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Human Nature: An Economic Perspective

Author(s): Vernon L. Smith


Source: Daedalus, Vol. 133, No. 4, On Human Nature (Fall, 2004), pp. 67-76
Published by: MIT Press on behalf of American Academy of Arts & Sciences
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Vernon L. Smith

Human nature: an economic perspective

Fruitful social science must be very largely stitutes self-interest hu


by observing
a study of what is not. mans in a variety of contexts than we
- F. A. have to teach using models based on tra
Hayek, Rules and Order
ditional assumptions about self-interest.
This is becausemy half-century involve
J\n economist on the topic of ment in the development of experimen
writing
human nature is surely expected to talk tal economics long ago revolutionized
about decision making by narrowly self the way I think about economics. Mar
interested rational agents. These agents ket and other group decision-making
are assumed to choose among all possi have
experiments deepened my under
ble options the one that maximizes their standing and respect for the power of
defined as utili human beings to create institutions that
expected gain, variously
ty, profit, income, wealth, and so on, de enable them to discover ingenious new

pending upon the standard model in ways to pursue and satisfy their inter
voked. Moreover, ceterisparibus, the par ests. This creative process is neither de
ticular context of the decision is irrele liberate nor visible to the
consciously
vant in the standard model. participants.
But Iwill not be fulfilling such a sim From an economist's point of view, the
am I of human na
plistic expectation; neither going to most compelling feature
claim that people are not motivated by ture is sociality. It has been our species'
self-interest. In fact, on balance, I believe capacity for social exchange that has en
we have more to learn about what con abled task specialization and the produc
tion above bare subsistence that has sup
Vernon L. Smith, professor of economics and law ported investment in the creation and
at GeorgeMason University, won theNobel Prize utilization of knowledge. As can be seen
inEconomics in 2002. A Fellow of theAmerican in the ethnographic record, in daily life,
since 1991, he has authored or coau and in laboratory experiments, whether
Academy
thored nine books and more than two hundred it is goods or favors that are exchanged,
andfifty articles on capital theory,finance, natu exchange promises gains that humans
ral resource and eco seek relentlessly in all social interac
economics, experimental
tions. Focusing on narrow,
nomics. His most recent collection of papers is easily mod
eled, a priori conceptions of self-inter
"Bargaining andMarket Behavior" (2000).
est distracts us from this
underlying
? 2004 by the American of Arts truth.
Academy
& Sciences

D dalus Fall 2004 67

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Vernon L. we economists have in take deliberate action to do good for oth
Intellectually
Smith our roots in the ers.
on many ways outgrown
human Scottish Enlightenment. We have far As Mandeville so stated it,
efficiently
nature more technical knowledge of the econo "The worst of all the multitude did
my than Adam Smith did. But while our something for the common good."2
understanding of economics has grown Many contemporary scholars have mis
more sophisticated, we have abandoned, takenly reversed Mandeville's proposi
forgotten, and failed to build upon some tion, arguing that the SSSM requires,
of Smith's most significant insights. As I justifies, and promotes selfish behavior.
shall endeavor to explain, this failure has That exclusively selfish behavior can
in our to ex
been costly diluting and blunting yield benefits others through
our no sense allows us to conclude
understanding of the foundations of change in
sociality. that the existence of social exchange and
The good news, however, is that the its key role in increasing welfare necessi
insights of the Scottish intellectual tradi tates such selfish behavior. That A (self
tion have reemerged in the study of mo ish behavior in exchange) implies B
tivated human behavior using the meth (wealth benefits via specialization and
ods of experimental economics, and in a markets) says nothing about whether or
wide variety of applications of this tech not B implies A.

nology to the design of new resource Cultures with evolved markets have
management problems in the field. This enormously expanded resource special
renaissance in research has enabled the ization and have created commensurate
earlier to be explored
traditions and ex gains from exchange, and are wealthier
tended with contemporary tools of in than those that have not.3 This supports
and promises to our un Smith's fundamental two-part theorem
quiry, deepen
derstanding of human sociality. that wealth is derived from specializa
- -
tion the division of labor which in
./\dam Smith did not champion the turn is limited by the extent of the mar
standard socioeconomic science model ket. Thus, we have :
(SSSM) based on the self-interest as -> -?wealth.
exchange specialization
as it is used most
sumption today by
economists. In Smith's view, each indi By Smith's account, "This division

