Homo Dialecticus – Notes on Adam Smith: Installment Four. Maybe markets really DO contribute to virtue!

Adam Smith sketched what I’ve called a ‘dialectical’ picture of humanity in which people grow from infantile ‘self-love’ to become socialised and psychologically much more complex individuals.

Self love remains powerful throughout their lives, but so too are the internal restraints that they impose upon themselves, their consciences becoming ‘impartial spectators’ which embody the values of their family and community.

Within families and closely knit communities these forces are particularly strong, but they work also between strangers in the right circumstances. The right circumstances are where there are some shared values, and also in markets where added to these shared values (represented by people’s conscience and sense of sociability) people’s self-interests are balanced against each other so that the best way for them to serve their own interest is to serve the interests of others.

The kind of culture one might expect to emerge, and which Smith argued would emerge is one in which prudence and probity are highly valued (because they are rewarded in a market, particularly where transactions between people are repeated and so reputations matter). Further, while people would appreciate that people are often motivated by self-interest, they would also appreciate the importance of fairness. Smith regarded ‘justice’ as the rock on which a society is built by which he meant the rule of law and the protection of private (and for that matter public) property. Along with other Enlightenment figures, Smith believed that commerce ‘softened’ the manners and made people more sociable and more not less capable of other regarding and cooperative behaviour undertaken without coercion.

Smith’s view of the world suggests that children (who are relative strangers to the conscience of the ‘impartial spectator’) are more selfish than adults who embody it. And it suggests that, far from making people more selfish as is the common conception, markets make people more prepared to trust and co-operate with strangers. And, so far at least, that’s how the evidence is stacking up.

For reasons that are a little bizarre, experimental evidence had long been stigmatised within economics as relatively unimportant, but economists gradually became more interested in experimental research from the 1980s.

A range of games have been designed to create situations of tension between naked self-interest and more other regarding behaviour.

The ‘ultimatum game’ was developed in 1982. The experimenter introduces a pool of (usually) money. One player can then elect to split the money as they choose with a second player. The second player then has a ‘veto’ power. They may accept the offer, in which case the split goes ahead, or they can reject it. If they reject it the experimenter takes back the money and neither player gets anything

Obviously it’s in the naked self-interest of the party making the ultimatum to offer as little as is judged necessary to prevent veto. And it’s in the naked self-interest of the party receiving the ultimatum to accept whatever they’re offered so long as it’s not zero (in which case they are indifferent). It’s much more complicated as a matter of theory if the game is repeated, but even when it’s only conducted once, it is quite clear that people are strongly influenced by norms of social/moral acceptability.

Other games include the ‘dictator game’ and the ‘public goods game’ The former has similar rules to the ultimatum game but the party receiving the ‘offer’ has no right of veto they take what they’re given. (Comparing the results of dictator and ultimatum games enables one to distinguish between self interested sharing (to prevent veto) and other regarding sharing. In all societies both effects are significant with dictator games generating larger offers than dictator games.

In the public good game players do better if they cooperate by putting some of their money into public goods, – but there is also an incentive for the nakedly self-interested to ‘free ride’ on others contributions.

As a recent study reports “Early cross-cultural economic experiments showed little variation among university students. However, in 1996 a surprising finding broke the consensus”.

The Machiguenga are a society of ‘slash-and-burn horticulturalists’ living in the southeastern Peruvian Amazon. They survive by clearing, burning and planting gardens every couple of years. And, at least as demonstrated by the kind of experiments described above, they “behaved much less prosocially than student populations around the world”.

(I’m tempted to say that judging by my own student experiences this is quite a strong finding, but that would be a cheap attempt at humour and would be beneath the lofty tone of this post. Observing that I’ve know some students who seemed to fit the description of ‘slash and burn horticulturalists’ would likewise be outside the tone of the post).

Findings such as these led to a major cross cultural study of economic behaviour in 15 “small-scale societies” directed by anthropologists from around the world. Researches got these societies to play these economic games and turned up greater variation than had been expected from the existing state of research.

Here’s a graph of the results of the ultimatum game.

As you can see at the top of this graph offering fifty percent of the pool is the modal offer. The Lamalera’s mean offer is above 50 percent but other societies including Pittsburg students have a mean either a little or quite a lot below fifty percent. And look at those ‘slash and burn horticulturalists’ that caused the fuss in 1996 the Machiguenga. They’re a grasping lot with a modal offer of below twenty percent. So do some other societies. What kind of societies are they?

The 15 societies were graded in a variety of ways including each society’s Social Complexity, payoffs to cooperation, degree of anonymous interaction, the scope for privacy and the societies exposure to markets and its size. Out of these indicators a new index of ‘aggregate market integration’ was created

The degree of market integration within these socieities and the mean ultimatum game offer they produce are strongly correlated as illustrated by the accompanying graph.

The researchers summarise their findings thus:

We found, first, that the canonical model based on pure self-interest fails in all of the societies studied. Second, the data reveals substantially more behavioral variability across social groups than has been found in previous research. Third, group-level differences in economic organization and the structure of social interactions explain a substantial portion of the behavioral variation across societies: the higher the degree of market integration and the higher the payoffs to cooperation in everyday life, the greater the level of prosociality expressed in experimental games. Fourth, the available individual-level economic and demographic variables do not robustly explain game behavior, either within or across groups. Fifth, in many cases experimental play appears to reflect the common interactional patterns of everyday life.

The same study suggests roughly what Adam Smith suggested with his picture of children, socialisation and the ‘impartial spectator’. The experimental literature with children is fascinating and very young like the kids themselves, with a lot of the work being done this century. But here’s the summary of the relevant point for our purposes from the same paper as quoted above.

¹here is intriguing evidence that children behave selfishly, but gradually behave more fair-mindedly as they grow older. An important exception is that about a third of autistic children and adults offer nothing in the ultimatum game presumably their inability to imagine the reactions of responders leads them to behave, ironically, in accordance with the canonical model.

Though these are ‘positive’ findings about how the world is, rather than how it ought to be, I will, when I manage to get the time, try to explain in the final installment of this series of posts why Smith’s whole schema is, contrary to the current way with social science, an avowedly rhetorical conjunction of positive and normative, of the is and the ought. If I really get my act together I’ll try to explain why this is a superior style of reasoning in social science to our own cherished insistence in the spirit of Adam Smith’s great friend David Hume on the complete distinction between the ‘is’ and the ‘ought’.

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