Sunday, April 26, 2015


Robert Litan, a nonresident senior fellow at the Brookings Institution, and chief economic adviser to Patent Properties Inc., and the author of “Trillion Dollar Economists, posts (25 April) HERE 
"Adam Smith Preached Self-Interest–and Self-Help, Too."
“Behave as if an impartial spectator is watching you. Use the idea of an impartial spectator to step outside yourself and see yourself as others see you. Use that vision to know yourself. Avoid the seductions of money and fame, for they will never satisfy.”
It sounds like something from a theologian or self-help guru. But those words were penned by Adam Smith, author of “The Wealth of Nations,” the late-18th-century work considered the first real book on economics.
The quotation is from “The Theory of Moral Sentiments,” a less well-known book that Smith wrote earlier in his career but that is, arguably, equally important.
        The insights in “Moral Sentiments” have been revived in a remarkable book        published late last year, “How Adam Smith Can Change Your Life,” by economist Russ Roberts. Like many people, I thought Smith was the original champion of why acting in one’s self-interest was good for society–ostensibly because it allowed each person or firm to specialize in what he or it did best and then trade for whatever else was required. But the self-interest that Smith made famous can be a powerful force for good in one’s personal life.
       According to Smith, many of us do good things because we want others to approve and admire us. Mr. Roberts explores implications of this and other Smith insights.
Mr. Roberts’s witty, candid take on Smith is filled with his own wisdom. Gurus, theologians and economists alike might learn a thing or two from him and the first modern economist.”
I certainly concur that Russ Riberts is a” witty” and “candid” writer and knows more than most about Adam Smith, but I am not so sure that Litan is correct on his “take” on Adam Smith is the last word. What he credits as a quotation from Smith is not a quote at all. Smith was more nuanced on self-interest, as usually expressed by economists, including those few who have read his “Theory of Moral Sentiments” (1759).
Self-interest has been transmuted into a sub-genre of competitive behaviour, especially when it is used to refer to how individuals should treat each other. We are not in competition with those with whom we wish to co-operate to manage exchange transactions and relationships, as anybody who has thought about or attempted to conduct a bargained transaction or persuade anybody would know.
Two self-interested egoists would have great difficulty in agreeing or concluding a bargain when each sees their preferred exchange as the other party being forced to “give in”. Exchange doesn’t work that way. Nor is it required that each person  ‘gives in” equally (whatever that is supposed to mean). I find anthropologists seem to express this view from a misguided belief that both parties should ‘gain’ the same in some sense, otherwise they assume that one bargainer would ‘lose’ more than the other. That so-called "loss" is an absurdity not an observation.
Smith made it clear in Wealth of Nations that we each “stand at all times in need of the co-operation and assistance of great multitudes” and we achieve that co-operation when we bargain by proposing “Give me that which I want and you shall have this which you want”. Our subjective assessments of our mutual gains or losses cannot be measured in practice. Even in the maths of "utility" theory a measurement the outcome of the bargain is the not the arithmetic sum of the 'gains' but the maximisation of their product.
We are most likely to prevail by interesting their “self-love” in our favour “from their regard for “their own interest”, by talking about their “advantages” from the proposed transaction and NOT of our “necessities”.
This is a very early expression by Smith of the “Conditional Proposition” which is the key to making bargains. It says nothing about who gains or loses most, as such estimates are wholly subjective and immeasureable. Self-interested bargainers use “persuasion” and “conversation” as discussed by Smith in “Moral Sentiments” on how we conduct relationships in society.
The way Litan presents Smith on the impartial spectator is fantasy. I am sure that Russ Roberts knows more than is presented by Litan about Smith's "Moral Sentiments".


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