The Betrayal of Liberal Economics: Volume II: How We Betrayed Economics 3030106705, 9783030106706

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The Betrayal of Liberal Economics Volume II: How We Betrayed Economics Amos Witztum

The Betrayal of Liberal Economics

Amos Witztum

The Betrayal of Liberal Economics Volume II: How We Betrayed Economics

Amos Witztum Centre for Philosophy of Natural and Social Sciences London School of Economics and Political Sciences London, UK

ISBN 978-3-030-10670-6    ISBN 978-3-030-10671-3 (eBook) https://doi.org/10.1007/978-3-030-10671-3 Library of Congress Control Number: 2019934108 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To the three pillars of my life: My wife, Daphna My son, Alon My daughter, Tamar.

Acknowledgements

It has not been easy to rise against such a powerful and dominant discipline like economics. It is extremely difficult to argue against something which, at least on the face of it, has the affluent appearances of success. I needed a lot of support, which I was lucky to receive. This book had been four years in the making and it would not have reached fruition without those who gave me the support that such a project requires. First of all, I must express my deepest gratitude to Professor Pascal Bridel, from the Centre Walras-Pareto at the University of Lausanne, who has been a dear friend to me over many years and has always showed appreciation and support to my line of research. With this book, Pascal was kind enough to offer me his companionship from the very beginning of the project. With infinite patience and diligence, he carefully read each chapter, gave me valuable comments and engaged with me in arguments and discussions. It is difficult to overstate the isolation within which those who wish to argue against the mainstream operate. Pascal was a lifeline to me. Not only has he lent me his mind, his heart was there too. I have also benefitted a great deal from the generosity of the Department of Economics at the Hebrew University of Jerusalem. Though very much a prominent mainstream department, it has nevertheless invited me, as a visiting professor, to regularly teach two courses that were entirely based on my own research and helped me organise my thoughts in the process of writing this book. It is rare in this day and age to find mainstream vii

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economics departments that are willing to embrace genuinely critical thinking. I am therefore particularly grateful to Professor Saul Lach, who in his capacity of head of department opened the door to such an adventure. More so, I am grateful to my friend Professor Joseph Zeira, who was not only instrumental in facilitating the engagement with the department but has been a wonderful friend and supporter over many years and throughout the writing of this book. I am also in debt to the numerous and wonderful students who came to my courses and showed incredible interest and enthusiasm that flowed like chilled and clear water in the parched landscape of academic dissent. The late Professor Tony Atkinson was another source of inspiration and strength. In spite of his illness, he showed great interest in my work and I benefited a great deal from the numerous discussions which I had had with him in the years leading to his untimely death. Tony’s enthusiasm for this project—emanating from the depth of his decency and commitment to justice—was an inspiration and an important fuel that helped drive my own stamina. Throughout these years in the academic wilderness, I was lucky to be supported by the friendship of Professor David De-Meza. Although himself part of the establishment and, thus, the object of my slings and arrows, and although he tried heroically to defend the indefensible (even though he was the one in the fortified castle), he never failed to be there for me and to give encouragements in hours of need. As is the case with such large undertaking, one can never escape the cyclical nature of hope. David, like the topic of insurance which he loves so much, helped smoothen the experience. And now I come to the essence of things. There are three people in this world who hold the edges of my soul supporting the canopy of my being. They are my wife Daphna, my son Alon and my daughter Tamar. I could say that their love has given me the inspiration and the strength to endure the treacherous winding road that is the creative process in a very harsh environment, and it did. I could say that it was my love for them that has filled my purpose and has fed the engine that drove me all the way to here, and it has. But the truth is that there are no words to describe what these three people mean to me.

Contents

Volume I Prologue: Introduction and Summaryxiii 1 An Illusion of Order  1 1.1 Early Conceptions: A Conditioned Order   6 1.2 Post-Enlightenment Developments: Internalised Conditionality 16 1.3 The Modern Era: Idealised Realism  27 Appendix: About Synchronic and Diachronic Orders  38 Bibliography 45 2 The Power of Beliefs: The Organisational Principles of Economics’ Paradigmatic Core 47 2.1 The Paradigmatic Core  52 2.2 The Nature of Theoretical Obstacles and Developments  62 2.3 The Hard Problems  67 2.4 Growth: The New Holy Grail  98 2.5 Conclusion 109 Appendix112 Bibliography119 ix

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3 A Sense of Irrelevance121 3.1 Share of Governments 131 3.2 The Share of Wages in National Income 144 3.3 Employment 163 3.4 A Note on Growth 195 3.5 Conclusion 202 Appendix206 Bibliography214 4 On Freedom and Justice: A Note Pertaining to Economics’ Liberal Connections217 4.1 Freedom, Liberty and Sovereignty: A Note 223 4.2 Markets, Justice and the Idea of Due Share 248 4.3 Conclusion 298 Bibliography301 Bibliography305 Index327 Volume II 5 On Human Sociality I333 5.1 Being Social 341 5.2 A Prehistoric and Evolutionary Dimension 364 Bibliography380 6 Human Sociality II: Intrinsic Sociality, Self-interest and Social Organisation385 6.1 Social Distance and Social Organisation 395 6.2 Cognition, Development and the Conception of Society 402 6.3 Conclusion 418 Appendix421 Bibliography422

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7 The Conception of the Individual in Modern Economic Analysis425 7.1 The ‘Choice’ of Rationality 430 7.2 Rationality and Sociality 437 7.3 Rationality in Economics 450 7.4 Socialising the Instrumentally Rational Individual 500 7.5 The Problem with Homo economicus539 7.6 Conclusion 569 Bibliography572 8 The Classical Alternative575 8.1 The Smithian Narrative 593 8.2 The Moral Benchmark I: The Individual 623 8.3 The Moral Benchmark II: The Analysis of Systems and Distributions648 8.4 Spillover and the Beneficence of Natural Distributions 674 8.5 Summary of Moral Argument 683 8.6 Conclusion 686 Bibliography694 Epilogue: Quo Vadis697 Bibliography739 Index761

5 On Human Sociality I

Synopsis: Up to now, the focus of our attention had been the way in which economics’ paradigmatic core betrayed us by its false promise. Here, however, we begin the examination of whether this lamentable state of affairs is not really a result of the way we—notably, the academic community—have betrayed economics. As modern economics is fundamentally an individualistic theory, its rise and fall are very likely to be associated with the accuracy and relevance, of the way in which it conceives the individual. Given that one of the main objectives of modern economics had been to create a theory which is both universal and ethically neutral—and, thus, suitable to all societies—it raises a question whether human nature does indeed lend itself to such an understanding. Does the conception of the individual in economic analysis take into account the fact that humans naturally live in societies and that economics is, in the end, part of a broader social system? Therefore, we begin our investigation into the origins of economics’ possible failure by inquiring about the nature of human sociality. The first port of call is about the possible meaning of being social. To have a clear vision of the subject, we propose from the outset two extreme visions of what human sociality may mean. At the one end, we have the purely functional view according to which, individuals’ sociality is a reflection of the usefulness of others to each individual. We form social ties or © The Author(s) 2019 A. Witztum, The Betrayal of Liberal Economics, https://doi.org/10.1007/978-3-030-10671-3_1

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we care about the others because they are useful to us. At the other extreme we have the case where individuals are innately, or intrinsically, social and where social relationships have no obvious immediate functional purpose for the individual. It is evident that given that the origin of morality lies in sociality, the first extreme suggests a complete subjugation of ethics and society to the usefulness of the organisation to the individuals who formed it. The other extreme, on the other hand, suggests that ethics and social principle may precede the principles of economic organisation. We identify along this spectrum some key social thinkers like Hobbes, Locke, Spencer and Durkheim, and we are also able to position along it the conception of the individual embedded in both liberal classical and modern economics. By adding a question with regard to the possible origins of the social drives—on a spectrum between the instinctive and the cognitive—we are able to extend our investigation into some of the evidence emanating from evolutionary biology, anthropology and comparative neurology. The evolutionary story seems to suggest that humans are predominantly social beings and that their sociality began as innate but turned into cognitive. Using Hamilton’s contribution in the form of ‘inclusive fitness’—of which ‘individual fitness’ is a special case—we examine the path which humans have taken from innate-based sociality to abstractly conceived cognitive sociality. We conclude that such an analysis would lead towards the liberal classical conception of the individual rather than to the one adopted by modern economics. It suggests that human sociality cannot really be understood as purely functional—which is how it is conceived in modern economics—and therefore, neither ethical principles nor social organisation can be predicated on some neutrally formed principles of economic organisation. * * * So far, we looked at that which prevented the promise of economics’ paradigmatic core from materialising. We looked at how asymmetric powers, asymmetric information, incompleteness and the lack of a meaningful process of convergence prevented the outcome of competitive decentralised decision-making from leading towards an order which could be considered both synchronic and diachronic. Yes, there could be

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a co-ordinated outcome to competitive interactions (i.e. synchronic order) but such an outcome would not really solve the economic problem society is presumed to be facing. This in itself should raise doubts with regard to the long-term sustainability of such a system (i.e. diachronic order). We also saw that reality is piling even greater challenges in the sense that the fundamentals of the economic reality which are modelled by modern economics may no longer seem relevant. As the domain of competitive interactions is de facto reduced and the ability of individuals to access national income through markets increasingly limited, the whole project of decentralisation appears questionable. Finally, we challenged the view according to which the pursuit of decentralised competitive interaction based on rational utility maximisers can be justified on the grounds of its universal association with freedom and justice regardless of its more general economic consequences. It is interesting to note that in spite of all these difficulties the unwavering message of economics’ paradigmatic core stubbornly remains that competitive decentralised decision-making produces a natural, or self-­ regulating, order that is socially desirable and which is both universal and ethically neutral. As such, it is indeed the appropriate form of economic organisation as it is consistent with all possible forms of social values and organisation. Every society, therefore, without exception, should aspire to get as close as possible to such an arrangement. And the world at large should be based on the same principles of economic organisation. Yes, there are occasions when intervention may be required but only in as much as it supports or emulates the working of the markets. In a paradoxical manner, we have returned to the origins of the idea of a natural order which we discussed in Chap. 1. We noted there that in both the Taoist tradition and the early Christian thought of St Augustine a natural self-regulating order, at least from the human perspective, is an ideal rather than a reality. The here and now was about ensuring that the conditions for the ideal to materialise are met but not to live the dream. Modern economics is working along a very similar way of thinking. Economists are, of course, fully aware of most of the difficulties we listed in the previous chapters. Nevertheless, they still believe that the ideal of such a system is attainable and should be, dare I say, almost religiously pursued. If we could only find ownership structures, contracts and

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regulations which could direct the competitive system of decentralised decision-­making to those allocations and distributions which solve the economic problem (thus achieving both synchronic and diachronic orders), a natural order—the ideal—will be achieved. Thus, instead of changing individual behaviour as is proposed by the Taoists, Christianity and, perhaps, all other religions—which is, of course, a tall order—we now have a seemingly much more manageable and appealing task: we will change institutions as if they are really independent of the nature of the individual. In essence, there is not much of a difference between the preaching of the church in the light of the Heavenly city and the preaching of economists in the light of the Shangri-La—or, rather, Eldorado— of competitive, market-based decentralisation. But the one question we have not yet addressed is that of the promise, the ideal, itself. Whether or not we can ever hope to achieve the ideal is, no doubt, secondary to the question of whether we really want to reach it at all. Recall that the great promise of economics’ paradigmatic core is that if people were left freely to pursue their own interests, there exists a co-ordinated outcome where the economic problem is solved. Namely, there is an allocation where resources are used in a way which maximises the value of economic activities and where all rational wants coincide. It solves the economic problem of each individual in society and that of society as a whole (which, of course, is nothing more than the sum of its members). Clearly this is something which is universally desirable and which would therefore constitute a natural order. But this conclusion is predicated on a conception of the individual as a rational utility maximiser in the sense that he or she would always choose the best means to achieve their desired end. We must also assume that each one of them is predominantly concerned with solving their individual economic problem.1 In other words, the economic promise, or ideal, which contains a conception of an economic problem as well as a mechanism for its resolution, is based entirely on a particular conception of the individual and his or her relationship with the others and with society.  We refer here to the relationship between allocative (Pareto-) and productive efficiency.

1

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Economists would like to think that there is nothing particular about the idea of the rational utility maximiser and that it is sufficiently universal to capture all sorts of preferences and behaviours. For instance, the fact that we may observe people acting in what may appear to be a social way, that is, benefiting the other (even at some cost to one’s self ), does not mean that this cannot be the result of a decision made by a rational utility maximiser. However, even if this were true, it does not alter the fact that within such a context whatever are your preferences your actions would always be aimed at directly serving your own immediate interests (the best means to an end which you seek to achieve). This in itself— independent of the contents of preferences—has many implications for the general question of social organisation and the role of economics in society. It would be reasonable to suppose that if people performed social acts for other reasons than their immediate direct interest, say, for instance, out of duty, society is very likely to be different.2 In other words, it is not the contents of one’s preferences which matter as it is the reasons for one’s actions. A society which is made up of people who live in it because the others are useful to them (serve their interests) would be very different from a society where individuals have an intrinsic desire to be with, and live with, the others.3 But even if we stick with the modern view that it is all just a question of preferences, the nature of human interactions and, subsequently, outcomes will be very different if people had different sets of preferences. In recent developments in behavioural and experimental economics, it has been observed that the outcomes predicted on the basis of the standard rational utility maximiser did not materialise. But to explain the actual, different, outcome, which did not appear to be consistent with a self-­ interested act, economists were not in a hurry to discard the notion of the rational utility maximiser. Instead, they claimed that the unexpected outcomes could be explained as a result of interaction between rational  Some would say that dutiful acts are also self-serving as they maintain a certain social order. Even so, there will be a difference between social interaction based on immediate personal interest and a broader long-term one. I would expand on this question further down this chapter and in the following one. 3  In such a case, their social acts will not necessarily be driven by their proposed consequences to the person who acts. 2

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utility maximisers who have social preferences.4 In other words, what appears to be a social act is, in fact, a self-serving act of an individual who is (functionally) interested in the other. But if the nature and consequences of the interaction between people with social preferences are so fundamentally different from those which would come about in the case of individuals without them, how can we conclude that the same institutional arrangements (competitive decentralised decision-making) will be socially desirable regardless of the nature and diversity of participants’ preferences? If the self-interested action of an individual with social preferences is to collaborate with the other and, therefore, act in a way which cannot be purely depicted as competitive, would the outcome be socially desirable if other agents had different preferences and the institutional set-up was that of competitive decentralisation? Be this as it may—and we shall expand on these issues later in the book—what seems to be important is that the results from experimental economics drove a growing number of economists to recognise that individuals are more socially minded than is implied by the standard model even though this has not led to a reformulation of the way economists depict individual behaviour.5 What is even more interesting about this process is that in so doing, some of them find their way back to classical economics and, in particular, Adam Smith, where the idea of sociality seems to have a much greater part in economic analysis.6 Unfortunately, none of this has led to any comprehensive attempt to revise or re-examine economics’ paradigmatic core.7 The proof, of course, is in contemporary textbooks and the ad hoc nature of this line of research.  See for instance, Charness and Rabin (2002) and Fehr and Schmidt (1999). We will discuss these issues in greater details in Chap. 7. 5  See, for instance, Heinrich et al. (2004), Bowles and Gintis (2011), Meier (2006), to name just a few. However, note that, as I said before, in most cases economists interpret social mindedness as a different form of preferences. In this respect, they do not reject the conception of the rational utility maximiser and they are not telling us much about the significance that this might have to the question of economic and social organisation. I will discuss later whether there are other ways to discuss social mindedness, which may not be just an expansion on the idea of preferences. 6  For the harking back to Adam Smith, see, for instance, Smith (1998). It is, of course, one of the themes of this book that classical economics differs fundamentally from neoclassical economics in being predominantly a social theory. I shall, of course, revisit these points as we progress in our analysis in the coming chapters. 7  It is important to note that not all accept the experimental results as sufficient reason to revise economics’ premises. The reasons for this are embedded in the questionable nature of the evidence generated either by such experiments or by the possibility that the results could still be interpreted 4

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So, could it be that the economic ideal—the one which we seem to be unable to accomplish—is based on a wrong conception of individuals and the nature of their interactions? Could the promise of modern economic theory, if agents were genuinely social, remain the same and continue to be consistent with all possible social values and morality? It is not too difficult to see that societies around the world differ in significant ways. Can one seriously believe that the cultural and social diversity around the world has no bearing on the question of economic organisation? Do we really believe that diversity is merely a reflection of different stages of development and that in the end all societies will look the same (and in some people’s mind, like the USA or the UK)? Or, perhaps, are we in a situation where power structures are such that an ideology, derived from the misguided promise of economics’ paradigmatic core, can impose institutional arrangements on societies that are inconsistent with the values and nature of those societies? To attempt to answer some of these questions we must try to understand what society may mean and in what way, if at all, can the study of economics be meaningfully and effectively segregated from its other components. Not only that, the way we understand the relationship between individuals and society must influence the way we conceive the economic agent, the economic problem, and the way we understand the interactions between such agents. However, to remain in the methodological environment within which the economic ideal has been conceived, we will stick with the underlying principle of methodological individualism, and will try to establish whether individuals are genuinely social being and what is the nature of their sociality.8 This, in turn, will suggest something about the general nature of social organisation which is bound to be useful in understanding the tenets of economic theory and their relationship with other constituencies of social organisation. as an expression of the self-interested rational utility maximiser in the spirit of evolutionary biology. Binmore (2006) is one such example. 8  To some extent one should not restrict one’s self to the methodological framework used by economic analysis as the problem may indeed lie in the choice of methodology. This is particularly so when we come to address the question of human sociality. At least one school of thought on these issues—evolutionary sociology (distinct from evolutionary biology or evolutionary psychology)— is based on an alternative way of thinking which would require adjustments in economic analysis well beyond what I intend to suggest. However, I think that there is enough to question economics even within its own methodological framework that I would rather focus on this, before embarking on more fundamental calls for revision.

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As could be expected, the subject of human sociality has drawn a considerable amount of attention from anthropologists, biologists, psychologists, sociologists and even, as was mentioned before, economists. It is, of course, a vast field with diverse approaches and multitudes of methods, and there are, as one can expect, quite a few competing theories. I would like to say here that it is not my intention to survey this literature in all its complexity or to get involved in any of the big disputations in these areas. The more interested reader is invited to consult some of the more recent contributions like Amit (2015), Bowles and Gintis (2011), West et  al. (2011), Gardner and Grafen (2009), Binmore (2006), Levinson and Enfield (2006), Burnham and Johnson (2005), Gintis et al. (2005), Heinrich et al. (2004), Greenwood (1997), Weingart et al. (1997) and Maryanski and Turner (1992), to name just a few. While we will touch upon some of the issues raised in this literature further down the line, it is important to say that the list is by no means comprehensive or representative of all lines of investigation into this question. The main purpose of this chapter, therefore, is merely to examine some of the more fundamental and intuitive issues pertaining to the idea of sociality. I do not think that there is much doubt or disagreement, that human beings are social in the sense that they tend to live in groups. But what is not entirely clear is why they do so. Is it an instinct? Is it cognitive? Is it self-serving? Is it intrinsic? More specifically, I would like to focus on the question of whether there are good reasons to view society as entirely functional (serving each individual’s purpose in the cognitive sense) or as a more organic arrangement which is based on a more intrinsic, perhaps even innate, desire of its individual components to be together. To some extent, the problem I pose here invokes the fundamental difference of opinion which emerged between two important pillars of sociology: Herbert Spencer and Emile Durkheim. According to Spencer (1897 [1874–1875]), society is the result of what he calls ‘egoistic co-­ operation’. Human survival needs lead them to a division of labour which makes them dependent on one another. The purpose of society, therefore, is to help individuals solve their private, predominantly economical, survival problem. Society, then, is entirely functional in the sense that it has a utilitarian purpose and in the sense that it is nothing more than the sum of its components. Durkheim (1933 [1893]), on the other hand, held the

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view that prior to any division of labour or the servicing of any material, or survival, need, there was what he calls ‘mechanical solidarity’.9 In the early stages of society, he claims, what held people together was a ‘collective conscience’ which is made up of commonly held beliefs, sentiments and norms. This, in his view, creates a ‘normative infrastructure’ upon which a division of labour can emerge.10 Though the division of labour becomes an important element of the more advanced society, it is still the ‘normative infrastructure’, or the ‘collective conscience’ which lies at the heart of social life. This, of course, corresponds to a view of society which is based on what I would call intrinsic sociality rather than functionality.

5.1 Being Social Let us begin with a more intuitive and contemporary approach to what it may mean to be social. We live in a world of increased globalisation where economic and communication boundaries are rapidly fading away. Capital can easily move around, and though to a considerable lesser degree, there is still a historically unparalleled availability of mobility to many of us.11 We are also exposed to the same culture through mass media (like cinema, television, radio and internet) even though, in prin In Durkheim, there is a duality in consciousness. On the one hand, there is the individual part of our consciousness and, on the other hand, the collective. He also uses two terms for solidarity: ‘mechanical solidarity’, which is based on resemblance (the collective part of our consciousness), and ‘cognitive solidarity’, where the individual specific part of our consciousness is more dominant. However, this does not mean the disappearance of our collective part but a cognitive reformulation of it. In other words, Durkheim effectively distinguishes between innate and cognitive sociality but both of them are a source of solidarity. 10  On this front, unlike Durkheim, Spencer is somewhat confusing. At some point, he states that ‘Cooperation is made possible by society and makes society possible. It pre-supposes the associated man’ (Spencer 1897, pp. 262–263) and that in a kin-based association we are likely to observe the greatest cohesion and the strongest power of co-operation (pp. 285–286). This is exactly the same idea which Durkheim was expressing. An interesting comparison between the two can be found in Corning (1982). 11  I am saying this for the sake of the argument. I do not believe that people are nearly as mobile as some would have us believe and this asymmetry between labour and capital could be quite detrimental to the proposed benefits of globalisation. In part, their immobility is associated with the subject of this chapter: namely, their sociality. 9

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ciple, the internet provides the opportunity for all possible expressions of culture to be transmitted to a large audience.12 So where does all this leave the individual as a social being? Are we now all members of the global community? If so, what does this mean? Should we feel responsible for the fate of all people in equal measure? Is this at all possible? Could being a member of the global community mean that we should engage in charitable activities everywhere around the globe? Or does this mean that we have now duties towards people everywhere around the globe? It is quite romantic for many people to adopt a cause (according to their personal preferences and at the time most convenient to them) supporting people in a part of the world (which they prefer) far away from where they live. But if we are all members of the same society, should such care be left to one’s personal preferences and voluntary choices? Do we not have an obligation towards other people which may require that we abandon where we are altogether and move to live and work in other parts of the world—not because we want to, but because we are needed and it is, therefore, our duty? It is very nice to go and volunteer for a few months in a remote African village but if we are all members of the same society, then maybe someone should be sent to live and work in that community for much longer periods of time. If so, who should decide and how, about who should go? Who should decide about which of the world’s communities-in-need should receive priority? Crucially, there will always be the question of who should pay? Should the funding of local educational needs in a prosperous Western society take precedent over the funding of an irrigation project in Asia or Africa which may save lives? Alternatively, should everyone be left to their own devices? Should no individual be expected to help anyone else far or near? In other words, is a society, local or global, just a collection of individuals whose sole duty is not to hurt the other? If so, what exactly is meant by ‘hurt’? Is it just physical or are there other, more hidden, ways in which individuals can hurt each other? Put differently, is it just a question of commission or a question of omission too? How natural would such a society be, given that  Whether or not the internet is a source of greater diversity is a complex problem on its own. On the one hand, the ease with which one can upload cultural expressions onto the internet is self-­ evident. On the other hand, whether people tune in to a more diverse portfolio of interest is considerably less obvious. 12

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we tend to live in groups (like families) which are distinctly smaller? How far should such a group—towards whom we may or may not feel a sense of duty well above the obligation not to physically hurt the other— extend? How significant are these smaller groups? Should society be just a framework which guarantees individuals their basic rights? If so, what are these basic rights? How would they be formulated? Where are, if any, the boundaries between alternative conceptions of rights? Or, perhaps, are these rights ‘universal’? If so, why and on what grounds? These are just a few of the (formidable) questions which spring into mind when we think of the fact that ‘no man is an island’,13 that our lives are always intertwined with the lives of others, and that we are, in principle, social being. They highlight the fact that in the end, sociality is not just about the fact that subjects live together but really about the extent to which the others matter. It is also not difficult to see that there could be—and have been—many different answers to all of these questions. However, it should also be clear that the answers to all these questions rest on two (related) fundamental issues: Why do we wish to act in a way that benefits the other (and at what cost to us)? Are there any limits on the group of people for whom we may wish to perform such acts? Both these questions, in turn, blend into one: What is it that brings people together? 13

 This, of course, is after John Donne’s poem: No man is an island, Entire of itself, Every man is a piece of the continent, A part of the main. If a clod be washed away by the sea, Europe is the less. As well as if a promontory were. As well as if a manor of thy friend’s Or of thine own were: Any man’s death diminishes me, Because I am involved in mankind, And therefore never send to know for whom the bell tolls; It tolls for thee.

Evidently, what is meant here by ‘no man is an island’ is not in the least functional. Donne is referring here to a profound and innate sense of belonging which has no meaning beyond itself and which probably corresponds to what Durkheim called ‘mechanical solidarity’.

