An Hour in the Life Of a Humble Journeyman

I have a copy of Hector C. Macpherson’s (1899) "Adam Smith", Famous Scots Series, Oliphant Anderson & Ferrier, Edinburgh, in my library in France, which I had cause to look up shortly after I arrived at for a week. I acquired my copy in a second-hand bookshop in Edinburgh in the early 90s for £5.00. There is an interesting inscription on the fly-leaf:

“With Mrs Pollocks’ best wishes. To Willie T. McVittie, Manse Auldgirth. July 1916.” Maybe, “Willie” was of an age for a First World War call-up and Mrs Pollocks thought he needed some good moral guidance?

The Manse, of course, was the Church of Scotland’s local Minister’s house, provided by the Kirk (the phrase, "son of the Manse" was a much used one until recently) and many Manses have been sold at good prices because they generally were subtantially built).

When I wrote (2003-05) my Adam Smith’s Lost Legacy (2005, Palgrave Macmillan), I quoted from Macpherson’s book:

“...Smith’s conception of economic science, including 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 in altruism. In Smith’s words: ‘In civilised society man stands at all times in need of the cooperation and assistance of great multitudes, while his 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 with 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.” (pp. 75-6)

“Hector Macpherson’s (1851-1924) unpretentious little book demonstrates a clearer understanding of Smith’s works than has been exhibited by many distinguished authorities. The sentence: ‘His view of the industrial order was wide enough to give full play to that subtle psychological chemistry by which egoism is transmuted in altruism’ allied to the phrase ‘the reciprocity of services’ cuts through the worthless babble about ‘selfishness’ and its associated ideas of ‘economic man’ (the one with the dismal personality).”

“...Economic science suffers, from what Macpherson called a ‘distracting confusion’, because it ignored how people actually satisfied their wants through reciprocal exchanges in real markets. Smith’s insight is no manifesto to selfishness, nor a triumph of the one-sided pursuit of self-interest (or indeed, a paean to the ‘granite of self-interest)! It is not necessary to wriggle to ‘softer’ interpretations of self-love’ to defend Smith’s insight.” (p. 114)

By the time I was compiling the Lost Legacy manuscript I had forgotten about Macpherson's ieas on the invisible hand and the social harmony that was induced by reciprocation. That particular part of my Lost Legacy concentrates on Smith’s unique assessment of the role of bargaining (corresponding with mine, as I had spent twenty-years observing and teaching bargaining at Business Scools).

I dealt briefly and inadequately at that time with the invisible-hand metaphor in chapter 39 of Lost Legacy, though traces of my eventual considered opinion are clear enough (see: "Adam Smith and the Invisible Hand: from metaphor to myth", 2009 HERE). It was not as important to me at the time in 2005 as it has become; the almost unanimous and serious misinterpretation of the famous "Butcher, Brewer, Baker" passage in Wealth Of Nations (WN I.ii.2: 26-27) was far more important than the invisible hand was to become.

Macpherson ascribes the invisible hand to the “ability” by which society in modern terms lessens the “individual struggle for existence” (progress to opulence?) in a “constant transformation of the onerous into the gratuitous utilities of life”. Looking at the transformation of the UK throughout the 19th century from Macpherson’s perspective, the spread of opulence was real (though children in Edinburgh slums were photographed shoeless around this time); in the early 19th century, Edinburgh slums were indescribably worse.

Smith and the Prisoner's Dilemma

John Cassidy writes on: “Rational Irrationality: The Real Reason That Capitalism Is So Crash-Prone” in The New Yorker (5 October). Normxxx comments, parenthetically, on Cassidy’s thoughts in normxxx ruminates... HERE
[[comments in double-square brackets are normxxx’s]]

“Because financial markets consist of individuals who react to what others are doing, theories of 'free-market economics' are often less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties. Much of the work done at RAND was initially applied to the logic of nuclear warfare, but it has proved extremely useful in understanding another 'explosion-prone' arena: Wall Street.

Imagine that you and another armed man have been arrested and charged with jointly carrying out a robbery. The two of you are being held and questioned separately, with no means of communicating. You know that, if you both confess, each of you will get ten years in jail, whereas if you both deny the crime you will be charged only with the lesser offense of gun possession, which carries a sentence of just three years in jail. The best scenario for you is if you confess and your partner doesn't: you'll be rewarded for your betrayal by being released, and he'll get a sentence of fifteen years. The worst scenario, accordingly, is if you keep quiet and he confesses.