vidual defined and pursued his own in of labor... is not originally the effect
terest in his own way. Indeed, Smith has of any human wisdom, which foresees
been badly and repeatedly mischaracter and intends that general opulence to

ized with the title 'economic man.'1 This which it gives occasion. It is the neces
sary, though very slow and con
label ignores his overriding moral con gradual,
cerns ; itmay prevent us from appreciat sequence of a certain in hu
propensity
man nature which has in view no such
ing the nuances of the key proposition
extensive utility; the propensity to truck,
articulated by Smith and almost all the
other Scottish philosophers :to do
good
for others does not require individuals to 2 See Bernard Mandeville's poem, "The
Hive :or Knaves Turned Honest"
Grumbling
i Cf F. A. "Adam Smith (1723 -1790) : (1705), in Hayek, "Adam Smith," 82.
Hayek, quoted
His Message in Today's in The Trend
Language,"
on Political Econo 3 Gerald W. "The Frame
of Economic Thinking: Essays Scully, Institutional
mists and Economic : work and Economic Journal
History (Chicago University Development," of
of Chicago Press, 1991), 120. Political Economy 96 (3) (1988) :652 - 662.

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one thing for
and exchange gains they enjoy from ordinary market
barter, Human
"4 nature :
another. transactions prevent market exchange an economic
Individuals can use their increased from promoting specialization and cre perspective
wealth for consumption, or
investment, ating wealth.
to the poor, the or the David Hume, Adam Smith's Scottish
gifts symphony,
Smithsonian. Markets economize on was concerned with the limits
neighbor,
the need for virtue, but they do not elim of reason, the bounds on human under
- a
inate it indeed, markets depend on standing, and with moderating the exag
modicum of virtuous behavior, if they gerated claims of Cartesian rationalists.
are to avoid and en As F. A. Hayek has put it, "Descartes
heavy monitoring
forcement costs.
Ifmonitored and exter contended that all the useful human in
enforced can never cover stitutions were and ought to be [a] delib
nally rights
- con
every margin of decision, then erate creation of conscious reason... a

trary to the notion that markets depend capacity of the mind to arrive at the
on selfishness - in all rela a deductive
opportunism truth by process."6 To
tional contracting and exchange across a was
Hume, by contrast, rationality
time is a cost, not a benefit, in achieving phenomenon that reason discovers in
value from trade. An ideology emergent institutions : "the rules of mo
long-term
of honesty means that people choose to ... are not conclusions of reason. "7
rality

play the game of trade rather than steal, Smith developed this concept of emer
although property crimes may well pay gent self-organizing order for econom
the rational lawbreaker.5 Nor does peo ics. In this methodology, truth is discov
ple's altruistic behavior in dispersing the ered in the form of the intelligence em
bodied in rules and traditions that have
4 Adam Smith, An Inquiry into the Nature and
Causes ed. R. H. Camp formed, out of the ancient
of the Wealth of Nations, inscrutably,
history of human social interactions.
bell and A. S. Skinner :
(Indianapolis Liberty
Fund, 1981), 20. Thus, when Smith uses the This is the antithesis of the anthropo
of the invisible hand, he is referring
metaphor centric belief that if an observed social
to the essential that in markets
insight people
mechanism like reciprocity or
achieve ends that are not part of their inten language
tion ; i.e., people achieve more efficient is functional, then somebody, some
arrange
ments induced by the specialization-exchange where, somehow must have invented it.
nexus than is possible without that nexus. The I am not saying, however, that we can
more common, inappropriate, interpretation do without a constructive sense of ra
is illustrated in the from
following quotation we
Joseph Stiglitz ("Information and the Change tionality. Indeed, employ rational
in the Paradigm in Economics," in Les Prix tools to formulate the hypotheses used
Nobel, The Nobel Prizes 2001 [Stockholm: The to interpret observations alleged to arise
Nobel Foundation, 2002], 472): "The argument from an emergent order. For example :
of Adam Smith ... that free markets led to effi
individual families initially providing for
cient outcomes, 'as if by an invisible hand,' has
all their own consumption discover that
a central role in these [information eco
played
some of their
nomics] debates_The set of ideas that Iwill they can gain by trading
corn crop for
present here undermines Smith's theory and bumper hogs to add to
view of government that rested on it. have
They
that the reason that the hand be 6 F. A. Studies in Politics and
suggested may Hayek, Philosophy,
- or Economics : of Chicago
invisible is that it is simply not there at (Chicago University
least that it is palsied." Press, 1967), 85.

