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.”

Comment
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.”

Comment
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: http://ssrn.com/abstract=2009375).

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.

Self-Interest is Not Selfishness

James Garvey, editor, writes (17 November) a post in TP Talking Philosophy (founded in 1997 to in 1997 to publish quality philosophy in a readable and enjoyable format for readers both within and outside academe).
HERE

“Mad men and Hippies”

“Spurred on by the Occupy Movement, I’ve been thinking again about the connection between morality and our economic troubles. I thought I blogged something about it at the start, and it turns out I did, in 2008. Maybe it’s interesting reading again (Ethics Stimulus Package). The idea, dredged up from a few lines owed to Adam Smith, is that we’re sometimes self-interested butchers and bakers (and maybe hedge fund managers), but we’re capable of acts of great selflessness too. Capitalism needs at least a dose of the former to work, but it would seem that it needs at least some of the latter too. I wondered then, and I wonder now, what leads us to ‘exercise our benevolent affections’, as Smith puts it. Some ages feel more in tune with those affections, some times seem better placed to express them. The interesting thing is what drives those changes, what pushes us, back and forth, between Mad Men and hippies, Gordon Gekko and … well, I’m having trouble settling on a contemporary name to set against his, but never mind. What is it, do you think, that makes moral sentiments wax and wane?”

Comment
The ‘butcher, brewer, baker’ paragraph is widely misunderstood, including among philosophers. This was not a ‘selfish’ property at work in the act of bargaining. Explicitly it is the opposite!

To persuade the ‘butcher, brewer, baker’ to supply the ingredients of your dinner, Smith advises you, a) not to rely on the tenuous feelings of their benevolence (as if there were unlimited dinners around and everybody was infinitely benevolent), or b) to appeal not to your own self-interest, but to ‘address’ their self love/ self interest. In short, to be other-regarding, not just self-regarding is the necessary quality of Smithian self-interest, a quality ignored by most readers of this passage who centre their attention of the ignorant 'hard' (bully) bargainer who have little experience of read-world bargaining.

A moment’s thought based on many moments observing people engaged in bargaining and persuasion, show the basic good sense of this statement by Smith. Two passionately self-centred bargainers, interested only in their own self-interests, would reach agreement with great difficulty, if at all.

Each self-interested bargainer requires the co-operation of others. The selfish, greedy person (a creation of Ayn Rand, not Adam Smith, and, before Ayn Rand, the creation of Bernard Mandeville, 1724) in failing to persuade others must resort to plunder and violence, or stop eating.

Bargaining is purposeful co-operation, which does not mean that every pair-wise encounter leads to happy bargains, a wholly utopian dream. If sentiments ‘wax and wane’ that is only human. Buyer’s regret and seller’s frustration are normal. But the emergence of market exchanges, from the ’propensity to truck, barter, and exchange’ throughout the long history of human societies from the ‘faculties of reason [Not rationality!] and speech’, took millennia to become common norms, amidst the long history, and longer pre-history, of the various failing and often bloody or tyrannical alternatives, the antipathy of beneficence and benevolence which regarded as major virtues.

Adam Smith’s Moral Sentiments was about an ethical alternative to the ‘bloody or tyrannical’ alternatives, the main roots of which were already present by the mid-18th-century experiences that he observed.

Adam Smith on Bargaining

[I am in France for a couple of weeks closing our house for the winter, and found on my Mac book a piece I was writing in the summer. I cannot recollect whether I posted it on Lost Legacy – a scroll back was inconclusive. Readers may remember that we left in a great hurry because of an emergency with a daughter’s pregnancy (Florence and baby Alexander are doing fine – the boy is now a healthy 8lbs 13oz; his mother is joyful and tired)].

However, here is the un-posted piece:

“The famous and frequently quoted passage of ‘the butcher, the brewer, and the baker’ (WN I.ii.2, pp 26-7) as a dominating force in exchange, together with the well-known passages about the invisible hand, have given rise to a too narrow and biased perception of Smith’s thought within neoclassical economics, either distorting or simply ignoring his moral views” (Montes, 2004, 56).

Leonidas Montes is on the right track here and if we unpack his paragraph we can see why.

There is no doubt that this paragraph is both a “famous and frequently quoted” passage, though in truth I would add that it is as frequently misunderstood as it is quoted. In fact, I would go so far as to assert that I have only found one reference to an accurate, and thereby promising, account of what Adam Smith was actually saying in this passage, and that this gem came from an unpromising and unpretentious 19th-century source:

“It has been customary to describe Political Economy as the dismal science , as the gospel of selfishness. In the hand of Ricardo and his disciples, Political Economy was certainly gloomy enough, and its gospel forbidding; but Smith’s conception of economic science as it did the co-operative and sympathetic side of life, was eminently hopeful and enervating. His view of the industrial order was wide enough to give full play to that subtle psychological chemistry by which egoism is transmuted into altruism. In Smith’s word: ‘In civilised society man stands at all times in need of the cooperation and assistance of great multitudes, while is whole life is scarce sufficient to gain the friendship of a few persons.’ In such a state, as Smith goes on to show, man can most satisfactorily connect himself to his fellows through the medium of the reciprocity of services – a process which invests self-interest with a social and ethical quality. From this social and ethical germ develops all the higher virtues of civilisation.” (Macpherson, H.C. 1899. Adam Smith. Famous Scots Series, Oliphant Anderson & Ferrier, Edinburgh).

The ‘butcher, brewer, and baker’ passage in Wealth Of Nations says exactly the reverse meaning to that which is commonly attributed to it by most modern economists (we cannot blame them alone because that is what they were taught by their tutors, themselves taught by their tutors – none of them bothering to read the passage carefully enough).