What should you do? The optimal joint result would require the two of you to keep quiet, so that you both got a light sentence, amounting to a combined six years of jail time. Any other strategy means more collective jail time. But you know that you're risking the maximum penalty if you keep quiet, because your partner could seize a chance for freedom and betray you. And you know that your partner is bound to be making the same calculation. Hence, the rational strategy, for both of you, is to confess, and serve ten years in jail. In the language of game theory, confessing is a "dominant strategy," even though it leads to a disastrous outcome. [[What you are trying to do is minimize your maximum possible loss.: normxxx]]

The Prisoner's Dilemma is the obverse of Adam Smith's theory of the invisible hand, in which the free market coordinates the behavior of self-seeking individuals to the benefit of all. Each businessman "intends only his own gain," Smith wrote in "The Wealth of Nations", "and he is in this, as in many other cases, led by an invisible hand to promote [[a socially positive: normxxx]] end which was no part of his intention". But in a market environment the individual pursuit of self-interest, however rational, can give way to collective disaster. The invisible hand becomes a clenched fist.”

Comment
There is a mixture of interesting ideas in this part of John Cassidy’s article, “Rational Irrationality”, in the New Yorker (5 October), on some perspectives of which I would put a different slant.

The two-person, single-round, Prisoner’s Dilemma game illustrates the choice between ‘co-operation’ and ‘defection’. Roughly, does a player independently choose to ‘co-operate’ or ‘defect’ (or, say, choose ‘trade’ or ‘plunder’)? This boils down to ‘doing what is best for self’ or ‘doing what’s best for both of us’.

The original Prisoner’s Dilemma (which is why it was called “prisoner’s dilemma”) is actually a 3-person game, with the detectives imposing the pay-offs of the two prisoners' choices, over which they had a contrary interest (law and order) to that of the criminals (getting away with their crimes).

In ‘co-operation’/’defection’ games the players’ gain or lose according to their choices. If one of them defects and is successful, her individual, positive payoff will be larger than the player who attempts to cooperate and loses, with a negative payoff. If both defect, successive rounds will produce losses for both of them (maximum sentence in prison, in which they can 'explain' to each other why they chose the defection option (confessing) to trap the other in not confessing!

If both cooperate (not confess) and are successful, they both gain a positive payoff, smaller than the gainer from an individual defection, but they have the prospect of repeating rounds of positive payoffs for both of them which are better than maximum jsil time. So, strategically, which game are we playing: defection for one-sided gains (which likely leads to mutual defection) or cooperation for mutual gains (which likely leads for successive mutual gains)?

The former is equivalent to mutual murderous plunder in the real world; the latter is equivalent to mutual, Smithian bargaining: “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.” (Book 1, chapter 2, page 26, Wealth Of Nations).

Bargaining is not about promoting self-interest or selfishness or defection; it is about addressing the “self-love” of the potential bargainer by “never talk[ing] to them of our necessities, but of their advantages” (WN I.2. page 27).

Hence, placing Smith’s statements as “less illuminating than the Prisoner's Dilemma, an analysis of strategic behavior that game theorists associated with the RAND Corporation developed during the early nineteen-fifties” is both a partial misreading of the sophistication of Prisoner’s Dilemma games and a partial ignorance of Smith’s acute observations of bargaining in competitive markets.

As I have taught for years at Business Schools, as sellers or buyers we are not in competition with the seller or buyer with whom we happen to be negotiating; we are in competition with the other sellers who can supply what the buyer wants across the table, or we are in competition with the other buyers who can buy what the seller across the table is selling. Not understanding this Smithian principle of competition is so fundamental, and so widespread among some very smart economists, as to constitute an error of perspective of the first magnitude.

The “optimal joint result” requires us both to do that which is best for both of us, not what is best for us alone. John Cassidy, however, is right in his analysis of the cause of the “madness of crowds” when piling into the insanity of the recent bubble – those who stayed in cash instead, not junk derivatives, survived; those who followed the rush, lost badly. They didn’t do what was best for all of them.

Given that Smith never endorsed a policy of acting selfishly under the fantasy that whatever they did would lead to social benefits (the modern myth of the “invisible hand”), he was not likely to advise anybody to chase the modern equivalent of the “South Sea bubble”. He had a low opinion of “projectors” and “enthusiasts”. So should Smithian scholars and practitioners.