7 David A Treatise
5 Douglass C. North, Structure and Change in Hume, of Human Nature
Economic History York: Norton, (London : Classics, 1985), vol. 2, 235.
(New 1981). Penguin

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Vernon L. their herd; from this experience The common Sir Edward Coke
Smith they lawyer
on learn that they can transform corn into
championed seventeenth-century social
more norms as law au
human
hogs cheaply through trade than commanding higher
nature
through home production. As more and thority than the king. Remarkably, these
more either in corn or forces prevailed,
people specialize paving the way for the
hogs and trade in this manner, the com rule of law in England, which would be
becomes wealthier come so essential to the development of
munity through
greater individual wealth. This dynamic the American liberal social order. What
could be a form of Smith's "very slow allowed the rule of 'natural' or 'found'
and gradual" process through which law to prevail in England "was the deep
create unintended opulence and entrenched tradition of a common law
people ly
then choose how to utilize that opu that was not conceived as the
product of
lence. will but rather as a barrier to all
anyone's
The durability of ancient Judeo-Chris - a tra
power, including that of the king
tian norms of social stability and the rule dition which Edward Coke was to de
of common law in England are difficult fend against James I and Francis
King
to fathom without the concept of an Bacon."10

emergent evolutionary cultural order.


The early lawgivers did not make the law to David Hume, there are
./Vccording
they presumed to give ; they observed "three fundamental laws of human
just
social traditions, norms, and informal nature, that of the stability of possession, of
rules and gave voice to them, as God's, its transference by consent, and of the per
or natural, law: 'Tis on the strict
formance of promises.
observance of those three laws, that the
all early "law-giving" consisted in efforts
peace and security of human society en
to record and make known a law that was
nor is there any
conceived as unalterably given. A "legisla tirely depend; possibili
ty of a
tor" might endeavor to purge the law of establishing good correspondence
among men, where these are neglected."
or to restore it to its
supposed corruptions,
If only we could have had amore widely
pristine purity, but itwas not thought that
distributed appreciation of these princi
he could make new law_But if nobody
and some operating of
had the power or intention to change the ples, knowledge
how to implement them, in the rush to
law... this does not mean that law did not
liberalize the former Soviet Union.
continue to
develop.8
Hume's insight is the foundation for
I believe that Hayek's interpretation ap both personal exchange, based on small
well to what one finds in the first and impersonal ex
plies group reciprocity,
written law, Ur-Nammur's Code. The markets. Central to both
change, through
Sumerian clay tablets containing laws kinds of exchange iswhat economic the
inscribed in cuneiform script that ap
peared by 2050 B.C. reflected the social mer:
Thirty-Nine Firsts inMan s Recorded
History
norms and practices already described (Philadelphia
:
University of Pennsylvania
-
in Sumerian proverbs and fables.9 Press, 1981), 51 59,116 -131.

8 F. A. Hayek, Law, Legislation and Liberty, vol. 10 Law, Legislation and Liberty, 85,167,
Hayek,
i, Rules and Order : of 173 -174- For a examination and cri
(Chicago University thoughtful
81. see Ronald Ha
Chicago Press, 1973), tique of Hayek's arguments,
mowy, "F. A. Hayek and the Common Law,"
9 Samuel Noah Kramer, at Su Cato Journal 23 (2) (Fall 2003) : 241 - 264.
History Begins

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Human
orists have traditionally called property Property rights mean that, one, if I
nature :
use the term, a property
rights. As I right plant corn, then I have the right to har an economic
is a guarantee allowing actions to occur vest the yield of that corn, and therefore perspective
within the opportunities and constraints the right to prevent an unauthorized
defined by the right. Such human rights passerby from harvesting it; and, two,
need have nothing to do with property if I use some of the income from the
in the sense of land or physical assets. sale of that harvest to invest inmore
We automatically look to the state as the land, then I have the right to plant and
guarantor against reprisal when rights harvest from that additional land. To be
are exercised, but we also know that the is to have accumulated. To
'propertied'
state can often be as much a part of the accumulate is to not consume all that my
as of its solution. labor, and previous
problem savings-investment,
In any case, property rights predate has produced. This allows my accumula
nation-states. This is because social ex tion to remain at work in society at large

