Sunday, March 05, 2006

Smithian Negotiation is About Mediating Self-Interests, Not inflaming Them

“It's important to know with whom we're negotiating. Capitalism is not neutral, a realization well represented in popular culture where in film and fiction "the corporation" is assumed to be evil, as Clive Crook noted recently in The Atlantic Monthly. Adam Smith, the initial philosopher of the free market, expected prosperity to come not from compassion, but from fierce competition between disparate interests. Alaska legislators have the difficult but critical task of harnessing the basest, worldly instinct of capitalism, greed, to the nobler, enlightened social purpose of state government, namely, material and human services for the state's citizens. This is an awesome responsibility, and no enviable one.”

That’s how Stephen Haycox, professor of history at the University of Alaska, Anchorage, puts it in an article: “It's oil firms' job to play hardball on tax” (3 March, Anchorage Daily News (

The Alaskan State government is negotiating with the large oil companies on rates of state taxes and they are in dispute, surprise, surprise, about a possible compromise. Should be a matter of time only, except for the different ideas they have about where the compromise should be struck, near to the demands of the State government or to the offers from the oil companies.

Professor Haycox evidently feels that the State government is not being tough enough with the oil companies, so he invokes a tough image for the oil companies and warns they play ‘hard ball’ when they negotiate, and advises the State government to play ‘hard ball back’, believing that the oil companies will cave in to a ‘tougher’ stance from the government sooner than to a ‘softer’ stance.

To move the tactical issues of ‘tough’ versus ‘soft’ a step away from a straight choice between them, Professor Haycox brings into the debate alleged views of Adam Smith, an 18th century economist, and his own assessment (fed by Hollywood fiction, of what capitalism is about in the 21st century as opposed to the ‘nobler’ purposes of legislators. He contrasts the “worldly instinct of capitalism, greed”, to the “enlightened social purpose of state government, namely, material and human services for the state's citizens”.

None of the language of government ‘good’; oil companies ‘bad’, is conducive to reaching negotiated settlements. For an historian it is not correct historically either - governments have done more harm to the people than business enterprises.

Also, Adam Smith was not ‘the initial philosopher of the free market”; he was ‘an early’ philosopher not the only one; he ‘expected prosperity to come not from benevolence’ – because ‘compassion’ and the ‘human decencies’ were always part of his moral economics. He did not believe that prosperity came from ‘fierce competition between disparate interests’, but did believe it came from the mediation of self-interests through ‘truck, barter and trade’, i.e., negotiation.

There is a rate of taxation of oil production compatible with incentivising investors to fund the costs of exploring, extracting and distributing it; there is also a rate of taxation that inhibits such activities, as is happening now in the North Sea oil fields following another hike in UK taxation on oil companies. Thoughts of ‘golden geese’ spring to mind.

I do not know what rate of tax should apply in Alaska, but I do know that it will not be found by using emotive language or images of the State Senators wearing the white hats and oil executives wearing the black hats.

Read my book, ‘New Negotiating Edge: a behavioural approach to results and relationships’, Brealely Publishing, 1998 (, it might help the state and the oil negotiators find the tax rate that suits both parties (they know which rates suit themselves). Also read Adam Smith on negotiation in Wealth of Nations, Book 1, Chapters 1, 2, 3.

Professor Haycox’s article is at:


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