Thursday, July 21, 2005

Adam Smith's Society is Based on Outcomes

An interesting philosophical discussion in today’s Global Politician: “an independent magazine providing objective, in-depth analysis of events in the world today” (19/07/05) by Sam Vaknin, Ph.D.

Sam Vaknin is the author of
Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101. Until recently, he served as the Economic Advisor to the Government of Macedonia.

Sam Vaknin’s article is about a question that Adam Smith also addressed in “Moral Sentiments”: to what extent must a moral action be motivated by benign (in a moral sense) intentions? Smith disagreed with his mentor, France Hutcheson that a moral act (benevolence) is compromised if the motives of the person acting benevolently were tainted with self interest. Smith’s view was that the ’passions’ could motivate virtuous acts and we should judge the act by the outcome not the motives which may not be knowable. Also intentions are too onerous a burden to impose on the merits or demerits of a moral action and, except for the Deity, are unknowable to human beings, and therefore, we must conclude, unknowable to philosophers and economists.

This has not stopped philosophers and economists theorising about the intentions of participants. John Nash set out the conditions for a solution of the bargaining problem using numerical utility and mathematics. Vaknin notes this and writes: “Still, in most cases, the players settle down to one of the Nash equilibria solutions. Their actions are constrained by the existence of the others.” Nash states the solution, not the process leading to it. He defines the optimal outcome as the exchange where their net gains are maximised. The fact that this is based on unrealistic assumptions does not alter the definition of the outcome.

Vaknin writes: “The "Hidden Hand" of Adam Smith (which, among other things, benignly and optimally regulates the market and the price mechanisms) - is also a "mutually limiting" model. Numerous single participants strive to maximize their (economic and financial) outcomes - and end up merely optimizing them. The reason lies in the existence of others within the "market". Again, they are constrained by other people’s motivations, priorities ands, above all, actions.

His first error is in seeing the ‘invisible hand’ as “benignly and optimally regulat[ing] the market and price mechanism”. Readers of this Blog will know that the invisible hand as applied by Smith had nothing to do with markets or the price mechanism in any of three occasions that he used it. The notion that it is to do with markets and prices is a 20th-century accretion to it by economists and philosophers too lazy to read his references (for details see below in the Blog archives).

The second error is seeing single participants in the market striving “to maximise their (economic and financial) outcomes”. People do not participate in markets as “individuals” – necessarily they must do so in (at least) pairs (otherwise it is not a Smithian market). Hence, of course, they end up ‘optimising’. To say that the ‘reason lies in the existence of others within the “market” is blindingly obvious – no market can exist with only one person in it. Again, this has nothing to do with ‘invisible hands’.

Vaknin adds: ”If a person does something which is supposed to increase the overall utility - but does so in order to increase his own utility more than the expected average utility increase - the resulting increase will be lower … We are envious because we think that the utility increase was unevenly divided (when adjusted for efforts invested and for the prevailing cultural mores).”

As utility cannot be measured for comparisons between two people it is not fruitful to see the utility available as a fixed sum. Nor is it fruitful to see individuals comparing their ‘gains’ against an ‘unevenly divided’ criterion. Even in Nash the division need not be the same – the optimal division is not necessarily the ‘mid-point’ in the utility frontier which is a common error in degree examinations (the area under the frontier need not be a square).

Vaknin’s assessment below is more satisfactory:

“Adam Smith, on the other hand, adopted the spectator theory of his teacher Francis Hutcheson. The morally good is a euphemism. It is really the name provided to the pleasure, which a spectator derives from seeing a virtue in action. Smith added that the reason for this emotion is the similarity between the virtue observed in the agent and the virtue possessed by the observer. It is of a moral nature because of the object involved: the agent tries to consciously conform to standards of behaviour which will not harm the innocent, while, simultaneously benefiting himself, his family and his friends. This, in turn, will benefit society as a whole. Such a person is likely to be grateful to his benefactors and sustain the chain of virtue by reciprocating. The chain of good will, thus, endlessly multiply.”

However, there are differences between Adam Smith and Francis Hutcheson on the role of the impartial spectator. For Smith there are no absolute virtues held abstractly. Moral Sentiments are established by people observing (as they grow and mature) what is acceptable to others and to win their approval (as others strive to win ours) we learn how to behave. Standards of behaviour can vary, upwards and downwards, depending on how we all behave. Where the positive virtues are practised to a degree, and where the rule or law (justice) obtains the protection of Natural Rights and Liberty, society is likely to be harmonious. But there is a ‘lot of ruin’ in a nation, and standards can vary downwards without society collapsing (this may be what is happening in the UK with public behaviour presently).

Smith’s “Moral Sentiments” and “Wealth of Nations” show how society is cohesive in both the moral and the market spheres. People, family to some, friends to a few, acquainted with a few more, but strangers to others (who themselves are family, friends, acquaintances and strangers to others - think of the interlocking circles in a mill pond, not just the one you are in) are affected by the constraints of others. Our dependence upon others is total – the ‘others’ in a global context are more numerous and anonymous – and what matters to us is not their intentions, but their outcomes. We can never know the former, only the latter.

The anonymity of the people we depend upon to feed, clothe and shelter ourselves, to provide the ‘decencies’ of life and those luxuries we enjoy in a functioning market economy, and also to walk by us in the street without assaulting us, or worse, is a Smithian society, not one peopled by people with known, or knowable, virtues. I suggest a closer reading by Sam Vaknin of what Adam Smith actually wrote than exhibited by some of the ideas presented in his article.

Sam Vaknin's Web site is at


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