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The views held by Spencer and Durkheim to which we referred earlier represent, in some sense, the two ends of a spectrum. At the one end of this spectrum, we will find a view according to which each individual is a world of its own, an island, as it were; where there is nothing inherent in the existence of people which connects them to one another except for a consciously well-defined self-serving functional purpose.14 Social acts too, in this context, would be performed due to their proposed consequences for the actor. Society, then, would not appear as an organic, or innate, association but rather as a purely functional structure which could only be measured by its success or failure in fulfilling those individual needs for which it has been formed.15 Ethics, too, which underlie the rules that govern human interactions and institutions, is more likely to develop in such a society in a manner which is subservient to the functional purpose of society and to the isolated nature of human’s ­individuality. As far as the limits to which such sociality may extend, there are no obvious barriers other than the usefulness of the other. At the other end of the spectrum there will be a view according to which individuals are innately, or intrinsically, social. Namely, they may have an intrinsic (either innate or conscious) desire to be with, care for and about, the others, or just have an innate need to belong to a group.16 In such a set-up, social acts are more likely to be performed by way of a rule (‘one does what is right by the other’) rather than as a result of ad hoc calculated consequences. Society in such a case will be more of an organic, or innate, nature.17 It stands to reason that the kind of ethics, social norms and  This includes situations where people become dependent on each other for the purpose of making themselves better off materially. Such interdependence is a cognitive choice and is not necessarily intrinsic or innate in any way. 15  Overlooking the methodological differences that exist between the evolutionary approach of Spencer and the hypothetical-deductive method of Hobbes, there is a similarity between the two but without Hobbes’s belligerent and nasty depiction of human character. For both of them, social organisation is a self-serving form of association, though in Spencer, as I hinted earlier, there is a confused position with regard to whether co-operation is innate or functional. 16  This corresponds to Durkheim’s ‘mechanical and organic solidarity’ but also, curiously, to Locke’s position. While Locke seems to suggest that people enter society willingly (suggesting a conscious functional purpose), this is not entirely so. He says: ‘Every one as he is bound to preserve himself, and not to quit his station wilfully, so by the like reason, when his own preservation comes not in competition, ought he as much as he can to preserve the rest of mankind’ (6 in Treaties II). 17  The term ‘organic’ here is used—and will be used throughout—in its more intuitive sense of ‘natural’ and not ‘premeditated’, rather than purely in the Durkheim sense of organic solidarity, which is conscious-based collectiveness. 14

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institutions that would develop in such an association would be distinctly different from the one which would have developed within the purely self-serving functional setting. More importantly, the way we evaluate social and economic institutions in such a context will necessarily be conditioned on the effects they may have on the integrity of the innate social drive. As for the extent of human sociality, this is more likely to be limited to those with whom there is a sense of intrinsic association. The limit itself, no doubt, will depend on the nature of that which is the cement of society or, to use a more Durkheimian notion, the nature of solidarity. On the face of it, the conception of the individual in the paradigmatic core of modern economics (the rational utility maximiser—with or without social preferences) seems to resemble the former—Spencerian—case, that of an individual who is, as it were, an island. However, this does not appear to be an outcome of a serious deliberation about human sociality.18 In other words, it is not that modern economists considered the question of human sociality and reached the Spencerian conclusion that all is done out of self-interest. If anything, it is more likely to be based on a conviction about the truth behind Adam Smith’s famous edict that economic transactions are not conducted from benevolence but from the self-interest of the participants. But in Adam Smith, as we shall see in later chapters, the idea of self-­ interest is far more complicated than the one used in modern economics. It certainly followed a long deliberation about human nature and a realisation that at its heart lies a strong sense of unconditioned sociality. In the famous opening to his Theory of Moral Sentiments, Smith writes: ‘How  One will not find such a deliberation in most of modern textbooks or even modern scholarship. Those who write about social preferences do not derive the idea of the rational utility maximiser from any initial social state but simply add sociality to it. However, this does not mean that the intellectual origins of this idea were devoid of such considerations. Both Gossen (1854) and Walras (1954 [1874]) clearly refer to the origin of social organisation and explicitly discuss the functional interdependence which brings individuals together. In Gossen, it all begins with the isolated man who is exchanging things with others to maximise his satisfaction, and in Walras, he clearly states that ‘the destinies of all men are bound together in the pursuit of the satisfaction of wants’ (Walras 1954 [1874], p. 74). With the exception of the anomaly in Spencer, who considered co-operation (or rather, interdependence) as both the condition for and a result of society, Gossen and Walras (and Jevons too) have clearly followed Spencer’s basic idea of egoistic co-operation. Having said this, we will qualify this statement later as Walras’s view of society is more complex than that of Gossen or the one embedded in modern economics. 18

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selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others’ (TMS, p. 9). Or ‘It is thus that man, who can subsist only in society, was fitted by nature to that situation which he was made’ (TMS, p. 85). Equally, J. S. Mill—another pillar of classical economics and the origin of the idea of Homo economicus (which is really what modern economics means by the rational utility maximiser)—states quite clearly: ‘It would be a great misunderstanding of this doctrine to suppose that it is one of selfish indifference, which pretends that human beings have no business with each other’s conduct in life, and that they should not concern themselves about the well-doing or well-being of one another, unless their own interest is involved. … I am the last person to undervalue the self-­ regarding virtues; they are only second in importance, if even second, to the social’ (Mill, On Liberty, 1859, p. iv.3). Moreover, as was noted before,  believing in the power of education and the evolution of the human character (ethology), Mill argued in his Principles of Political Economy that as people become more educated their relationship with the others change and they are more likely to co-operate rather than compete. This, of course, would have tremendous implications for the organisation of society in general and its economic activities in particular. Inevitably, there will be a change in social objectives which, according to Mill, should shift from material growth to cultural growth; a shift of attention from the fulfilment of material needs to the fulfilments of other, less tangible, human needs. This seems to suggest that while modern economics is clearly at the Spencerian extreme of functional sociality, classical economics is more akin to the Durkheimian end of the spectrum, that of a more innate, or intrinsic, sociality. This in itself should be sufficient to raise doubts on the widely held view about the continuity of thought between classical and neoclassical economics or on whether the former is really just a precursor of the latter. More importantly, it raises the spectrum that classical economics is actually a very different, perhaps an alternative, way of thinking about the subject. So how can we explore the nature of human sociality? How can we decide which end of the spectrum is more convincing as a premise on human sociality (and society)? We have already said that there can be

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little doubt that humans are social being. The fact is that they have lived in groups since the beginning of the zoological group called hominids. But we also noted that the mere fact the subjects live together does not tell us much about the nature of their sociality. This, no doubt, is best explored in the analysis of the relationship that individuals will have with the others. Once we understand this, we will also be in a position to make better sense of what it means for individuals to pursue their own interest. In the end, the way one goes about servicing one’s needs are not independent of the nature of one’s relationship with the others. Not surprisingly, a considerable amount of the debate about human sociality has been focused on interpreting the nature (and prevalence) of social acts. These, I hasten to say, may span from the purely altruistic acts to the more mundane notions of co-operation. At both extremes, one is benefiting the other but the difference between them is in the level of benefit/cost to one’s self. Some would like to think that both the extent of human’s social group and the prevalence of social acts among them suggest that humans are particularly (perhaps even, uniquely) social (here in the sense of not selfish) among all the species. They may also think that this is something which could explain their unique success in acquiring a certain command over nature. But the reality is that there are many other species where subjects live in large groups and perform what would be deemed as social acts.19 However, can the social act of a bee, or an ant, be deemed the same as the social act of humans? Exactly in the same manner as living in large groups does not imply a particular notion of sociality—is the school of fish, or any herd, the same as human society?—nor does the presence of social acts. Spencerian ‘egoistic co-operation’ does not mean that individuals do not perform social acts which may appear like altruism or co-operation. But the reason for such actions could be selfish. The reasons for the same type of actions in Durkheim’s ‘mechanical solidarity’ are bound to be different. So, what we need to explore is not whether individuals perform social acts but what are the causes for doing so. As we discovered that many of the social traits which we thought are unique to humans exist in other species we need to broaden our perspec19

 See, for instance, Hamilton (1972), Sachs et al. (2004), West et al. (2007) or Goto et al. (2010).

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tive in order to identify what may be specific (if not unique) to humans. We need to look beyond the simple question of whether a social act had been performed to serve the interests of the actor (i.e. a selfish act) or because the actor was genuinely interested in benefiting another. We need to establish the degree to which the subject had been consciously aware of his or her motives. It should be clear to us that a social act performed out of conscious self-interest implies a different sociality than a social act performed out of conscious commitment to the others. But it should also be clear that an apparent social commitment emanating from instincts would also imply a different sociality than a conscious social commitment. In reality, of course, the origins of our behaviour are more of a mixture of instincts and consciousness but the balance between them would be significant in determining the nature of our sociality. To clarify this point, let us consider, in a somewhat abstract manner, the relationship between the level of cognition (or consciousness), the apparent motive and the type of sociality: The nature of human sociality Cognitive (Hobbes)

(Spencer)

Cognitive functional sociality (modern neoclassical economics)

Mechanical functionality (individual fitness)

Selfish motive Instinctive

(Durkheim)

(Locke)

Cognitive organic sociality (classical economics)

Naturally organic sociality

(inclusive fitness)

Social motive

The vertical axis depicts the origin of the motive. It varies from an extreme case where the act is entirely driven by instinct to the other

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extreme where the motive is entirely driven by reason (or cognition). The horizontal axis depicts the nature of the motive. This can vary from extreme selfishness where the purpose of the act is solely to benefit the actor, to an act which is entirely aimed at benefiting the other (altruism).20 The four areas depict different types of sociality according to both, the nature of actions and the origin of their motivation. Needless to say, in many species we will discover both selfish and social acts but our purpose is not to classify the species according to the presence or dominance of one form of acts or another. One could think about it according to the prevalence of actions. A species dominated by selfish consideration will be at the left-hand side of the graph. A species with a significant number of social acts will occupy the right-hand side of the graph. But our objective is not really to distinguish between species as it is a hypothetical exercise to ask what would have been the nature of sociality if all actions (including the social ones) were derived from selfish motives as opposed to a case where all actions (including the selfish ones) were influenced by social considerations. The top left-hand rectangular depicts the combination of predominantly selfish acts but where the origin of the motive is some kind of a cognitive process. This means that subjects are mainly driven by their own interests and these are formed cognitively. In such a case, society can only exist if the individual finds co-operation (which here may mean collusion) or social existence, useful. Society, therefore, is what I call ‘cognitively functional’ as the usefulness of collaboration is based on its explicit and recognisable usefulness to the individual himself. Inevitably, the rectangular I refer to entails a multitude of nuances for such a society. At the top-left end of the rectangular, we are looking at the extreme case where the origin of motives is fully cognitive (and, thus, calculated) and the motives themselves are entirely selfish. No social act can be attributed to anything other than the cold, calculated self-interest of the actor. This may correspond, in a somewhat distorted manner, to Hobbes’s idea of society in the Leviathan:  We should note here that when we discuss instincts, it is very difficult to describe them as a source for selfish, or social, behaviour. However, the way we use it here is not so much by way of assigning responsibility but rather in a much simpler way of looking at the origins of actions which may appear selfish or social. 20

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The final cause, end, or design of men (who naturally love liberty, and dominion over others) in the introduction of that restraint upon themselves, in which we see them live in Commonwealths, is the foresight of their own preservation, and of a more contented life thereby; that is to say, of getting themselves out from that miserable condition of war which is necessarily consequent, as hath been shown, to the natural passions of men when there is no visible power to keep them in awe, and tie them by fear of punishment to the performance of their covenants, and observation of those laws of nature set down in the fourteenth and fifteenth chapters. For the laws of nature, as justice, equity, modesty, mercy, and, in sum, doing to others as we would be done to, of themselves, without the terror of some power to cause them to be observed, are contrary to our natural passions, that carry us to partiality, pride, revenge, and the like. (Hobbes, p. 103)

But there is no need for Hobbes’s gloom and doom to imagine a society where individuals only care for themselves and interact with one another only for the purpose of promoting their own end. In fact, the modern economic conception of the rational utility maximiser is a case in point. However, it is important to note that when I refer here to the rational utility maximiser, I am not referring here to the utilitarian nature of the theory. The latter, as I will argue below, is more akin to the bottom-­ left rectangular as it is based on the instinctive response to pleasure and pain. The modern economics conception of the rational utility maximiser does not tell us a priori why an agent may consider something to be in his interest. In this respect, it is an entirely cognitive story. This means that it is in this rectangular that we find the foundation of modern (neoclassical) economics which suggests a cognitive functional sociality. At the same time, as we move to the right we get towards the centre of the graph—still within the domain of the cognitive functional sociality—where motives are mixed, though the origins of them are fully cognitive. This, I suggest, corresponds to the somewhat ambiguous notion of ‘egoistic co-operation’ to which Spencer was referring. But all in all, the notion of cognitive functionality represents the combination of a predominantly cognitive drive with a desire to serve one’s own interest. The top right-hand side of the graph depicts the combination of a highly cognitive drive and the desire either to be with or to benefit the others. I suggest that this combination will lead towards the ‘cognitive organic society’. Just to be clear, this is not a society of ‘do-gooders’. It is

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a society where people are engaged both in acts aimed at serving one’s self and in acts aimed at benefiting the others. The difference between this case and the previous one is that the prevalent of social acts is likely to be greater but, which is more important, both types of actions—the self-­ interested act and the social act—are informed by a general and overriding conscious desire to live in society and to care about the fate of the others. At the extreme, this kind of society is more akin to what Locke had in minds when he said that ‘[e]very one as he is bound to preserve himself, and not to quit his station wilfully, so by the like reason, when his own preservation comes not in competition, ought he as much as he can to preserve the rest of mankind’ (6 in Treaties II). It also seems to be what Durkheim meant when he talked about ‘mechanical solidarity’. His choice of words may be unfortunate as there is nothing mechanical in what we describe here nor is there anything mechanical in what he describes himself. Instead, this is clearly very much a deliberate and reflective type of solidarity.21 Bearing in mind the references we made earlier to Adam Smith and J. S. Mill, there is a good reason to suppose that it is in this rectangular that we shall find the foundation of classical economics. Recall that the main objective of this exercise is to understand the nature of the social act and, as we said, the fact that individuals are selfish does not mean that they are incapable of actions which will appear like social acts (i.e. co-operation and maybe even altruism) even though there would be a selfish explanation behind it. So how can we distinguish between social acts performed by a social motivation and those which are motivated by selfishness? A possible answer would be that the latter are more likely to be motivated by the proposed consequences of the actions to the actors alone while the former may be performed regardless of their immediate consequences to the actor.22 Therefore, even though social acts are social acts regardless of the motivation behind them, the implications that the motivation will have for the question of economic and social organisation are enormous.  Durkheim calls ‘mechanical solidarity’ that which requires considerable amount of consciousness (the moral cement of society) while he calls ‘organic’ the more functional association which is derived from the division of labour. My use of the terms is therefore independent of his use. 22  This also corresponds to the distinction drawn by Weber (1922) between what he calls instrumental and expressive rationality. This theme will be explored in greater details in Chap. 7. 21

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The bottom part of the graph deals with the cases where the origins of motives are less cognitive and more instinctive. I felt it important to include it as a great deal of the debate about sociality rightly demands that we take notice of the fact that social behaviour exists among a large variety of species. Naturally, I am not suggesting that this part deals exclusively with animals as it is not only about behaviour driven exclusively by instinct. It is also about behaviour which is driven by a combination of instinct and cognition where the former is of greater significance than the latter. There is, of course, some difficulty with attributing any motivation to actions which are performed instinctively. However, there are two reasons why we stick to this framework here. Firstly, we are not discussing here only the extreme case of instinct but rather a different mixture of instinct and cognition. Therefore, motivation is not going to be completely out of place. Secondly, and more importantly, evolutionary biologists have adopted the economic concept of rational utility maximisation as a metaphor for instinctive behaviour. Economists, of course, saw in the association of their key analytical instrument with the increasingly successful Darwinian Theory a confirmation of their own views about human behaviour. It would therefore be useful to stick with the same metaphor so that a common analytical framework can be used in the move between species. In the bottom-left side of the graph we have the combinations of instinctively motivated selfishness.23 This, in many ways, corresponds to the approach of evolutionary biology and the Darwinian concept of ‘Individual fitness’. The purpose of adaptation (the process of natural selection), according to Darwin, is that ‘evolved characters will appear designed as if to maximize the individual’s reproductive success’ (West et al. 2011, p. 232). In the nature of things, it is a rule designed to be universal. It should be true to the amoeba, the ant, the antelope as well as humans. For this to hold there cannot be a significant role for cognition in the process.  This is not to say that there is no sociality here but if there is, it would be driven by a selfish instinct as opposed to the calculated selfish manner of socialising (with social acts) of the agent in the rectangular above. 23

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As I said before, evolutionary biologists found the economic model of the rational utility maximiser as a useful representation of this principle.24 ‘Individual fitness’ accordingly ‘is analogous to the idea in economics that individuals should be self-regarding utility maximizers—in both cases, it is not required that individuals are consciously striving to maximize their fitness or utility, only that selection will have led to individuals that do so’ (ibid.). This means that the ‘rational utility maximiser’ is the character which will survive the process of natural selection, and it is not that individual choose to be self-interested or become selfish. It is simply that the instinctively selfish individuals will inherit the Earth. The meaning of this is that the rational utility maximiser to which the evolutionary biologists are referring is the utilitarian one. Namely, it is the one where utility represents the calculus of pleasure and pain. You choose to do things which maximise your pleasure and minimise your pain. While this could be conceived as a cognitive choice, it may also be an instinctive response. However, this is not what is meant by rational utility maximisers in modern economics. The economics concept of the rational utility maximiser does not tell us what it is that the individual wishes to maximise. After all, the universality of the project was based on the presumption that we know nothing about the contents of preferences. We know that people act according to their interest, but this interest may be of other things than the calculus of pleasure and pain. Therefore, while the utilitarian version of the rational utility maximiser may fit the idea of ‘individual fitness’, it is not evident that this is indeed the rational utility maximiser of modern economics which, in fact, we found in the top-left rectangular together with the Hobbesian or Spencerian conceptions of the individual. The question that arises is in what way is the more instinctive form of selfish behaviour different from the more cognitive based selfishness? The answer, in my view, is in the degree of choice or consideration which the subject possesses with regard to both acts that are explicitly aimed at serving their own interest and those which may appear as social acts. If one is driven instinctively to behave in a selfish manner, this would mean that over a very long period of time (what evolutionary biologists call adapta24

 See, for instance, Alcock (2005), Krebs and Davies (1993) and Westneat and Fox (2010).

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tion) a certain trait may prove to serve best the survival interests of the subject. However, in each specific period—which is evolutionary insignificant but not so in the life of the subject—this trait is not really optional and not dependent on the immediate outcome for the actor himself/herself/itself. It is, in other words, a mechanical rule of behaviour. For instance, it has been shown that the adaptation process (natural selection in evolutionary biology) of individual fitness among some fish leads them to live in groups (schools) to reduce the risk of predation. This is sometimes termed as ‘the selfish herd’. Namely, the school is an association (a society, of sort) but the subjects living in it have not consciously chosen to be in it. Moreover, it has also been shown that in the face of danger individual fish may turn on one of their number and chase it out (i.e. victimise one of the school’s members) to save themselves. While this is clearly a selfish trait of behaviour, it is a rule, or habit, rather than a learnt or calculated choice.25 Surely one would have to raise an eyebrow if the behaviour of the fish can be thought of as similar to the behaviour of selfish humans. It is, of course, true that in reality we are not looking at a pure case of instinct or a pure case of cognition but what the extremes should tell us is that the more significant is the instinctive drive behind the selfish motive, the more likely society will appear like a school of fish rather than a form of Spencerian ‘egoistic co-operation’ or even a Hobbesian gathering. In other words, the cognitive selfish agent is more likely to be concerned with the immediate consequences of his or her actions rather than their long-term survival across the generations. Social life for a cognitively based selfishness has benefits and costs, either in the Hobbesian case or in the Spencerian one. This is not the case of the fish. Therefore, the kind of sociality embedded in the instinctive selfish behaviour must be of a mechanical nature. The right-hand bottom diagram is of a particular interest. It captures the combination of instinctive drives and social motivation. This, perhaps, is the ultimate case of what one may call innate sociality: The case where subjects have an instinctive (or innate) desire to benefit the other,  See, for instance, Vinicius et al. (2013).

25

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which could lie at the heart of their desire to live with them. In fact, the real dichotomy we face when trying to establish the nature of human sociality, is the axis going diagonally in our diagram, from extreme conscious selfishness (top left) to extreme innate sociality (bottom right). As the bottom part of our graph is focused on the instinctive, we are still in the domain dominated by evolutionary biology where we need to provide an account of social acts performed instinctively. In the case of the selfish instinct, we saw that the principle of the ‘selfish herd’ may explain sociality but it will be difficult to explain social acts in such a set­up. Recall that by social acts we refer to the entire spectrum of doing things with or for the others, from the extreme case of altruism where one aims to benefit the others at considerable cost, to the case of simple co-­ operation where benefits are mutual. In the case of the selfish instinct, the most obvious social act performed by the selfish fish is to live with others (the formation of the school). It is, perhaps, some form of co-operation and there is interdependence, though there is no division of labour here. As I said earlier, there is plenty of evidence that social acts from altruism to co-operation take place in a wide range of species and is by no means unique to humans. For instance, consider the case of the Belding’s ground squirrels where a subject raises the alarm when aerial danger is detected. In so doing, the subject exposes its own position and therefore increases the danger to itself, but at the same time helps the other members of its group to save themselves.26 How does this sit with the process of natural selection and the idea of the selfish agents (individual fitness)? The answer was given by Hamilton (1964), who coined the new concept of ‘inclusive fitness’ which led to recognition of the importance of kinship (society) in the natural adaptation process. The idea of ‘inclusive fitness’ was developed to demonstrate that the purpose of ensuring maximum reproductive success can also be approached, indirectly, by ensuring the success of reproduction through other means than one’s own success or survival. The case of the Belding’s ground squirrel demonstrates this idea. If the squirrel did not alarm its mates, the danger to the individual squirrel is lower than in the case of alarming them. However, by alarming them and risking its own life 26

 See, for instance, Sherman (1977).

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(ostensibly against the principle of direct individual fitness), the squirrel is raising the chances for all other members of his group to survive. In this way, the squirrel is ensuring its own reproductive success through the reproduction possibilities of the entire related group. Before dwelling on the meaning of related group, there is a question of whether this kind of behaviour is really different from the instinctively selfish behaviour we discussed before. Well, in some obvious sense it is definitely different. While both the fish and the squirrel live in associations, the fish uses it only for its direct reproductive success while the squirrel transfer its own reproductive success to the entire group. Hence, the fish does not perform any social act beyond the limited co-operation embedded in the formation of society but the squirrel does. But one may still insist that in many ways this is nonetheless a selfish act; it is the ­squirrel maximising its own reproductive success. Altruism here, according to this, is simply a form of mercenary behaviour. However, the problem is that when we consider evolution we are discussing something—a certain form of life—that persists through time. This means that when we are referring to, say, the squirrel, we are referring to the squirrel in a generic manner; we are not referring to a specific squirrel. At the same time, an altruistic act—or a social act more generally construed—is a concept of the here and now. It is a concept describing the behaviour of a specific agent, an individual manifestation of the organism. It is about the relationship between a specific individual and a specific—contemporary—social group. While from the time perspective of evolution the sacrifice of the individual may serve the organism’s needs, for the action to be selfish we need to inquire whether or not it has also served the need of this specific squirrel. For the concepts of selfish or social acts to be meaningful, we must be sure what it is that we mean by the ‘self ’. For a clear selfish act to take place, the ‘self ’ must also be well defined. This, of course, is less of a problem when we discuss the cognitive or more conscious origin of motivation but when we talk about almost purely instinctive behaviour, the ‘self ’ may be less obvious a concept. An instinctive selfish behaviour suggests that the ‘self ’ being served is bigger than the agent; it could be the biological entity (like the organism) which, obviously, transcends time and place. The fish we described earlier was selfish in all possible ways.

