Adam Smith, Scientist and Evolutionist: Part 1

Vernon Smith for AdamSmithWorks
In this series of essays, I want to illustrate the power of Adam Smith’s social system, developed in The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations to bring order to contemporary experiments where traditional game-theoretic models failed to predict human action even under the conditions of anonymity and to elaborate on lessons that behavioural scientists should draw from Smith’s works. In Part 1, I outline Smith’s social, evolutionary system of Sentiments and its relevance to both human decision making and the broader rules of human conduct. In Part 2, I apply these rules to game theory to show how they improve upon traditional models and explain why the orthodox response to the failure of those models falls short of Smith’s system. Finally, in Part 3, I explore the implications of Smith’s social-moral system to trade, wealth, and human liberty.






Part 1: The Foundation of Smith’s Social System


The eighteenth century opened on the last 27 years of the life of Isaac Newton (1643–1727), who had a profound influence on how people thought about the world in which they lived. Perhaps no figure was more significantly affected by Newton’s thought than Adam Smith (1723–1790), who was destined to envision and describe a new, freer, and more prosperous world, enabling a leap into the future for the classical liberalism established by John Locke (1632–1704). 




Early in his career, Smith wrote his essay, History of Astronomy, which revealed much about his intellectual future. Published posthumously (Smith, 1795), this work is a testimony to Smith’s early admiration for the Newtonian system and provides a glimpse into his scientific program and its inspiration. This essay is about Wonder, Surprise, and Admiration—sentiments that fuel the human imagination and curiosity, helping us to understand and explain the observed order in the physical world. It describes the discovery that that order can be explained by a system governed by invisible forces with rules of motion that “recommend it to the imaginations of mankind.” (Smith, 1795, p 103) Newton’s profound accomplishment was a theory that could account for the observable motion of all bodies on earth and in the heavens, ranging from the moon to the comets, based on postulated forces of gravity and inertia that were invisible to human awareness. Newton saw order in the physical universe, discovered the rules that governed that order, and thereby modelled the invisible forces of that governance.




Similarly, Adam Smith observed order in human social, political, and economic life as expressed in Roman and Greek history down to the Northern European cultures that surrounded him. Smith’s program, and that of others in the Scottish Enlightenment, was to inspire and launch a methodology for discovering the forces in human sociality and economy that governed and shaped that order but were invisible to human awareness. 




Smith published two books in a lifetime of intense scholarship. His first, a work in social psychology, was The Theory of Moral Sentiments (Smith, 1759; hereafter Sentiments). Sentiments was well-received in its time, but failed to attract a following in the 19th century. Psychology and social psychology would not be distinguished from natural philosophy until over a hundred years later. His second book, An Inquiry into the Nature and Causes of the Wealth of Nations (Smith, 1776; hereafter, Wealth) was a book for all time and established the field of economics. When Smith died in 1790, after completing the extensively revised and expanded sixth edition of Sentiments, he had already become widely known as the author of Wealth.[1] Smith saw Sentiments as a superior work to Wealth.[2] I think he was right, in part because his first book was essential in conveying the full implications and importance of his second book as a contribution to human understanding. But posterity would judge otherwise; Wealth was a spectacularly successful book, like few others in history. It was digested by scholars throughout Europe and America and by statesman such as William Pitt the Younger, prime minister of Britain for 17 years. 




Sentiments is about sympathy, an undefined primitive human characteristic known and identified through the work it does in enabling the emergence of the human capacity for fellow-feeling (Smith, 1759, p 10). Fellow-feeling provides the experiential foundation for our rule-following conduct and constitutes the evolutionary basis for human sociality. Similarly, gravity in Newtonian physics was a primitive concept known by the work it does in governing the orderly motion of all bodies in the observable universe, as it was known in Newton’s time. Both systems sought to explain and understand observations by means of postulated forces at work in nature, but insensible to human awareness. 




The evolutionary cultural nature of Smith’s thought is evident in both Sentiments and Wealth. He had a curiosity-driven fascination with change: in history, in the heavens, and in the social and economic world. Smith sought to explain through systematic analysis disciplined by “experiments”. In other words, he sought to explain using test cases.




Smith’s system rested on axioms about human behavior: we go through a social maturation process, we exhibit self-love, self-command, and an asymmetry between our feelings of joy and sorrow; and three principles of human conduct: human sociality as the driver of our motivation, our tendency toward social mediation, and our love of what is honorable. These axioms and principles help describes the steps in the social maturation process, through which from birth we learn to “humble the arrogance of our self-love and bring it down to what others will go along with” (Smith, 1759, p 83). As we socially mature, we naturally bring ourselves in line with society.





Axioms of Human Behavior
Smith’s fundamental axiom underlying human conduct is self-love; technically, in modern language, we are explicitly said to be “self-interested” and never satiated. In other words: more money (or more of a good or resource with monetary equivalent) is better, less is worse.[3] In modern economics this axiom directly motivates and is even assumed to determine individual action. But in Sentiments, man’s inherently self-loving (or “self-interested”) nature does not imply that people fail to nurture empathetic, other-regarding attitudes and conduct toward others in their community of family, neighbors, and friends. By “other-regarding”, I mean that the individual’s specific actions are sensitive to whether they benefit or hurt others, and not only to the individual’s own gain or loss.




