes associated with Adam Smith and evolutionary thinking from Darwin’s “Origin of Species”. There is much in Sanne Taekema and Wouter de Been's paper that I would comment upon, especially in respect of their statements of Smith's "Moral Sentiments" (1759) and modern research; but I shall reserve that for future posts.



Blogger Paul Walker said...

"Private vices are public virtues. If everybody pursues their own self-interest, then this will lead to optimal prosperity for all.

Unfortunately, this is exactly how modern economists think, and how they disparage those economists who do not conform."

If this is true then what are we to make of the use by modern economists of examples like the prisoners' dilemma or the "tragedy of the commons"? These are standard examples of where rational self interest does not result in an optimal outcome.

1:57 a.m.  
Blogger Gavin Kennedy said...

I am not sure that I understand the point you are making. It seems to be repeating that which I made. But I suspect that there is something else. Could you clarify either here or direct and I shall respond, preferably here, or as you wish?

I observe, however, that the label “modern economists” may be ambiguous. Not all “modern economists” since the 1960s was, or is, a “modern neo-classical economist”. Some, now quite a crowd, were, or are just “modern economists”, expressing varying degrees of scepticism about ‘rational self-interest’, which is why I prefer to describe Smith’s use of ‘self-interest’ being expressed as ‘reasoned’, not "rational" self-interest.

I mean by this in the sense that individuals ‘reason’ their self-interest as being what she can achieve in the circumstances of having to ‘address the self-interest’ of others (“butcher, baker, brewer”), whose consent, or at least alignment of interests, is required for what they both could agree to. Sellers, in competitive markets (not necessarily what we call “perfectly competitive”), usually have to lower their “price” (subsuming the mix of all the product/service’s qualities) in order for the buyer to agree. The buyers, likewise, act by improving the quality of their offers for the seller to agree, i.e., by bargaining.

‘Reason’, recall, along with ‘speech’ were faculties acquired by humans, according to Smith, and were when they ‘acquired the propensity to “truck, barter and exchange”. (I suggest that “exchange” is the key word here.) Perfect rationality is a modern construct of marginal utility and neo-classical thinking. It is post-Smithian and largely mathematically expressed (hence, not real as far human behaviour is concerned – “man of system” thinking, etc.,).


7:44 a.m.  

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