A Sympatheic Commentor on Adam Smith's Views

Winton Bates writes ‘How High was Adam Smith’s Jen Ratio?’ in
Citizen Economists HERE:

‘I have been looking forward to reading “Born to be Good”. I have previously considered on this blog the question of whether the inner nature of humans is good and I want to explore this topic further.

However, after reading a few pages I began to wonder whether reading this book will do much to improve my jen ratio. The problem is that it seems to me that Keltner’s discussion of the views of Adam Smith is uncharitable. Keltner claims that Smith portrayed Homo economicus as some kind of ideal of human evolution who was designed to maximize self-interest in the form of experienced pleasure and advances in advances in material wealth ( p 8).

Smith had a realistic view of human nature. I don’t think he saw humans as rational maximisers of anything, but it is true that he did make some famous observations about self interest as a motivating force. Smith stated: “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” (“Wealth of Nations”, I.ii.2). It seems to me that this is an observation about the way the world works rather than a statement advocating selfishness.

I think the closest Smith got to advocating selfishness is his claim that by pursuing his own interests an individual frequently promotes that of society: “I have never known much good done by those who affected to trade for the publick good” (W.N., IV, ii, 9).

It is arguable that Smith was being too cynical at that point. It is possible to think of examples of a great deal of good being done by not-for-profit organisations e.g. in running schools and hospitals.

Anyone who had an interest in presenting a fair picture of Smith’s views of human nature, however, would also take account of the views he presented in “The Theory of Moral Sentiments”. For example: “The virtues of prudence, justice, and beneficence, have no tendency to produce any but the most agreeable effects. … In our approbation of all these virtues , our sense of their agreeable effects , of their utility, either to the person who exercises them , or to some other persons, joins with our sense of their propriety, and constitutes always a considerable, frequently the greater part of that approbation” (TMS IV, iii, 59).

It is not fair to portray Adam Smith as promoting an “ideology about human nature … with a jen ratio trending toward zero”.

Comment
The ‘Jen Ratio’ is complicated to explain and readers should consult the article in the link above.

Adam Smith never portrayed anybody as Homo economicus (a late 19th century notion, much lauded by modern economists to no valid purpose), nor as ‘rational maximisers’ (a mid-20th century assumption that removes people from markets).

Yes, the famous quote about “the benevolence of the butcher, the brewer, or the baker” is about self-interest (“Wealth of Nations”, I.ii.2: 26-7) and Smith is postulating from observation and this did not mean either party was ‘selfish’.

Look closely at the paragraph: there are two self-interested parties, not just one. You in your self-interest want your dinner and you are willing to pay something for it; the butcher, brewer, and baker, want (out of their self-interest) to earn revenue by supplying you with your dinner.

The bargaining problem is to find a price that both parties can agree upon. But how is this determined? If you just go on about why you need your dinner and you ignore the interests of the sellers, and the sellers go on about why you should pay them the price they demand and ignore your interests, the result will be deadlock. But Smith goes beyond that narrow view of self-interest.

He advises you to ‘address’ your conversation to the sellers advantages (interests), not your own necessities (interests)’. And bargains are obtained by offering the other party something that is to their ‘advantage: ‘Give me that which I want, and you shall have this which you want’, known as the conditional proposition. As each party lowers their demands and improve their offers, they move towards an acceptable bargain.

The alternative is to demand the other party surrender and you will suffer deadlock. Two selfish demanders get nowhere. If that was the rule of bargaining in commercial society, it would never prosper.

The reference to “I have never known much good done by those who affected to trade for the publick good” (W.N., IV, ii, 9: 456) is not about ‘selfishness’, its about the discordant music played by a few when trading, again for no good end.

Winton Bates demonstrates a sympathetic appreciation of what Adam Smith wrote and is to congratulated for that. My remarks above are offered to clarify important aspects of his thinking.

Adam Smith and Greed

Richard Gwyn writes on: ‘Unchecked, unregulated greed breeds corruption’ in the Toronto Star HERE:

“Capitalism is about greed. It's not exclusively about that. It's also about creativity and independence (the alternative to the market is some form of bureaucracy), providing a service or good that people need, and about providing jobs.

But greed is the motor that powers capitalism. Way back in the 18th century, Adam Smith understood this when he wrote in The Wealth of Nations that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us.
Smith, though, also wrote a second book, one that he regarded as far more important. Its title was The Theory of Moral Sentiments. In it, he tried to come to terms with the ethical consequences of unleashed greed and self-interest.”