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Swimming in schools and sacrificing other members is selfish in the fact that it serves both the individual fish and the species. But this is not the case of the squirrel. Self-sacrifice here may serve the organism (indirect individual fitness) but it does not really serve the specific squirrel. While the individual squirrel itself may not have a sense of purpose beyond the reproduction of the organism, there surely is a distinct difference between an instinctive selfish act and instinctive social act, which is important.27 Therefore, even from evolutionary biology’s perspective where everything has a sole purpose, the difference between individual fitness (direct) and inclusive fitness (indirect) is very clear. Ignoring the intention at this stage (as we cannot really apply such an idea to instinct), the appearance of individual fitness is that of a selfish act, while the appearance of inclusive fitness corresponds more to what we may deem as a social act. So I hope that we agree that we can make a meaningful distinction between the behaviour of the fish and the squirrel, and between a purely selfish instinctive act and an instinctive social act. What, then, can we deduce from this about the nature of social organisation? We already said that in the case of the instinctive selfish act society is mechanically functional. The subject is probably born within the group and stays with it for protection. This is easy enough as the subject does not perform social acts which would require a more targeted conception of society. In other words, will the subject sacrifice its life for any member of its species? The answer is obviously not. Social bonds, in such a case, will have to be better defined to understand the nature of this association. To try to understand this better, it may be worthwhile to look explicitly at the principle of inclusive fitness as it is used in evolutionary biology. The idea which Hamilton developed is surprisingly simple and very broad in implications. If there are two individuals (say, i and j), then an act of assistance (a social act) has an evolutionary advantage over other mechanisms if:

 There is something quite remarkable about the idea of inclusive fitness. In a strange way, it is quite reminiscent of the Hegelian system. In each period, the spirit of the universe has a concrete manifestation and individuals reach the ultimate freedom when they die in its service. Naturally, here we are referring to an entirely cognitive rationalist system but one cannot help but marvel at its similarity with an instinctive-based empirical system. 27

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ci < rij ⋅ b j

where ci represents the cost to actor i; b j, the benefits to agent j (the recipient; the beneficiary of the action); and rij , a measure of relatedness. From biology’s perspective, rij is really the probability that a certain gene will be found in the beneficiary. Naturally, the higher the probability is, the more likely it is for the actor and the beneficiary to be related. Thus, if the beneficiary is a close relative (a high r), then even an action with a high level of cost to the actor may be evolutionary advantageous. On the other hand, with low relatedness, only social actions with very low cost to the actor (co-operation?) may be performed.28 In the natural world of instincts, the most obvious candidate for relatedness is clearly one’s physical relatives. Indeed, this idea of inclusive fitness is sometimes called kin selection and it may help explain (a) that social acts are more likely to be performed among relatives and, therefore, (b) the social bond of society is more likely to be based on blood kinship. If society is the sphere within which social acts take place, then we may conclude that society in such a case will be natural (instinctive) and organic. Namely, in spite of the fact that nature (through evolution) may have its own reason for this, from the perspective of the individual and contemporary subjects they are in an association with members of their extended family for no immediate or obvious direct benefit to them. There are good reasons to believe that the origin of human motivation (and I am referring now to Homo sapiens) is not entirely instinctive and that cognition contributes much to it. We also know that humans perform social acts. So, to understand our sociality we need to agree whether we are in the top-left rectangular where all actions—including social— are based on a cognitive principle of self-interest (and thus, society is entirely functional) or the top right-hand rectangular where there is  Note that the principle of ‘inclusive fitness’ is not a contradiction of the idea of ‘individual (or direct) fitness’. It is simply a more general expression of the same mechanism. For low levels of relatedness, the rule of behaviour will be the same as in the case of individual fitness. What is important for our purpose, however, is the realisation that while the utilitarian rational utility maximise could have been the metaphor for individual fitness, it is not really the right metaphor for inclusive fitness. (See a discussion in West et al. 2011, p. 233.) 28

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intrinsic sociality which means that social bonds are an end rather than a mean. Given that human beings have evolved, the interesting question is which route did they take as cognition developed? We have the following possible routes: Possible paths of cognitive developments Cognitive (Hobbes)

(Spencer)

(Durkheim)

Cognitive functional sociality (modern neoclassical economics)

B

Mechanical functionality (individual fitness)

Selfish motive Instinctive

(Locke)

Cognitive organic sociality (classical economics)

C

A

Naturally organic sociality (inclusive fitness)

Social motive

Route B suggests that human development has merely meant the replacement of the instinctive care for one’s self with a more conscious version of the same thing. The difference, so to speak, will be between a purely utilitarian rational utility maximiser (in the sense of pleasure and pain calculus) and a more sophisticated concept of self-interest which is not necessarily based on instinct or physical sensations. However, while in some sense, the top left-hand part of the diagram is a natural progression from the bottom part, it is difficult to imagine that even in the early stages of human development their behaviour would have been anything like that of the fish we discussed earlier. I would therefore argue that this, perhaps, is the least likely scenario.

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The other two scenarios are much more likely as they begin with what, I believe, human beings were in their early stage of development. I will say more about this in the next section, but if we accept that humans evolved from apes, then we can easily observe that primates behaved more like the squirrel than the fish. In other words, primates are both social and perform social acts. This means that there is an element of innate sociality in their existence. By implications, the utilitarian base for the rational utility maximiser should be treated with great suspicion. Our ancestors were neither selfish nor mechanical in their social interactions. The question which remains, therefore, is whether from the innate sociality of the instinctively social beings, humans developed into cognitive self-interested individuals for whom society is directly functional (route C) or the cognitive social being who finds intrinsic (and not necessarily innate) values in social existence beyond that which has immediate beneficial consequences for the actor (route A). If we accept that the dominant principle for meaningful social life (i.e. communities containing the objects of social acts) at the instinctive level to be based on Hamilton’s idea of inclusive fitness, then the shift into the cognitive sphere has to be focused on the nature of relatedness. Recall that the instinctive rule for a social act is:

ci < rij ⋅ b j

At the instinctive level, the most obvious principle of relatedness must be blood relations (blood kinship) as the r denotes the probability of traits of organism i to be found in organism j. This means that a subject would not socialise with any member of its species but with those who are blood related: the extended family. At such level of existence, the only way one can establish blood relationship must be physical through smell or touch. As cognition develops, we would, I think, expect the ability to relate to others to be influenced by it. In order for us to move along route C, we would need to assume that human development led to a cognitive state where the value of r has been reduced to zero at all times. No action which is costly to the actor will be performed regardless of its benefits to the other. Indeed, an action per-

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formed on the basis of the above equation will clearly violate the principle of self-interest (embedded in individual fitness) and, in particular, the one captured by the modern version of the rational utility maximiser. No matter what the actor’s interests are, in what way can it be in the interest of the actor to incur a cost while others benefit? So if we assume that in early stages, human society—like some other animals—was based on the entire spectrum of social actions which was facilitated by inclusive fitness, we now end up in a society where the spectrum of social actions has been severely truncated. We noted before that in a society of cognitively self-interested individuals, social actions will take place but only if they serve the interest of the actor. Society too, in such a case, is purely functional. This, based on impressionist observation, does not sound right. Nor does it seem logical that the richness of inclusive fitness would be reduced over time when cognition develops. This leaves us with route A.  The meaning of it is that if evolution means an increase in cognitive powers, then it has led human beings to become organically social in the cognitive stage at least in as much as they were at the more instinctive stage. In other words, social acts—and hence sociality—are not the result of selfish or self-interested motivation but rather of a more intrinsic sense of community. At the early stages, social acts were derived from an instinctive sense of relatedness (blood kinship), which meant that actions which benefit the other at one’s own expense may have been performed with an innate habit of promoting the interest of a bigger concept than one’s self. Now, relatedness becomes more cognitive, and, therefore, to act in the service of a more abstract notion of relatedness suggests, potentially, both a broader community that could be the object of such actions, and some rules of behaviour which are not directly associated with the interest of the actors and which are not innate (i.e. there is cognitive choice involved) but, nevertheless, intrinsic and not functional in the simple sense of the word. If indeed cognition is a crucial element in the evolution of human beings, the question of the degree to which social sciences should separate from biology becomes more urgent. Many social scientists believe that human social behaviour is uniquely complex and, therefore, cannot be

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explained by traditional biological tools.29 In some sense, the direction of travel has been from the social sciences to biology (through the rational utility maximiser and the selfish gene) but it has also worked in the opposite direction through concepts like the Evolutionary Stable Systems (ESS).30 The latter, however, helped strengthen the economic conception of human behaviour by offering a selfish explanation to social actions. Turner (1997) makes an interesting case for some separation between the biological and the social. He argues that to conceptualise the social we need to find a criterion that will differentiate the degree of sociality among all species of organised animals (p. 105). He goes on to suggest that such a criterion should be based on the ratio between what I would call innate (or genetic) and the cognitive (the non-genetic; the learned).31 In so doing, Turner proposes a continuity of analysis between the biological to the social which, however, provides a larger scope for non-­biological explanations of the social. In some ways, Hamilton’s inclusive fitness mechanism allows us to capture part of this distinction and facilitate a measure of continuity. As I suggested before, the notion of ‘relatedness’ in the basic equation proposed by Hamilton—even in its basic formulation—suggests something which is quasi-metaphysical. The organism, that entity which lives through time, controls the behaviour of its physical manifestation at each point in time. Not only that, but this organism seems to have a will of its own: to maximise its own reproduction. Relatedness, in such a situation, is based on the spread of the organism’s manifestations at each point in time and this can be detected through blood kinship. The mechanism by which relatedness is detected would, of course, be physical and the action mechanical, or instinctive.  A good summary of some of  the alternative approaches to human sociality can be found in Thornhill et al. (1997) as well as in Amit (2015) and in Shettleworth (2012) to name just a few. 30  See Maynard Smith (1982), though it must be noted that the ESS is not aimed at explaining social actions but it has been used for this purpose by economists. As I noted earlier, biologist recognised that the ESS models are only useful for individual fitness but not for inclusive fitness. 31  Turner is referring to the ratio between genetic and non-genetic coding. He says: ‘[t]he criterion is the ratio of genetic to nongenetic coding in those communicative processes involved in interaction among the members of the species. The more the communicative dynamics among conspecifics are learned, the more they are flexibly constructed in response to circumstances, the more they reveal complexity in modalities and channels of communication used in interaction, then the more social are the relations and structures organising members of a species’ (Turner 1997, p. 105). 29

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But as cognition develops, relatedness (as any other aspect of the organisms’ relationship with the world) will change too. This can happen in two different ways: firstly, we can recognise blood relationship through other means than smell or physical contact, and, secondly, relatedness may become altogether a different concept in the sense that we may feel more related to other members of the species on different grounds. In short, it means that the fundamental equation of inclusive fitness must be slightly adjusted to allow the social to integrate with the biological:

ci < rij (C ) ⋅ b j

where C represents cognition. The level of cognition will determine the level of relatedness between any two individuals which may be based on a variety of cognitive processes. This means that we can go much further than blood relationships. We can have kinship based on common ancestors (which would lead to a significant extension of blood relationship), common beliefs (like religions or nationhood) and so on. This does not preclude the principle of inclusive fitness, though it expands it beyond that which may be considered innate or instinctive. In this way, we allow for more complex means of communication and interaction to influence the level of relatedness that any two individuals may feel towards one another. It may enhance the natural proximity through blood or it may diminish it. It means, for instance, that we can find relatedness that will trigger altruism between friends that may not be the same as the one existing between more remote (or sometimes, close) members of one’s own family. A higher level of cognition can trigger social acts between a larger number of individuals towards whom we may feel relatedness, which is not physically based. As something else may replace in our conscious the organism which lives through time, that which is the cement of society may change over time, though our commitment to it (whatever it is) will remain. Serving the ever-lasting organism or the abstract concepts in our mind, is what I would call intrinsic motivation which cannot be confused with self-interest in the same manner that the Belding’s ground squirrel was not selfish laying down his life for his mates.

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The implications of this for our story are that as we move along route A from innate organic sociality to cognitive organic sociality, the spectrum of our social activities expands, the nature of social commitment changes and those who become the object of our sociality, our community, increase in number. Therefore, to be more confident that such a broad take on this complex issue makes some sense, it would be useful to take a look at that which characterises the evolution of our species, Homo sapiens.

5.2 A Prehistoric and Evolutionary Dimension So far, we discussed the logical significance of what it may mean to be social in the broadest terms possible. We moved from the selfish instinctive sociality without social acts to the cognitive self-serving sociality with social acts; and we moved across to instinctive and cognitive altruistic sociality. We looked at it in this way because social acts are performed by many species and socialisation, as such, is clearly not uniquely human. Consequently, we noted that even though there is agreement about the high cognitive levels of human interaction, there are basically two alternatives to the conception of human sociality. For many anthropologists and sociologists there is no doubt that human sociality is a complex unique cognitive affair and, therefore, resides in the top-right rectangular of our previous diagram. Economists, on the other hand, with an increasing rank of other social sciences, insist that human sociality resides in the top-left rectangular of the self-interested agent whose social acts and sociality are nothing more than a simple self-serving exercise.32 Moreover, from the economic perspective, the question of human sociality is of great significance as if social acts are not driven by self-interest, the pursuit of one’s self-interest will also be influenced by the same sociality which lies behind the social act.  It is interesting to note here that there are two sub-issues hiding behind this. Firstly, economists feel that by siding with the view of evolutionary biology, they give greater scientific credentials to their discipline. Secondly, the spread of these ideas into other social sciences is more a result of what may be called economics imperialism through the modern version of political economy than a realisation by other disciplines that economists have always known the truth. More about some of these issues will be discussed in later chapters. 32

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To be able to determine which of these two options is more likely to be the correct depiction of human sociality, it could be useful to try to establish a certain path which humans must have taken in the evolution of our species. Have we moved from instinctive selfishness to cognitive c­ alculated self-interest or, have we moved from being innately social to become cognitively so? It is for this reason that we digress a bit into prehistory. Indeed, there is an interesting manifestation of the problem surrounding the sociality of mankind in the fields of paleo-anthropology and paleo-neurology where attempts have been made to understand the development of human behaviour. While the question may not actually be framed in this manner, one could see in it an attempt to understand that which may be considered the secret of the success of Homo sapiens or that which may be seen in the eyes of others as the reason for its uniqueness. While many may immediately retort that every species is unique, it is difficult not to think that there is something special about humans. Firstly, we seem to be the sole survivors of our zoological family called hominids. Namely, though in all the years prior to the emergence of Homo sapiens there were more than one group representing hominids, in the last 20,000  years or so we have become the sole representative of the family: Hominoids evolutionary schematic timeline (years) Ardipithecus Ramidus Australopithecus Anamensis Australopithecus Afarensis Australopithecus Garhi Australopithecus Robustus Australopithecus Boisei

H. Erectus

Australopithecus Africanus H. Habilis

H. Neanderthal…

H. Rudolfensis H. Ergaster

H. Sapiens -100,000 -50,000

H. Erectus

-

H. Heidelbergensis H. Neanderthalensis H. Sapiens

-6

-5

-4

-3

-2

-1

-

Millions

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But more than that, it is difficult to ignore the fact that we have also managed to gain an unprecedented command over nature. This, of course, is not necessarily an accolade and the command which humans have gained over nature may in the end lead to their demise but the extent of it is nonetheless unique. So what is it that makes us special and how did it come about? Well, it all seems to have started about 4.5 million years ago when it is believed that jungles became cooler and drier. This meant that primates who used to live in trees were forced to spend more time on the ground, which gave rise to the first bipedal apes known as Australopithecus.33 From this sprung a string of hominids each of which, most of the time, shared the Earth with at least one other representative of the family until the very late emergence of Homo sapiens, who, at first, shared the Earth with Neanderthals (Homo neanderthalensis), Homo Erectus, and Homo heidelbergensis but who have finally, as it were, inherited the Earth.34 So why and how have Homo sapiens become the sole representatives of their family and what is it that gave them the edge over all other species? Going back so many years makes the reliance on evidence somewhat problematic but there are interesting ways in which paleoanthropologist as well as paleo-neurologists can make use of this limited source. For instance, perhaps the most striking fact that emerges from the study of the evidence is the change in the size of the hominids’ brain (even more striking when considered relative to the size of the body). The diagram below provides the evolution of the average cranial capacity of various hominids throughout time (in ­chronological order):

 The question of when does the zoological family called hominids begin is rather complex but there is an agreement that bipedalism is clearly associated with this. See, for instance, Gibbons (2006). For the connection with climate change, see Maslin and Christensen (2007). Another possible association of the beginning of hominids with the Australopithecus could be associated with the beginning of a distinct change in the structure of the brain. Maryanski (1992) argues that the apes evolved from monkeys and that at the time of the cooling of the Earth the apes were the weaker species and were pushed to the periphery of the jungle. This was one of the reasons they ended in the Savannah both exposed to prey and having to walk tall to see. 34  Tattersall, I. (2000). Once we were not alone. Scientific American 282 (1): 56–62. 33

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Mean cranial capacity 1600 1400 1200 1000 800 600 400 200 0

en pi

is

sa

ns

H.

ale

sis en an

de

rth

sis

ne

H.

he

id

el

be

rg

en lo

so

ec

tu

s

lis

er

bi ha

H.

H.

H.

H.

Au

st

ra

lo

pi

th

ec

in

es

Mean cranial capacity

Source: Holloway et al. (2005)

While the increase in brain size is clear, what is even more striking is the fact that most of this development occurred during the last 2 million years.35 In the 2.5  million years before this—since the beginning of bipedal posture—the size of the brain remained more or less constant and small. What it is that brought about these increases in the size of brain is not altogether clear. A large brain consumes a lot of energy (20% of the energy in humans, at rest, in comparison with 8% in a large ape), which meant that humans had to spend even more time to find food to support the increased demand for energy. In other words, developing a large brain was costly. However, such a development could have been facilitated by yet another evolutionary twist: the discovery of fire. When hominids tamed fire, they were able to cook their food. This, in turn, allowed for the shortening of the intestines, which are also major consumers of energy. Hence, by reducing the amount of energy needed for digestions, the hominids’ body could have supported a larger brain without the need to increase the effort of maintaining it.36  Homo habilis is dated from around 2.5 million years, and the real climb begins between Habilis and Erectus, which starts around 1.8 million years ago. 36  Gibbons (2007). 35

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However, the brain would not increase in size just because it can.37 From an evolutionary perspective—either from individual or inclusive fitness considerations—there must have been some clear benefits to having a larger brain. But while it should be fairly obvious why the adoption of bipedal posture would increase the survival rates of the primates who have been pushed into the Savannah, the explanation of the benefits of a larger brain appears to be somewhat more complex. We know that standing high on two legs allows the subject to see better in the Savannah, but why would a larger brain help us survive better? Embedded in the idea of survival is also a notion of the command which the subjects may have over the environment within which they live. At the instinctive level it would be a more passive notion in the sense that the more acute, or developed, are our senses, the better we can interpret what goes on around us and act accordingly. Expanding this to a higher cognitive level which would include the development of abstract language and complex symbolic cognition would mean that command over the environment is far more complex and involves not only an ability to interpret or understand our natural environment but also the ability to make use of it through the creation of tools and the ability to organise ourselves. Such command, or understanding, inevitably translates, first and foremost, into an improved ability to find and acquire food and an ability to preserve one’s self (personal security). So when we observe the evolutionary increase in the size of brain, our first instinct (pun intended) should lead us to conclude that larger brains must have produced an evolutionary advantage by improving the command which hominids had had over their environment. From today’s perspective, one may very well be tempted to conclude that as the increase in the size of brain characterises the evolution of our species, then it is indeed the case that larger brains in hominids must have given them an evolutionary advantage. This is because we naturally associate the development of knowledge and tools with our brain and,  As was poignantly phrased in Dunbar (1998, p. 179), where he rejected the epiphenomenal and the developmental argument as an explanation to the development of the brain. The former argues that the brain changes in response to the change in the size of the body while the latter is based on the argument that it develops as a result of maternal digestive systems (and brains do develop at an early stage of gestation). The argument is repeated in Dunbar and Shultz (2007). 37

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t­herefore, we believe that larger brain means greater cognitive abilities, understanding or intelligence.38 But do relatively larger brains as such really mean greater intelligence? While intuitively this may seem right, there have been some questions regarding the ability to infer from brain size alone anything about intelligence or behaviour. Holloway (1966; Holloway et al. 2005), for instance, questions the ability to make such inference as we are not comparing similar things.39 Given that the neurological composition of the brain can change, it is not very meaningful to compare a unit of brain size between two brains of different compositions. But fossils data does not provide us with sufficient evidence about the contents of the cranial capacity and therefore, argues Holloway, cranial capacity alone cannot provide us with much information about human behaviour or ability. So could it be something in the internal composition of the brain which can explain humans’ progress and, if so, what is it? If we are to look for clues in the internal composition of the brain, we may wish to identify the part of it which is most likely to have given us an evolutionary edge through better understanding and command of the environment. The most obvious candidate for this is, of course, the neocortex, which is the part of our brain responsible for our cerebral functions—and therefore, our language, cognition and ability to abstract. To establish whether the larger human brain also means larger cerebral powers, we need to look at it in relation to the other part of the brain, the more primitive one, which is responsible for our physiological functions: the medulla.40  Notice that we are referring here to the size of brain within the hominids group rather than the general question of whether brain size, across species, is an indication of intelligence. In particular, this is problematic when we consider this relative to body size. For one, as the brain size needed for certain physical functions is the same in small and large animals, this means that relative to their bodies animals with similar capacities will not have the same brain to body ratio. To take this into consideration, an Encephalization index has been developed, according to which humans have a higher index (even relative to whales or elephants) by a very large margin. 39  Reader and Laland (2002), however, claim that nonetheless with that they have managed to show with the ‘use of ecologically relevant measures of cognitive ability, reported incidence of behavioural innovation, social learning, and tool use, to show that brain size and cognitive capacity are indeed correlated’. More recently, some of the debate has been more focused on more refined objects like cortical neurons and conduction velocity (see, for instance, Roth and Dicke 2005), but this may not necessarily contradict the other findings. 40  ‘The important point in the present context is that … relative to the more primitive parts of the brain such as the medulla, the neocortex shows dramatic and increasing expansion across the range 38

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It appears sensible to suppose that larger brains with a greater ratio of the neocortex to medulla would mean greater capabilities to develop abstract language and complex symbolic cognition, which will allow the subject to gain the required command over nature.41 To understand the significance of different ratios of neocortex to medulla, to the behaviour and abilities of a subject, it makes sense to follow the other route mentioned in Holloway (1966): comparative neurology. In spite of limitations emanating from any cross groups study, the examination of different primates with different ratios of neocortex to medulla may help us understand how the development of the human brain could have led us to where we are at the moment. In an elaborate research programme, Dunbar (1993, 1998, 2007, 2014) has done just that by studying the neocortex/medulla ratio in different groups of primates. Earlier studies by Passingham (1982) and Stephan et al. (1981) have confirmed that among primates there is a great variety in the neocortex/medulla ratio. They have looked at the distribution of the neocortex/medulla ratio within and across prosimians, platyrrhines, Old World monkeys (OWM) and hominoids (Great Apes). They find that while in each species there is a distribution of the neocortex/medulla ratio, the mean value of this ratio is rising as we move from the prosimians to the hominoids and, among the latter, hominids have by far the largest ratio. It lies well above the mean value of this ratio for the group of hominoids. Therefore, there can be little doubt that the high neocortex/medulla ratio is indeed one of the characteristics which distinguishes humans from other primates as well as from the group of Great Apes. Given the of primates. The neocortex is approximately the same size as the medulla in insectivores; however, it is about 10 times larger than the medulla in prosimians and 20–50 times larger in the anthropoids, with the human neocortex being as much as 105 times the size of the medulla. This suggests that rather than looking at total brain size, as previous studies have done, we should in fact be considering the brain system, namely the neocortex, that has been mainly responsible for the expansion of the primate brain’ (Dunbar 1998, p. 180). Dunbar (1998) also discusses the various alternatives to measuring the contents of the brain and makes the case for the neocortex/medulla ratio or, more broadly, just the relative size of the neocortex. 41  The argument that the development of language (a cerebral skill) is key to the understanding of human development is a widely received view. However, there are dissenting voices which claim that abstract language appeared at an early stage of human development and does not have anything to do with the more recent developments in human behaviour. See, for instance, Arensburg et al. (1990) and Scheparts (1993).

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nature of the neocortex—the home of our cerebral functions—this does suggest that it is indeed the development of abstract language and complex symbolic cognition which facilitated the improved command which hominids have had over their environment. But was it only through the ability to develop tools, knowledge, and then, again, more tools by which the larger brain and larger share of neocortex in it have given humans their evolutionary advantage? Or, perhaps, there were also organisational issues—like the forming of associations or, sociality—which were either directly or indirectly instrumental to such a success? Dunbar’s findings seem to suggest something quite surprising and powerful. He finds that the most significant aspect in the life of the subjects which is strongly correlated with the relative size of the neocortex is not the way in which they look for food—which would have been the most obvious candidate to reflect a command over the environment—or the nature of their diet—representing a certain understanding of it—but rather, the size of the social group within which the subject lives:

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While it is true that for a given relative neocortex volume the group size among monkeys will be greater,42 the relative volume in apes (and certainly in humans) goes well beyond that which is observed in monkeys. Therefore, the relative neocortex volume in humans should facilitate a social group size well beyond that which is observed among all monkeys and apes. Again, it is only the social group size which seems to be correlated with the relative share of neocortex in the brain; not even the methods of extractive foraging or the subject’s diet, which, as I suggested, may indicate the importance of tools and knowledge, appear to be correlated with the relative size of the neocortex.43 Hence, given that a significantly larger relative size of the neocortex is clearly a distinct feature of humans, it seems that it is their sociality rather than any other aspect of their lives that should be considered as one of their most distinct characteristics. As such a brain composition also suggests greater cognitive and abstraction abilities; it seems that it is through their sociality that humans managed to achieve their unparalleled command of their environment. But while there may not be an obvious correlation between food collection ‘technology’ and the share of the neocortex in the brain across groups, there is still the possibility that within the hominids group (and perhaps other groups too)44 the increase in the ratio may have had an effect on technological development. In fact, when one thinks about it, it seems difficult to completely separate sociality from the issue of toolmaking and technology. Not only are they both associated with the development of cognitive abilities, they also seem to be somewhat conditioned on each other. Stout (2011), for instance, who studied stone toolmaking developments, argues that one cannot really separate the two. While the art of toolmaking is clearly associated with developments in cognitive  Consistent with what we said earlier about the Old World monkeys pushing the apes into the Savannah and leading to the development of bipedalism amongst them. 43  See Dunbar (1998). Later findings, by Reader and Laland (2002), show that brain size (not the share of neocortex) does seem to be correlated with technological innovation and new food sources. Dunbar and Shultz (2007) acknowledge this but suggest that this demonstrates a certain synergy between the ecological and social approaches as the results are based on social learning, which is dependent on the level of sociality. I discuss this shortly in the context of humans’ tool development further below. 44  This means moving vertically up in Passingham’s diagram which depicts the neocortex/medulla ratio across species. 42

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abilities as they require hierarchical structures (of thought), its transmission—which is an essential element in explaining the achievement of high level of technological complexity—is more likely to be socially determined.45 Transmission could be done through imitation or emulation. The former is based on copying behavioural means, while the latter is based on understanding of goals or objectives. The more complex the technology becomes, the less effective is the former. Thus, concludes Stout, ‘the successful transmission of complex technological behaviours would depend on two factors: individual capacities for hierarchical information processing and social mechanism of skill acquisition’ (Stout 2011, p. 1056). By looking at some primitive societies, he points out that the length of time an investment in the process of transmission required cannot work without social ‘scaffolding’ or social support that allows people to devote so much time to the learning of a skill (which may sometime take ten years).46 This, of course, does not mean that it is the division of labour which ‘causes’ society. The making of tools in itself requires a certain development of cognitive abilities and, therefore, an increase in the neocortex/medulla ratio, but transmission is not an integral part of making the tools. Society must be there already to facilitate the transmission which could subsequently lead to a more complex technological development. In other words, the association of toolmaking with sociality suggests that the art of toolmaking and the sociality of humans come from the same origin and do not cause each other. However, the presence of sociality was instrumental to the achievement of transmission that allowed humanity to achieve its unique success in commanding the environment.47  In more general terms, there are claims that the uniqueness of the complexity of human cognition and technologies is predominantly the result of the accumulation of knowledge—that is, intergenerational transmission—which is, in effect, culture (see, for instance, Tomasello 1999). 46  ‘In the modern community of Langda in Papua Province, Indonesia, traditional stone toolmaking skills are transmitted through semi-formal apprenticeships that can last 10  years or more. Motivation and commitment though this extended period are promoted by the social context of toolmaking, which occurs in a supportive group setting and is a source of pride, pleasure and personal identity’ (p. 1057). 47  To some extent this brings us back to Spencer’s somewhat ambiguous claim that ‘[c]ooperation is made possible by society and makes society possible. It pre-supposes the associated man’ (Spencer 45

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The association of the developments in toolmaking with sociality within a particular group (though not necessarily across groups)48 together with the distinct association of the relative size of the neocortex with social grouping has made sociality an important characteristic of humanity and a key to the understanding of its evolution. One can easily imagine that larger social groups would give the subject an evolutionary advantage. In the same manner as bipedalism was useful to early humans when they found themselves out of the forest and in the open Savannah, large groups could have been a response to the ecological conditions of the time. For instance, in an era of hunter-gatherers, it makes sense to suppose that larger groups would have an advantage both in food collection and in security. Both of these are consistent with the biological purpose of evolution and are clearly achieved here through an application of the concept of inclusive fitness. All of this led to the formulation of the Social Brain Hypothesis,49 which suggests that individuals who live in larger stable social groups will face greater cognitive demands than those facing individuals who live alone, in small groups or for whom social arrangements are transient (functional?). The cohesion of the group, inevitably, will rely on individuals being able to meet their own requirements (inclusive fitness?) as well as be able to co-ordinate their behaviour with that of other members of the group. Therefore, one could say in a somewhat coarse manner that the evolutionary pressure for larger social groups would have triggered the development of larger ratios of neocortex in the brain which would, in turn, increase the cognitive abilities of the subject predominantly required for the service of social life. The rest, so to speak, is a by-product of this basic development. The logic of this argument is quite straightforward. In small groups, it is enough to see, hear or touch other members of society to establish one’s 1897, pp. 262–263). My point here is that there is nothing in the evidence from Dunbar’s project or the toolmaking analysis to support Spencer’s general theme as if society is the result of the development of a division of labour. 48  Therefore, it does not contradict Dunbar’s finding that across groups one would not necessarily find a correlation between neocortex/medulla ratios and the technology of food foraging. 49  Initially known as Machiavellian Intelligence (see Byrne and Whiten 1988) but, as Dunbar claims, ineptly termed. See a discussion in Dunbar and Shultz (2007, p. 1345).

