Monday, July 23, 2012

Adam Smith's Morals

Chief Rabbi Lord Sachs writes “Profits and Prophets HERE 
There used to be a belief among superficial readers of Adam Smith, prophet of free trade, that the market economy did not depend on morality at all: “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.” It was the brilliance of the system that it turned self-interest into the common good by what Smith called, almost mystically, an “invisible hand.” Morality was not part of the system. It was unnecessary.
This was a misreading of Smith, who took morality very seriously indeed and wrote a book called The Theory of Moral Sentiments. But it was also a misreading of economics. This was made clear, two centuries later, by a paradox in Games Theory known as The Prisoner’s Dilemma. Without going into details, this imagined two people faced with a choice (to stay silent, confess or accuse the other). The outcome of their decision would depend on what the other person did, and this could not be known in advance. It can be shown that if both people act rationally in their own interest, they will produce an outcome that is bad for both of them. This seems to refute the basic premise of market economics, that the pursuit of self-interest serves the common good.
The negative outcome of the Prisoner’s Dilemma can only be avoided if the two people repeatedly find themselves in the same situation. Eventually they realise they are harming one another and themselves. They learn to co-operate, which they can only do if they trust one another, and they will only do this if the other has earned that trust by acting honestly and with integrity.
In other words, the market economy depends on moral virtues that are not themselves produced by the market, and may be undermined by the market itself. For if the market is about the pursuit of profit, and if we can gain at other people’s expense, then the pursuit of profit will lead, first to shady practices (“your silver has become dross, your choice wine is diluted with water”), then to the breakdown of trust, then to the collapse of the market itself.”
Arguing with a distinguished religious scholar is not something I do regularly (though I commented last week on something Lord Sachs wrote) but he strikes me as a person with which one can discuss differences without rancour. 
He certainly knows more about Jewish theology than I do, given that what little I do know came from a Presbyterian upbringing that included fair slices of the Old Testament (I know even less of Islam). Hiowever, Lord Sachs demonstrates knowledge of economics, including Games Theory, and I am qualified to take issue with him on that which he demonstrates, in the quotation above.
On his broad theme that morality and market behaviours are important – perhaps decisive – I entirely agree with Lord Sachs.  I am not so inclined to agree with his interpretations of Adam Smith in Wealth Of Nations and of more recent ideas such as Prisoner’s Dilemma.  In both cases, with respect, I suggest he has missed the moral point.
First take the now famous, and as widely misunderstood, reference of Adam Smith to: “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.”  Humans in no economic or social system has ever been able to survive on the total benevolence of other people alone.  That is an impossible aspiration, dare I say, this side of heaven. 
Whereas God, by theological assumption, has all the resources of the world, indeed of the universe, at his disposal and therefore could be benevolent in the extreme towards all living creatures and still have resources to spare, no humans have access each day of their lives to supply everybody’s else’s human needs – somebody has to labour to acquire whatever resources are needed for her (since the expulsion from the Eden Garden) to benevolently dispose of a proportion of them to satisfy everybody else’s needs.  This is not a particular moral failing of today; it’s been a fact of life since Genesis (in theological terms).
The moral issue comes down to how resources are distributed for our dinners.   Why do “butchers, brewers, and bakers” enter into Adam Smith’s equation?  Because, he opined, it was in their self-interest to do so.  He advised those searching for the wherewithal for their dinners to enter into a dialogue (not a one-sided monologue!) with those whose self-interest brought them into consideration by those searching for their dinners in their own self-interests.
How is this dialogue to be conducted?  Smith advised potential diners not to “talk of their own necessities” but to “address the self-interests of the “butcher, brewer and baker” (and, of course, vice versa).  This point seems to have escaped the attention of Lord Sachs and all those many others who draw the same wrong moral conclusion. 
Self-interest is not a license to be “selfish” or “greedy”.  Far from it.  It is an admonition to serve our own self-interests by mediating with the self-interests of the “butcher, brewer and baker”.  In this, each of us becomes a merchant.
In short (Smith’s previous paragraph), the nature of each bargain is summed by the expression “Give me this that I want and you shall have that which you want”.  (In modern negotiating, I express this as “IF you do this for me, THEN I shall do that for you”). The exact contents of each such bargained dialogue is determined by how each party adjusts his own self-interest to the other party’s self-interest.  That is a very moral proposition.  Two egoistic self-interested demanders, uninterested in the self-interests of each other would never reach an agreement. That was the moral and pragmatic point of Smith’s parable. Morality was part of the system. It was absolutely necessary. 
On Prisoner’s Dilemma, I am not sure that Lord Sachs has got this post-War theorem (1950) correctly formulated, though, of course, it was not an idea considered by Adam Smith 174 years earlier (1776).  The two prisoners were offered a deal to chose separately without consultation among: both confess (10 years each in jail); one confessed but the other didn’t (the confessor serves 20 years, the silent one, goes free, there not being enough evidence to convict him); both stay silent (both go free).   What do they each do individually? It depends on what they think their partner will do!
Having supervised real-world negotiators thousands of times playing single-shot and multi-shot Prisoner’s Dilemma games, I can concur that most pairs were stumped at playing what was in their best interests as pairs.  They either ended up serving 10 years each or one serving 20 years and the other going free.  Very few chose the option that meant they both went free, mainly because they did not trust the other to choose not to confess.   But note that law observance in society, gained from one or both serving prison terms.  However, consider if they was a trustworthy ‘honour among thieves’, and they both chose to ‘not confess’, society would not have benefitted and their criminal immorality would have been rewarded.  (I have not the space to discuss this further in respect of observing many thousands of plays of the ‘Red-Blue’ game – perhaps another time?). But the gist of the moral conclusions of Prisoner’s Dilemma game illustrates the conflict between personal morality and the healthy morality of society.
Lastly, I have not commented on Lord Sachs’s remarks about the attribution of a moral role to the “invisible hand”: Lord Sach’s writes ”It was the brilliance of the system that it turned self-interest into the common good by what Smith called, almost mystically, an “invisible hand.”   Regular posts on Lost Legacy challenge this attribution to Adam Smith, so I shall not repeats them here.  Lord Sachs can cast his eye over many posts on the subject. Suffice to say, Adam Smith had no such ideas as expressed by many modern economists and there was nothing “mystical” in his use of the popular 17-18TH century metaphor.  That there was is an wholly modern invention from Paul Samuelson (1948) and others.


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