change within stateless tribes, and trade and for all others to benefit from my
between such tribes, predates the agri capital investment. This is the basis for
cultural revolution. Both social exchange all net wealth accumulation in society.
and trade implicitly recognize mutual There can be no other basis. If there is any
consensual rights to act when engaged abridgement of my right to so harvest
in voluntarily and spontaneously. But and accumulate, then there is a direct
how is it possible for property rights to abridgement of the right of all others to
emerge without an external enforcement the benefits of my accumulation
enjoy
authority? Repeated exchange: if you and to a corresponding reduction in
or grow I husband goats, their poverty.
gather grain,
and we trade our surpluses, then we each We should all love rich people, be
have a stake in the other's rights to terri cause
they
consume such a small per
tory and in a common emergent incen centage of their accumulation, leaving
tive to band together in defending those almost all of it to work in the economy
rights. and make the rest of us better off. But
Some political activists juxtapose rich or not, there are solid reasons why
property and human as if it is good economics to love thy neigh
rights rights
they were mutually exclusive phenome bor as thyself: each of us benefits
na. Those activists are
sadly confused. through exchange from the utilization
Property is that over which an individual of specialized knowledge possessed by
human, or association of humans, exer others.

cises some and sanctioned


recognized
specific priority of action with respect to v^ince the pioneering work of Boas
other humans. Only humans, not prop over a century ago, the
study of extant
erty, can be a tribal societies has
recognized by community hunter-gatherer
as allowed to act without reprisal from made plain the sophistication and diver
others. Moreover, such rights must have of hu
sity property rights throughout
over time if are to enable man Of the hundreds of exam
stability they history.
production. ples that could be cited, Iwant to quote
The essence of property rights is the one of my favorites, from Peter Freu
claim to the product of one's own labor chen's Book of theEskimos. As you read it,
and to the further productive yield gen keep in mind Hume's laws of human
erated by the savings from that product. nature.

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Vernon L. "A [polar] bear is so constructed that it this is the key condition -
share equally
Smith
on does not like to have spears in it," say the or more in the rev
flexibly remaining
human [Inuit] Eskimos. As if to prove what they enue.
nature - as
say, the bear they run right up to the These deep ethical principles surface
beast with their incredible courage and in laboratory that
experiments showing
hurl their puny weapons at it - takes the when there is no way to differentiate in
spears that have lodged deeply in its flesh dividual contributions, people support
and breaks them as if they were match the equal outcome rule. When contribu
sticks. tions can be differentiated, people tend
.. to custom, all the hunters to prefer a rule that rewards in propor
.According
- more
present are to get parts in the quarry, in tion to individual contributions
this case both of the meat and skin. There to those who sacrifice more for the
are three pairs of trousers in a bearskin. If
group. The literature developing these
there are more than three hunters present, social-psychological mainsprings of our
the ones who threw their spears last will goes back at least to George C.
humanity
usually be generous enough to leave their Homans's 1967 The Nature of Social Sci
parts of the skin to the others. The hunter ence, and has been widely examined and
who fixed his spear first in the bear gets in experiments. The point
replicated
the upper part. That is the finest part, for that I cannot overemphasize is that we
it includes the forelegs with the long mane are all a norms
collage of the and rules
hairs that are so much desired to border of human exchange, and that the rules
women's kamiks [boots] with. -
which we do not observe consciously,
... So the hunter measures with his and of whose work in enabling social
whip
handle from the neck down, and marks we are unaware - in turn de
stability
the length of his own thighs on the skin
pend upon context.
and cuts off at that mark. The next hunter
does likewise with the next piece, and the now, that you have been re
Imagine,
third one gets the rest.11 cruited to our economics for
laboratory
an When arrive, are
In terms of social exchange and its experiment. you you