Yes, it is about self-interest; however, it is not about approaching the acquisition of your dinner, or of supplying it, solely dominated by consideration for one’s own self-interest. Far from it! The passage Wealth Of Nation, Book I, chapter 2, p 26-7) specifically states that one should not appeal to one’s own self-interest in attempting to conclude a bargain with the ‘butcher, brewer, and baker’, or anybody else for that matter, but we must address the self-interest of the other party.

He has already defined the nature of a bargain a few lines before the famous passage: ‘Give me this that I want, and you shall have this that you want’. This is the conditional proposition in the form: 'If you give me this, I shall give you that' (If-THEN).

Bargaining is an exchange, not something for nothing. To get some of what we want from someone, we have to give them some of what they want in exchange. The amounts that are exchanged are variable (negotiable). Moreover, we must address their self-interests (self-love), and definitely not only ours. The self-interested egoist is more likely to be disappointed and deservedly so.

Negotiation exchanges between to self-interested egoists are likely to end in deadlock, but negotiated exchanges between self-interested persons who are also other-regarding, which is the essence of Smith’s advice to those seeking the contents of their dinner from others, are likely to be rewarded.

Why readers of Adam Smith's Wealth Of Nations and his Moral Sentiments cannot get that right is itself a mystery, as I regularly found in many years taking of literally thousands of managers through negotiation courses at the Edinburgh Business School.

Mirror Neurons and Smith's Sympathy

Nicholas Baumard writes (23 June) in The International Cognition Institute (HERE): and takes on a topic which has appeared with increasing regularity recently and, while appreciated as a step towards greater understanding of Adam Smith’s actual contributions, it still leaves much that is not understood.

“OK, I admit. Adam Smith never talked about mirror neurons. So why am I bringing this topic up? Because Smith actually did, in a way, tackle the debate about mirror neurons and empathy.

What is this debate? In recent years, empathy, understood as the capacity to recognize and, to some extent, share feelings (such as sadness or happiness) that are being experienced by another sentient being, has received more and more interest. In particular, the study of the neural underpinnings of empathy has received increased interest following a Behavioral and Brain Sciences target article published by Stephanie Preston and Frans de Waal, following the discovery of mirror neurons in monkeys that fire both when the creature watches another creature perform an action as well as when they perform it themselves. In their paper, they (as well as others like Gallese) argued that perception of the object's state automatically activates neural representations, and that this activation automatically primes or generates the associated autonomic and somatic responses, unless inhibited.

But what does any of this have to do with Adam Smith? Like modern psychologists and anthropologists, Smith thought that our capacity to experience feelings about the feelings of others was the basis of social life. In fact, his Theory of Moral Sentiments starts with these words:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it."

And for those who are tempted to doubt the connection between Smith's view of sympathy and its modern counterpart, he immediately adds that it is automatic:

"As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own person, and it is by the imagination only that we can form any conception of what are his sensations."

So does this mean that we should see Smith as the 'big ancestor' of the modern mirror neuron theory? Not so fast. Actually, my point is that Adam Smith had anticipated some of the weaknesses of the mirror neuron theory.

Although Smith agrees with modern advocates of empathy that humans have a unique capacity to be moved by the feelings of others, he disagrees about the actual mechanism. We do not feel pain for others because their emotions automatically activate similar emotions in us. Instead, it is because we understand their situation:

"Sympathy, therefore, does not arise so much from the view of the passion, as from that of the situation which excites it. We sometimes feel for another, a passion of which he himself seems to be altogether incapable; because, when we put ourselves in his case, that passion arises in our breast from the imagination, though it does not in his from the reality."

Indeed, says Smith, we are sometimes moved by others' situations while not sharing the same emotion:

"We blush for the impudence and rudeness of another, though he himself appears to have no sense of the impropriety of his own behaviour; because we cannot help feeling with what confusion we ourselves should be covered, had we behaved in so absurd a manner."

If the advocates of mirror neurons were right, we should experience the same emotions as others. But this is not the case. We do not automatically imitate others' emotions. Instead, we experience our own emotion, which depends on our interest in the other's situation: if a friend is in a bad situation, whether or not he feels bad at the time, we will be sad; in contrast, if an enemy, someone for whom we have some antipathy, is in a bad situation, we may actually be happy; and if a friend feels, say, jealous of his partner, we won't be jealous as well, we will, depending on our opinion of the situation, be sad as well, or maybe angry at our friend who is unjustly jealous. In all these cases, others' emotions do not automatically generate similar emotions in ourselves (a point that is well emphasized in Anderson and Keltner's reply to Preston and de Waal). In other terms, it is not clear that humans have a capacity for empathy (to share someone else's emotions) rather than a capacity for sympathy (to share someone else's interests).”

Comment
Follow the link and read some more. Also, best if you read Smith’s “Theory of Moral Sentiments” (1759), bearing in mind that his book covers much of his lectures to his moral philosophy class, which were also supported by his students undertaking additional ready and attending regular tutorials where they read their essays and discussed set questions. With today’s shorter attention spans and less stylish reference books, quite different in their 18th-century literary style than today’s, reading Smith may take some effort.

The behavioural school consists of psychologists, sociologists, and some pretty sharp economists of the neoclassical school. The latter realized quickly that their observations of behaviours in their ‘games’ did not correspond to their economics beliefs that they (wrongly) understood were rooted in the Homo economics of the rational calculus in their theory, attributed, surprisingly to Adam Smith. I exchanged emails with a Professor Cramer some years back drawing his attention to this wrong attribution in a multi-author paper in which he featured. He dismissed my comments on ground that he did not write that part of the paper – it was another one of the authors – as if that was a sufficient grounds for dismissing my observation that the reference to Adam Smith on the invisible hand was inaccurate (a mild rebuke as these exchanges were in the early year of Lots Legacy) and I had expected leading economist to be aware of this fact.