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social belonging and engage in social posturing and manoeuvring. For this, as has been established, primates may have even developed a concrete language. But in a larger group this becomes unmanageable. It is impossible to create an association among so many individuals which is based on physical contact. In this respect, one may say that when the group size is based on physical or concrete contact, the connection between its members is more likely to be concrete as well. When the group is getting to the size which corresponds to that which the composition of their brain can support (relative to other primates), the relationship between all members of society could no longer be supported by the concreteness of the relationship (and the language). If one had to touch or pick fleas from all other members of a large group, one would never have time to do anything else. Therefore, one must conjecture that the need arose to find something which would bring together members of larger groups which is somewhat less concrete. The answer which would correspond to the Social Brain Hypothesis is that the development of an abstract language and symbolic cognition would be the key instruments for achieving a cohesive large grouping. By creating a sense of community which is based on non-concrete concepts like, for instance, kinship (based on common ancestry rather than blood), religion or other forms of abstract concepts which would bind people together, humans could have created the groupings which could have been supported by what the composition of their brain seems to allow. If we refer all this to the method of evolutionary biology, this will suggest that inclusive fitness as a means of explaining social behaviour must be expanded to include cognitive elements (recall our adjusted equation of: ci < rij (C ) ⋅ b j ). Hence, if a social act performed by an agent depends on the related benefit to the other exceeding the cost to the agent, then the concept of relatedness (rij ) can no longer be simply the probability that the beneficiary of the act shares physical traits with the actor. The development of cerebral abilities in humans through a greater neocortex/medulla ratio effectively altered the means by which relatedness is e­ stablished. As society increased in number and the cohesion of the group—vital to the survival of the individual—was no longer based on physical attributes alone, a social act could have been performed based on a more abstract sense of relatedness. If we take the extreme abstract version of the

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Belding squirrel’s act of self-sacrifice, it would be the Hegelian notion of self-sacrifice in the service of the contemporary manifestation of the spirit of the universe. In a somewhat less dramatic version, I refer here to the fact that we have repeatedly observed throughout history that people may sacrifice themselves for the preservation of non-physical traits like religion or nations, the cement of society. Therefore, our glance into prehistory and the attempt to understand the evolution of humans lead us back to a particular route in our discussion in the previous section where we speculated about the possible paths which human development could have taken. To remind you, in the earlier figure we considered movement from a selfish instinctive behaviour towards the more cognitive self-interest as is captured by economics’ conception of the rational utility maximiser (route B), movement from instinctive social motivation towards cognitive self-interest (route C, which we discarded) and a movement from the instinctively social towards the cognitively social (route A). Reproducing the diagram and adding into it the story we have been telling in this section about the evidence on the evolution of humanity, we could see that the story we have been telling suggests that following path: The path suggested by evidence Cognitive (Hobbes)

(Spencer)

Cognitive functional sociality (modern neoclassical economics)

(Locke)

Cognitive organic sociality (classical economics)

Mechanical functionality

(individual fitness)

Selfish motive Instinctive

(Durkheim)

E

Naturally organic sociality (inclusive fitness)

Social motive

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If we look again at Dunbar’s finding, we can see that for low levels of neocortex relative size the level of sociality in general is low but apes, the nearest to humans among primates, seem to have the lowest level of sociality. Monkeys seem to live in larger social groups than apes when the relative size of the neocortex is low. Turner (1997)—following Maryanski and Turner (1992)—provides an account of why this is so. Monkeys lived in groups with strong kinship ties based on females and male dispersing at puberty to other groups. Apes, on the other hands, had weak ties and females dispersed at puberty. Given that early hominids had significantly smaller brains than humans have today, the relative size of their neocortex would have been more or less the same as these apes. Therefore, at the early instinctive stage, hominids had probably lived in relatively small groups. In other words, their innate sociality was probably smaller than that of the monkeys. We therefore begin our journey at point E (for early), where hominids were more like the Belding squirrel than the selfish fish but, still, at a stage of limited social motivation. Namely, as they lived in groups, they would have instinctively performed social acts but the extent of sociality would probably be quite moderate. As the relative size of the neocortex increases, the size of the social group increases too and with it the level of social motivations and, subsequently, the number of social acts. This clearly reflects the Social Brain Hypothesis. It means that both the level of cognition and the level of sociality expand simultaneously and we move along the heavy blue line upwards towards the domain where society becomes sufficiently large for required relatedness to be dominated by abstract cognition rather than by physical instincts. This would be the logical implications following Dunbar’s findings and the fact that today’s humans have a significantly larger share of the neocortex in their brain. However, it should also be noted that in Dunbar’s findings we can see that both monkeys and apes experience an increase in social grouping as the neocortex expands proportionately. Although there would definitely be some cognitive developments at the early stages of the increase in neocortex share of the brain—like, for instance, the development of concrete language—the levels of abstraction or symbolic cognition at these stages of brain’s development are still low. Therefore, one may conclude that the process of increased social grouping which correlates with the increase in the relative

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size of the neocortex also contains elements of a more innate nature. Subjects seem to develop an innate desire to live in larger groups. But the means of achieving a stable cohesive larger group consistent with such desires will ultimately depend on the development of cognitive abilities.  These, in turn,  would increase the extent and degree of relatedness amongst members and subsequently, increase the prevalence of socially motivated social acts (top right-hand rectangular). Hence, we may conclude that modern humans have both an increased innate sociality (though probably less than what monkeys would have had had their brains expanded in a similar manner) and an enhanced cognitive ability to support it. Therefore, it seems that the evidence about the development of humans, which ties them together with the development of their sociality, suggests that humans are predominantly social being. While this sociality may not be entirely instinctive—as it relies on cognition—it is nonetheless intrinsic in the sense that  one’s belonging cannot be viewed as functional. This means that it is route A in our discussion in the previous section which is the more likely path humanity has taken. It also means that human sociality is more cognitive and organic and, therefore, more in line with Locke’s view of social organisation than with Hobbes and more in line with Durkheim’s mechanical and organic solidarity than with the egoistic cooperation of Spencer. In broader terms, this means that if our social actions are not driven by selfish motivation, nor would the pursuit of our own interest be exclusively driven by such a motivation. From the point of view of economic analysis, this clearly suggest that there is something profoundly wrong with the adoption of the idea of self-interest, as it is captured by the rational utility maximiser, in modern neoclassical economics, and that the classical conception of it—which we need still to explore—is far more in line with the actual development of Homo sapiens.

5.2.1 An Aside While one can understand the attraction of the neat representation of individual behaviour through the idea of the rational utility maximiser, one cannot but wonder why it is that economists find it so difficult to abandon the notion in view of mounting evidence that it is, perhaps, a wrong way of capturing human behaviour. As will be discussed in following

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chapters, one should be under no illusion that the model is an attempt to describe how people actually behave as models are, in essence, an abstraction which is an attempt to capture a fundamental feature rather than to fully describe the reality of its manifestation. So, the question is not so much about circumstantial evidence but rather about a more basic principle of what is the essence of human behaviour in society. The query I have is why do economists, in the face of so much evidence about the fundamental sociality of human beings, still stick to a model which captures something completely different. Maliciously, one may suspect that this has something to do with the rift between biology and the social sciences about the uniqueness of human sociality. As we noted earlier, most biologists would argue that there is nothing unique about human sociality and, by implications, that there really is no room for the separate study performed by social scientists. The latter—with the exception of economists—would argue that there is something unique about human sociality which deserves a different form of analytical investigation. The fact that biologists adopted the economic model to capture the scientific nature of individual fitness has been a source of great pride to economists by giving them an aura of hard science like biology. But there is a fundamental difference between the way in which biology interprets the notion of self-interest or rational utility maximisation and its role in economics. In both disciplines, the term ‘as if ’ is being used to denote that the model is not an actual description of behaviour but an analytical tool. However, the biological ‘as if ’ means that while at any point in time not all agents will behave like this, in the long run, through natural selection, only those agents who behave like this will remain. This means that, for economics’ time horizon, at any point in time there may be many individuals who do not behave according to the selfish rule. This does not matter to the biologist’s horizon of research but is extremely relevant to the economist. Sadly, however, this no longer remains a useful tool once we expand the idea of evolutionary adaptation to ‘inclusive fitness’. In economics, on the other hand, the use of the term (coined by Milton Friedman in his 1953 paper) is very different indeed. The model is not descriptive in anyway and at any time. It is simply a good mechanism to predict economic outcomes. Thus, even if the predictions which are based on such a model were to be repeatedly confirmed (which is nowhere near

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the reality of the subject), it would still not make the model descriptive or allow a believable explanation to be constructed on it. Therefore, one is led to conclude that the reason why economists seem to stick to a model which is neither particularly relevant to biologists nor very useful to economics is its false scientific aura. Maybe it is time for economists to recognise that they work in the social, rather than the natural, sciences.

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6 Human Sociality II: Intrinsic Sociality, Self-interest and Social Organisation

Synopsis: Having argued that individuals are intrinsically social, we now address the question of the organisational implications of these conclusions. As one of the key elements in modern economic analysis is the separation of the spheres of economic and social interactions, we ask whether or not the kind of sociality we identified in the previous chapter lends itself to such a conception of society. By the separation of the spheres we mean that it is possible to analyse economic interactions without any reference to the specificity and diversity— across cultures—of social interactions in other spheres of social life. Needless to say, this is a necessary condition for any attempt at retaining a position of social neutrality. There are two key elements in the analysis of the potential separation of the spheres. The first is the presumption that individuals can behave in a consistent manner across the different spheres and, the second, that behaviour in one sphere will not influence the behaviour in another. Clearly, a selfish individual would be someone who can behave consistently across spheres and his or her behaviour in each one of them is unlikely to affect his or her behaviour in another. But for an intrinsically socially minded individual, the answers to these two questions may be more complex.

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The mechanism by which we propose to relate the nature of human sociality, the form of social organisation and the possibility of separating the spheres is the concept of social distance. It stands to reason that the greater is the social distance between individuals in a society, the more likely it is for society to be functional and for the spheres of social life to be open to separation. Equally, the lower is the social distance—the greater is the sense of relatedness amongst members of society—the more likely it is for society to be organic in the sense that the purpose of society is not solely the service of the immediate private  interests of its individual members. In such a society where people have a greater interest in the fate of the others, the separation of the spheres will become less likely. However, the concept of social distance itself depends on various factors which complicate the relationship between basic human sociality and social organisation. As our sense of relatedness (in the Hamiltonian meaning of the word) is a function of both some initial brain capacity and the development of abstract cognition, we may observe increasing or decreasing social distance corresponding to the same initial social capacity implied by a given brain structure. As abstract cognition develops, and technology with it, it means that people will have a greater ability to relate to an increasing number of other individuals. The effects that this would have on the level of relatedness which people would feel towards those who live in their immediate circle are uncertain. Abstracting our sense of sociality means that the domain of our sociality goes well beyond the domain of what may be called, our core society which is the social network within which we subsist socially. Such an expansion may reduce the strength of our sentiments towards those with whom we have a more immediate contact. If this were to happen, the social distance within the core society becomes greater even though our natural sociality has not changed. This means that even with the high level of sociality we identified in humans, there may still be a reason why societies may become somewhat functional. Naturally, such functionality will be nothing like the one suggested by extreme self-interest, but, nevertheless, the nature of social organisation may vary even with a given level of brain capacity for sociality. Technology too, which is a by-product of the development of abstract cognition, will help expand the potential for social ties. However, it may also be the case that what may be technologically available may be too difficult for human cognition to absorb given the initial, natural limitation on our

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s­ociality. When the distance between what is feasible and what we are able to conceive increases, the level of relatedness within the core society may increase (reflecting a rising alienation towards the larger social reference group and a redirection of one’s sense of sociality). This suggests that society may move away from the functional towards the more organic. All of this suggests that within the boundaries of human’s natural sociality, social distance may change over time and social organisation will fluctuate between the more functional and the more organic. But in no stage would the functional nature of society correspond to the one which is consistent with modern economics’ take on human sociality. Consequently, the presumption of the possible separation of spheres may not be relevant for the analysis of human societies. * * * So far, we were concentrating on the way in which human behaviour is understood. We argued against the view according to which human behaviour can be characterised as the eternal pursuit of one’s own individual  private interests. We claimed that the intrinsic social nature of human beings—as revealed through comparative neurological studies and upheld by anthropological ones—suggests that humans are likely to perform social acts which cannot be described as serving one’s own immediate interests. The prevalence of such acts, and subsequently the extent of society, is a function of cognitive abilities that are facilitated by the structure of the human brain, and which, in principle, should be expanding over time. There is also a good reason to suspect that such a disposition towards the others would have an effect not only on the way people interact socially but also on the way in which agents care for their own affairs. While this line of reasoning works against the claim according to which the standard economic conception of the individual as a rational utility maximiser is either an appropriate depiction of human character or sufficiently broad a conception of it to allow all aspects of social analysis to be subjugated to economic methodology and reasoning,1 there is  I am referring here to what has become known as ‘economic imperialism’, where other social science disciplines like sociology or politics use economic methods—and in particular the rational 1

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still the alternative claim according to which there are areas in individuals’ lives where they do behave like self-interested agents or rational utility maximisers. Namely, it is an argument which, on the face of it, accepts the sociality of humans but nevertheless insists that it is manifested somewhere outside the sphere of economic interactions. Such a position implies that the spheres of social life can be easily separated between the domain of exclusively economic (or self-interested) considerations and other domains of exclusively social considerations. There are two questions hidden here. The first is whether it is conceivable to think of human character in such a segregated manner. Can people really behave in one sphere of their social interaction in a way which is completely different from the way they will behave in another? In particular, can they really do so if acting in their own immediate best interests is not the only motivation to act? For instance, suppose that you are a sales agent in a shop selling some sort of home appliances. You are on commission which is dependent on the value of what you sell and a young couple (with a child in a push chair and where the woman is pregnant) enters the shop. You can see from the way they are dressed that they are not well off. At the same time, you see that the husband is somewhat childish and impressionable. They have to buy the product as it is essential for their daily lives (say, a stove). Do you lure them to purchase the most expensive and impressive product—appealing to the childish wishes of the husband—offering them seductive financing, or do you feel empathy (relatedness) towards them which leads you to direct them to the cheaper and more practical end of the market? In other words, on the one hand, there may be a rule of behaviour derived from some rational principle which directs one to act in a particular manner so as to enhance his or her interests. In this case, the rule would be to persuade the pair to buy the most expensive product. On the other hand, when it comes to the execution of that rule through the encounter face-to-face with the object of its application, the social aspect of one’s character—the sense of relatedness which they may feel towards the people they come across and utility maximiser—as the backbone of their analysis. But there are also economists who delve into areas outside what may appear to be a strictly economic domain. See, for instance, Akerlof and Yellen (1990), Becker (1996), Benabou and Tirole (2006a, b) and Bernheim (1994), to name just a few.

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which motivates their behaviour in other spheres of social life—may intrude on that principle.2 If it does, then separation, in the mind of the agent, of the various spheres of social interaction becomes highly problematic. However, if we accept that all actions are motivated by a broad sense of self-interest—which includes social acts like co-operation but not real altruism—then the separation of the spheres from the point of view of the actor may not, on the face of it, be such a problem.3 All actions, in such a case, are measured against a single rule: whether they serve the actor’s interest; and it is difficult to see how an action in one domain— which clearly promotes the interest of the actor—can be deemed inappropriate because it seems to violate the best interests of the actors in another domain. Had this been the case, then the original act could not have been the one which best serves the interest of the actor. In other words, while the expressions of one’s self-interests in the different domains of social life may be different, and hence there may be some cross influence between the spheres, there are plenty of means available to the agent to promote his ends in each sphere. This means that either the agent need not care about other spheres when engaged in one or he or she can compensate for any possible spillover which an action in one sphere may have on another. In terms of our little story, the salesperson wants to act in his own best interest in the purely economic domain (his behaviour as a salesperson). Clearly, this means to lure the couple to buy the more expensive product with the seductive (yet crippling) finance deal.4 This, in principle, does not contradict the fact that the self-interest of the individual may also require that within the social (non-economic) domain he  This point is of some importance and we will discuss it further later in the book, but the notion that there is a difference between planned action and its execution is something which has dogged economic analysis for a while. To some extent, a distinction along these lines may help understand why it is that experimental results in economics are so often in conflict with the prediction of the model. As I will argue later, in itself this is not something which invalidates the model. The fact that reality diverges from the abstraction should not come as a surprise to anyone. The test of a discipline is the way in which it is being dealt with. We discussed some of it in Chap. 2 but we will return to it later in connection with the question of whether game theory can help socialise the rational utility maximiser. 3  We will explore this question further in the next chapter. 4  Recall that the agent works on commission, and we assume that no matter how crippling the financial deal may be, there is insurance to ensure the payments. 2

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would need to command the respect of the others even if such a respect can only be acquired by appearing to be caring. When he goes home— having secured the high commission—he may engage in a variety of visible volunteering activities in his community (those activities, of course, that he likes and are not too demanding) so that he will appear as an adroit member of society and so gain other people’s respect which is, sadly, part of his general pursuit of his personal and immediate self-­ interest. This would be true even if there were a possibility of spillover across the spheres in the sense that his activity in the shop may become publicly known and harm his reputation among his social circle. In such a case, the individual may prefer to secure the high commission while increasing his voluntary activities to compensate for the initial loss of reputation. Therefore, the spheres of behaviours have been clearly segregated, and in such a world it may be possible to argue that economics and the rational utility maximiser (the agent who always acts according to his own best interest) provide a well-defined domain of analytical investigation. Having said this, we must note a difficulty in connection with the conception of the rational utility maximiser to which we will return more thoroughly in the next chapter. We are referring here to the question of whether even self-interested behaviour facilitates, from the perspective of the individual, a real possibility for the separation of the spheres. It is, of course, true that the agent we discussed may prefer to have his high commission even at the expense of reputation if he can compensate for the latter with enhanced voluntary activities. But this also means that the weight which the agent puts on material wellbeing as a means for serving his interest is much greater than the weight put on reputation as a self-­ serving objective. If that weight were different, even a self-interested individual could have acted like a social being and opt for the cheaper more practical option rather than harm his reputation. Namely, even though the spheres are clearly separable as the actions which serve one’s self-­ interest in different spheres are very different indeed, the way the agent acts in each one of them is not entirely independent of the other. As such, it would undermine the claim that one can analyse the behaviour of the rational utility maximiser without taking into consideration the way in which self-interest is expressed in other spheres of social life.

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The second question which arises is whether it is at all possible to segregate the various domains of social life in a manner that may allow individuals to act in one domain without any reference to the other irrespective of whether in their mind they could have made such a distinction. Namely, it is a question about the feasibility of separating spheres which would, of course, be a necessary condition for people to be able to treat them differently. This, we would like to argue, is a question of social organisation which comes on top of the question of whether individuals are capable of doing so. Can a society be organised in such a way that behaviour in one domain is unaffected by, and unrelated to, behaviour in another? In the case of our simple story and where the agent is not only motivated by his own interests (i.e. agents have intrinsic social motivation), the question is whether the salesperson can choose, so to speak, whether to allow his sense of relatedness (the empathy he felt towards the couple) to intrude on him. In other words, is it possible that the agent may feel some empathy with the couple but would be able to ignore it, or, alternatively, could society impose a behaviour which is compatible with the resulting sense of compassion even if the agent does not experience it? If, for instance, society—as a collective—chooses to ensure that self-interest does not override basic sociality, it can, for instance, interfere by legally prohibiting the practice of commission-based sales. However, whether society as a collective chooses to act in such a way or not depends, to a great extent, on the purpose of social organisation and, of course, on the nature of human behaviour. If the objective of social organisation is merely to allow individuals to pursue their own interests, society as a collective has no purpose of its own. It is, thus, completely functional or, better still, instrumental. In such a case, whether one can distinguish between the different domains of social life depends entirely on whether individuals are able—and inclined—to do so. If they can, society will be able to support it. Hence, whether people can separate the spheres because in all of them they seek to pursue their own interest or if people can separate the spheres even though their behaviour in one (commercial sphere) is distinctly different from their behaviour in the other, social institutions will then be entirely based on facilitating this separation. In fact, this is very much what one would recognise in the implicit association that exists between contemporary economics and the

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idea of civil society which appears to be closely associated with the way liberalism is widely understood today.5 In such a framework, the role of society is limited to keeping the peace and facilitating individual prosperity even though what is meant by prosperity remains somewhat unclear. Commonly, it seems to be understood as private wealth. All other aspects of social life should be based on voluntary actions which are outside the concerns of society as an organisation. On the other hand, if society has a purpose of its own, when it is not merely there to facilitate the pursuit of individuals’ own interests, then the separation of the spheres may not be possible. For instance, if society upholds a collective principle or value of, say, equality, then this principle will tie together the rules governing commercial interactions with the non-commercial ones. It is important to stress that I do not mean here a society in which the public chooses (through elections) to pursue redistributive policies. I am referring to a society where the equality principle is, as it were, engraved in its collective psychic. For instance, the motto of the French Republic is not negotiable. Liberty, equality and brotherhood (whatever this may mean) are not simply policy decisions. They reflect overarching principles which must dominate all aspects of social life.6 The fact that they are engraved in the social conscience (and all public buildings) means, among other things, that society will try to instil these values through education and culture and, in so doing, it creates a thread which would govern and connect the activities of its members t­ hroughout all social spheres. A society which reflects that which binds it together cannot be seen as functional or instrumental. It must be a form of an organic, or natural, organisation.7  For an interesting discussion of the different ways in which the concept has been used, please consult: Seligman, A. B., (2000), Civil Society as Idea and Ideal, in Alternative Conceptions of Civil Society Chambers, S. and W. Kymlicka (eds), Princeton University Press: 13–33. 6  It is important to stress that only one of the three principles (liberty) can be viewed as an individualistic idea: to protect the freedom of every person. The other two—equality and fraternity—are both collective ideas; they are ideas about the relationship between individuals and not about what some may consider as the ‘rights’ of the individual. 7  To a great extent, all societies are functional as they serve a purpose. My distinction here is between a functionality which is transferrable and one which is not. Extreme functionality is when we have complete social laissez-faire in the sense that everyone does what is best for themselves. Society has no explicit objective of its own. Equally, however, a Hobbesian society is also functional; the purpose of society is merely to remove the obstacles from the pursuit of one’s own interest (the lack of 5

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As one can easily imagine, the two questions are closely intertwined. Namely, there is a good reason to think that the kind of social organisation which will emerge in society and which subsequently may or may not facilitate a separation of spheres is not unrelated to the nature of human sociality. This, in turn, will tell us something about the ability of agents to segregate social spheres through their behaviour. In the previous chapter we posed the question of whether human sociality should be defined as cognitive functional or cognitive organic. We reached the conclusion that it must be of the cognitive organic nature. This means that people’s social actions are motivated by a sense of relatedness rather than a calculated pursuit of their own private interests. Inevitably, it will also influence the way in which they pursue their own affairs as well as give rise to the possibility that society will reflect the underlying value, or idea, that govern this sense of relatedness. In such a case, it may be more difficult to segregate spheres of social interaction from both the perspective of the individual and the perspective of social organisation. In other words, human society, in principle, is more likely to be based on organic or natural principles rather than on functional or instrumental. This may come as a surprise to quite a few who live in some of today’s modern and economically successful economies (and I deliberately use the term ‘economy’ rather than country or society). There can be no doubt that some of the more successful economies today perceive their social organisation along the lines of what is seen as the modern liberal view of civic society.8 It is a society which is purely functional and instrumental in the sense that its only objective is to allow individuals to pursue their own private interests. The only purpose of social organisation is to keep the peace and facilitate wealth creation (which as we said before security). At the other end, society which is not functional may still have a purpose. The Lockean society is driven, among other things, by ‘the love and want of society’ (Treaties 2, p. 101), which may encapsulate a purpose that cannot be achieved without the collective. Another example could be both the Platonic Republic and the Aristotelian democracy: both societies as institutions are aimed at explicitly achieving that which, presumably, each of its citizens want—a just society, or the good life (eudemonia). Though there are institutional differences between the kind of society each of them prescribes, the difference is more a result of their different epistemological position. Both of them attribute a role to society which has as an objective to promote the social aspects of human life. 8  This is particularly true to immigrant societies like the USA, Canada, Australia and New Zealand, which are all, interestingly, Anglo-Saxon in character.