paid $5 for appearing at the scheduled


economic function (I do not deny, but
time and place. You are escorted to a
cannot here consider, other important
computer terminal in a room with
functions), Iwant to note that the Inuit large
a
each at work
'first harpoon' property norm is an roughly forty terminals,
right
desk with partially enclosed sides to fa
incentive rule that rewards the greater
cilitate privacy. Others arrive and, when
risk and cost of being the first to har
all are seated, everyone reads through
poon this incredibly dangerous prey. It
the instructions on the monitor. You
is an equal opportunity rule, not an
are with one other
outcome rule, that evolved from randomly paired
equal
ancient prehistory. of the person whose identity you will never
Any member
know.12
hunting team is free to go first, pay the
risk cost, and collect the higher revenue.
12 Sometimes interactions similar
two-person
All others, however, whose contribu are conducted
to this 'double blind,'
- meaning
tions cannot be differentiated and that the experimenter can never know who
made what decisions. double-blind
Introducing
il is a way of social distance
Peter Freuchen, Book of the Eskimos (Cleve procedures changing
land: World 1961), by removing the experimenter and all others
Publishing Company,
53-54. from knowledge of the decisions.
subjects'

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A sequential move for two of persons i pass to their matched per
Human
procedure nature :
persons is displayed on your computer son 2, and some two-thirds or more of
an economic
screen. In the experiment you will be persons 2 cooperate. For example, in perspective
either as a person i or a per one version, person 1 can choose ($10,
designated
son 2. If you are a
person 1, you move $10) or pass to person 2, who chooses
first. You choose between two alterna between ($15, $25) and ($0, $40). You
:
tives $20 for yourself and $20 for person think that few will pass to person
might
2, or you can pass the decision on to per 2, since it is in their interest to take the
son 2. If you do not pass, the $40. In fact, half of the undergraduate
experiment
is over and you will each be paid $20. If subjects pass to person 2, and 75 percent
you pass to person 2, he or she has two reciprocate with ($15, $25). Incidentally,
alternatives: $25 for each ($25, $25) or the same fraction of graduate students
$15 for person 1 and $30 for person 2 ($15, choose to pass if they are persons 1, and
$30). All this is done privately to protect as many, 67 percent,
nearly reciprocate.
Hence, can survive
anonymity. cooperation training
If each is a narrowly self-interested in economics and game theory.14
'economic man,' i.e., chooses
always
the larger of two amounts of money for do these experiments reveal so
Why
him or herself, and each believes that the much cooperation?
other is similarly motivated, then per I :people are altruistic ;
Hypothesis
son 1will look ahead in the decision se like to even to
they give money people
and see that if he to
quence passes per they do not know and will never be able
son 2, she will elect the outcome ($15, to identify.
$30). Thus, person 1will 'rationally' Hypothesis II :people tend to recip
choose to opt out with ($20, $20). This rocate; they like to 'return the favor'
is the proffered equilibrium of the for when others make choices that benefit
mal game when it is played once be them.
tween players who are strangers with How can we
test, that is, discriminate,
no or future. between two hypothetical
these
history expla
What do we observe ? Among fifty nations? The reciprocity takes
argument
four subjects (twenty-seven re into account that person 2 sees that per
pairs)
cruited from
the general undergraduate son 1 gave up the outcome ($20, $20).
63 percent of persons 1 pass therefore that we do the same
population, Suppose
to their matched person 2, while 37 per experiment, except that we eliminate the
cent choose the predicted equilibrium in which 1 choose the
option person may
($20, $20). Of the persons 2with the op and instead re
predicted equilibrium,
to make a
portunity choice, 65 percent quire him to cede the choice to person 2.
elect to cooperate ($25, $25), while 35 this means he incurs no
Economically,
percent choose to defect ($15, $30).13 cost; psychologically, this
opportunity
We have data from many of these trust means his 'trust' is now involuntary.
game experiments with different payoff Then the entire game task reduces sim
outcomes ; typically, about half or more ply to person
2
choosing between ($25,

13 Kevin A. McCabe, Mary Rigdon, and Ver 14 Kevin A. McCabe and Vernon L. Smith, "A
non L. Smith, "Positive and Inten of Na?ve and
Reciprocity Comparison Sophisticated Subject
tions in Trust Games," Journal of Economic Be Behavior with Game Theoretic Predictions,"
havior and Organization :
52 (October 2003) Proceedings of the National Academy of Sciences 97
-
267 275. (7) (2000): 3777-3781.