On this occasion, Nicholas Baumard, contrasts Adam Smith’s assertions about sympathy with modern behavioral ideas about empathy. Smith’s ideas on self-interest too easily slide in the minds of modern thinkers into an idea of selfishness – check how Samuelson and others equate Smith with selfishness, as in ‘the selfish actions of individuals are led by an invisible hand to benefit society’, which has nothing to do with what Smith ever wrote, though it was in what Bernard Mandeville argued, and which views Smith said were ‘licentious’. Likewise Smith was not an exponent of the idea that self-interest meant selfishness, particularly in the parable of the ‘butcher, brewer, and baker’. Smith’s point is explicit that the customer must have regard for the interests of the trio to agree a bargain. In short, self-interest is not enough; the customer and the trio had to ‘other regarding’, not selfish.

I posted on Lost Legacy ‘Adam Smith On Bargaining’ making this point specific – scroll down to Tuesday 10 August:
‘Adam Smith on Bargaining and My Experience Applying His Theory’ and take a look at what TMS and Wealth Of Nations really meant.

Adam Smith On Bargaining (Again)

Naked Capitalism carries a post (26 August) by David Graeber, Reader in Social Anthropology, at Goldsmith’s University of London (HERE): and author of: ‘Debt: The First 5,000 Years

“What is Debt? – An Interview with Economic Anthropologist David Graeber conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?
By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

Comment
David Graeber develops his argument in his rather folksy way and runs Adam Smith’s concepts together in a misleading manner. And David had the benefit of over 250 of years of field research, not available to Adam Smith, and still seems to get some basics wrong. Plus, David believes in the substantial misrepresentation of Smith invented (not too strong a characterisation as readers of Lost Legacy will recognise) by modern attributions to Adam Smith of ideas he never expressed. Post-1870 neoclassical economists and advocates of so-called theories of Homo economicus of perfect rationality, ignore Smith’s clear stances on moral sentiments and his ‘other-regarding’, not purely ‘self regarding’, views on self-interest. David has had access to the works of the Adam Smith, born in 1723 in Kirkcaldy, and shows no signs of having read them, yet. The Kirkcaldy Adam Smith had a quite different persona to the 20th-century ‘Adam Smith’, invented in Chicago.

Adam Smith centred his historical method on the early propensity for humans to engage in exchange relations which was never limited to mere notions of ‘trade’ in the modern sense (something that Polanyi – author of the Great Transformation, 1941 - sometimes conflated). Smith studied the origin of languages early in his career (first published in 1761). Two or more humans had to engage in exchange relationships to agree to common sounds and meanings, and signs, for understandable communications to commence – and continue. This is probably why Smith linked the origin of languages as "the necessary consequence of the emergence of the “faculties of reason of speech” (WN, 1776). The widespread (and separate) exchange relationships in scattered early human societies had their early origins in human sociability (in the ‘first age of man’).

Building on the human propensity to exchange, and before the complex ‘gift’ propensities noted by Maus, the natural forms of reciprocity, practised by primates and other species, were rooted in that same sociability among con-specifics. Reciprocity can involve a notion of ‘debt’ in the sense implied by David; but it need not, at least for as long as a non-reciprocated act is tolerated (depending on local cultural norms). Reciprocation may not be the sole motive that initiates an exchange transaction, but a failure to ‘close’ the transaction can cause resentment, and a refusal to engage in subsequent transactions can promote avoidance reprisals (including violence) that is still true today – though uncompleted obligations can remain ‘open’ for years (others must be ‘closed’ within hours).

Reciprocation exchanges – its rewards and penalties for non-reciprocation – are well-covered in anthropology and social psychology (as David presumably knows), and by primatologists too (See Dunbar on the social role of gossip). While people can be – and some are - beneficent (an important virtue for Smith) without expecting reciprocation, social life intrudes sometimes to make reciprocation mandatory (severe scarcity). In my research on 'the pre-history of the bargain', I have found that the exchange relation in these cases is in effect a progression, over many generations: ‘If you take the benefit, you ought to contribute in return', albeit later. This becomes, under later social pressures of scarcity or danger: ‘If you take the benefit, you must contribute’ in return, albeit later. The giving and return were originally separated in time; gradually it became an obligatory ‘quasi-bargain’ form of exchange. And this goes on for millennia without the involvement of money. That came much later when ‘kingdoms’ formed (Mesopotamia, and all that). Kings issued coins as payment to their armies as symbols of their awesome power, and travellers exchanged their coins for local currency, via the temple networks across Euro-Asia, close to trade routes).

Bargaining (an instance of an immediate exchange): ‘Give me that which I want, and you shall have this which you want” (Wealth Of Nations) evolved from social quasi-bargains in some places and times, while traditional quasi-bargains continued, as well as pure reciprocation obligations, in remnant societies of the kind that David and his colleagues investigate.

Taking a nursery-level approach to transferring the behaviours of remnant societies across to commercial societies without exploring how one, in some places, but not others, evolved is not valid evidence against Adam Smith’s approach. He dealt with 'nations', not small bands.

Adam Smith did not postulate that exchange in “transactions took the form of: “I’ll give you twenty chickens for that cow” in the first ages of man. Far from such a wild generalisation, Smith's thinking about the central role of exchange in human sociability was far more pointed than that, and of far earlier vintage (the 'necessary consequence of the faculties of reason and speech', Wealth Of Nations) than David’s folksy sounding ‘bunch of Neolithic farmers’ (and therefore long before ‘ancient Mesopotamia’ too). I agree with him – if such represents David’s level of knowledge of Adam Smith and Wealth Of Nations, let alone his apparent ignorance of Smith’s Theory of Moral Sentiments (1759) – “it’s hardly surprising that we haven’t found anything” if that is what they are looking for.