Comment
In what is a familiar story line, at least to readers of Lost Legacy, Richard asserts, as if it is self-evident (though not to the ultra-poor masses of unemployed labourers and their families in large swathes of the planet, looking in on the life-styles of the vastly richer peoples of Canada) that ‘greed is the motor that powers capitalism’.

Richard goes ‘way back’ to the 18th century when almost the whole world was stuck in poverty, superstition, disease that carried off most children who were born, and those who ‘survived’ had the luxury of living, if ‘lucky’ to the ripe old age of about 40.

Murder rates per thousand were higher than the most gang-ridden modern slum towns, illiteracy was almost total, and the ground where you first stood on (if you survived infancy) was the only ground you would ever know. Richard should ask himself: where would he rather live – in the slums of Mumbai or rural Darfur or the slums of Toronto?

His evidence for ‘greed’ apparently comes from his misunderstood point that Adam Smith allegedly made in that famous partial quotation ‘that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us’.

Actually, it was about the ‘Butcher, the Brewer, and the Baker’ from whom Smith observed that it was a more reliable way to get the ingredients for your dinner (obviously 18th century nutrition was not as well catered for in Scotland at the time, which is why many Scots left out shores for Canada, including my maternal grandfather, a coal miner, for Toronto) to appeal to the self-interests of said ‘Butcher, the Brewer, and the Baker’, rather than telling them solely about your self-interests or needs.

Why was this so significant?

Well, merely considering your own self-interests was unlikely to persuade them to serve you; two parties only intereted inn themselves cannot conclude a bargain, as Smith makes clear in the same paragraph that Richard misquotes:

‘He will be more likely to prevail if he can interest their self-love in his favour, and show 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.’ (Wealth Of Nations, I.ii.2: pp 26-27)

What is greedy about applying the observed offer to exchange what you have (money) for what he has (ingredients for your dinner)?

Smith did not quite write ‘a second book’ – The Theory of Moral Sentiments was in fact his first book (1759 – 17 years before Wealth Of Nations, 1776). In it he did not try ‘to come to terms with the ethical consequences of unleashed greed and self-interest’. He discussed how people behaved, well, kindly, or otherwise.

He discussed morality, including the morality of the historic development of property and its consequences, particularly the division of labour and the creation of complex supply chains that, from productivity. raised the ‘meanest labour’ in Scotland into higher standards of life than the most powerful ‘kings of Africa’ and North America, including around the area that became Toronto.

In fact, Smith decried the philosophy of Bernard Mandeville (1732), who claimed that ‘Private Vice was Public Virtue’, and he described it as ‘licentious’ and stated that Mandeville’s assertions about the benefits of greed were wrong in practice and in philosophy.

Richard aims at the wrong target. He might care to reflect on the basis for his assertions about Adam Smith.

A Financial Advisor who Understands Adam Smith

Michael Hennigan, Founder and Editor of Finfacts (Ireland) HERE, writes a most encouraging post : ‘The "free market" in these calamitous times’, containing this gem:

“Adam Smith, the father of modern economics, in his 1776 book The Wealth of Nations, identified the importance of individual self-interest, but contrary to what some critics have claimed, his emphasis was that you serve your own self-interest by serving the self-interest of others. It is not what is generally concluded because the last line of the following extract is what is most often quoted, in isolation:

"In civilized society he [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. 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 show 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 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 self-love, and never talk to them of our own necessities but of their advantages."

Comment
Regular readers of Lost Legacy will recognise this familiar quotation from Wealth Of Nations (WN I.ii.2: pp 26-7; Edwin Canaan, 1937 edition, p 14).

Michael Hennigan is absolutely right in his reading of this famous passage. Congratulations.

Hollywood 'John Nash' Was Wrong

Hwee Ling writes a most interesting Blog, The Learning Economist (HERE):

“Is Economics a "Science"?

The scientific approach involves the 4 following steps:
1. Observation
2. Reasoning
3. Formulation of Theory
4. Testing
In the movie "A Beautiful Mind", you can see part of this scientific approach in use: The scene is set in a bar in which John Nash (played by Russell Crowe) rebutted Adam Smith's idea that, 'the best result comes from everyone in the group doing what's best for himself'. Adam Smith had said: "In competition, individual ambition serves the common good."

But John Nash took an opposing view.