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Vernon L. I predicts
$25) and ($15, $30). Hypothesis fold increase, from other
people. Kindness
Smith
on no difference between the choices made is the parent of kindness.15

2 in the
human
by persons 'voluntary trust' and Most of my career has been devoted to
nature
'involuntary trust' games. Hypothesis II,
the experimental study of market and
however, predicts that more persons 2
other exchange mechanisms with at
will choose to maximize their own
least four subjects. In one simple experi
reward. -
ment there were twenty-two subjects
Hypothesis II seems to be confirmed
ten buyers and twelve sellers.16
In twenty-seven Privately
experimentally. pairs of each buyer was assigned a value, and
all of whose persons 1must
subjects, each seller a cost. Unknown to everyone,
involuntarily trust persons 2, we observe
the demand schedule, defined by the set
that only 33 percent of persons 2 choose
of all buyers' values ordered from high
the predicted equilibrium ($25, $25). In est to lowest, ran from $3.70 to $3.10.
the voluntary trust case, person 2 implic
Also unknown to all, the supply sched
sees that person 1 has an
itly performed
action that enables person 2 to make him
ule, defined by the set of sellers' costs
ordered from lowest to highest, ran from
or herself off, but also to 'return
better
$0.20 to $3.80. These schedules inter
the favor.' In the involuntary case, no
sected at a uniform clearing price of
such interpretation of an con
implicit and at a volume of
$3.40 corresponding
tract is evident.
nine units traded. Buyers earned a profit
We interpret this behavior as driven
to given by the difference between their
by the human propensity engage in value and the purchase price from some
- in ex
exchange this context, personal
seller. Sellers earned a
What we learn from the profit given by the
change. experi difference between their unit private
ments is that this propensity is so strong
cost and the price received. No subject
that it survives anonymity in half or
knew the defining economic environ
more of the in
participants single-play ment, so each had to function
over 90 entirely
protocols ; in repeat interaction,
with only two pieces of information :the
percent of the subjects are able to sustain
outcomes.
personal private value (or cost) ;and the
cooperative
Adam Smith would have been public information generated by the
hardly
: open outcry of buyers' bids and sellers'
surprised by these results a
asking prices in version of the trading
Of all the persons... whom nature
points
mechanism known as the double auc
- a
out for our peculiar beneficence, there are tion two-sided generalization of the
none to whom it seems more
properly
di ancient progressive buyer-bid auction,
rected than to those whose beneficence we dating back to the Babylonians of 500
have ourselves Na B.C. and still used by auction houses to
already experienced.
ture, .. .which formed men for their mutu

al kindness, so necessary for their happi


15 Adam Smith, The Theory of Moral Sentiments
ness, renders man the peculiar ob
every (Indianapolis: Liberty Fund, 1976), 225. Notice

ject of kindness, to the persons to whom that Smith is


talking about reciprocity, but

he himself has been kind.... No benevo without using this word from our time. Then
he proceeds to talk about formation
lent man ever lost altogether the fruits of reputation
and positive cultural responses.
his benevolence. If he does not always
gather them from the persons from whom 16 Vernon L. Smith, Papers in Experimental Eco
he ought to have gathered them, he sel nomics (Cambridge
:
Cambridge University
dom fails to gather them, and with a ten Press, 1991).

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Human
vend collectables, tobacco, wool, and gate the dispersed private information nature :
other commodities. possessed by their participants. The re an economic
All subjects hear (or see, in computer sults are robust to variations in the sub perspective
based electronic auctions) the bids and and many cross-cultural com
ject pool,
acceptances that yield the serial contract parisons have been made.

prices. The
competitive equilibrium
clearing price and volume of trades, and /although Adam Smith recognized the
their particular realization in this exam that we
call reciprocity, he
phenomenon
are of course unknown to never realized that the personal senti
ple ($3.40, 9),
the subjects. Yet these simple markets ments he described in his first book were
converge across repeat trading periods a form of like the
exchange functionally
to approximately the ruling equilibrium markets whose consequences he spelled
within two to five periods (depending out so in his second book. He
eloquently
upon the thickness of the markets, the did not see the unity between
apparently
number of participants, and the parame the two works based on a broader uni
ters of the supply/demand environ versal of the "propensity to
conception
ment). The subjects deny, if asked, that truck, barter, and exchange."18
any kind of model can pre Itwas Hayek who saw clearly the ten
quantitative
dict their final price tendencies. They sion between the two orders of exchange
also deny that each could be doing as and the cultural that each posed
dangers
well for him or herself as possible, given for the other :
the restraining effects of what all others
we must our lives, our
are doing. Yet these are precisely the constantly adjust