The transactions that Smith mentions were illustrative of the third and ‘fourth ages on man’ – ‘age of farming’, with nearby ports and towns, and ‘age of commerce’. In the famous ‘beaver-deer’ parable, Smith referred to a possible method of finding a common value in the transaction without a common unit of money, primarily to illustrate his first stab at a ‘labour theory of value’, not as a comment on alleged anthropological facts, of which he, like his contemporaries, were bereft of field experience. David’s mocking, 230 years later, of Smith’s non-knowledge of the contents of ‘Anthropology 101’ is a cheap shot.

Hence, David’s image of ‘what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” Indeed, modern observations speak of a native hunter taking his skins to a trading post in which the hunter denigrates his skins and praises the trader’s trade goods to the point of absurdity, and the trader mimics the hunter’s negotiating norms by denigrating his own trade goods, while praising the hunter’s skins, which is often a long prelude to their arriving at a ‘fair’ exchange rate to complete their transaction, with both of them happy. Different forms of such parlaying occur in many societies. So what? Indeed, what has it got to do with the very long pre-history of exchange behaviour, going back to long before the ‘hydraulic societies’ of Egypt, Babylon, India and China, mentioned by David, flourished briefly, leaving their stone detritus across the Eurasian continent.

When Smith does speak of modern bargaining, witnessed in the 18th century, he directed our attention to a crucial aspect of it, melding Moral Sentiments with Wealth Of Nations. This too is often quoted – perhaps his most famous statement – but is seldom understood (again from ignorance of Moral Sentiments, 1759).

“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).

Smith makes it clear we operate our self-interest by addressing the self-love (self-interests) of others. In exchange by bargaining we have to be ‘other-directed’ and not ‘self-directed’.

The rest of David’s hypotheses are similarly semi-spurious in content – jumping from Mespotamia to Nixon’s presidency has an appealing “Huffington Post” feel about it. Some parts are interesting, others speculative, or stretched (follow the link).

But I suggest that David first goes back to Adam Smith and gets his thinking right before embarking on these wider issues.

I also note that this is the third article on interviews conducted by Philip Pilkingon of Dublin that I have commented upon critically. He too might wish to reflect that his pre-suppositions about Adam Smith require some attention. Yes, I realise he is only asking the questions, but the answers he elicits suggest he should ask more pointed questions about the knowledge his interviewees have of Adam Smith.

Adam Smith on Bargaining and My Experience Applying His Theory

I wish to elaborate on my post over the weekend Philip Pilkington On Rational Expectations Theory because it contained a comment on the most important thought of Adam Smith’s, often misunderstood and as often used (wrongly) to come to the wrong, even opposite, conclusion to that which Smith made. I refer to the famous reference by Smith to the “butcher, brewer, and baker” as the source of our dinner. Here is my last paragraph from my comments on Philip Pilkington’s post:

“In Moral Sentiments, Adam Smith did not restrict behaviour to “self interest” self-regarding only, but also wrote about the necessity for being “other-regarding” too. In Wealth Of Nations he did this very clearly in the oft-quoted passage about persuading the famous “butcher, brewer and baker” to provide our dinners, where he specifically advises us not to “talk of our own necessities” but to address their “self-love”. In short, we serve our self-interests by serving the self-interests of others - in contrast to that nasty libel of Smith’s legacy by Gekko of ‘Wall Street’ fame.”

But first, I want you to look up John Paul Rollert, a doctoral student at the Committee on Social Thought at the University of Chicago, who has posted a remarkably good article, “What Republicans get wrong about capitalism” (HERE) (how encouraging it is to read two articles that show their authors have at least read and understood Smith (which does not mean I endorse Paul’s political assertions about ‘top heavy’ sole beneficiaries of capitalist markets in today’s USA). Here are John Paul Rollert’s opening paragraphs that cover some of the ground of my earlier article:

“Near the beginning of "The Wealth of Nations", Smith calls our attention to what, for him, is one of the fundamental qualities of human experience: helplessness. "[M]an has almost constant need for the help of his brethren," he says, for unlike animals, we cannot tend to even our most basic needs on our own. How exactly do we gain the help of others? The answer, says Smith, lies somewhere between the fawning cocker spaniel and the commands of an all-powerful king.

Let's hold the king aside for a moment. When a cocker spaniel wants to be fed, Smith says, "it has no other means of persuasion but to gain the favor of those whose service it requires." It wags its tails, licks its master's hand, and appeals to him with puppy dog eyes. The cocker spaniel will occasionally succeed, and so too will the fawning beggar, but such an approach is obviously not an optimal way to get what you want. Indeed, most times people will simply pass by you, leaving you hat in hand.
Thankfully, says Smith, human beings have a natural propensity to negotiate or, as he describes it, to truck, barter, and exchange. "Give me that which I want, and you shall have this which you want" is not only the manner in which we acquire most things in this world, but it is the building block for an economically advanced society. Thus, Smith declares in his most famous passage: “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.”

People who read this passage and nothing else of Smith tend to regard it as an affirmation of the virtue and efficacy of selfishness over and against the relative impotence of altruism. But that isn't its significance for Smith. Yes, our personal interests act as a sharper spur to action than the interests of others, but the same may be said for the cocker spaniel. The difference is not that we have selfish interests, but that only by understanding the interests of others are we able to fulfill our own. Indeed, the passage attests to the human capacity for empathy, the focus of Smith's other great work, "The Theory of Moral Sentiments". It is because of our natural tendency to stand in the shoes of others and see the world through their eyes that we can appeal to their interests. The commercial effect of this practice is that we individually learn how to make the kinds of exchanges that, in the aggregate, lead to the wealth of a nation.”