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seems to be erroneously connected with wellbeing or the good life), and the only way to do so is through competitive institutions and the complete separation of the different spheres of social life. But this is by no means true—either as a perception or as a reality—for the world as a whole, nor even true to all successful economies. While most Anglo-Saxon economies are more likely to see themselves as purely liberal civic societies, the rest of the developed world, and Continental Europe in particular, is less likely to fit these terms.9 As we suggested before, when liberty, equality and brotherhood are coupled together as the underlying principle of social organisation, it means that society has taken on board the role of guarding and promoting that which brings people together (brotherhood) as well as a priori collective ideas, like equality or liberty. It will come as no surprise that in such societies, the level of public spending which, to an extent, reflects the level of collective involvement in the life of individuals is relatively higher than the level one would find in those societies which adhere more strictly to the self-interested-based notion of civic society.10 This, in turn, suggests greater proximity to the organic rather than the functional notion of society. But even if one would like to think that advanced societies tend to become more functional in the sense of the modern notion of the liberal civic society, one would have to acknowledge that this is, in historical time, far too a novel phenomenon to be sure that it is not just a transient development. In the end, the idea of the liberal civic society can only work if the promise of the economic paradigm is believed to be true. Only in a world where people can care for all their private interests through ‘voluntary’ market interactions and for their social interests through non-market voluntary activities can a society become genuinely functional. While there was a considerable amount of laissez-faire in the past, the level of interdependence among individuals (which is driven by  They may indeed think of themselves as liberal civic societies but the meaning of the term in different places may vary. In part, some of these differences are manifested in the willingness of society to let people fend for themselves. Hence, fewer protective labour laws and low level of support outside work could be more symptomatic of a more functional society, whereas greater social expenses may correspond to a society which is interested in providing its members with more than just a framework within which to pursue their own affairs. It may be of some significance to note that most Anglo-Saxon economies are also, as we said before, immigrant societies (like the USA, Canada, Australia and New Zealand). But the UK, for other reasons which need exploring elsewhere, too is predominantly a civic society as is, in a more planned manner, Singapore. 10  See the Appendix to this chapter for some basic data. 9

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the degree of division of labour) was not sufficiently high to create a meaningful distinction between the private and the social domain in the sense that a great deal of caring for the private interest would have been conducted through non-market mechanisms. In other words, a great deal of private concerns was dealt within the group within which one felt social affiliation and, therefore, there was no need for a civil society to be formed. The combination of extreme interdependence and the promise of the markets—the backbone of the liberal notion of civic society—is indeed a very modern perception of the functional civil society. Nevertheless, one cannot deny the importance of the functional society in today’s discourse on social organisation. Whether this is a result of some form of intellectual colonialism or a genuine response to the challenges of technological development, it is imperative to be able to address this issue within our framework of analysis. Namely, we need to be able to explain whether it is conceivable that a functional social organisation will emerge among subjects who are clearly social being in a more intrinsic than interested sense. The alternative would be to argue that functional societies are the right form of social organisation because individuals are not genuinely social beings and that social acts are merely another form of serving one’s own interests. This, of course, is the essential view of society embedded in modern economics and is clearly inconsistent with everything we have been saying so far.

6.1 Social Distance and Social Organisation The key to resolving the tension which may exist between what we seem to observe about human nature and the kind of social organisation which seem to emerge at least in some parts of the world is to look at the role of cognition in human sociality. The evidence suggests that as the share of neocortex in the brain increases, subjects live in larger social groups. It has also been established that the increase in that share, increases the cognitive abilities of the subjects; and the expansion of the social group is closely associated with the improvement of cognitive abilities (in broad terms, the development of language (abstract) and complex cognition).11 11

 The Social Brain Hypothesis.

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But do the changes in cognition and the size of the social group tell us something about social organisation? The connecting element between the sociality of the subjects and the question of social organisation is, in my view, its affect on what one may call social distance within a given group. By social distance I mean the degree to which members of a particular group feel close or related to the others in their group. It is easy to imagine that in a group of individuals who feel closely related and subsequently care a lot about each other, the social distance between members of the group will be small. Is such a group more likely to be organised in a functional or organic manner? The answer, I suggest, is quite obvious. A society where people feel close to each other and therefore care for one another is more likely to be an organic, or natural, organisation than a functional or instrumental one. The extent of genuine social actions will be great and that which binds people together will consequently dominate their lives. On the other hand, in a group where people do not feel any close affiliation to other members of society and, therefore, care little about their fate, social distance among members will be great. In such a group, the form of organisation which is more likely to prevail is, of course, the more functional or instrumental one. It would be helpful to express this relationship diagrammatically: Basic relation between SD and social organisation Nature of social organisation Functional: civic society

Organic Social distance (SD)

The horizontal axis measures the level of social distance among members of society. The greater is the number, the less cohesive is society. The

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vertical axis depicts the level of social functionality. The greater is the value on the axis, the more functional is society. This means that at the high end we have the ultimate functional society (corresponding to the modern notion of civic society). At the bottom end, the opposite of functionality is the organic nature of society, where sociality is not a means but rather the end of social existence. Thus, the greater the social distance within a group of individuals will be, the more functional social organisation will tend to become.12 But do subjects have to be motivated by a care for their own interests for the group to experience a high level of social distance? Or, is it possible for subjects who are intrinsically social, feel a sense of relatedness and care for the others to end up in an organisation which is functional or instrumental? An intuitive and immediate answer would be that this would depend on the strength of the sense of relatedness and care which is felt by the subjects. Put differently, social distance is not just a function of whether there is a sense of relatedness between individuals but also a question of the strength of such sentiments.13 The greater is this sense, the more prevalent will social acts become and the lower will be the social distance between members of the group. It is also bound to affect the way in which they pursue their own interest. But it is also possible, in principle, that people may care, or have the capacity to care, about other members of society, yet the strength of their sense of relatedness may very well be low. In such a case, even though people relate to a great number of people, the prevalence of social acts will be lower (which will also affect the way they pursue their own interests) and the form of organisation within the group is more likely to be more akin to the one created by individuals who are only pursuing their own interests and do not care at all about anyone else in 12  In the literature on the concept of nation in political thinking, the dichotomy is similar between primordial and modern civility. See, for example, a discussion in Geertz (1963), Eller and Coughlan (1993) and Grosby (1994). In our case, we do not need to resort to primordialism as the nature of relatedness is open and can become cognitive and even rational (though not in a consequentialist sense). 13  Recall that one way of looking at it was by borrowing Hamilton’s concept of inclusive fitness.

Accordingly, a social act is an act which is performed when ci < rij (C ) ⋅ b j , which means that the

cost to the actor is lower than the expected benefit to the person who, as it were, is being acted upon. What determines this is the strength of r which is both the probability of relatedness between the two agents as well as the cognitive strength of their relationship. Stronger r(C) means that there will be more social acts between any two agents as well as more agents who may become the objects of such acts.

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their society. The question then is what is it that may affect this sense of relatedness? When we look at the evidence which we discussed in the previous chapter, we noted that as the share of the neocortex in the brain (which we will now denote by the letter R) increases, the size of the social group within which subjects live increases too. As a higher share of neocortex also means a higher level of cognition, does this mean that the level of sociality (and, therefore, social distance) in larger group is greater (social distance smaller) or smaller (social distance greater)? On the one hand, one may intuitively think that in larger groups the strength of relationship between any two individuals is likely to be lower than in a smaller group as one is sharing his or her limited ability to relate (or the limited stock of empathy which they have) with many other individuals. But while this may be true when we discuss people of a high level of cognitive ability, it may not mean the same thing when we discuss different levels of cognition. Is the strength of relationship which is based on physical attributes (as would be the case with lower levels of R) necessarily greater than the strength of relationship based on cognition? To put it more bluntly, would humans do more or less for each other than, say, a group of gorillas? It is, of course, very difficult to answer this question even though it does seem true that a group of humans will do more for each other than a group of gorillas. The only thing we can infer from the evidence is that for each level of R (also corresponding to a certain level of cognitive abilities) there exists a group size which the brain can support. The fact that the brain can support it must also mean that the social distance between the individuals in the group cannot be great. Had the group been too great in number for that which the brain can support, the cognitive ability of individuals would not have been sufficient to allow them to feel a strong relationship with so many others and this would lead to a greater social distance. In other words, I claim here that the relationship between the relative size of the neocortex in the brain and the level of social distance is inverse. The higher is the cognitive ability, the more likely it is that for the optimal group size the level of relatedness will be greater than it would have been for lower levels of cognition. Hence, the social distance will be falling the higher is the share of neocortex in the brain (R).

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This is depicted by the red line in the bottom diagram which corresponds to the vertical axis on the right14: Basic relation between SD and social organisation Nature of social organisation R

Functional: civic society

H.S

Organic

SD0

Social distance (SD)

We thus added the red line to the previous diagram while indicating the levels of the share of the neocortex in the brain (R) on the right-hand vertical axis. We could have drawn the red line from the top left side of the diagram to the bottom right and create a clear inverse relationship between cognitive ability (entailed in the level of R) and social distance. The reason why we drew the red line with a steeper slope is to capture that which we said earlier about the strength of relatedness which may influence the level of social distance. As R increases, the social group increases. This in itself may lead to an increase in the social distance if there were no change in cognition. But as the level of cognition increases, the strength of relatedness among members of the larger group would increase. Therefore, as R increases, there are pressures on social distance to increase (more individuals to relate to) as well as to decrease (better ability to feel related to the others). In other words, there is no obvious reason to  Note that the diagram is merely a schematic representation and not a specific functional form. It simply captures the relationship between R and social distance without identifying a specific functional form which could represent the relationship between R and social distance. 14

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believe that the strength of relatedness felt by individuals in groups of different sizes, but which are appropriate to the ability of their brain to manage, should be very different. Having said this, we must bear in mind that this may, to some degree, undermine the evolutionary advantages that larger groups could provide. Therefore, it is much more likely that the improved quality and strength of relationship emanating from the higher cognitive ability will, altogether, offset the pressures on social distance to increase due to the larger social group. The steeper slope in the above diagram represents this outcome of the opposing pressures. Consequently, what we see from here is that if point HS on the right-­ hand vertical axis denotes the prevailing level of R in Homo sapiens, then the level of social distance within such a group will be sufficiently low ( SD0 ) to suggest that the form of social organisation most becoming human society is more organic in nature than it is functional or instrumental. This, more or less, is what we said earlier, before we posed the question of whether it is possible for individuals with intrinsic sense of sociality—as do humans—to nevertheless end up in a functional form of social organisation which is more reminiscent of the modern notion of civic society. However, there is one thing about humans which seems to be distinctly different from other primates in the context of their sociality. This may indeed be the result of the significantly larger size of humans’ social group but unlike other primates, humans live in a multitude of social circles. What I mean by this is that other subjects in the study to which we referred, conduct their entire social (and economic) lives within the group to which the share of their neocortex in the brain gives rise. For low levels of R such groups may indeed be based on innate sociality, which means that there cannot be much for the individual beyond the group. But as we allow R to increase, and with it the level of cognitive abilities, the innate may become more intrinsic (based on cognition) and the possibilities for relatedness increase with it as well. In itself, this does not tell us much about the circles of subjects’ lives other than that all social (and economic) activities are now taking place within a larger group. However, the fact that cognition may develop—and, hence, technology—may mean that the circles within which the subjects live could become more complex.

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In the case of humans, extrapolation from the data suggests that the corresponding (intrinsic) group size of humans is about 150 individuals. What is meant by this is that most people are not likely to feel sufficiently close to, or personal with, more than about this number of people. However, we do know that people live in much larger groups than that and relate (perhaps in a collective way) to an even larger number of people. We all have our blood kinship which may include our immediate and extended family; we have all those people with whom we have an existential interdependence (I am referring here to the effects of the division of labour on the number of people on whom we depend to get our life’s necessities); we have those to whom we relate because we feel a shared heritage and so on and so forth.15 Surely the strength of our feelings towards the others in these various social circles would be different, but the question is whether the fact that there are multitudes of circles—which means an increased number of individuals—has any effect on the social distance within any of the groups in those circles. It is clear that the increase in number of social circles within which humans live is a result of the development of their cognitive ability rather than an increase in the share of neocortex in their brain. From an evolutionary perspective, this is too short a period for these changes (which have been taking place quite recently in evolutionary sense of time) to be explained by the change in our brain composition. This means that the intrinsic group of about 150 and its position within these evolving circles may still play a role in explaining the level of social distance in society. The most probable reason for the departure of human society from the basic intrinsic framework is not the cognitive ability as such but its development. Nature may have designed our brains to allow us to live in groups of 150 so that we will have an evolutionary advantage as, for instance, hunter-gatherers. But nature cannot command the extent to  An interesting question which I feel is worth pursuing but will not do so here is whether in the process of enlarging circles of association through complex cognition and abstract language the notion of sociality is transferred from the individuals to the idea. Hence, people may have strong feelings and be willing to perform social acts in the name of their group (say, the nation, or religion), yet when they do so it has nothing to do with any particular individual. They may become committed to the abstract. 15

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which the cognitive ability will develop. Once we begin to develop abstract language and complex cognition, it is not clear how far this will go and what impact it will have on our sociality. In particular, it is the fact that humans developed the ability to accumulate knowledge which led to the emergence of the multitudes of circles of social existence.

6.2 Cognition, Development and the Conception of Society We already discussed in the previous chapter how the development of cognition corresponded to developments of tools and, hence, technology. The supporting social structure (facilitated by R) which allowed the knowledge to be transferred across generations and, thus, be augmented over time, generated technological developments which have, in turn, altered the circumstances of human life. If in early days humans subsisted as hunter-gatherers, a group of 150 was probably an advantage. But as abstract language and complex cognition developed, it allowed us, on the one hand, to relate to even greater number of individuals through abstract concepts like common ancestry, tribes, nations or religion, but it also allowed us to develop technology which changed the way we subsisted and increased even further (through division of labour) the number of people on whom we depended for our subsistence. So, if we look back at human history (with a very broad brush) we can see that two things happened more or less simultaneously. They were both the result of enhanced cognition and accumulation of knowledge and they both led to the expansion of the social circle within which individuals had to live as well as wanted to live. The first is the technological development which mainly had the following two effects: (a) increased the division of labour and the circle of people on whom we depend (one can think of it as moving from a village community through a regional community with villages and market towns to national communities with large cities as well as global trade) and (b) facilitated ease of contact between an increasingly larger circle of people through the development of means of communication and transportation. The second development which resulted from our enhanced cognition is our ability to relate

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to ever-increasing circles of people. If at first the only people we could relate to were our direct family members, developing a notion of common ancestry expanded our relatedness to people whom we could not physically identify as members of our initial reference group but with whom we seemed to share some abstract ideas. The main question is, of course, whether these two types of development led to a corresponding change in the physical and the notional social environment. Does our abstract ability to relate to other people correspond to the number of people which technology—developed on the same cognitive basis—allows us to relate to? Judging by the amount of wars which plagued human development for a long time, this is probably not the case. A possible reason for it is that the accumulation of technological knowledge does not progress in the same pace as the accumulation of our intellectual understanding of things human. What I mean by this is that there is much less leakage of knowledge in the ­development of science than there is in the development of our more general intellectual heritage.16 To try to demonstrate this point, let us imagine a sequence of human development. Suppose that at first we live within our extended family which supplies us with all of life’s necessity. What binds us together is a blood kinship which is obviously based on some physical attributes. With developments in cognition, we invent tools and technology that lead us to settle and start working the land. We now live in village communities which supply us with all of life’s necessities. However, as land cannot be infinitely divided between members of family, people begin to move across communities as well as form new ones. This means that the children of one community may either go onto land in another community which may be available, or form a new community where they will come together with similar children who had left other communities. In other words, over time, even though the village is still our mode of subsistence (we get from it all of our life’s necessities), it is no longer made up of people whom we recognise as our blood relatives.  One can think of this as the difference between the developments of two categories of human understanding: humanities and natural sciences. There is a more systematic and well-defined progress in our understanding of the physical world but much less so in our understanding of our own humanity and its various expressions. 16

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The same cognitive ability which brought about the development of tools and technology that led to the changes in our lives (the move into villages with communities that are not based on blood relationship) will also give us the means to be able to relate to the new people who are not our relatives. With our complex and abstract cognition, we may develop a concept of common ancestry, which means that the new people in our village may not be direct relatives but they may come from some imagined or otherwise common ancient family; they share, as it were, a common fate. In this case, technological development and intellectual developments led to a corresponding change in the social circles. The circle on which we depend for our subsistence is also the circle with which we can easily identify in the sense that we are willing to perform for them genuine social acts. In other words, as our cognition is catching up with its applications (technology), social distance may remain the same even though the size of the group is now larger than the one for which our brain was originally designed. However, this is not the only possible outcome to the development of our complex cognition and the changes in both the size of the group upon which we rely for life’s necessities and the one with which we feel associated. The effect that the move from, say, the family based society to the village community will have on social distance within the groups, depends on what would have been our intrinsic group as determined by R. If R suggests that the ‘natural’ social group is the extended family, then the move to the village will create a certain dissonance within the extended family, though this will bring increased harmony with greater number of people with whom we had no relationship before. Within the extended family, the move away from blood kinship to a common ancestry as the cement of society will probably lead to a somewhat lesser degree of relatedness and, therefore, greater social distance. Before, other members of the family were the object of our entire empathic emotions. Now, these emotions have other, new, outlets which, to some degree, will reduce the importance, for us, of the members in the extended family. In a crude manner, one can say that the increase in the number of people within the social group somewhat reduced the social significance of each one of them. Alternatively, we could say that the new abstract cement of society is enhancing the level of relatedness within the extended family—

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as now they matter to us not just because of our blood relationship—but as it also led to a larger society, our relatedness with the larger circle is not as strong, so on average social distance is likely to increase. If, on the other hand, the share of neocortex in our brain was aimed at a community of the size of the village, then the move from family based society to the larger village community would have probably reduced the social distance. Our ability to relate to every one of the new members of society will not be lesser than our ability to relate to our blood relatives and, in addition, we all have now a higher notion than blood to bind us together, which will inevitably increase the sense of relatedness among all members of society. As knowledge continues to accumulate and technology develops, we now move from the village to the city, as our mode of subsistence changes further. We depend on a much greater number of people to supply our life’s necessity than our brain is capable of dealing with on a personal basis. We may develop abstract notions of community like a polis, or a nation, to help us find ways to relate to such a large number of individuals but the social distance between members of the group is bound to be much bigger than it used to be in the village. This is clearly a case where that which technology provides does not correspond with what our cognitive development allows. If cognitive abilities developed in perfect correspondence, people’s ability to relate to other members of the nation should not have been lower than the ability of people to relate to each other within the village. One possible reason for this could also be the growing distance between the intrinsic group (our 150 people with whom we may have personal relationship) and the group within which we have to live. The development of our cognition may ameliorate the effects of the transition from a smaller to a larger group but may not be successful in completely offsetting it.17 Going back to our original framework we can describe this in the following way. We suppose that social distance in a given group of individuals  An interesting indirect piece of evidence on this can be found in Easterly et al. (1999). To some degree the level of public expenditure is a reflection of the collective spirit of the community and, hence, can be considered, to some degree, as a measure of social distance or social cohesion. They find ‘that certain public goods—such as education, roads, sewers—supplied by U.  S. cities are inversely related to ethnic fragmentation in those cities’ (p. 1243). 17

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who have the same share of neocortex in the brain (R) is a function of the average level of relatedness between any two individuals in the group. This level is clearly dependent not only on the size of R but also on N, the number of people in the group, and relative to the number of the ‘natural’ group ( N ( R ) ). We can write this in the following way:



N (T ( K ))  1 N (T ( K ))    SD = F  R, K , = ∑ SDi , j  R, K ,  N ( R)  n ∀ i , j∈N N ( R)   

where SDi , j =

1 N (T ( K ))   ri , j  R, K , N ( R)  

N (T ( K ))   The function ri , j  R, K , is the measure of social distance N ( R)   between any two individuals in the group which is based on the relatedness measure we borrowed from Hamilton’s concept of inclusive fitness. The social distance between any two individuals in the group ( SDi , j ) is inversely related to the level of their relatedness ( ri , j ). The stronger is their sense of relatedness—and, hence, the greater will be the number of social acts which they may perform—the lower is their social distance. To capture this concept for the entire group in a simple way, we look at its average even though this may require a much more complex form of computation. Clearly, the level of relatedness between any two individuals in a group is bound to be influenced by their cognitive potential (as measured by R) and the stock of their intellectual heritage (K). From the finding we discussed earlier we may deduce that the higher R will be, the stronger will be the sense of relatedness among all members of the group and, therefore, the lower will be the social distance between them.18  Recall that in this case we noted that it is difficult to distinguish between the strength of emotions in different natural groups (determined by R) but we identified two opposing forces which may explain this and they are the strength of relatedness (which would reduce social distance) and number of individuals (which would increase it). 18

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Equally, we can say that the higher will be the stock of intellectual (cognitive) heritage (K)—the more developed is the abstract language and the complex cognition—the stronger will be the sense of relatedness between the people in the same group. If one is attached to his family members because of their physical closeness, he will be even more attached—and willing to perform social acts—if he shared with them other common (intellectual, or abstract) traits. However, at the same time, a higher stock of intellectual heritage also means an expansion of technology  [T(K)], and the reference group which is now the circle of people on whom one may depend for the supply of life’s necessities (we may call this the core group (CR) or the group which is necessary for an individual to fulfil his or her personal and social needs). This, in turn, may lead to either an increase or a decrease in the level of relatedness within the initial group, but as the reference group has now expanded, the average level of relatedness among all members of society is bound to fall. This, of course, is true as long as the new reference group N is greater than the ‘natural’ social group N (T ( K )) > 1).19 In theory, if our cognition can catch up with techno( N ( R) logical development, then it is possible that an increase in the reference group relative to the initial group may not have a negative effect on social cohesion but this is unlikely to be the case given that our initial R was designed to support only N ( R ) . Going back to our framework which relates our natural social capacity (captured by R) to its suitable form of social organisation, we will find  Hamilton (1975) discusses the effects on relatedness of expansions of social groups in animals and primates. As there are no technological development, changes in group’s size or composition are a result of movement of individuals across groups. He claims that ‘the less migration there is the more relatedness will build up within a group’ (p. 338). While his model refers to animals, and therefore, to a more instinct (rather than cognitive) sense of relatedness, this is very similar to the story we were telling on the shift from the extended family to the village or from the village to the city (though in the case of the animals it is a change of composition rather than expansion is size but the two, in my view, can be viewed as equivalences). The moment your reference group (the group on which you depend for life’s necessities) expands to include individuals who until now were not part of your initial group, the level of relatedness within the extended group will fall. What Hamilton is not taking into consideration is the possibility that with the technological expansion there may be a parallel cognitive development which will reduce the distance between new members on the basis of a new connecting ideas. But he does take into account that much of the effects depends on the nature of what binds people together and he claims that among some groups of animals, newcomers are more tolerated though they go through a period of probation. 19

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that even though the original level of sociality suggested a more organic form of social organisation, cognitive development may lead to a more functional one even though there had been no change in the natural, or initial, level of human sociality.20 The key, of course, is the development of social distance. Incorporating the possible effects of the accumulation of knowledge—both on our cognitive abilities and on their applications (technology)—will lead to the following outcome: Basic relation between SD and social organisation Nature of social organisation Functional: SD(K0) civic society

R

H.S SD(K1)

Organic

SD0

SD1

Social distance (SD)

 It may be interesting to note in this connection the work by Henry Maine, who was a historian of law who wrote at the time of Darwin and attempted to formulate an evolutionary analysis of social development. Maine’s main claims which are relevant to our discussion here are the ones he developed in Ancient Law from 1861 and The Early History of Institutions 1875. Accordingly, society, at the original stage, was not made up of individuals but rather it was an aggregation of families. The main social bond, accordingly, was that of blood kinship. In opposition to the more dominant line following the Enlightenment according to which individuals create society (i.e. the purely functional approach), he held the view that it is more likely that it was society that created the individual (Maine 1920 [1861], Chaps. 1 and 2). Historical changes—and in particular, the settling on land—led to changes in the nature of kinship which, in turn, led to social changes too. The key component in Maine’s analysis is the role of property which he claims was originally collective and then was disentangled into private one. He concludes in his analysis that what typified the shift from the more blood kinship base of sociality to more cognitive ones (like, common ancestry) was a move away from a hierarchical (status based) form of social organisation to a contractual one. This, in terms of our discussion, corresponds to the move from organic to more functional form of social organisation. 20

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In the initial stage, for a given level of sociality embedded in the share of neocortex in the brain (HS), there was a corresponding level of organic sociality which is reached through the connections created by the blue line. Now, for the same level of R as before (point HS), due to the increase in the stock of knowledge (K) which also led to technological development (T(K)) resulting in a larger social group (N(T(K))), the social distance within the core group would increase. This is the shift from the red steep line to the green less steep line.21 The green line depicts the level of social distance that would have materialised in the core group (i.e. the social group which is necessary for one’s social and personal subsistence) as a result of the increase in accumulated knowledge from K 0 to K1 . As we said earlier, the cognitive development which brings more people into one’s social domain increases the sense of relatedness with the original group but also reduces the average distance due to the larger number of people with whom sociality is now shared (given the initial capacity to share which is determined by R). We start at HS (representing the share of neocortex in the brain of Homo sapiens) on the right-hand side—which denotes our natural cognitive capacity—and travel left until the point where the blue line intersects the green line (which is the corresponding social distance of this level of R and an enhanced level of K which would lead to a larger reference group). Following now the yellow line, we can see that it would lead to a move towards a more functional form of society even though the sociality of agents is still based on the notion of relatedness and non-interested social motives. This last point is of considerable importance. While it may be true that the accumulation of knowledge would lead to increased social distance and, therefore, a more functional society, the difference between such a society which is based on individuals with an intrinsic sense of sociality and the one which is based on people who only act in their own interest cannot be overstated. One such reason is the fact that in spite of technological progress and cognitive developments, the basic social attribute of being able to personalise relationship with a group the size of which is  The reason we suppose the line to be less steep is that the effect of cognitive development is bound to be greater on those with greater cognitive ability than on those with lower such ability. 21

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determined by the share of neocortex in our brain (R) has not really gone away. This means that while people may be able to relate to a larger group than their ‘natural’ one, there will be a new form of such relationship which is going to be less personal but not less committed or less self-­ interested. When the sense of association shifts from blood kinship (which is very personal) to a more cognitively constructed abstract, people may transfer their sense of sociality from specific individuals to the collective. Namely, a person may perform social acts (a la Hamilton) even when the measure of relatedness is not personal. A person can act heroically and even sacrifice his or her own life for a collective idea like, say, nation, religion or even justice rather than perform such an act for specified other individuals. He, or she, may even perform social acts for specific individuals based entirely on their association with the collective rather than any personal relationship with them. Clearly, such acts, though definitely social, cannot really be considered as a personalised act. Moreover, the effect of the person’s sacrifice is going to be felt differently among the people of his natural group—with whom he or she had had personalised relationship—and the rest of the community in whose collective name he or she acted. The significance of this distinction between a functional society where agents have no social attributes beyond that which serves their own interests and a similar society where agents have such an attribute is that in the latter case excessive rise in social distance may also lead to some forms of alienation. If the only purpose one would socialise is to achieve personal individual ends, then whether there are varying levels of relatedness in society is of no interest to the actors. As society expands due to the accumulation of knowledge, so will the domain within which one can pursue one’s own interest. It can only end well. But if one has social attributes which means that relatedness is engraved in one’s psyche, then the loss of relatedness—or a confusion about its boundaries—would have an inevitable effect on the disposition of this person. For the self-interested agent, society is, more or less, one circle. He may achieve different self-serving objectives in different domains of society but there is, in principle, no difference between the political, the economic and the social circles of society.22 For the socially minded individual  This, of course, is the Becker agenda.