In the movie, he observed what was going on in the bar, in which it was clear that all his friends had the same idea.. to go straight for a pretty blond girl who had just walked into the place with her other pretty (but not quite as pretty) friends. He related to his friends how they could all score if they all didn't go for the blonde but for her friends instead... He told them that, 'the best result will come where everyone in the group does what is best for himself ... and the group.' He envisioned a scenario -- a bargaining strategy -- in which nobody loses.. Watch how the idea (which was later developed into a theory) was conceived after he carefully observed the scene...

In case you missed the dialogue, here's the transcript:

Nash : Adam Smith needs revision.

Hansen : What are you talking about?

Nash : If we all go for the blonde...we block each other. Not a single one of us is gonna get her. So then we go for her friends, but they will all give us the cold shoulder because nobody likes to be second choice. Well, what if no one goes for the blonde?
We don't get in each other's way, and we don't insult the other girls.
That's the only way we win.
(Laughs)
Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? That's what he said, right?

Others : Right.

Nash : Incomplete.
Incomplete, okay?
Because the best result will come...from everyone in the group doing what's best for himself...and the group.

Hansen : Nash, if this is some way for you to get the blonde on your own, you can go to hell.

Nash: Governing dynamics gentlemen. Governing dynamics. Adam Smith...was wrong.”

Nash leaves the bar.

Comment
I have commented several times on Lost Legacy on this scenario from the film, Beautiful Mind, and the above words written by Hollywood script writers, whose authority for attributing ideas to Adam Smith is an unknown variable, though it is unlikely to be accurate if influenced by the existing consensus of US academe with its, frankly, appalling record of misunderstanding, misattribution, and mistaken presentation in many matters relating to the philosophy and political economy of Adam Smith.

I have no objections whatsoever if the above scenario is presented as a strategic Prisoner’s Dilemma problem using a casual dating game as its subject, which, plausibly, is replicated in bars and clubs across the land. My objection is to the imagined scenario being associated with Adam Smith’s assertions about individual self-interest and group behaviour.

The lesson of the Prisoner’s Dilemma, either in its original form of a ‘red-black’ [NB. The convention later became a red-blue choice] 100-round game, or as the well-known choices of confessing or not confessing offered separately to two prisoner’s suspected of a major crime, is that acting for what is best for self (confess to go free – as long as the other prisoner does not confess) or acting for what is best for both of them (both of them not confessing), is that always acting for self, or always playing red, leads to long jail sentences or high negative scores, whereas doing what is best for both of them (both don’t confess; both play black), as long as they both choose leads to short sentences and high positive scores.

This was precisely what Adam Smith recommended through the venerable and ancient ‘propensity to ‘truck, barter, and exchange’, or bargaining: ‘give that which I want, and you shall have this which you want’.

To settle a bargain, the players should consider that which is best for both of them; competing in a bargain to get the best deal for self, generally means that they don’t get a deal; they deadlock, fail to agree, and go their separate ways in disappointment.

In the bar scene, all the boys have the same choice; pick separate ‘targets’ and go for their favoured girl. (Unsaid, of course, the girls had the same choice of picking one boy; the male script writers typicaly took a chauvinistic view of the scenario.) As everybody is a stranger, it doesn’t really matter which you pick; you’re not making a life-time choice!

The real lesson of Prisoner Dilemma games is quite interesting (I have used them thousands of times in Business School negotiating courses since the 1970s) is that in the overwhelming majority of cases (92 per cent, when I used to keep scores for analysis) the outcomes were sub-optimal, that is negative red-blue scores, translating in Prisoner’s Dilemma games to maximum long jail sentences. Only 8 per cent of pairs scored maximum blue points (48 each).

Other researchers (John Carlyle, for instance) reported slightly better results of 87 per cent and 17 per cent respectively, but while I can be sure that my pre-game briefings were the same each time, and no hints were given by me, it may be that John’s pre-briefing of the game was not devoid of ‘hints’, which would account for the slightly different outcomes.

In short, Adam Smith was correct. People who act without addressing the self-interests of the other party do much worse than those who do (See WN I.iii.2: p 26-7).

It may be that John Nash understood the better outcome of the co-operative choice as well as Adam Smith did - people bargaining are not competitors; they are co-operators; they do best for themselves by serving the interests of the other guy – or gal – too.

Bargaining exchanges that conclude successfully are co-operative outcomes; both do best by serving each other’s interests consistent with the best available outcome for themselves.