Many modern economists consider in this passage about the “butcher, brewer, and baker” sanctifies Smith’s praises of self-interest (and among leftish academics, it is “proof” that Smith saw “self-interest” as essentially, and decidedly, as a necessary selfish behaviour that drove what they call, but he did not, capitalism). Others see it has evidence of a contradictory fissure in the thrust of his two books, Moral Sentiments (1759) and Wealth Of Nations (1776). It is nothing of the kind. The so-called “Adam Smith Problem” is another myth, created by a lackadaisical reading of quotations from both books.

Contrast the “butcher, brewer, and baker” passage with the opening paragraph in Moral Sentiments:

“However selfish man maybe supposed, there is evidently some principle in his nature, which interest in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. … The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it” (TMS 1.1.1.1: 9).

This propensity or capacity for concern for the “fortune of others” kind, captured in Smith’s first book, is surely the antithesis of pure self-interest, especially of the hyper-calculating kind represented by the rational, utility-maximising kind that is still popular among many neo-classical economists.

Our moral sentiments drive us to be concerned for others, in modern jargon, our ‘other-centred’ natures, is counter-poised by other ‘natural propensities’ that drive our self-interests to be supremely ‘self-centred’ and not ‘other-centred’. But is this supposed dichotomy a true representation of Adam Smith’s two books?

I don’t think so. Maybe I am almost alone in seeing something deeper in Smith’s “butcher, brewer, baker” than commonly found in the meaning he placed on bargaining. Remember, Smith’s characterisation of what happens when people bargain came in Book I, chapter 2, of Wealth Of Nations. There is good reason to acknowledge that these ideas were of older vintage than 1776 among his writings. His Lectures on Jurisprudence were taken down by students in 1763-4 (prior to France and his meetings with the Physiocrats) and were probably developed in his earlier years at Glasgow (from 1751), if not in Edinburgh 1748-51. They follow his presentation of “The division of Labour” in Chapter 1. They are the key-stone of his historical approach, which showed the division of labour as the “very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another”, which was probably “the necessary consequence of the faculties of reason and speech”. In short, from the very beginning of the formation of the proto-human bands hunting in the forests, long, long before self-interest in anything like markets had emerged.

My own interests in the evolution of bargaining in pre-history (“The PreHistory of Bargaining", unpublished ms) has continually brought me back to Smith’s chapter II, partly fed by a long period in Business Schools teaching and consulting on negotiation skills with business enterprises across Europe, North America, Asia, South Africa and Australia. I raise this bit of biography only to claim considerable practical experience with negotiators in the real modern world.

That is why I read chapter II with reference to what negotiators do in practice, not with preconceived theories about what they would do if the mathematical certainties of utility maximisation applied outside neoclassical classrooms and neoclassical imaginations. Smith didn’t make it up; he saw and heard traders and customers bargaining their exchanges using persuasion and sales patter in the market stalls and shops along Kirkcaldy High Street where he grew up, and in busy Edinburgh, Glasgow, and London (and almost certainly in French market fairs too, of which there were thousands all over France (there still are hundreds in many small towns and centres, including around where I live, part of the year).

Smith didn’t see much of the self-centred stubbornness implied in most modern theories of bargaining – aggressive concession convergence, modulated by threats and sanctions, and so on.

“… 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. 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).

A simple game that I included in every negotiation workshop that I ran from 1972-2005 (when I retired) was the ‘red-blue’ (prisoner’s Dilemma) game, in which I used to introduce beginner (and 'old hand') negotiators to the consequences of pure self-interested bargaining, and it showed clearly the folly of only considering one’s own interests in transacting with others. Over the years it revealed some interesting data about those consequences.

The game is played in pairs, randomly sorted. It is played first thing on the first day. They are given two coloured disks, one red and one blue. They are told the rules (no talking with partners), and given absolutely no advice on how to play or what they will learn, or what was the point of the exercise. They scores are simply shown on flip charts for the four possible outcomes of each play, and told to commence playing with a partner anywhere in the room, standing or sitting.

The scores were for each play: Both play ‘Blue-Blue’ = +4 points each; both play ‘Red-Red’ = -4 points each; one plays ‘Red’ and the other plays ‘Blue’, then the Red player = +8 points and Blue player = -8 points; or, one plays ‘Blue’ and the other plays ‘Red’, then the Blue player = -8 points and the Red player = +8 points.

They choose the colour they intend to play behind their backs for each round and each revels their plays simultaneously on a common signal. They note their score for each round according the score sheet. They play the next round without talking. After the first four rounds they pause for a 5-minute conversation, perhaps recriminating on the other’s plays or defending their own, and perhaps agreeing on how to play the next four rounds, under the same rules and scores. Again, after round 8, they stop for a 5-minute conversation, perhaps again recriminating if one or both defected on their agreement from the previous 5-minute break. The last two rounds are played with all scores doubling, to give paired-blue play = +16 points each; paired red play = -16 each; one plays blue and one plays red = +16 points to the red player = -16 points to the blue player.

Then we discussed the resulting total scores over the 10 rounds from each pair. Over the years the pattern of plays across all levels of management, experience, countries of origin and domicility, moral (religious) labels, ages (from youngest school children to retired), education levels, private and public sector employees, caring professions, hard-nosed financial traders, all nationalities, mixed groups, both sexes, politicians, health staff (from porters to surgeons), and beginning and experienced sales and buying staffs, showed relative stability.

Now the maximum score from total cooperation (no defections) was 48 points each. I found that over the years this score was achieved by only 8 per cent of the players. A competing (but friendly, as you would expect from two teachers of negotiation) consultant, John Carlyle, reported achieving maximum scores among 17 per cent of his attendees, but I do not know if, or how much, he briefed his players before they commenced playing. I gave absolutely no pre-game briefing other that described above. The 8 per cent was too stable to be influenced by prior briefings. Despite almost always being asked to identify the objects of the exercise, I said nothing other than ‘maximise your individual scores’.