22

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it is always a complex set of circles beginning with the one which is his core group and where he finds that which he needs for his social subsistence. Even though the political and the economic circles may expand and overlap, the expansion of the social is always anchored on the core group. The question is, therefore, what would happen to the level of relatedness—and, hence, social distance—within the core group as society grows and there are increasing differences between the various circles of social life. To begin with it would be useful to identify more clearly the different social circles and the way in which they may influence the concept of social distance which, as we have been arguing, is detrimental to the question of social organisation. Firstly, there is the intrinsic social group (ISG) which is the group for which nature originally designed our brain. This, to use Dunbar’s extrapolation, stands on about 150 people with whom we would normally have relatively intensive personal interactions most of which may not be functional at all. The second group is what we called the core group (CR) which is the people with whom we are involved for the purpose of social subsistence. This means all those people who, through the division of labour—which is, of course, a by-product of our cognitive development—supply us with life’s necessities. The third group, social reference group (SRG), is the one containing all those individuals who belong to society according to whichever way we conceive its binding cement. Finally, we have the technological reference group (TRG), which is the group of individuals with whom technology facilitates social interactions. We start at the point where all four groups overlap and are made up of the same individuals. So, for instance, a group of hunter-gatherers of, say 150, contains all social spheres (ISG = CR = SRG = TRG). It is where people experience personalised sense of relatedness with all others; it is where political decisions are made and it is also the domain within which the economic division of labour takes place. As cognition and technology develop, society expands. At this stage, two things happen. First, we have more people in society with whom we interact directly or indirectly due to enhanced division of labour, and, secondly, we have a new concept to bind us all together. Suppose too that the new concept is, say, common ancestry as opposed to blood kinship with which we started. As the

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expansion occurs, one would expect the overall social distance to increase. This is mainly due to the fact that there are many more people in society and on average the level of relatedness between all of us is bound to fall. What is less clear is what would happen to the relationship within the core group (the original extended family). To put it all in terms of our different groups, what happened here are the following changes: the ISG remains of the same size and will remain so as long as our brain has not changed. It is, perhaps, the only constant in our story. However, technological development suggest that the division of labour will deepen, which means that we are now going to be dependent on an increasing number of people (beyond ISG) to supply us with our life’s necessities (which include social needs). Thus, CG has increased relative to ISG. At the same time, the same cognitive development which facilitated the technological application that increased the domain of CG also offered us the ability to formulate a concept of social bond which is abstract (like common ancestry) and this, in turn, created an SRG which is even larger than the CG. As for the TRG, this may or may not allow us, at this stage, to reach all those who now belong to the SRG. So, the question now is this: the social distance within which of these reference groups should be the one detrimental to the question of social organisation? The answer is that this should be the social distance within the core group (CR). It is because the core group is, perhaps, the most significant expression of social ties which are relevant to the individual. He or she can easily survive without any reference to the larger social group (i.e. all those who are of the same common ancestry but live beyond their own reach) but they cannot subsist without the core group. Therefore, the question which we need to answer is whether the development which we just described would lead to an increase or decrease in the social distance within the core group. The core group is now bigger, which means that it includes people who were outside the intrinsic social group (recall that at first, ISG = CG). On the one hand, we could say that the level of relatedness within the intrinsic group would be enhanced. We suggested that this could be due to the fact that now not only are we related by blood but we also have something more that binds us together: our common heritage. This would

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mean that within the ISG there would be a decrease in social distance. But as our relationship with all others who now belong to CR and who were strangers to us before is likely to be less intense than the relationship we had had with our kin before the change, the overall level of social distance in the core group is likely to increase (recall that we measure the social distance as an average of relatedness across all members). On the other hand, and perhaps a more likely scenario, when society expands, the level of relatedness within the intrinsic social group would fall. Before the change, they were the only people we related to and we had not much choice in the matter. Now, that which binds people together is a broader abstract concept. It therefore allows us to choose the people with whom we wish to have strong relatedness (and thus, perform social acts that would benefit them at our expense) from a larger set of individuals. The members of our extended family are still related to us but the strength of such relatedness will somewhat diminish. In simple terms, this is a reference to the idea that sometime people have stronger bonds with friends than with members of their own family. Both scenarios suggest that the social distance within the core group will increase. This is mainly due to the presence of new individuals who belong to the core group but, even more importantly, to the fact that the social reference group now is much bigger. This means that the weight of each individual in the formation of one’s sociality becomes somewhat reduced. Suppose that the change we described here is the change from hunter-gatherers to a village community. In the village, the ISG  p > y per x then both will benefit 2 from the arrangement and the market solution will be at point A where everyone fully specialises. It is important to emphasise that I am not saying that the price has to be in this range for them to enter the social arrangement. The logic here is the other way around. If both are instrumentally rational, individuals who seek to have more of that which they desire, the competitive market price that will emerge, will have to be in the range between ½ and 2 (not included). As each one of them will maximise their own utility subject to their constraint, which is now dependent on the prices of the goods which they will need to trade, it will lead to the following outcome: Friday’s economic problem with Robinson

Robinson’s economic problem with Friday

y

y 10

A

6

5 2.5

5

A

4 Au 5

u0 6

10

Au

u1

u1

u0 x

2.5

4

5

x

It is easy to see that if the price is, say p = 1 y per x then the competitive outcome means that both of them will fully specialise, which will lead the economy to point A. Each one of them will now face the heavy line in the above diagrams which represents the amount of goods they can get in return of the good they have produced. One can see that this will be a market solution as at point A Robinson will be selling 4 ys for which he will get 4 x, which is what Friday will sell in return for 4 ys. Markets co-ordinated well their activities through the allocation of

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resources, which led to the fulfilment of their desire to choose the most preferred bundle which is available. The question which arises here is whether in such a story there could still be a reason why one would wish to update or reform the conception of the individual as we move from the pre-social to the social state. The answer is evidently yes. For one, the problem we posed in the previous story according to which the choice of how many hours one would work given that it will affect the other is still relevant. The fact that we fixed it and took it out of our considerations for simplicity of exposition does not make the issue irrelevant. So there is still a question of how much labour they will invest. But here, we wanted to focus on additional economic dimensions of social relevant which arise from social association. Namely, given that they contribute a certain amount of labour, how would they benefit from the division of labour between them and will this lead to a need to reconsider either the conception of the individual or the role of the markets? We saw that when two instrumentally rational utility maximisers come together, there will be benefits for both from their encounter. Given the nature of their rationality, the benefits are measured simply in terms of comparing that which they could have had outside society and that which they have inside it. This, in spite of the fact that the move from the pre-­ social state to the social state led to the introduction of the other, and inevitably gave rise to interdependence. There are two dimensions to this interdependence. Firstly, they must both have similar desires for the arrangement to succeed. Namely, if, for some reason, Friday is not a consequentialist (and, therefore, not instrumentally rational) and is more interested in the process of production than in the outcome, then it means that he gets pleasure from spending half his time collecting apples (y) and half his time collecting berries (x). For him, the initial position is a good one and he is not interested in having more of the apples and the berries even though they are clearly economic goods for him. In such a case, society will not be formed even if Robinson is instrumentally rational and sees the benefits of dividing their labour so as to acquire greater quantities of the economic goods. Nor will competitive decentralised decision-making be of any use as a guiding principle for any potential association between them. In fact, if an association is to emerge, it will clearly be

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based on non-economic principles and the allocation of resources as well as the division of labour could only be an afterthought in the sense that it will have to be subjected to the other reasons (than to have more of all available economic goods). So, the working of the competitive system as a principle of social or economic organisation is predicated on all agents being equally instrumental in their rational behaviour. Secondly, while there are clear benefits to be had as a result of the division of labour, the distribution of these benefits will not necessarily be equal. As there is nothing a priori about them which suggests that they are different from one another in any meaningful way, one would expect the price to be exactly half way between ½ and 2 ys per x. Only in such a case one can say that the benefits are equally distributed. It is easy to see that the closer will the price be to one’s reservation price (which, in this case, is the cost one would have faced had he not joined the project), the less will this agent be able to benefit from the arrangement. Hence, the closer the price gets to ½  y per x, Friday will benefit very little while Robinson will have great benefits. The other way around will be the case had the price been closer to 2 ys per x. But competitive prices depend on demand and supply and not on social principles. Therefore, there is nothing about the system which will guarantee that the price that will emerge will be the one where benefits are more or less equally distributed. If berries (x) are liked more than apples (y), the quantity demanded of them will be greater and their price will be higher ( px goes up). This will increase the relative price of x and lead the equilibrium price to move nearer to the value of 2 at which Robinson—who specialised in y—will get a diminishing share of the total benefits created. But this will not be the result of his laziness or the inferiority of his skills. It will simply be the result of subjective tastes parameters. Therefore, in this case, it is the action of consumption, or one’s preferences over the goods, which affects the distribution of benefits and not the direct action which produces these goods. In a world of instrumentally rational agent, it will be difficult to correct this distribution without affecting the total benefits created. As interference will affect the relative prices, it will, in principle, affect the choices of specialisation which agents will choose. If we add to this the cost of switching from one specialisation to another (which we also discussed in

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Chap. 4), then the merits of markets as a way of accommodating the social aspect of the union when agents are instrumentally rational are much diminished. Having said this, it is not at all clear that the instrumentally rational individual will be particularly concerned about the inequality generated in the distribution of benefits. If we all benefit, why should anything else matter? This is, of course true, if the conception of the individual in the economic system is identical to the one who lives in the wild. But there is a far more serious distributional outcome which will not be captured by the standard instrumentally rational agent but which should have affected the way in which we conceive the individual. I refer here to the distribution of burden. Suppose that there is a fundamental difference in the nature of the work when producing x and y. Suppose that the working environment in the production of y is considerably more pleasant than the working environment of x. So, if y are the apples and x the berries from the previous story, then one could say that if the apple groves are located at the top of the mountains with wonderful views and very pleasant micro-climate and the berry bushes are located at the bottom of the valley in dense bushes with hot and unpleasant micro-­ climate, then working in apples is a much better experience than working in berries. Naturally, it is not anyone’s fault that the working environment in one industry is so distinct from another, nor is it anyone’s fault that one person is more suited to work in one industry while the other is more suited for the other industry. We said at one place that Robinson will have a comparative advantage in apples because he is taller and Friday will have a comparative advantage in berries because he is shorter but this cannot really be a justification why in a world of full specialisation Robinson will spend all his time in a pleasant occupation while Friday should spend all of his in an unpleasant environment. It is important to emphasise that both are capable of working in both industries but it is the distribution of people with particular tastes (subjective parameters) that will make the competitive prices what they are and send them to specialise in those particular industries. Had they not joined society, they would have divide their time between the two occupations but now, in the name of efficiency, they will find themselves working only in one of these

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occupations because the only thing that matters is that they will have a lot of leisure and plenty of fruits if they do so. In other words, it is the consequence of their actions rather than the process that matters. But this is again one of those issues which arise in the social setting and to which the standard conception of the individual will lack sensitivity. Notice that the issue here is not whether the individual is particularly keen on the environment within which he operates. Instead, it is a question of equity: Why should one person work full time in a good environment while the other work full time in an unpleasant one? Even when the distribution of benefits (of the outcome) is equal, it is still the case that one of them enjoyed these benefits while having a pleasant working environment while the other did not. One could argue that the markets will compensate for the more difficult environment but it is not at all clear how. If there are more people like Friday than Robinson in society, the wages in real terms earned by those working in the less pleasant environment will be lower, which also means that the price of the good they produce will be lower; hence, the distribution of benefits will be skewed against them. Even if, for argument’s sake, we say that the person working in the berries industry (x) would get a higher wage, this would mean that the price of berries will rise and this will increase his share in the benefits. However, to suppose that one can compensate for a principle of equity by giving someone other economic goods is making a mockery of the idea of principles. While it is not embedded in the idea of instrumental rationality that a principle (like that of equity) should be substitutable with other desirable outcomes, it does seem to be embedded in the utility maximisation manifestation of it. An instrumentally rational agent may see the distribution of burden as part of the consequences of participating in the social project and then prefer an outcome where burden is equally shared over an outcome where it is not. But for a utility maximiser whose preferences must satisfy a certain axiomatic structure, there must be some substitutability between equal burden and plenty of economic goods. There is no distinction between the nature of preferences regarding equity and those regarding, say, consumption.54 Hence, it stands to reason that the plenty  If there were a difference we would have faced a form of lexicographic order which does not lend itself to real-number, or utility function, representation. 54

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of goods which can be obtained at the expense of the equity of burden could be a reason why such an agent would abandon the principle of equity. Unlike the previous story where part of the argument against changing the conception of the individual in modern economics could have been attributed to the difficulty of tracing the effects of one’s action on the other, here the problem is visible and easy to detect. Yet, economic theory will have us believe that the rational utility maximiser of the pre-social state will remain unaffected when they enter the social arrangements. The issue here is that when the two agents get into the social arrangement, they realise that something that was not there before society came into being is now clearly there: the distribution of burden in producing material wellbeing. If they feel that being members of the same community suggests that burden should be equally shared, then the principle of equal burden may be an overriding principle which is followed in what may appear to be a more expressive form of rationality. Recall that when Robinson and Friday formed a society of instrumentally rational individuals who use competitive decentralised decisionmaking as the co-ordinating mechanism, they ended up at point A in the diagram below: The economic problem with an expensive equity principle

y 15 B A

10

EB1

9

7.5

EB

7.5

C

9

10

15

x

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Recall too that there would be no other competitive solution than A as in areas B and C one of the agents would not participate in the social project. However, to satisfy the equity of burden principle (EB), each one of them should spend some of their working time in both types of occupation. But as we are still dealing with the case where economics was the initial drive to get into the social arrangement, there should be some economic benefits to being together. At EB we have perfect equality of burden as each one of them is working in both occupations as they did before they entered the social arrangement. Therefore, at EB the total output will be the same as before. But this outcome is due to the specifics of our story. To make the equity principle not entirely orthogonal to the economic benefits, let us suppose that the principle of spending some time in both occupations translates into everyone spending at least 20% of their time in the other occupation. In such a case, we will end up at point EB1 , where they will now have more of both goods and some sharing of the burden. We know that in order for the agents to get into a social arrangement that will lead them to point A it is enough for them to remain instrumentally rational and to  set-up the institute  of competitive decentralised decision-making. Will the same lead them to points EB or EB1? The answer is clearly no. As we noted earlier, competitive interaction will lead them to point A and nowhere else in this diagram. This, of course, is the idiosyncrasy of our story and, in general, they could get by competitive means to any point on the production possibility frontier. But can they get by competitive means to a point inside the frontier? Well, only if markets fail and the economy is inefficient. Recall that for markets to mediate between individuals and the objective costs of things, prices must reflect the marginal product of producing them. This happens on the frontier but not inside it. In other words, if they remove the allocating power of the markets (by deciding that all agents should spend a certain fraction of their time in different occupations), then they will have no real role in society. So while in the previous story, acting expressively by choosing to work the most in whatever occupation one is suitable for, will not necessarily offend the mechanism of the market; the outcomes which markets will produce may nevertheless offend social sensitivities.

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Namely, if agents know that by not working as much as they can they are depriving other members of society from the benefits which they derive from their actions, they may decide—regardless of price and without substitution—to work as many hours as possible. This means that their decision on the most important aspect of their life is a non-economic, non-instrumental, yet rational, decision. If they then allow markets to do their allocation of people into occupation through the mechanism of prices, they will discover that the distribution of benefits may not be appropriate to their sense of sociality (if they have one) but, which is more important, that the distribution of burden is clearly offensive. While it is true that the distribution of benefits may be anything depending on people’s taste in economic goods, the distribution of burden is bound to be uneven. As there will always be a fundamental difference in the nature of occupation and as specialisation is a key component in the promise of decentralised decision-making, people are likely to spend most of their lives in either a pleasant or an unpleasant environment. Clearing one’s conscience by saying that the rewards will be greater—which is by no means guaranteed—assumes that people’s sense of sociality can be compromised. So what we have discovered in this somewhat prolonged section is that the conception of the individual in standard economic analysis is totally insensitive to the fact that individuals live in a social context. The fact that there was no difference in the way economics analysed the lone wolf and the social agent is a clear indication that economics does not consider the social context to be of any significance to the analysis of individual behaviour. We identified this problem with the format of instrumental rationality. Even if one is making a decision which is based on the consequences of actions, the social context introduces consequences which are evident yet ignored by the economic agent. We acknowledged that people may have difficulties tracing the effects of their actions on others but to choose to ignore this is blatantly defining the agent as self-­interested and raises questions pertaining to the universality and neutrality of the subject. We noted that there are other ways in which the agent may take these effects into account through a form of expressively rational considerations. In such a case, we noticed that the mechanism of the markets may not be terribly useful in affecting the decision of how much work people wish to invest. However, markets could still be useful in allocating people into occupa-

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tions and in co-ordinating consumption. But this raises further two social issues which are ignored by the instrumentally rational utility maximiser employed by economic theory: the distribution of benefits and the distribution of burden. Adding expressive considerations here would make markets fundamentally redundant. Nevertheless, as we said before, this is not a call to get rid of markets but merely a reflection on the market as an ideal. While under instrumental rationality it is an ideal in the sense that it can resolve the economic problem of such individuals, it does not lend itself to a significant correction of the socially relevant outcomes (like the distribution of benefits and burden) due to the costs in terms of overall benefits. When, however, we introduce expressive considerations, it is clear that market operations will not lead to the solution of the economic problem that the individuals face when they recognise that they are social beings. But as expressive rationality may require a rewriting of economic theory from scratch, the question we should address is whether in spite of some conceptual difficulties it is still possible to socialise the i­ nstrumentally rational utility maximiser and, in so doing, preserve the ideal of the market as the preferred form of economic organisation in society.

7.4 S  ocialising the Instrumentally Rational Individual Let us begin with a quick recap: We agreed on the importance of reason (and, hence, some form of rationality) in the conceptualisation of human behaviour. However, we observed that this does not imply a unique form of such conceptualisation. We identified at least two distinct ways in which we can identify a reason-based conception of human behaviour: an instrumental and an expressive form of rationality. We discussed the relationship between these concepts and the notions of human sociality which we borrowed from our previous analysis (i.e. the questions of brain structure, social distance, technology and social organisation). This led to the following problem:

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Human sociality and rationality

Interest in the others (R)

Expressive rationality IIO ( R0 )

B

A

Irrational IIO ( R1)

ISI

C D1

D0

Domain of considerations

We noticed that instrumental rationality that is consistent with the level of interest which a social agent will have in the other requires that the domain of one’s considerations should be at least as broad as that interest. As instrumental rationality is based on the preferences which individuals have over consequences, there is a need for an agent to evaluate the effects of his or her actions on all those who fall within the domain of his or her interest (point A in the above diagram). We then noticed that technological developments are likely to lead to an increase social distance (at least in some stages of its development). In part, this will be due to the increase in the division of labour and, subsequently, in the level of interdependence coupled with a rise in its complexity. This means that both the ability of agents to evaluate the effects of their actions in the more intricate world of technological interdependence and their ability to relate to the others, in such a world, on a personal basis are seriously reduced. Consequently, the interest which agents have in the others will be transformed into something more abstract. It will inevitably be a less specific interest that is unlikely to be associated with the outcome of any particular individual action. It is also more likely to take the form of an expressive rationality where we act in a way which we believe is in everyone’s interest even though we do not examine the direct effects of an

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individual action (hence, the immediate domain of our decision-making narrows) (point B in the above diagram). We noticed that the conception of individual behaviour in economics is fundamentally instrumental and takes the form of the rational utility maximiser. In terms of the domain of consideration, it seems to be characteristic of an individual who would fit point C in the above diagram. But such an agent is a good way of characterising a self-interested individual and not a socially minded one. It is an individual who has little or no interest in the others and, consistently, does not take into consideration the effects of his or her action on anyone except themselves. Implicitly, we assume that such agents can at least correctly evaluate the effects of their own actions on them. However, this may be a plausible assumption only when we consider the case of the lone wolf. Without other agents around, it stands to reason that an individual would know, more or less, the effects of his or her actions. But such knowledge is not as straightforward as it is supposed to be when there is interdependence and agents interact in a more intertwined social environment. As the standard conception of individual behaviour used in economics seems to have fitted well the behaviour of a sole agent who lives without society, we asked whether the introduction of the social context allows this conception to remain unaltered. For simplicity sake we assumed that agents have no reason to enter a social arrangement other than an ­economic one. Nevertheless, even such extreme functional sociality immediately introduces economic interdependence at the heart of the discussion. It meant that the model of instrumentally rational utility maximiser, if it stays as it is currently used in standard economic analysis, suggests that agents continue to examine what each action means to them while knowingly ignoring the effects that their actions now have on the others. Given that the domain of considerations has not changed, we concluded that the agent must be either at C—which means that he or she is clearly self-interested55—or that he is trying to be at B but cannot calculate the effects of his actions on the others. However, one cannot really be  It may be useful to point out that the term ‘self-interest’ is really only meaningful in the social context. In a pre-social state, one cannot really have ‘self-interest’ as there are no other interests one could have adopted. So the difference between the notion of ‘self-interest’ in a pre-social state and a social state is in that the latter is cognitively so, while the former is not. 55

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at B and be instrumentally rational without properly evaluating the effects of one’s action on the others. How could such an agent rank his or her preferences if they do not know what are the consequences of their actions for those about whom they seem to care? The difficulty which agents must have in assessing the effects of their actions on the others led us to the conclusion that there may be a deeper problem with the idea of the instrumentally rational agent in a social context. To some extent, the analytical framework of game theory attempts to address this question by clearly associating the outcome of one’s action with the action of the other. However, while this may be true in cases of very limited environment of very few players and rather simple actions, it may not be a good representation of the more complex world of economic and social interactions. Even if people are aware of the fact that the outcome of their actions depends on the actions of others, they may nevertheless be unable to correctly evaluate those effects. In such a case, they may opt for an alternative way of taking into consideration the effects of their actions on the others or, as it is in this particular case and not insignificantly so, the effects of other people’s actions on them. Economics, in its more general form, seems to circumvent this problem by arguing that agents do not consider these effects simply because they understand that their individual actions are insignificant and, hence, will have no impact on anyone. That is to say that agents care about the others but do not think that their actions affect them. This is somewhat a strange position to take. How can anyone understand that they live in an environment where there is interdependence and yet believe that they are exempt from thinking about the effects of their actions on the others? How can there be meaningful interdependence if one’s action is insignificant? If someone specialises in law, one would still need to get his food and clothes from other people. Would not the lawyer expect to be treated by the tailor in the same way as he treats his own customer? If the problem is that of evaluating consequences, it means that anywhere along the instrumental rationality sleeve in the above diagram (north-east of point C) will not be feasible. Hence, the only way to introduce people’s concerns towards the others would be in the form of expressive rationality, or a rule-based behaviour which is independent of any immediate consequences. We then asked whether this would make

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any significant difference to economic analysis and to the message emanating from its paradigmatic core and concluded that the conceptualisation of human behaviour is detrimental to the evaluation of the role of markets in the economy. We identified two main domains of social considerations which affect both the ability to use notions of instrumental rationality and the role of markets in society. The two domains were those of duty and justice. The case of duty relates to what the agent does irrespective of the other and the domain of justice relates to what the agents may expect relative to the other. We showed that if people choose how much to work according to their sense of duty towards the others, the markets play no role in the allocation of time (or effort). They may still be useful in allocating other things (and, in particular, agents to professions) but the fact that not all economic decisions are governed by the markets suggests that the outcome will not be efficient (in terms of the standard conception of the economic problem). On the other hand, as correcting the distributional consequences of the markets will not affect the contribution of effort (though may distort other aspects of the allocation of resources) markets may seem altogether harmless. However, when one adds the question of justice—the relative position of agents—the problem may become insurmountable. Becoming aware of one another introduces concepts into the life of agents which could not have been there for the self-interested rational utility maximiser. We looked at two such concepts: the distribution of benefits and the distribution of burden. We saw that if people have a view about the distribution of burden, then not only the allocation of time (across occupations) becomes independent of the market but so would the allocation of one of the most important factors: labour. In such a case, the markets as an ideal cease to be relevant. Of course, the reason why markets lose their status as an ideal was basically the shift towards the expressive form of rationality in order to overcome the calculating difficulties which were embedded in the social expansion of the instrumentally rational. But the question which we now wish to address is whether it is just this difficulty or something much deeper that prevents instrumental rationality (in its rational utility maximisation form) from properly representing the social agent. In other words, we ask whether it is nevertheless possible to move from point C in the above diagram to point B if we leave aside the problem of calculation.