For a person’s conduct to be other-regarding, they have to know, or at least be able to reasonably expect to guess, how others are likely to benefit or be hurt by any specific action. The context (situation, circumstances) in which an action takes place allows people to imagine what alternative action(s) could have been taken, but were not. In Sentiments, Smith assumes that everyone knows that everybody is self-interested and non-satiated. The fact that everyone knows (it is common knowledge) is sufficient to allow people to judge the potentially beneficial or hurtful effects of their context-specific actions on others in their social groups. Without knowledge about who is hurt and who benefits from an action, an actor cannot make the choices that will benefit those around her. In Sentiments, this axiom is essential to the socializing process in which our actions are governed by appropriately other-regarding rules. 




These considerations lead to a second axiom. We each experience the benefits or hurts that are a direct consequence of the actions of others; and, together with context, we make judgements about their intentionality. Others always mark their approval or disapproval of our actions in response to the benefits or hurts they feel. In this conjunction with others, we each gradually come to see ourselves as others see us. Hence, the mature “impartial spectator” within us learns to exercise “self-command”, better enabling us to choose actions of a beneficent nature toward others and to avoid the self-loving temptations of the moment that may be hurtful toward others. Sentiments is about articulating a process whereby we become socially effective in our relations with others, all the while being strictly self-loving.  




A third axiom states that human sentiment is characterized by a fundamental asymmetry between our joy and our sorrow. Between our natural normal state, 
“…and the highest pitch of human prosperity, the interval is but a trifle; between it and the lowest depth of misery the distance is immense and prodigious. Adversity, on this account, necessarily depresses the mind of the sufferer much more below its natural state, than prosperity can elevate him above it.” (Smith, 1795, p 45)




In discussing justice,[4] Smith uses the asymmetry between how we feel gains and losses as a principle that explains the difference between how society treats violation of property and violation of contract: “To be deprived of that which we are possessed of, is a greater evil than to be disappointed of what we have only the expectation. Breach of property, therefore, theft and robbery, which take from us what we are possessed of, are greater crimes than breach of contract, which only disappoints us of what we expected.”[5] (Smith, 1759, p 84) 


Principles of Conduct
Smith’s model of sociality talks about a person’s conduct, rather than about their decisions, because he is concerned with more than just isolated decisions: with manners and the patterns of action we take as individuals in our relations with others. Each action is richly sensitive to its particular contextual circumstances, and these patterns establish a person’s character. But our rule-following behavior need not be a deliberate, self-aware process. Rules result from invisible forces that are outwardly manifest in the observable social order. 




Certain principles govern Smith’s modelling of conduct.

First, human motivation arises as part of our sociability. There is no such thing as an individual who is separate and distinct from her social origins and experience. The desires that motivate us come from our inner experiences of joy and sorrow, which are manifest in the world in the form of gains and losses.[6] Gains come from the desire for praise and praise-worthiness, while losses come from the desire to avoid blame and blame-worthiness. “Praise and blame express what actually are; praise-worthiness and blameworthiness, what naturally ought to be the sentiments of other people with regard to our character and conduct.” (Smith, 1759, p 126) Consequently, the third axiom comes into play:
"We suffer more…when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better. Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages.”[7] (Smith, 1759, p 213).

What is at stake is more than our wealth. We can also lose our health and our rank and reputation. In other words, we can lose our social standing in the beliefs and thoughts of others and, reflecting on their lost esteem for us, we feel worse about ourselves.  




A second principle derives from the axioms of self-love and social maturation. Our awareness of society mediates the actions we choose, and our actions constitute “signals” to our fellows, which are shaped by how we guess they will be judged (their propriety) in a given situation, circumstances or context in which the action is to be taken.[8]  Thus,
“As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation.” And “Sympathy…does not arise so much from the view of the passion, as from that of the situation which excites it.” (Smith, 1759, p 9, 12)

Smith’s vision of the social world is one of constant change, learning, and adaptation. The impropriety of a hurtful action may readily invoke a rebuke or punishment that would lead us to avoid taking the same action under similar conditions in the future. The propriety of a beneficial action is likely to bring reward and encourage us to repeat that sort of action in the future. If an equilibrium exists in the modern sense, it lives in “rule space” and is under constant testing and reexamination through all of our interaction (and our interpretation of those interactions). This testing and reexamination of the propriety and praiseworthiness of our behavior shapes the cultural fitness of any societal equilibrium.




Finally, Smith refers to “the love of what is honorable” (Smith, 1759, p 137) and thus to our natural desire for both praise and praiseworthiness and to avoid blame and blameworthiness. We are especially disposed to consider the worthiness of our actions. Here, in brief, is an example to illustrate the importance of worthiness (and its distinction from praise or blame—that is, from the reaction of others) from my personal experience. 