Players could suffer from the other’s early red play and subsequent defections (no sanctions were suggested nor imposed on defectors, other than the almost predictable retaliatory Red play defections of former Blue players, some fairly drastic red play from Round 5 onwards to round 10 (and almost certainly from round 9). Counter-defectors from broken promises by red players could reduce the early defector’s scores, even though they also ended with a high minus score. No red player with early counter defections reached +48 (the Blue-Blue score) or better. On two occasions only in 33 years did a Red player reach +96 - because the other player played Blue every round and they were unconcerned at their constant losses to -96.

In a large minority (sometimes a majority) of plays of the game, early defection was followed by unbroken promises to pay blue in every round, which though the total positive score was less than +48 (perfect no-defections), it was at least +32 each and sometimes better.

In brief, players could learn that playing a co-operative blue each round after early defections could result in a better score than defecting to gain at their partner’s expense, who would retaliate. It was not a perfect exchange, but zero-sum bargaining never was better than non-zero bargaining as identified by Smithian bargaining:

“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.”

The rest of our workshops showed how to achieve non-zero sum bargaining in the real world.

[Please note you can read my book on negotiation teaching in “Kennedy On Negotiation”, Gower, 1995 (apologies: the publishers chose the title!]

Philip Pilkington On Rational Expectations Theory

Philip Pilkington writing in Irish Left Review (6 August) (HERE):
Nails the erroneous assumptions of neoclassical ‘rational expectations’ and open the way to a more accurate assessment of Adam Smith’s concept of “self-interest” (and the invisible hand).

“Neoclassical Dogma : How Economists Rationalise Their Hatred of Free Choice”

“Rational expectations is indeed an obscure doctrine. It essentially holds that people operating within a market generally act in line with the expectations of neoclassical theory. This tautology – for it is a tautology – can be traced back to Adam Smith’s ‘invisible hand’ which we explore in more detail later on.
But this goes beyond simple tautology. The neoclassical assumptions are themselves especially stringent and seem to be wholly counterfactual to any observer of human behaviour. Rational expectations theory expects people to act, well, rationally. More specifically it assumes that people always act in order to ‘maximise their utility’ and that such actions result in optimal behaviours that ensure that prices are always perfectly in keeping with what they ‘should be’ – that is, an equilibrium price that perfectly balances supply and demand. Prices then become a pristine and perfect measurement; they translate consumer desire perfectly and are beyond question.”

Comment
Philip Pilkington is to be congratulated for asking the right questions and implying scepticism in his assertions. Neoclassical assumptions are not just contrary to the behaviours of human beings in their societies, for the record they are also contrary to how Adam Smith formulated human behaviour. The former, of course, is a more significant criticism of neoclassical rational expectations, but in so far as Adam Smith is drawn upon in support of them, as he is, we should understand this calumny imposed on his legacy.

The use of the metaphor of “an invisible hand” on two occasions in his published Works (1759, 1776) is widely interpreted to be about “markets”, “supply and demand”, and “equilibrium”. Smith made no such claims at all; that is a modern invention, made popular by Paul Samuelson in 1948. Smith never used the IH metaphor in relation to “markets”, etc., but neoclassical authors (and graduates of their courses) wrap up “invisible hands” in their assertions about “miraculous markets”.

In Moral Sentiments, Adam Smith did not restrict behaviour to “self interest” also being solely self-regarding; he also wrote of self-interest” as “other-regarding” too. In Wealth Of Nations he did this very clearly in the oft-quoted passage about persuading the famous “butcher, brewer and baker” to provide our dinners, where he specifically advises us not to “talk of our own necessities” but to address their “self-love”. In short, we serve our self-interests by serving the self-interests of others - in contrast to that nasty libel of Smith’s legacy by Gekko of ‘Wall Street’ fame. His contemporary, Mirabeau, was right: 'we think we serve ourselves by our actions, but we really serve others'.

Adam Smith On Bargaining (Again)

Philip Pilkington writes on Naked Capitalism (HERE):

In a part of his piece, Philip Pilkington, a journalist living in Dublin, makes a strong case that is worth reading in its own rights (follow the above link) against neoclassical economics, especially in the form of rational expectations theory, but he also links neoclassical theories, originating in the 1870s and in ‘marginalism’, to Adam Smith’s (died 1790) alleged complicity in neoclassical doctrine, largely based on its applying elementary calculus from imagined (heroic) assumptions about individual maximising behaviours under the guidance of a so-called ‘invisible hand’, and at once buys into modern, deeply flawed and utterly false assertions about the IH metaphor in Adam Smith’s thinking. This is a sample:

“Philip Pilkington: Neoclassical Dogma: How Economists Rationalise Their Hatred of Free Choice”

“Rational expectations theory expects people to act, well, rationally. More specifically it assumes that people always act in order to ‘maximise their utility’ and that such actions result in optimal behaviours that ensure that prices are always perfectly in keeping with what they ‘should be’ – that is, an equilibrium price that perfectly balances supply and demand.”

Comment
Whatever relevance this paragraph has for rational expectations theory it has absolutely no relevance for Adam Smith’s theory of ‘market’ and ‘natural’ prices (WN Books I and II). Smith did not have an equilibrium theory of prices – quite the opposite! Disequilibrium was a more noted feature of markets, within which its powerful affects work through. Not only did Smith's explanation of ‘natural’ and ‘market’ prices 'gravitate' towards each other, but they do not necessarily (if ever) meet in a durable equilibrium. I refer to his explanation claim that his description of the real word, though it does express an important feature of it in the minds of buyer's and sellers, which is buried within it and mostly overlooked in price theory.