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Let us go back to our story of Robinson and Friday and when they come together. Recall that in their pre-social state (their entirely self-­ interested state) acting a (which was the number of hours worked) would lead to consequence zi = Li e , xi Li e , i = R, F , that is, the amount of leisure and good x (fruits) which they could obtain. Each one of them had preferences defined over the outcomes which were represuch that a rational sented by a utility function ui = u Li e , xi Li e choice would have been an outcome z which provides the highest value possible of u. When they enter the social arrangement where each one of them owns a plot where the other is an employee, the constraint they faced—reflecting the division of labour between them—would be I i = Wi Li e + p i L j e . Their interdependence is manifested in that the choice of leisure of the one affects the feasible set (or the constraint) of the other. We saw in the previous section that according to standard economic analysis their preferences will still be defined over the consequences, to them alone, of their choice of leisure (and, hence, action). In such a case, if there are no serious differences between the agents, we saw that the social arrangement will indeed be beneficial to both. This case is depicted in the right-hand diagram below:

(

( ))

(

( )

( ))

( )

Robinson’s/Friday’s market solution to the economic problem when both are aware of the other

Robinson’s/Friday’s market solution to the economic problem when the domain of their preferences remain unchanged

It is clear that as the domain of their preferences has not changed, they will move from A to B where it is clear that they are both at higher level of utility. The social arrangement is better for both of them in terms of their preferences before and after entering the social arrangement. We

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also note that if the two individuals are fairly similar in terms of their preferences (and, to some extent, their abilities [the position and shape of the blue line]), the outcome to both of them will be similar too. They each enjoy more or less the same combination of leisure and goods and the composition of profits and wages in their income is more or less the same. Moreover, as the heavy blue line describes their own contributions to the total production of fruits (Robinson contributing apples while Friday, berries), they each get, in terms of the two components of fruits, an amount which is exactly the same as their contribution to the collective output.56 Suppose now that they can calculate the effects of their actions on the other. If they are aware of the other and the effects of their own action on them, this means that entering the social arrangement will alter the meaning of the consequences over which their preferences will be defined. Now, an outcome of an action (choice of leisure and therefore, work) will be as follows: zi = Li e , xi Li e , L j e , u j x j Li e , L j e , i, j = R, F . This means that an individual’s preferences are defined not only over the ­outcome of his own action to him (which is made up of the direct leisure time remaining and the amount of fruits (x) that he can command (through his labour and through the profits on the other’s labour)), but also over the consequence of his action to the amount of fruits available to the other agent (through profits). Without complicating the exposition too much, it is easy to see that for agent i to increase his leisure by 1  unit will lead to the following effects: (a) increase his utility from leisure; (b) reduce his utility from fruits (x) as he will now be working fewer hours and, ostensibly, earn less in wages; and (c) reduce the amount of profits to agent j which will lead to fewer fruits (x) for the other and this, if he cares about him, will lead to a reduction in his own utility. In a simplified way, it means that his utility from an hour of leisure will now be lower than before. If before the change, the utility of leisure was only offset by the fall in fruits available to him, now this loss is much greater: it is the fruits that he himself will

(

(

) ( (

)))

 This, of course, is not a necessity and we may indeed be in a situation where one of them gets less than what he had contributed but is still better off than he was before. This, in turn, will raise the question whether he should stay indifferent but we will soon touch upon this. 56

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not have + the fruits the other will not have (i.e. it is now (b) + (c) rather than just (b)).57 To keep the diagrams simple, we depict this case in the left-hand diagram where one can see that the decline in the marginal (as well as overall) utility of leisure translates into a flatter indifference curve. We therefore move from A to B where both individuals have different preferences to the one they had before they entered society (denoted by ui and ui respectively), which mean that we cannot really compare the utility at A with the one at B. However, we can see that in terms of their pre-social preferences the agents would become worse off as they move from A to B. At the same time, we can see that in terms of their social preferences (where they take into consideration the effects of their actions on the other) they would have preferred point B (i.e. the social arrangement) over A. Does this tell us anything about whether or not they would have entered the social arrangement in the first place? Not really and it also raises an interesting question which corresponds to some of the issues surrounding Rawls’s famous veil of ignorance.58 If people have to decide whether they want to enter a social arrangement, would they make such a decision based on their preferences in the pre-social state (the self-­ interested one as there was no one else around) or on their socially adjusted preferences? Even if people have social preferences (a la ui ), in the presocial state their actions will not affect anyone else and, therefore, will be the  same as ui . It is now clear that at A within a social arrangement, the individual will be worse off as his choice of leisure adversely affects the other. In other words, as we cannot compare their preferences before and after the social arrangement it is difficult to establish whether or not the  Formally, if their utility function is now ui é zi ( Li e ) ù , then the change in utility as a result of an increase ë û ¶ui d ui ¶ui ¶xi ¶ui ¶u j ¶x j in leisure will have the following effect: × i + × i , which is × i = i + ¶L e ¶xi ¶L e ¶u j ¶x j ¶L e dL e exactly what is listed in (a), (b) and (c) above. At the optimal choice the value of this should be equal to zero, which means that as the second and third elements are negative, the first element (the marginal utility of leisure) must be very large. As standard analysis suggests that marginal utility of anything is diminishing, it implies that leisure should be minimal (thus making it very precious). 58  Rawls’s (1973) A Theory of Justice, to which we referred earlier, is a theory of social institutions which is based on choices people would make in a pre-social state but without knowing who they will be once society is formed. This is known as the veil of ignorance. However, there is always the question of whose preferences are going to be used behind the veil of ignorance. 57

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individuals would want to enter the social arrangement. But at the same time, it is also clear that to enter the social arrangement without considering the effects of one’s actions on the other is beneficial and purely functional. If people are intrinsically social, their choice of the social arrangement is more likely to be based on a non-consequentialist argument. Therefore, for a social being, the social arrangement is a necessity and the choice of B would then be clearly better than that of A. In the left-hand diagram, we repeated the presumption behind the righthand diagram where we depicted a situation in which both agents make similar choices (i.e. more or less homogeneous agents). In this case, however, they work a lot and receive the exact equivalence of that which they have contributed. Note, too, that to a great extent this is very similar to the allocation we would have reached had agents acted expressively (out of duty) and fixed their working time at a high level. Does this mean that if we leave aside the problem of the intractability of interdependence, the instrumentally rational utility maximiser can very well capture the sociality of individuals and take us from C to B in the diagram at the beginning of this section? While on the face of it the answer may seem to be in the affirmative, this may appear less so the more we dig into the significance of social mindedness in the instrumentally rational utility maximiser. It is evident that the choice of leisure (and, hence, work) made by this individual is very similar to the one that was made by the expressively rational agent whom we discussed in the previous section. But the similarity ends here. The expressively rational individual makes this choice not because of any particular cost of leisure (wages) to him but rather due to a sense of duty or propriety. His choice, therefore, is independent of its immediate consequence to him and, hence, will not be sensitive to economic signals like that of wages. In other words, the amount of work the agent contributes will not change had he received more or less compensation for his travails or had the rewards for his effort been greater or smaller. In slightly more colourful terms one can say that his principles are non-negotiable. This is significantly different from the way in which the socially minded instrumentally rational is making his choice. Here, the choice of action will very much depend on the level of wages and, therefore, on the personal return on his effort. Namely, while the agent is considering the effects of his action on the others, his actual choice is based entirely on

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what the effects of the action will immediately mean to him, personally. It is not the others as such who matters here but the degree to which their predicament spoils the agent’s own ‘sense of fun’. By considering the effects of one’s action on the others, one, effectively, only alters the subjective evaluation of leisure. Consequently, if there is a fall in wages, the socially minded instrumentally rational utility maximiser will choose to have more leisure and, thus, deny the fruits of his labour from the other (though he is still receiving the fruits of the other’s labour by way of profits). The expressively rational individual will not respond in this manner. In fact, there is a hidden anomaly behind all this which highlights the difficulty in taking seriously the notion of the socially minded instrumentally rational utility maximiser as a distinct form of behaviour to the selfinterested rational utility maximiser. It can be seen in the comparison between the effects of a fall in wages on the two types of instrumentally rational agent: A compensated fall in wage (without income effect) will make the socially minded individual increase in leisure more than the self-interested one

Initially, along the red line, the socially minded agent would choose less leisure and more work than the self-interested instrumentally rational utility maximiser (points A and A′ respectively). Now, when wages fall, we look at the effect that it would have on their choices when their overall

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level of utility has not changed (namely, we are only looking at the substitution effect of the change in the price of leisure). This is depicted by the two blue lines and the move to points B and B′ respectively. For the same level of utility, when wage falls the socially minded individual will increase leisure (and, thus, reduce labour) according to the left-hand arrow, while the self-interested one will increase leisure according to the right-hand arrow. The flatter slope of the indifference curve of the socially minded individual suggests that any slight fall in wages will lead to a relatively large increase in leisure. As the slope of the indifference curve of the self-interested individual is steeper, it suggests that the increase in leisure (for the same level of utility) will be smaller. So we see that the socially minded instrumentally rational agent would respond in the exact same manner as the self-interested instrumentally rational utility maximiser to a change in the cost of leisure. They will both respond in a way which adversely affects the other. However, and this is the curiosity, paradoxically, the one who takes into consideration the effects of his action on the others will act in a way more hurtful to them than the one who is oblivious of such effects. Surely there must be something wrong with the attribution of distinct social mindedness to such form of behaviour. Furthermore, as both leisure and fruits (x) are economic goods, for the rational utility maximiser (whether self-interested or, ostensibly, social) it means that when there is an increase in income the individual would want to have more of both goods.59 Hence, he would want to have more leisure even though there has been no change in the way his choice adversely affects the other and the way in which he takes this into consideration. Moreover, if the reason why his income increases is because he now has a stake in the profits which is produced in the sector where he is also the employee (consequently greater income inequality), responding by an increase in leisure cannot really be considered as genuinely social mindedness. Not only will his action reduce the total amount of profits available, the share remaining for the other will fall even further. In this  This can be seen by a shift upwards of the red line in the above diagram on the left. There is nothing inherent in social considerations to suggest that leisure should be seen by the agent as an inferior economic good. 59

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respect, there is no substantive difference between the self-interested instrumentally rational utility maximiser and the socially minded instrumentally rational utility maximiser. Indeed, that which makes it so difficult to distinguish between the two forms of instrumental rationality is an inherent aspect of the analytical framework used by rational utility maximisation which makes individuals intrinsically opportunistic. This feature is that of substitutability, according to which there is always a multitude of outcomes which equally serve the same purpose. Even though the utility function merely ranks outcomes and, hence, numbers should not mean anything, the model of the rational utility maximiser implies that the objective of any particular choice is nothing but this very number; it is, in fact, to achieve the highest utility possible (i.e. the highest number). Given that within standard analysis, for an order of preferences to be represented by a function like the one we call utility, there is a need for continuity which, in the end, gives rise to substitutability (i.e. indifference curves). This means that there are numerous outcomes (and, hence, actions) which yield the same number. Our objective, therefore, is not a particular action, nor a particular outcome but the numerical value of its consequence. As for every level of utility there are many such outcomes, the action (choice) itself (with its attached consequence) does not matter. If there are many actions which yield the same utility, then these actions are equal in value in the eyes of the agent. We saw this well in the above diagram as both A and B (and similarly A′ and B′) represent two very different actions; yet as they yield the same utility they are equally valued even though there is a profound difference, from a social perspective, between them. This may be fine for a self-interested agent who does not care about the effects of his or her action on the other, but how can someone who is aware of the effects of his or her action on the other—and cares about them—be at the same time indifferent between two actions even though one of them is clearly more harmful for the other? Well, the answer is that such an attitude is typical of anyone who is an opportunist. And an opportunist is very unlikely to be a socially minded individual of the type we described in the previous chapters. The definitions of an opportunist or an opportunistic act vary slightly across dictionaries but they all seem to agree that it is about acting to promote one’s own interest with a complete disregard to anything else

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(and, in particular, society and, hence, morality).60 This, of course, does not sound particularly social. We saw in the survey at the beginning of this chapter that more people say that they act according to propriety (or properly). This means that actions seem to have something akin to intrinsic values. Naturally, it is not the action per se which gives it the value but some other consideration which may be associated with its more broadly conceived consequences. For instance, an action which is deemed to be socially desirable is likely to be of the type of action associated with the concept of inclusive fitness which we discussed before, namely as an action which may not benefit the individual organism but may have implications for the larger group (in this case, society). Even though the process in which actions receive their apparent intrinsic values may be a complex one,61 once the value has been assigned, individuals act on it regardless of its immediate consequences. In terms of utility theory, as we said before, it is as if individuals have a lexicographic ordering in which the choice of some actions is independent, or takes precedent, over the considerations of the personal and immediate outcome of such actions. This, however, effectively rules out the rational utility maximiser as the analytical tool to capture any form of genuine social behaviour.62 Some may argue that the reason why the rational utility maximiser may appear as an opportunist is because we have not included the actions themselves in the domain of his or her considerations. In our Robinson and Friday example, the action itself was not an argument in the utility  Williamson (1975, p. 255) famously defined ‘opportunism’ as ‘self-interest seeking with guile’. Namely, it is not self-interest which defines opportunism but rather the other way around. If the socially minded instrumentally rational utility maximiser is an opportunist, then he is not very different from the self-interested one. Williamson also noted: ‘Economic man is a much more subtle and devious creature than the usual self-interest seeking assumption reveals’ (ibid.). It is worth noting that some of the definitions also require the absence of a plan for an opportunistic act to take place but the case of the rational utility maximiser is that it is a plan to be opportunistic. One wants to maximise utility, and if there is a change in price, one will change the choice regardless of what it means to anyone else and as long as it serves one’s own preferences. 61  And here we have the vast literature which deals with how norms are created or how co-operative behaviour emerges. Most of this literature is based on evolutionary games analysis. Alternatively, one could think of Kantian notions like that of the universal test or the Smithian notion of the impartial spectator. 62  Recall that if the rational utility maximiser—in its most generalised form—is not the right conception of the individual, the generalised proof about the effectiveness of markets as a form of social organisation is severely undermined. 60

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function but only its consequences. Hence, though there was a direct correspondence between the amount of time either of them chose to work and the amount of leisure and goods they would enjoy, their preferences did not include the action itself. However, including the actions within the domain of the utility function will not make any real difference even if we employ a technique that will allow us to restrict the domain of permissible actions through what is known as Stone-Geary preferences. In the end, everything which is an argument in the utility function is substitutable. If actions become arguments, they too will be substitutable. Allow me to demonstrate this with a simple example. Suppose that actions a are defined over an interval from zero to a according to their harm to the other (or society): a Î [ 0, a ] . Suppose too that each action generates a personal outcome x for the individual. We assume that the relationship between the actions and the outcomes to the individual ( x ( a ) ) is as given in the diagram below. Namely, at first, an increase in harm to the other is associated with an increase in personal benefit up to a certain point beyond which the harm to the others also reduces the benefit to the individual.

x

Private benefits of actions with increasing social harm: the self-interested agent

u0 u1

x*

x1

x(a)

a1

a*

a2

ai

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If the individual’s preferences are defined over the actions and outcomes (i.e. u ( a, x ( a ) ) ), then if the agent is self-interested and does not care about the other, his or her indifference curves will be horizontal lines suggesting that they only care about x and it does not matter to them how much harm the action generates. They will therefore choose point a * as their optimal action. However, beyond the obvious which is captured by the actual choice (the most x regardless of what it does to the others) we can learn about the nature of these preferences by looking at the nature of these horizontal indifference curves. If we look at a lower level of utility, we can see, not surprisingly, that the individual will be indifferent between two actions, say a1 and a2 , even though they have different social significance. Now, if the agent is socially minded, he or she would want to have a lot of x but with as little harm to the other as possible. Their utility will be rising towards the north-west and their optimal choice will be point: ã in the diagram below. Clearly such an agent will choose an action which is less harmful to the other than the action chosen by the self-interested individual. However, if we look at the indifference curves of such an agent, we can clearly see that he or she will be indifferent between acting a3 and a * even though the two actions have different social significance. In short, we have not really escaped the problem of substitutability and opportunism. Private benefits of actions with increasing social harm: the socially minded agent

x

u0 u1

x* ~ x

x (a )

x1

a3

a~

a*

ai

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Both the self-interested and the socially minded instrumentally rational utility maximisers will have preferences suggesting that they will be indifferent between actions with significantly different social meaning. Therefore, though the choice of the socially minded individual will be less harmful to society, it is still reflecting a similar kind of opportunism which is clearly present in the self-interested individual. In contrast, an expressively rational agent will choose the lowest level of harm acceptable irrespective of what this may mean to the amount of x available to him or her. Nor would he or she change that choice had there been a change in opportunities available to them. Now, adding what is known as Stone-Geary preferences means that individuals have preferences which do not allow them to cause too much harm. Namely, the choice of action is going to be limited by, say a (see diagram below). This means that we end up with the situation where the indifference curves are asymptotic (vertically) to this level of harm: Private benefits of actions with increasing social harm: Stone-Geary preferences

x

x* x2 ~ x

x1 1

B

u0

x(a ) A

a3

~ a

a4

a

a*

ai

It is, therefore, true that in this case agents will never act in a way which is too harmful to the other (a* is hence excluded), which, to some extent,

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gives an air of sociality. However, though the agent is conscious of not harming the others too much, he or she will still be indifferent between an action which is the border line of acceptability and one in which one sacrifices a great deal of his or her own return just to make sure that the others are not harmed. In other words, in spite of not being willing to harm others beyond a certain level, the agent is still happy to harm others in exchange for higher personal return. It is as if sociality carries weight only at the extreme of one’s considerations and one would be willing to con the others but within a certain limit. Namely, though one has a conscious limit on how much they are willing to harm the others, they are nevertheless happy to move from A to B. It means that they are willing to harm the others by moving from action a3 to a4 (almost at the limit of the acceptable) only to increase their own personal gain. This, one must admit, does not sound like agents who genuinely cares about the other; it is more like drawing a line in the sand beyond which anything goes. Therefore, even with a Stone-Geary delineation, it is still the case that the indifference curves suggest that the individual will be indifferent between actions regardless of the distinct difference in the amount of harm they generate. This, in spite of the fact that in one case they do not care about these effects and in the other they do. There is, of course, no doubt that in both cases (with or without Stone-Geary preferences) the ‘socially minded’ individual would choose an action less harmful than the one chosen by the self-interested agent. But this does not remove the opportunism from the choice which means that what may appear as socially minded in one set of circumstances may dramatically change—in the same manner that it would affect a self-interested person—in another. Indeed, as we saw in our example of Robinson and Friday, any change in market values will change the optimal choice whether we conceived them as socially minded or self-interested instrumental rational utility maximisers. Consequently, while it is possible that the choices made by an expressively rational agent would, at times, be similar to those made by a socially minded instrumentally rational agent, the latter cannot really be deemed as social due to the opportunistic nature of his or her choice. How can one be sure that what may appear to be the act of commitment is not really just a circumstantial result of self-interested calculations? In the case of Robinson and Friday the decision to work hard could either be the result of their social commitment and sense of duty, or propriety, or be

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the result of the way they value leisure (whether or not they take into consideration the effects of their action on the other). But the fact that an instrumentally rational agent made a similar choice to a genuinely socially minded agent does not make him or her a social agent. The moment changes in market values occur, the instrumentally social agent will respond in the same manner (though perhaps not in the same magnitude) as would the self-interested agent. This confusion between what may be genuinely social behaviour and the opportunistic—and apparently social—behaviour of a self-interested agent has come to the fore in the debates surrounding the prisoner’s dilemma and experimental economics. Here, one of the main issues has been whether co-operative behaviour observed by experimental economics but not predicted by standard theory suggests that individuals are socially minded rather than self-interested and that their sociality can be consistent with the instrumentally rational utility maximiser. Naturally, one would expect socially minded individuals to behave co-operatively but not every form of co-operation suggests social mindedness. When co-operation is an instrument of promoting one’s own interests, it is just another form of self-interest. In such a case, co-operation will exclusively depend on its immediate consequences to the agents involved. But if co-­ operation is a result, rather than an instrument, of one’s sense of sociality, then co-operation itself will have an intrinsic value which will not be a function of the immediate consequences to the actor. In terms of our terminology, this would suggest that people are more likely to be expressively rational—to act properly or according to propriety—rather than instrumentally so. In what follows I will argue that attempts to show that co-operative behaviour can be the result of competitive interaction (captured by the analytical framework of ‘non-co-operative games’) based on instrumental rationality are doomed to be depicting self-interested behaviour. In other words, I will argue that the use of socially minded instrumental rationality to explain co-operative behaviour will only produce an explanation of self-interested (or instrumental) co-operation and, in this respect, will make socially minded instrumental rationality indistinguishable from its self-interested form. For co-operation to be a result of sociality and of expressive rationality, we will have to ask whether competitive interaction or the conceptual framework of non-co-operative games is the right analytical framework.

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For some, the mere presumption that economic interaction can be captured by the tools of game theory is already a proof that individuals are social beings.63 As agents behave strategically in the sense that they devise their action in response to what other people may do, it seems, in the eyes of some, to suggest an inevitable sociality.64 However, to a great extent, such a claim, more than anything, demonstrates the confusion surrounding this question. There is no denying that individuals who live in a social group are, in a broad sense, social and, hence, both capable of social acts and in need of some co-ordination. But this is true for a multitude of other species that live in social groups. What concern us here are the specifics of human sociality and, in particular, the nature of its cognitive dimension. In terms of our discussion in the previous chapters, the question we are interested in is whether humans are functionally social or intrinsically so. Namely, the question is whether they perform social acts because these serve their own immediate individual interest or do they perform them for a reason associated with their attitude towards the other.65  See, for instance, Manski (2000).  There is, of course, the question of the extent to which game theory is an appropriate analytical tool to analyse economic interaction. There are evidently cases in which individuals interact in a way in which it is clear how the action of each one would affect the other but this cannot be extended to the majority of economic interaction. Nor would the nature of strategic interaction necessarily be the one embedded in the concept of Nash equilibrium. In the latter, agents make their decisions taking into account the responses of the other agent. However, prior to the Nash story there was the Maximin-Minimax idea, which is more in line with the non-strategic interaction typical of most economic behaviours. In this case (the von-Neumann approach), individuals are aware of all possible outcomes and simply select one regardless of what the other agent will do. This is very similar to the price-taking behaviour and would therefore suggest as much sociality as the standard economic model. For an interesting discussion on the development of Game theory, see Giocoli (2003). 65  We noted in Chap. 1 that already in Adam Smith we can find the understanding that humans are naturally social and, therefore, almost by definition, dependent on one another. However, this does not tell us anything about the nature of their sociality. People, argues Smith, are always in need of each other’s assistance but this assistance can either be provided in a mercenary way from a self-­ interested motive or be provided in a disinterested manner from motives of fellow feelings and benevolence (TMS, p. 83). Indeed, the moment that the division of labour takes place people become dependent on one another and the mere development of the division of labour already suggests that there is a degree of trust among them. This is so because they will need to co-ordinate their actions both in production and in consumption and in this sense they will inevitably have to co-operate. But they will do this whether they have fellow feeling and disinterested motives or mercenary self-interested motivation. As we mentioned earlier, when J. S. Mill refers to Smith’s idea of the division of labour, he uses Wakefield’s take on it, which uses the word ‘co-operation’ explicitly without any reference to the way, or motivation, behind such co-operation. Namely, classical scholars have 63 64

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In essence, the representation of competitive economic interactions in the context of game theory and the ensuing problem of the prisoner’s dilemma can be captured in the following simple framework: Actor II Actor I

Act C

Act D

Act C

(8,8)

(5,10)

Act D

(10,5)

(6,6)

Each agent can choose one of two strategies (or actions). To act C suggests co-operation (which we will explain in a minute) and to act D suggests defection. The numbers inside the matrix represent the returns to each agent if the corresponding strategies are chosen (the number on the left in each box, represents the return to actor 1 and the number on the right, the return to actor 2). Hence, if actor I’s choice is to co-operate and so does agent II’s, they will get 8 each. If actor I’s choice is to co-operate but actor II defects, then actor I will get 5 and actor II (the defector) gets 10. It is easy to see that whatever actor II does, actor’s I best response (in terms of achieving the highest returns for himself) would be to defect (act D) and the same will be true for agent II. Therefore, there exists only one Nash equilibrium where rational agents would both choose to act D (defect) (which is each one’s best response to the other’s best response). In such a case, the outcome for the players is clearly inferior to the one they could have achieved had they cooperated instead. Strategy C is called co-operation because it is clear that the agents would have to agree (tacitly, in this case) to act against that which seems rational if they wish to get to this point where each one of them gets 8 rather than 6. Without adding any other considerations beyond the immediate interests of the actors, one can see that it is clearly in the interest of the self-interested rational utility maximiser to reach such an agreealways understood that behind the competitive model of The Wealth of Nations stands a basic idea of co-operation. What is less evident is the reason for this co-operative behaviour. In our case of Robinson and Friday, it was clear that each one of them can benefit from coming together (and dividing their labour) but does this mean that it is these benefits that brought them together in the first place or that the presence of the other has not influenced their view of the world?