of the to which thoughts and our emotions, in order to


properties equilibrium live simultaneously within different kinds
they have just converged in repeat inter
of orders according to different rules. If
action. The results have been replicated
we were to the unmodified, un
in many hundreds of experiments with a apply
curbed rules of the... small band or
and demand troop,
variety of different supply or... our families... to the order
[extended
schedules. These equilibrium observa
of cooperation through markets], as our
tions also have been extended to far
instincts and sentimental yearnings often
more interdependent multiple
complex make us wish to do, we would destroy it.Yet
commodity markets in which the costs
ifwe were to always apply the rules of the
in one market depend upon the volume
extended order to our more intimate
and price in the others.17
we would crush them.1^
These laboratory experiments have es groupings,

tablished that markets efficiently aggre


ics," Grand Hotel Saltsjobaden, December

17 Arlington Vernon L. Smith, and 4-6, 2001. The effects of using different trad
Williams,
in institutions have also been
John O. Ledyard, "Simultaneous Trading ing extensively
Two Markets," (Bloo explored ; see Smith, Papers in Experimental
Competitive manuscript
: Indiana of Economics.
mington University Department
Economics, 1986) ;Arlington Williams, Vernon
18 See Vernon L. Smith, "The Two Faces of
L. Smith, John O. Ledyard, and Steven Gjerstad,
"Concurrent in Two Experimental Adam Smith," Southern Economic Associa
Trading
Markets with Demand tion Distinguished Guest Lecture, Southern
Interdependence, "Jour
nal of Economic 16 (2000) : 511 - 528 ; Economic Journal 65 (1) (July 1998) : 1-19.
Theory
Charles Plott, In
"Equilibrium, Equilibration,
formation and Multiple Markets :From Basic 19 F. A. Hayek, The Fatal Conceit :
(Chicago
Science to Institutional Nobel of Press, 1988), 18. The
Design," Sympo University Chicago
"Behavioral and Experimental Econom italics are
sium, Hayek's.

D dalus Fall 2004 75

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Vernon L. Here ismyinterpretation of the prob Hence, the understanding that can stem
Smith
on lem of living within two "kinds of or from experiments that probe behavior in
human ders according to different rules" :In arrangements that do not exist.
nature
the world of personal social exchange, If undeveloped economies based on
which all of us live in no matter how personal exchange and local trade are to
we the trust that supports
deeply involved might be in special grow wealth, pro
ization and markets, our is among people well known to
experience ductivity
that good comes from deliberate acts of each other must somehow be transferred
- and reciproci to institutions that enable and
good sharing, kindness, exchange
ty. "I owe you one" is a common human to be extended to vast net
specialization
expression across many languages. works of strangers. One still must give in

By contrast, the work that markets do order to receive through that extended
and the unintended good
we
accomplish order, exactly as in traditional societies,
through them is completely foreign to but through the intermediary of mone
our direct experience. There tary and financial institutions that dis
personal
fore, it seems to us that weought always connect individuals from the pervasive
to be able to intervene, introduce con bonds that traditionally held them in
trols, and make them work for a greater mutual and dignity. Tak
trust, respect,
good. But failing proof of efficacy, any ing is nolonger plainly related to giving,
such policy can so easily not result in and the rules of the market that benefit

improvement, and can yield unintended all by deepening specialization may con
consequences that make worse. front, clash, and the old con
things destroy
Thus, restrictions that keep jobs from nectedness without making visible the
con
being exported prevent domestic firms productively superior replacement
from lowering cost to meet competition ; nections.

firms slip toward bankruptcy and the


are lost anyway, postponing the
jobs
natural predilection of the economy to
direct resources into new industries.

old economy are artifi


Yesterday's jobs
cially retained by policy restrictions,
blocking the channeling of funds into
new
creating tomorrow's jobs and
wealth. Political emerge from
lobbies
those wanting to protect their past ;no
lobbies emerge from those who will cre
ate the new products, technologies, and
- are part of what is not.
jobs for they
If unintended outcomes are not
plain
visible as part of our experience and
ly
are thus identified as the result of our
constructivist interventions, we fail to
learn the great harm we have done. The
value of all that ismust derive from that
which is not, from that which could have
been. Understanding what is requires

understanding what might have been.

j6 D dalus Fall 2004

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