By ‘natural price’, Smith meant a price that covered a product’s costs plus a profit. The price that covered its costs often varied from one ‘neighbourhood’ to another. In the real world described by Smith a single stable market price did not exist. By ‘market price, Smith meant the ‘actual price’ at which a commodity was sold, which may be above, the same as, or below its ‘natural' price. Sellers do not always get the price that they want because they are not in unilateral control of exchange prices when they negotiate prices with buyers.

When economists dropped Smith's distinction between ‘natural’ and ‘market’ prices we may have gained in succinctness but we lost an important distinction that lies at the root of the frustration of planned outcomes, particularly the outcomes of bargaining in real markets between real buyers and real sellers, who are not present in the mathematics of price among sellers and buyers. Buyers are uninterested in a seller’s costs but sellers are constrained in their bargains by their costs which they hope (intend) to recover, which they have already expended, and by the profit that sellers hope (expect) to gain. Buyers hope to achieve lower prices than sellers hope to achieve.

Smith summed the offered bargain: ‘Give me that which I want and you shall this which you want’. The bargaining problem is that both the buyer and the seller can (and do) seek exactly the same form of the bargain yet each side’s idea of the content of the bargaining offer the hope to achieve can (and usually is) quite different from when the offer with which they open the negotiation. That difference is the agenda for their ‘higgling and haggling’, which is a process considered (rightly) to be widespread both in bargaining (WN) and in general persuasion (TMS).

Smith advised each bargainer to each ‘address’ the other’s ‘self love’ (not their own!) and ‘never to talk to them’ of their own ‘necessities ‘ but of the ‘advantages to the other of concluding a bargain (WN I.ii.2: 26-27). Sellers receive considerable, regular, and mainly expensive, training in the appropriate language, deportment, and manners of the selling process. Major buyers also receive training, though in my experience this less intense and less expensive than accorded to sellers.

Just why the outcome of all the myriad bargains occurring each day (hour!) should provide a single and distinct ‘equilibrium’ price all along all of the supply chains is not evident, except by heroic assumptions. Truly a triumph of credulity over observed experience, observed in a classroom, but not in the real world among business negotiators. Anybody believing that there is an equilibrium price for something does not undertake much bargaining.

Adam Smith's brief treatment of the bargaining process was succinct and closer to events in the real world than much of the mathematical attempts of neoclassical economists, including the efforts of Edgeworth's box diagrams and the coercive sanctions and convergence focus of theorists from Zuethen and Hicks in 1931, and Nash, Pen, Shackle, Harsanyi, Cross, Coddington, plus many others from the 1950s onwards.

Adam Smith's Insight Spreads Across the USA - and Ethiopia

Lynne Kiesling (a Distinguished Senior Lecturer in the Department of Economics at Northwestern University, and in the Social Enterprise at Kellogg (SEEK) program in the Kellogg School of Management at Northwestern University) writes in Knowledge Problem HERE comments ‘Recently Caught my eye’, also posted in the Ethiopian Review (!) (HERE)

"Gavin Kennedy provides a gentle correction to Dani Rodrik’s interpretation of the meaning and implication of Adam Smith’s analysis of the human “propensity to truck, barter, and exchange”, which Rodrik inaccurately claims to be innate in Smith’s view. Kennedy’s pointing to Smith’s connection of that propensity to our “faculties of reason and speech” is accurate and important to bear in mind because, as Kennedy points out in this excellent post, Smith saw this exchange propensity as a “foundation of human social life”, not just commercial activity. I could not agree more."

Comment
Thank you to Lynne Kiesling for publicising a post from Lost Legacy (and to Ethiopian Review for picking it up - they could do with a lot of Smithian exchange in their part of the world).

So many economists misconstrue Adam Smith's idea on the prevalence of exchange relations (some like Karl Polanyi to add balast to their ideology, unfortunately picked up by some people whom I otherwise admire) that its a lonely road to trying to set the record straight. My pieceon Adam Smith on Bargaining can be read HERE

Rodrick and others show pay attention to this paragraph:

'Institutions are formed by people, not equations, and people have a ‘propensity for exchange’ that shapes the institutions they form. Less than perfect economies, with people in less than perfect liberty have formed working societies well short of perfection. Neither perfect competition nor perfect natural liberty (and we can add not even perfect institutions) are necessary or sufficient for progress towards opulence (Smith rebuked Dr Quesnay on this very issue: WN IV.ix.28.674).'

Adam Smith on Bargaining

Amol Agrawal posts in Mostly Economics HERE

How Vernon Smith has helped us understand Adam Smith better…

Maria Pia Paganelli of Yeshiva University has this nice paper on the topic.

She says most economics bases itself on self-interest. However, this is not always the case as we see humans valuing cooperation and fairness as well. Adam Smith’s The Theory of Moral Sentiments was based on these ideas. AS said humans value other things as well- sympathy, and innate desire to be both praised and praiseworthy.

Vernonm Smith extended Adam Smith’s ideas and showed via experiments that indeed people valued cooperation and fairplay and were sympathetic to others. This led to people monitoring and giving punishment for non-cooperative behaviors or by following internalized rules of conduct that promote fair and cooperative behaviors.

In experimental results in industrialized countries, cooperation and fairness are routinely observed. Cooperation and fairness may vary with the degree of anonymity, because subjects do respond to incentives. Nevertheless, even with complete anonymity, a relevant amount of cooperation and fairness is observed. For example, using undergraduate subjects from the University of Arizona, even with double blind procedures, 29% of second movers choose $25 for self and $15 for other, over $40 for self and $0 for other, after the first movers have forgone $10 for self and $10 for other (Cox and Deck 2005). Additionally, cooperation and fairness are also observable in many foraging societies across the globe, although in different forms from the ones observed in industrialized countries.