This propensity among humankind was of early vintage in the history and pre-history of humanity (see my Pre-History of Bargaining: a multi-disciplinary treatment, Part I’, downloadable from Lost Legacy’s Home Page). It’s in chapter 2 of Wealth Of Nations. The 'Beautiful Mind' scriptwriters are wrong about Adam Smith (John Nash may well have been innocent).

Incidentally, if only I had read Wealth Of Nations before I was 20:

when I was a teenager going to weekly dances (jiving, etc.,) I had a friend who demonstrated his dating technique, which was to dance with girls who were ‘wallflowers’, rather than ‘popular’ girls. He claimed he always got a ‘certain’ date that way, while most of us ended up walking home alone …

Congratulations to Hwee Ling for writing a most interesting Blog for students.

More on Foley's Folly

In a review Adam’s Fallacy by Duncan K. Foley (2006) on the Mediated Blog HERE: This comment caught my attention:

“The ‘fallacy’ as Foley describes it, is as follows: “Smith asserts the apparently self-contradictory notion that capitalism transforms selfishness into its opposite: regard and service for others.”

To which I posted this comment:

Adam Smith did not confuse self-interest with selfishness. He was a moral philosopher and not one given to sloppy thinking; his criticism of selfishness as a behaviour is set out in his book, The Theory of Moral Sentiments (1759), particularly his specific critique of the ‘licentious’ views of Bernard Mandeville (‘Private Vice, Public Virtue’, 1724), which many modern commentators confuse with Adam Smith’s.

In Wealth Of Nations, 1776, he explains that self interest in a commercial economy (he never used the word ‘capitalism’ – it was not invented in English until 1854) where everybody is dependent on the services of thousands of others for their ‘necessities, conveniences, and amusements of life’, requires them not to think only of their own self interest, but to address the self interest of others, i.e., to be ‘other’ not ‘self’, centred by mediating their mutual self interests.

Unless they do this they may go hungry – there not being enough resources to make relying on benevolence, or stealing, reliable behaviours for everyday civilised life.

Thus, people receive the means for their dinner, and much else besides, by offering others their daily bargains:

“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.’ (Wealth Of Nations, II.ii.2: p 26).

For this fundamental misunderstanding of Adam Smith by Duncan Foley, a distinguished historian of economics (I have heard him lecture), I described his 2006 book in a review as ‘Foley’s Folly’.

Adam Smith on Bargaining

Stephen J. Dubner writes the Blog: Freakonomics (‘the hidden side of everything’) HERE:

‘The Weirdest Cookbook You Will Ever Need

Shopsin has just written a book that is half cookbook and half memoir, entirely fascinating. I had never sat down and read a cookbook from cover to cover but that is what happened with Shopsin’s book (co-written with Carolynn Carreno). It is called Eat Me. The introduction is a reprint of a New Yorker article by Calvin (Bud) Trillin, a regular at Shopsin’s.

Trillin also figures in a story that Shopsin tells in the book, a story that illustrates the creativity with which we human beings barter and exchange. Gains from trade indeed. Adam Smith would be proud:

I’ve never used cookbooks for recipes, but I do like to read them to get ideas and to see how different cooks do things — and I especially liked doing this way back when I first started cooking. Back then, Bud Trillin used to bring me the review copies of cookbooks that were sent to him. He would bring in a stack of cookbooks, and in exchange I would give him 25 percent of the face value of the books in food credit. It was a great deal for both of us.

*From Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations: “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that.”

Which provoked the following interesting comment from a reader, Michael Sullivan:

The quote from Adam Smith is interesting in that it is, strictly speaking, no longer true. There was a case involving an orangutan at a zoo. The zookeepers came in one morning and found the orangutan in the moat separating his enclosure from the public. They moved the orangutan back to his enclosure, berated the staff for not locking the door and considered the incident closed. The next morning they found the orangutan back in the moat. Thinking that it was unlikely that the staff would forget to lock the door after being berated the previous day, they investigated further and found that the orangutan was using a piece of wire pried loose from somewhere in his enclosure to pick the lock on the door. So, they removed all wire that he could use to pick the lock. This solved the problem, for a while. When they again found the orangutan in the moat, they again investigated. What they ultimately found out was that there was a female orangutan in an adjoining enclosure who was overweight and therefore on a diet. She was giving the male orangutan pieces of wire in exchange for some of his food. I may have some of the details of this story wrong, but the basic point is that there is no way to describe the interchange between those two orangutans other than as a barter transaction, thus disproving the second half of Adam Smith’s statement.” Michael Sullivan”

Comment
Stephen Dubner is correct in that the exchange between “Calvin (Bud) Trillin” and “Shopsin” is a clear example of the normal exchange common in commercial societies and societies with elements of commerce in their mode of subistence.