In the Tucson suburbs, homeless individuals occupy the center islands of major intersections and offer newspapers for sale. I occasionally buy a paper from the man who occupies an island near my home, giving him $5 for a $2 newspaper. But I rarely read media newsprint anymore; so approaching the island one day, I see the familiar man at his station. I stop and roll the window down, reaching out with a $5 bill in my right hand. He reaches for the bill with his left, and extends his right hand to me holding the newspaper. I say, “That’s ok, you can keep the paper.” He instantly pulled back both hands, replying matter-of-factly, “I only sell newspapers.” Although startled, I recovered and said, “I’ll take the newspaper.” He looked at me and smiled; we had a contract. 




Notice the detailed circumstances. My intention had been to be doubly generous, let him sell the paper to somebody else. But he corrected my error: He was a business man, not someone looking for charity. It was therefore entirely acceptable for me to show my gratitude for his service by giving him $5 for a $2 newspaper, but there was no way I could refuse the paper while he accepted the bill without those actions giving the lie to the integrity of his work-ethic. He would not allow me to be an instrument of his corruption. I corrected my error, and in a later encounter saw more evidence of his devotion to his customers. Neither of us doubted that the other preferred more money to less. The monetary stakes were minor—what mattered more was our conduct. 




Smith knew that although praise and praiseworthiness (and blame and blameworthiness) are related, they are not necessarily so, 
“The love of praise-worthiness is by no means derived altogether from the love of praise. Those two principles, though they resemble one another, though they are connected, and often blended with one another, are yet, in many respects, distinct and independent of one another.” (Smith, 1759, p. 114) 

An action can therefore be something that earns praise or something that makes us worthy of praise. And, as we can see from this story, the circumstances in which a decision is made are also relevant to how an action is judged. 




Armed with the knowledge that humans are self-interested, exhibit self-command, and feel pain more than pleasure, and that we are socially motivated, tend to adapt to one another, and love what is honorable, we are armed with the tools that Smith provides for social analysis. While Smith’s axioms and principles may seem fairly common sense, they are not the basis on which economists since the neo-classical revolution have predicted and modeled human behavior. In Part 2, I will examine the failure of the neo-classical model to predict behavior in a lab and explore how Smith’s model of behavior and societal evolution can be formally modeled in a game theoretic context. 









[1] As an economics graduate student in 1950, I read Wealth. Nowhere in Wealth does Smith cite Sentiments (1759), leaving the student-consumer without a clue as to its importance as a prolegomenon to understanding his second work.

[2] Ross (1995, p 177).

[3] In Sentiments, proper attention to self is a virtue to be respected: “We are not ready to suspect any person of being defective in selfishness…Carelessness and want of oeconomy are universally disapproved of, not, however, as proceeding from a want of benevolence, but from a want of the proper attention to the objects of self-interest” (S, p 304)

[4] I will expand on the role of sentiments in justice in part three of this essay series.

[5] Although this property of law clearly reflects Smith’s proposition on the asymmetry between gains and losses, he does not explicitly make that cross reference. Elsewhere, for example in the quotation on page 213, Smith cross references page 45 where he first develops the idea of gain-loss asymmetry. I do not see that omission as significant in terms of his understanding.

[6] Kahneman (2002) was cited by the Nobel committee for his contributions “concerning human judgement and decision making under uncertainty.” The asymmetry between gains and losses, particularly as it is manifest in decision under uncertainty, is perhaps one of the most persistent and well-documented regularities established since the 1970s in the decision and judgement literature by experimental psychologists, behavioral, and experimental economists. It is significant that none of this literature was influenced by Smith (1759), whose contribution was not so much lost to modern thinking and research, as was never found. It is equally significant that the subsequent literature independently discovered many of the principal elements that Smith articulated, reproducing, if less comprehensively, important aspects of his analysis and its implications 200 odd years later. 

[7] This passage explains why innovation is relatively rare; why so few penetrate the boundaries of tradition to risk failure.

[8] As we will see below in applying Smith’s framework to a two-person extensive form game in Part 2, circumstances—the set of moves and resulting payoffs—all matter because intentions are conveyed not just in the action taken but in the available action that could have been taken at each decision node. The situation as read by others help form the rules-as-conventions or cultural norms that we follow.









 



References
Kahneman, Daniel (2002) “Maps of Bounded Rationality: A Perspective on Intuitive Judgment and Choice.” Prize Lecture. Stockholm: The Nobel Foundation.


Ross, Ian S. (1995) The Life of Adam Smith. Clarendon Press, Oxford: Oxford University Press.


Smith, Adam (1759) The Theory of Moral Sentiments. Edited by D. D. Raphael and A. L. Macfie. Oxford: Oxford University Press, 1976.


Smith, Adam (1795) Essays on Philosophical Subjects. Edited by W.P. D. Wightman and J.C. Bryce. Oxford: Oxford University Press, 1980


Smith, Adam (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, Volumes 1 and 2. Edited by R. H. Campbell and A. S. Skinner. Oxford: Oxford University Press, 1976.