Fairness seems to be universally present among humans, even if it varies with different incentives and across cultures (Henrich et al. 2004). Interestingly, similar experiments done with non-human primates also show some level of cooperation and “fairness.” Non-human primates help each other in getting food and reciprocate the help received. They get upset if one gets an “unfair” share: if one primate undeservedly gets a larger portion or tastier food, the other primate screams in protest (de Waal 1996 and 2003 de Waal and Berger 2000, de Waal and Luttrell 1988, Brosnan and de Waal 2003, Jansen, Hare, Call and Tomasello 2006).

The paper looks at this linkage of Adam Smith thoughts to Vernos Smith’s experiments:

This paper develops as follows. The first section describes some of the hypotheses used to explain cooperative behaviors in the existing literature. It is followed by the explanation of how Adam Smith may help us understand the mechanism through which we may be able to move from personal to impersonal exchange, namely the internalization of rules of cooperation achieved through sympathy, reducing the transaction costs present in complex anonymous societies. The Smithian explanation is subdivided in three sections: the generation and internalization of cooperation at the individual level, at the social level, the institutionalization of the rules of cooperation which may be seen as a feedback mechanism caused by and causing increasing cooperation. The final section of the paper briefly examines some limitations for developing cooperation.

Comment
I had the privilege of hearing an early version of Maria Pia Paganelli’s paper in 2009 at the Summer School on the History of Economic Thought at Richmond University, Virginia and commenting on her paper. Maria is a rising – probably by now, a risen – star of Adam Smith scholarship. (Apologies if the above link to it does not work; it failed to do so on my Apple Macbook Pro).
I shall cover briefly the gist of my thoughts on Professor Veron Smith’s work, as I understand it.

Modern economists have lumbered Adam Smith with ideas he did nto have, at least in the form as it is commonly presented. Smith was not a singular theorist who boiled everything down to pure self-interest, often eliding into ‘selfish self interest’. This is so far from Adam Smith’s presentation that I am often provoked into critiquing it on Lost Legacy and elsewhere when it is invoked, usually in reference to the famous (and misunderstood) paragraph on the ‘butcher, brewer, and baker’ example in Wealth Of Nations. First check out the preceding lines:

‘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. 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’ (WN I.ii.2: 26).

Clearly, Adam Smith is emphasizing the important point (crucial to understanding his approach) that relying on someone else’s benevolence is not enough (nobody, be they benevolent in the extreme, has sufficient of anything, to donate it to everybody else who might need it). That is the limitation of benevolence, our admiration of it as a virtue, notwithstanding. He goes to on make his point even clearer:

“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).

As clearly, Adam Smith did not counter the evident limitations of the virtue of absolute benevolence with a reliance on self-interest alone. That might justifiably be termed selfish. But he didn’t draw that conclusion at all. Instead, he said that one’s self-interest is best served by addressing the self-interests/ ‘self-love’ of the other party (butcher/brewer/baker or whomsoever. In sum, Adam Smith, asserted that self-interests are realized in our bargaining transactions with others by serving their (not our!) self-interests.

So, when Maria Paganelli says that ‘most economics bases itself on self-interest” she is reporting how modern economists (not Adam Smith) have reduced economics to this single assumption and build its neo-classical Homo economicus upon it (it suits the maths much better to arrive at its claimed determinate conclusions).

No wonder on this inaccurate interpretation that modern economics is under siege from practical attempts to model actual behaviours in the fascinating games that Professor Vernon Smith and others have devised in what has become known as the school of behavioural economics. The modern assertions of Adam Smith’s view are exposed convincingly by the numerous experiments conducted across the world, but Adam Smith never made such narrow assertions about self-interest in the first place.

The ingenious experiments designed by Professor Vernon and others for their observations of the behaviours of graduate students have produced many remarkably consistent results exposing the near fallacy of the pure self-directed, self-interest thesis as proclaimed by most modern economists (rational behaviourists). And in the main, I applaud their work with the provisio that they recognize their fundamental error of attributing the limited concept of self-interest to Adam Smith.

My own experience, where from 1970-72, I observed live negotiations at a Shell Refinery for my MSc degree in 'Productivity Bargaining', and since 1972 through Strathclyde Business School to 1983, and then through Edinburgh Business School to 2005, where I was involved in observing thousands of real world bargainers at real work for real stakes, felt by them to be important to the welfare of their businesses or countries and, ultimately, to themselves and their families, all of which invariably showed Adam Smith’s insight in Book 1 of WN was confirmed time and time again.

People learn, one way or another, that demanding the other party give them all of what they want without in some measure offering some of what they want in return, seldom works and that mostly it doesn’t. Self-centred egoists refusing to move, more often than not find it leads to ‘no deal’; but formulating their offers in some version of: ‘Give me that which I want, and you shall have this which you want’, as Adam Smith advised, more often than not leads to a mutually acceptable agreements.

Selfish, or narrow-minded would-be bargainers, who insist on their self-interests alone, seldom succeed, especially when they act as if they conform to the behaviour of the so-called ‘rational egoist’ beloved by so-called ‘scientific’ micro-economics taught across modern campuses.

In bargaining, where conversation is present, we can see what happens in the Vernon Smith game where the ‘so-called ‘rational egoist’ offers the other party 1 unit while demanding 99 for him/her self. By not accepting the offer, the idea that 1 unit is better than none (an heroic assumption that he/she would accept only 1 rather than nothing) the frustrated bargainer, says in effect, ‘then you shall have none too’ – a perfectly reasonable reaction, consisting of no surprises, in my experience of real-world bargainers. These games confirm Adam Smith’s insight; they do not revise it in any way. That the players in the games have single choices, without conversations, strongly confirms Adam Smith.

My message to the behaviourists is that they are not ‘extending’ Adam Smith, nor revising him. He is completely innocent on this subject. It is the so-called ‘rational’ school that is in the frame for revision, not Adam Smith. I suggest to everybody that they study Paragraph 2 in Book I of WN and understand the exact words of Adam Smith.