The section of Wealth Of Nations from which Dubner quotes is at WN I.ii.2: p 26, and is part of the most important, but under-appreciated passages, in the whole book.

Even in this quote, Smith states the conditional proposition: “this is mine, that yours; I am willing to give this for that.” He follows this up later in the same paragraph:

“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.”

On the substance of Michael Sullivan’s comment, I am only partly convinced, not least because Sullivan admits to not being sure of the accuracy of his account of the incident (I would love the read the actual report), but also because I have read various similar accounts of apparent exchange among primates, which specialists claim were coincidental (mainly 'sex' for 'food'), though this exchange of 'wire' for 'food' is exciting in that it appears purposeful.

For those interested some years ago I wrote a ms, “The Pre-Hisrtory of Bargaining”, from which I have presented a version in two-parts, the first part of which I presented at a conference of the “European Association for Evolutionary Political Economy” in Rome a week or so ago. You can read a copy from the Lost Legacy home page (HERE).

This paper looks at Adam Smith on bargaining exchanges and its evolution from exchange behaviours (‘quasi-bargaining’) among the primates, including the evolutionary tracks of the numerous Hominid species to the Homo sapien species as hunter-gatherers.

The second-part, as yet unpublished on Lost Legacy takes the evolution of bargaining through the invention of property – shepherding and farming – to the emergence of commerce.

I believe I show that Adam Smith’s statement of the conditional proposition is absolutely correct and holds today. Presently, I reserve my final views on whether the second part of Smith's above statement is sound or is 'disproven', as Sullivan asserts.

There are several reports of other primates implicitly exchanging in an intentional manner, over which disciplinary experts are divided at present.

Why economists should study the origins of bargaining?

Having presented part 1 of my paper, ‘The Prehistory of Bargaining: a multi-disciplinary approach’, to the EAEPE in Rome, I had a conversation later with one of the participants about why I worked on such a subject, it being distant from the normal concerns of economics.

In parenthesis I must confess I have asked myself the same subject many times since I moved on from my research and the writing of successive versions of my incomplete manuscript in 2003.

I began the work almost accidentally while pondering why economists had so little to say about the ubiquitous behaviours of negotiation, which dominate human relationships, and not just in commerce. While teaching and writing about negotiation for many audiences, I had consumed fairly early on the sum total of books and papers appearing within the modern discipline, beginning with Zeuthen (1931) and Hicks (1931), Nash (1950) and onwards.

Surprisingly, Zeuthen and Hicks were least useful in that they were about the process of coercive bargaining through threats and their affect on the participants’ willingness to risk strikes or lockouts if they did not comply with the other party’s offers or demands. Incidentally, Zeuthen’s book was entitled ‘Problems of Economic Warfare’, to which Joseph Schumpeter contributed the forward to the English edition.

While such approaches had interest within the confines of a special case of bilateral monopoly, they were not within the scope of the universal experience of voluntary exchanges that take place in commerce. We all buy and sell; we don’t all run trade unions or large corporations, and nor do we all negotiate the termination or wars between belligerents.

Economists moved on from interest in the behavioural aspects of price determination once satisfied with the robustness of supply and demand theory. Dealing with managers almost daily through Business Schools, price determination was not a distant coincidence of MC=MR, once the players got ‘close and personal’ in their everyday work of buying and selling in multiple meetings, post-tender negotiations, and in covering multiple contingencies during the life of a contract. It seemed something was missing in price determination theory.

John Nash wrote ‘The Bargaining Problem’ in 1950 (Econometrica, XVIII, pp 155-62), which ‘solved’ it by assuming away the process of negotiation, covered in Zeuthen and Hicks), to concentrate (brilliantly) on the determination of the optimal bargain (where the product of the parties’ net numerical utility gains were maximised). This too was not immediately applicable to the behaviours of bargainers in the real world (though the insight was interesting!).

I soon turned back to Wealth Of Nations to re-read what Adam Smith had to say about the bargaining problem and was not disappointed. My educative work with bargainers, and repetitive observations of them at work (a rare privilege), had already taken into account that the significant element of their process was the multiple consideration of the ratios of exchange in making their offers; each made offers to settle the price (or whatever the subject of their deliberations) and eventually worked their way to either an irretrievable disagreement (a failure) or an agreed solution to the terms of an agreement (a success).

Struck by Adam Smith’s statement of the process and outcome, I was impressed:

“Whoever offers to another a bargain of any kind, proposes to do this. Give that which I want and you shall have this which you want, is the meaning of every such offer; and it is this manner that we obtain from one another the far greater part of those good offices that we stand in need of.” (WN I.ii.2: p 26)

This is what I witnessed bargainers the world over (no exaggeration) doing two hundred years after he published Wealth Of Nations. Yet, among economists –even those few writing about bargaining – I found nary a mention of it. In the intervening years to 2000-3, I kept coming back to this absence of comment or recognition of Adam Smith’s statement of the bargaining process by modern economists.

Smith, famously, wrote however briefly about exchange and not just in Wealth Of Nations It is a common feature in all his writtings. For him exchange was a universal constant if you like, and had great significance among humans long before commercial society appeared. In that most famous other quotation – often quoted but seldom sung about – he set it out:

“This division of labour, from which so many advantages are described, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though 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” (WN I.ii.1: p 25)

In the same paragraph, Smith identified tentatively that the ‘propensity to exchange’ was probably ‘the necessary consequence of the faculties of reason and speech’. This suggests that exchange behaviour was learned and not innate. The question became what process of social evolution promoted conditions for the learned behaviour of bargaining?

And that started my quest to answer the question.

Smith himself had much to say about how bargaining may have emerged with, for exampe, his parable of the deer and beaver hunters transacting by ‘higgling and bargaining’ to find a satisfactory ratio for their exchange. I was not satisfied that this was more than an attempted ‘explanation’ for an imaginary exchange for another purpose.

That is why I widened my search beyond economics to history, eventually to prehistory, to evolutionary psychology, to anthropology, to sociology and beyond.

Some part of this work is contained in my paper, ‘The Prehistory of Bargaining: a multi-disciplinary approach’, Part 1 of which you may download from the Lost Legacy Home page.

Comments and questions, of course, are most welcome.

Brief Report From Rome

European Association for Evolutionary Political Economy 20th Annual Conference, Rome

I presented my paper, The Pre-History of Bargaining: a multidisciplinary approach (downloadable from the Home page), this morning and it attracted several questions and comments. Given only 25 minutes to present the paper and answer any questions there was not much time for elaboration.

Among the questions asked was why I say that neoclassical theories of bargaining are mainly about wage negotiations (Zeuthen, Hicks,Pen, Harsanyi, Coddington, Cross, which are coercive - strikes and lockouts) and not mutual gains for both parties. Nash (1950) published a Theory of Bargaining which was premissed on the assumption that the process of baragaining was assumed away! The questioner argued firmly that neoclassical exchange was voluntary, to which I commented that neoclassical price theory does not incorporate bargaining being based on price theory.

Adam Smith was quite specific that when someone bargains they use a conditional proposition: 'Give me that which I want and you shall have this which you want'. This is the 'meaning of every such offer' (Wealth Of Nations, WN I.ii.2: p 26). They are not price takers; they 'higgle and bargain' with each other. What today we call the 'negotiation dance'. That process is to too difficult to model. Price theory assumes it away.

A philosophy lecturer asked why I called it a theory of bargaining and not a theory of exchange. Well, my paper is labelled 'Part 1', which goes from the evolution of the Hominids (about 18 species of them) through to the emergence of Homo sapiens in Hunter-gatherer societies, and Part 2 continues the account through the invention of property to shepherding and farming before history was recorded, though both weak quasi-bargaining (reciprocity) and strong quasi-bargaining (enforced reciprocity) operated in the millions of years prior to human society and for thousands of years before full bargaining appeared.

One colleague asked whether mine was a genetic theory of social change, to which the answer is know, but evolution of the hominid and later human species was continuing through the 5 million or so years following the speciation of the Hominids from the common ape ancestor with the chimpanzees. My account of these changes was coincidentally partly genetic, but not causally.

The chairperson was worried that I was going to predict the future of the human species; fortunately I was able to assure her that I followed Adam Smith's self-denying ordinance, not to make predictions Economists divide into two: those who make predictions and those who don't; the former are always, in my view proved wrong; the latter who look backwards and not forwards, can explain why sets of predictions were falsified; the former avoid such explanations, but usually keep making the.