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ment with the other agent.66 But would this really make their co-operation a selfless social act? Or would it just be another way in which a self-interested instrumentally rational utility maximiser can best serve his or her interest? To make it a bit more colourful, would one say that the Pirate code or the tacit agreements between criminals suggest that they are social beings who selflessly act for the good of their community? Alternatively, when animals hunt together they too co-operate but they do not do so for the sake of the other. Moreover, even within standard neoclassical theory, based on general equilibrium analysis, there is a general presumption that there are norms with which agents must comply for the system to achieve its efficient outcomes. If the laws governing the civility of trade were not upheld, markets will not produce an efficient outcome. Hence, the self-interested rational utility is not operating in a vacuum. But complying with these rules is clearly a means for the self-interested agents to best serve their own interests; it was in no way motivated by the concern of the agents for the other. Such a person will avoid cheating not because he or she respects the other as they fear to be on the receiving end of such behaviour. Consequently, it should have come as no surprise that results in experimental economics have shown that people tend to choose Co-operate rather than Defect as their optimal strategy.67  Indeed, the problem of the prisoner’s dilemma emerges here as it is a one-off game. The problem will persist in a finitely repeated case as well but may not emerge in the infinitely repeated case. The reason is that there is clear incentive for agents to renege on their tacit agreement and choose D when the other is choosing C. However, each agent may expect the same thing of the other and, therefore, they would end up playing (D,D). In the infinite repetition case, the agent will have to weigh the benefit of defection today with a string of punitive actions by the other player. If the other agent credibly threatens continued defection if the player defects even once, then the player will have to weigh the gain of 10 today with the present value of an infinite string of 5s. It is possible that this would mean that the agent will always prefer to co-operate. As the infinite repeated game is more likely to be relevant for economic interaction, there does not seem to be an obvious issue here. However, experimental evidence is always based on either a one-off or a finitely repeated story in which the expectation is for the agent to defect. It is in this context that the evidence raises doubts over the role of the standard notion of the rational utility maximiser. 67  There are, in fact, three general forms of games which have been the focus of attention in demonstrating that the expectations derived from the standard model of the instrumentally self-­ interested rational utility maximiser do not match the results. The first is the ultimatum game (see, a summary of evidence in Oostebeek et al. (2004) as well as Schmitt (2004), Heinrich et al. (2004) and Camerer et al. (2011)). The other two are more directly associated with prisoner’s dilemma situations and they are comprised of the oligopolistic games (see, for instance, a summary in Engel (2007)) and the public good games (see, for instance, a summary in Chaudhuri (2011)). 66

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Notwithstanding the difficulties associated with both the relevance of game-theoretic structures to a generalised conception of economic interaction and the significance of experimental results in social sciences in general and economics in particular, these findings generated a sense of revelation. If until now we thought that the agent at the heart of economic analysis is a self-interested (if not downright selfish) individual who is a-social, this evidence seemed to have shown us that individuals are not really self-interested. Instead, they have revealed themselves to be social beings who care for the others and are willing to co-operate with them. More importantly, the good news was that such a realisation did not seem to require a change of method and the instrumentally rational utility maximiser is as good an analytical tool for the depiction of the selfish unsavoury character as it is for the depiction of the benevolent disinterested saint.68 However, when one thinks of our example from above, none of this is particularly helpful or even insightful as no one should be surprised by the fact that even selfish individuals may perform acts which appear to be social if they serve to enhance their personal gain. So, when we know that agents who are aware of each other choose to co-operate, can we really conclude from this whether their sociality is self-serving (i.e. functional) or intrinsic? The answer to this question lies in what one means by the word ‘co-­ operate’. Colloquially, it does sound convincing to surmise that if someone prefers to co-operate over defect, that person is more socially minded. But, as we said before, such behaviour does not exclude the use of others to further one’s own personal gains. Indeed, the very same game-theoretic set-up which generates the prisoner’s dilemma has two distinct economic manifestations. The first is the case of oligopoly (or duopoly if we consider two players) and the second the case of the public good. Would the  Two main lines of explanations have been developed in response to these findings. The first is an attempt to introduce the other (either directly or through ethical concepts like fairness or reciprocity) into the world of the instrumentally rational utility maximiser (see, for instance, Fehr and Schmidt (1999) and Charness and Rabin (2002)). The second is to develop a complex evolutionary story that will explain why instrumentally rational agent may nevertheless choose to co-operate (see, for instance, Verbeek (2002), Bowles and Gintis (2011)). Both lines of reasoning are based on the presumption that self-interested individuals will not choose to co-operate and that the behaviour of the co-operating socially minded individuals can still be captured by the instrumentally rational utility maximiser. Binmore (2012), for instance, sums it up well when he says that ‘not only do game theorists agree that human beings are social animals who cooperate most of the time, we think that they are usually rational to do so’ (p. 278). 68

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strategy ‘co-operate’ in the case of oligopolistic competition mean the same thing as to ‘co-operate’ in the case of a public good game? Surely the answer here must be negative. Though the significance of the strategy is the same from game theory’s perspective, the meaning of it will be very different. In the case of oligopoly—which is about agents who wish to maximise their profits, implicitly, at the expense of consumers—we will call co-operative behaviour, collusion even though consumers are not really participants in the game. This, of course, does not sound so social but it is in fact the very same strategy—motivated by almost identical considerations—as co-operate in the public good case where achieving one’s objective is not necessarily at the expense of anyone else.69 The Oxford Dictionary defines co-operation as ‘the action or process of working together to the same end’. Collusion, on the other hand, is defined as ‘secret or illegal cooperation or conspiracy in order to deceive others’. Therefore, simply saying that choosing C (co-operate), in our case above, will not tell us much about whether the reason behind the action was co-operation or collusion. In fact, it is not at all clear that when agents co-operate to seek the value of 8 (instead of 6) in the case of duopoly, they think about more than just the profits that will be accrued to them. They are unlikely to be considering the fact that raising the price to generate this profit will reduce consumer surplus. If they only thought about the profit, their behaviour will not be different from that of players participating in a public good game where the value they seek is the best net benefit that would be accrued to them if they contribute to the public good. It means that in both cases they simply co-operate. If, however, they were aware of the fact that they are extracting consumer surplus for themselves, then we could have said that they are colluding as opposed to co-operating. But can we really say this in the unrealistic context of experiments? So what does it mean that agents choose co-operation as their line of action? According to the definition, the agents would need to act together for the same purpose. But what exactly is meant by seeking the ‘same end’? Is it a situation where agents, individually, have an identical objec In fact, given that the oligopoly and the public good are virtually the same game (in terms of its set-up but not in terms of the story behind it), it is not evident how the fact that the outcome in the one case has adverse effects on others, while in the other it does not, becomes an explicit part of the analysis. 69

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tive or is that they wish to promote a collective end in the sense that their concerns are directed at all those affected by the action? In a ­comprehensive and insightful study of co-operation, Tuomela (2000, 2007) provides a useful distinction between two forms of co-operation which may better explain the aspect of the definition relating to the notion of the same, or common, end. Tuomela argues that we must distinguish between what he calls g-co-operation and i-co-operation. The former means acting together to advance a common collective goal. It is, as he puts it, a form of an action based on We-mode considerations. The latter kind of co-­operation, the i-co-operation, is typical of the prisoner’s dilemma problem and it is a form of co-operation where the ‘same end’ is a private-based end and where the action is an I-mode form of considerations. He calls such co-­ operation weak co-operation.70 He concludes: ‘Standard economic and game-theoretic accounts of cooperation are individualistic. According to them cooperation is undertaken because it brings individual gains (positive gains or helps to avoid sanctions). They may accept other-regarding reasons but are hardly concerned with purely collective social reasons for cooperation’ (Tuomela 2000, p. 368). Indeed, in our case it is true that we assume that the purpose of all agents is the same, but it certainly is not a collective objective; it is very much a private end and very much an I-mode of an action. They do not perform the act to help the other or because of care for him or her. Each agent has an objective which is only about himself or herself. Each agent wants the best outcome for themselves. There is nothing in his or her choice of action, which is directly related to what the other will receive other than in as much as it may support the achievement of one’s own objective (i.e. to ensure that the other would not defect). In our specific example, the agent can get either 10, or 8, or 6 or 5 and he clearly prefers 10 over 8 over 6 over 5. Though he would like to get 10, he knows that the other will not accept this as he would then have to get 5 out of the same set of returns (and preferences). For the same reason that the one agent would want 10 rather than 5, so would the other. Therefore, 8 is  He also uses the term ‘friendship co-operation’ as opposed to ‘exchange co-operation’ to discuss the differences between the two forms of co-operation but only the former one is considered to be a fully blown form of co-operation (see Toumela 2000, p. 369). 70

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the next best thing which the agent can secure for himself. Without the other’s support, the agent will only get 6. Therefore, choosing C is ­perfectly consistent with an entirely selfish act which is aimed at promoting the private, rather than the common, purpose. In fact, it is easier to see co-operation here as a result of self-interested exchange than it is to claim that it is a form of collective considerations with g-co-operation and the We-mode of action. Evidently, if the only thing individuals cared about was the outcome for all agents collectively, then it is clear that in the case above agents would choose to co-operate. If both of them act C, the collective return will be 16 (8 + 8). If agent II acts C but agent I defects, the collective outcome will be 15 (10 + 5). Hence, if the collective is the objective, agent I should prefer to act C in this case. Assuming agent II acted D, then if agent I replied with C, the collective outcome will be 15, but if agent I reciprocated with D, it would be only 12 (6 + 6). Therefore, the collective view of the objective would indeed instruct agents to choose co-operation. However, would co-operation become synonymous with collective considerations in the case of such games? Let us introduce a few changes to the payoff system: Actor II Actor I

Act C

Act D

Act C

(8,8)

(2,9)

Act D

(20,5)

(6,6)

We still have a prisoner’s dilemma here and the differences in returns when agents choose different strategies may reflect their different abilities. However, if agents only considered collective outcomes, it is evident that one of them will choose to defect and the other, to cooperate! (If both act C the outcome will be 16; if 2 acts C and 1 acts D the outcome will be 25; if 1 acts C and 2 acts D, the outcome will be 11 and when both act D the outcome is 12. Therefore, if they just want the highest number, then if 2 chooses C, 1’s best response is D (25 > 16); if 2 chooses D, 1’s best response is D (12 > 11) hence, D is his, or her, dominating strategy. By similar argument, 2’s dominating strategy would be C). So co-operation, in the context of these games, cannot be considered as a manifestation of individuals’ sociality. Even if we preserve the symmetry between the two agents and go back to the origi-

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nal game but make just a slight change by replacing the 10 with a 20, only a reduced form of co-­operation will be the outcome of this interaction. In this case, if agent II acts C and so does agent I, the total will still be 16. But if agent I responded with D, the outcome will be 25 (20 + 5). Equally, if agent II chose D and agent I replied with C, then the total will be 25, while if both played D the outcome will be 12. Now we face a situation where there is no solution in pure strategy to the collective outcomes game, and if there is a solution in mixed strategy, it would mean a much-reduced notion of co-­ operation. There is, therefore, something profoundly misleading in the attempt to find collective reasoning behind co-operative behaviour in the context of the games we have just described. Co-operation here will be conditioned on the collective outcome and while the behaviour may be driven by collective considerations, co-operation is in no way a sole representative of such considerations. This apparent contradiction may suggest that there is a problem in trying to capture collective considerations or We-mode behaviour using the analytical framework of non-co-­operative games. But collective considerations are not the only expression of sociality and I would like to go back to our original case where co-operative behaviour emerges in a place where standard self-interested behaviour would lead to a prisoner’s dilemma. We noticed that it was self-evident for self-­interested agents to wish to co-operate so that they end up with (8,8) rather than find themselves with a (6,6). Nevertheless, there is a problem with how do we actually get to choose C if D is clearly a dominating strategy. The answer is that we can either add the effects of the action on the other into our considerations and thus turn (8,8) to be preferred over (10,5) and (5,10) to be preferred over (6,6) (so that C becomes the dominating strategy),71 or we could argue that through some evolutionary process people have acquired an understanding over time of that which was clear from looking at the complete picture and opt for co-operation as a means of ensuring that they do not fall into the trap of the prisoner’s dilemma.72  This is the case of social preferences to which we referred in an earlier footnote and which produces an outcome that is in line with the interest of a selfish person. Note that (10,5) is not really an option as the other agent would also choose D and the self-interested agent would end up with 6 instead of 8. The fact that the game leads to a prisoner’s dilemma could very well be a problem of how relevant is game theory to economics rather than to look for solutions for a non-problem. 72  This process in which norms of behaviour develop over time is clearly designed to support the interest of the individual even though they may be based on reciprocity or even empathy. The development of social norms has long been associated with the behaviour of self-interested agent in exact same manner as the underlying civility of market exchange in standard economics has always been presupposed. 71

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The problem with the ‘social preference’ approach is that it maintains the substitutability and therefore opportunism of the self-interested instrumentally rational agent. Thus, if again we slightly altered the numbers such that we replace the 10 by 20, our instrumentally socially minded individual will, all of a sudden, find defection as his best strategy. If before he preferred (8,8) over (10,5) because the gains to himself (of 2) were overridden by the effects of the loss to the other (by 3), now when he compares (8,8) with (20,5), the gains to himself (+12) may be sufficiently large to offset the disutility he will experience from the effect of his action on the other (loss of 3). Hence, this very socially minded individual— whose preferences are captured by the instrumentally rational utility maximiser—will now find D as his or her preferred strategy. Co-operation, then, has no intrinsic value and the other’s pains are conditioned on one’s own gains. It is very difficult to consider such an individual as a socially minded agent whose apparent co-operation is a sign of his or her sociality. But there is also an alternative line of thought which argues that people co-operate because it is a behavioural norm that developed through some kind of an evolutionary process.73 Over time, people ‘learn’—either through natural selection or through group dynamics which would include the formation and evolution of social institutions—that co-­ operation is an optimal form of behaviour. This means that when agents face the kind of game we proposed here, they will opt for the co-­operation strategy as a matter of norm rather than in a calculated manner. This seems more akin with the idea of expressive rationality rather than instrumental one. However, the way the ‘norm’ is used in these kinds of explanations is not conducive to the idea of expressive rationality as agents are still instrumental rational utility maximiser. It is simply that their ­considerations are somewhat more complex. In our example and as rational utility maximisers, they know that they prefer the outcome of (8,8) over (6,6). This preference is made in a traditional self-interested fashion. What they are concerned about, and where the norm comes into operation, is for their tacit agreement to hold. So, the question for which the norm provides an answer is not ‘which is my best strategy’ but rather, ‘will  See, for instance, Bowles and Gintis (2011) and Verbeek (2002). There is an extensive literature which is not necessarily associated with game theory but which has suggested how self-­interested instrumentally rational utility maximisers will form norms and act on them. 73

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our agreement hold’. The evolutionary process will teach them that they should and can trust the other to fulfil their part of the deal (also because it is in their best interest to do in the broader context of human interactions). It is this aspect of the story which leads some to conclude that co-operation based on norms is a reflection of genuine sociality.74 Therefore, the evolutionary explanation to why people may choose to co-operate in a game where defection has an appeal is not an explanation of co-operation as a strategy but rather an explanation of the co-­ordination of strategies whatever they are. In other words, the norm which evolves over time does not explain why they choose to co-operate in this game. It explains why a choice of a strategy—any strategy—that best serves the interest of the player but relies on another player’s commitment would still be chosen. But the choice of that strategy is still based on the calculations of a self-interested instrumentally rational utility maximiser. It is, perhaps, worth noting here that this whole episode of trying to explain co-operative behaviour in the context of competitive interactions by inventing a social rational utility maximiser is reminiscent of almost 200 years of scholarship that was trying to reconcile what became to be known as Das Adam Smith Problem. The apparent problem was based on the presumption that Adam Smith attributed conflicting characteristics to the individual behind his social and moral theory (The Theory of Moral  Bowles and Gintis (2011) go out of their way to claim that the co-operative behaviour we observe in experiments must be a reflection of genuine sociality and ‘Like de Tocqueville’s [in his Democracy in America (1830)], we object to the tautological extension of the principle of self-interest’ (p. 441). They concede that ‘It goes without saying that … even cultural evolution may be strongly biased towards proliferation of behaviours leading to individual success’ (ibid.), but claim that the self-­ interested explanations of co-operation are only true in the case of repeated interactions. The evidence from experiments is always based on one-off or finite repetitions. Moreover, they claim that the co-operation they are referring to is about ‘individual behaviour that incurs personal costs to engage in joint activity that confers benefits exceeding these costs to other members of one’s group’ (p. 430). However, while we accept that the Hamiltonian principle of inclusive fitness which they describe in this sentence suggests genuine sociality, we do not accept that this is what they mean. They provide an example of the public good game as a demonstration to someone incurring costs (paying rather than freeriding) while conferring benefits (exceeding these costs) on the others. But this is NOT the Hamiltonian principle and it is a perfectly self-interested position to take. The agent that incurs the costs is receiving benefits which exceed these costs. The fact that the other agent receives benefits too is neither here nor there. Individuals do not freeride because they want to benefit themselves from the public good and think that if they contributed, as did the others, the benefits will be greater. This is self-interest pure and simple! The fact that they may rely on a norm not to take advantage of the other and to defect in the last minute is no more a social norm than the tacit understanding in standard economic analysis that people do not steal, or cheat or lie. 74

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Sentiments) and the one behind his economic theory (The Wealth of Nations). The former highlights fellow feeling and sympathy as the most important feature of human character that explains both society and the evolution of social norms and ethics. The latter seemed to be based on self-interest. The modern resolution of the problem seems almost identical to the position which experimental economists have taken with regard to the puzzle of co-operative behaviour in non-co-operative games. According to it, only in a world of ethical and social individuals can the system of decentralised decision-making based on self-interested behaviour work. If we take non-co-operative games as an example of a competitive environment, then it is easy to see that self-interest alone will drive people to a prisoner’s dilemma which is clearly an inferior economic outcome. However, if we make people social—either through social preferences or through evolutionary process where they learn to commit to each other— then the system of natural liberty will lead society to the good outcome. There are two questions which arise from this. The first is quite damming. Why did it take over half a century for economics to reach the understandings which have already been present in Adam Smith? The second question, which is much more important, is whether this reading of Smith, or this resolution of the puzzle of co-operative behaviour in non-co-operative games, is correct. Is the received view about the way to resolve Das Adam Smith Problem a correct interpretation of his work? Is it really true that the instrumental rational utility maximisers, who opt to co-operate, are socially minded individuals? We will deal with some aspects of this question in the next chapter, but at this stage we would like to remind the reader that our conclusions as far as the behaviour of the instrumentally rational utility maximiser in the non-co-operative game cannot seriously be attributed to genuine social mindedness. The co-­ operation we observe in these games is clearly a self-serving one. However, the fact that co-operation may be a reflection of self-­interested behaviour (a form of weak co-operation a la i-co-operation) does not preclude it from also being an expression of its stronger form (g-co-operation). The question that will immediately follow is, how can one distinguish between the two in the context of the game which we have just described? In other words, what will be the difference in our analysis if instead of the instrumentally rational utility maximiser (social or self-interested) there

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was an expressively rational agent behind our story? How can we tell the difference between a strong and weak co-­operation in this case? The answer is in the structure of the game. The game that we described above is known as non-co-operative, or competitive, form of a game. It presupposes that agents select a strategy solely on the basis of its consequences to them. This means that from the outset, there are competing options for actions (co-operate or defect) and none of them is ruled out at the outset. But in the case of expressive rationality, for a socially minded individual the action of defect may not be an option. Given that norms of behaviour are not necessarily the outcome of an evolutionary process aimed at protecting the interests of the agent but could also develop by other means and for different purposes (like, for instance, ethical principles emanating from, say, the Smithian impartial spectator or the Kantian categorical imperative), the action itself will have an intrinsic significance which is independent of the immediate benefits to the agent. If defection is deemed to be morally unacceptable, the socially minded agent will not consider it regardless of the nature of the outcomes and the ‘game’, as it were, degenerates. In other words, expressively rational social agent will choose C but not because of any other reason than the value of C itself. They will therefore choose C even if this would mean an inferior outcome for them. If the game set-up was mimicking the market, for expressively rational agents, the values determined in the market (i.e. the returns) will have no influence on the way they act. Therefore, while the instrumentally rational agent will choose C too, he or she will always consider D as well and their choice will depend on the values of the outcomes. Moreover, this also means that if sociality is present in the population in different levels (i.e. heterogeneous population), the socially minded expressively rational agent will act C regardless, while the self-interested or even an instrumentally socially minded individual who is aware of this would then choose D and the outcome will be harmful to the expressively rational agent as he would never consider acting D. Such a situation where some agents take advantage of any change in market signals (outcomes) to enhance their interests (opportunism) while others do not, exposes another failure of the market which is a form of exploitation of one group of agents by another. To complete the circle let us go back now to our original story of Robinson and Friday with which we opened this section. We would now

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examine how the standard competitive story we showed in the first two diagrams of the self-interested and socially minded instrumentally rational individuals translates into the problem we examined within a game-­theoretic context. We do this to demonstrate how in the context of our problem there cannot be a genuine socially minded instrumental rational utility maximiser. Recall the two diagrams we showed at the beginning of this section where we saw how the socially instrumentally minded agent would choose an allocation which is similar to the one the expressively rational chose in the previous section. Recall too that Robinson and Friday are the employees of each other and that their incomes (based on wages and profits) are determined by the markets. To transform the situation into a simple game we now suppose that there are only two possible actions: work hard (equivalent to co-operate and corresponds to the choices made both by the expressively rational and by the socially minded instrumentally rational in our original story) and work little (i.e. defect). Now, if Robinson works hard, he is producing a lot of profits for Friday (denoted by p F ) but his own wage per hour will be very low. Nevertheless, we assume that altogether his total earning from labour (wages = wage per hour multiplied by the number of hours worked) will be higher (denoted by w R ) than if he worked a little. At the same time, he will also have very little leisure which we denote by Le R . So if he works hard, then regardless of what Friday does, the values for wage rate and leisure will be w R ; Le R respectively. That which depends on what Friday does are the profits which he will receive from owning the berriesbushes. If Friday works hard, his profits will be high (denoted by p R ). If R Friday works little, Robinson’s profits will be lower (denoted by p ). By virtue of symmetry, Friday faces a similar situation. Therefore, both Robinson and Friday face the following game:

(

)

Friday’s Action

Robinson’s Action

Work Hard

Work Little

Work Hard

(

+

;

) ,(

+

;

)

(

+

;

) ,(

+

;

)

Work Little

(

+

;

) ,(

+

;

)

(

+

;

) ,(

+

;

)

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The left-hand column depicts the actions of Robinson, which could be to either work hard or work little. The top row depicts the actions chosen by Friday. He too may work hard or work a little. The four boxes inside (the shaded area) provide the information about the outcome to both of them in each of the four possible situations. The left-hand parenthesis always denotes the outcome for Robinson, while the right-hand parenthesis denotes the outcome for Friday. We can clearly see that if both of them decide to work hard, the left-hand top box describes the outcome for both agents. In the left-hand parenthesis, we see the return to Robinson: p R + w R ; Le R , which means that he will have a lot of profits (as Friday works hard) and high wages (even though the wage per hour is low but he works hard) and, for the same reason, low leisure. Similarly, the outcome for Friday will be p F + w F ; Le F . Now, Robinson has to choose whether to work hard or work a little. As an instrumentally rational agent—whether self-interested or socially minded—he will be concerned with choosing the best means to achieve his end: the most preferred outcome in terms of fruits (x—which come in the form of profit and wages) and leisure time. He may ask himself what would he had done had Friday worked hard. In such a case, if he worked hard too, he would get p R + w R ; Le R . But if he chose to work a little when Friday works hard, he would get p R + w R ; Le R . In terms of preferences we can now distinguish between the self-interested and socially minded instrumentally rational utility maximiser through the substitutability of outcomes expressed in the shape of their indifference curves. Namely, the consideration is not going to be based on any intrinsic value of ‘work hard’ but rather on the balance of the various elements which make up the personal return to the individual. Recall that as the agents affect each other through their choice of labour, the considerations which they may or may not have for the others will only affect their utility from leisure.75 If one is aware that with every hour of leisure he deprives the other from fruits, the utility of an hour of leisure will be much lower. This means that the indifference curve will be flatter:

(

)

(

)

(

) (

(

)

(

))

i i j i j  Namely, the consequence of the action is still zi = L e , xi ( L e , L e ) , u j x j ( L e , L e ) , i, j = R, F , but in the space of leisure and x we do not note the effect on the other explicitly but rather through its effect on the utility of leisure.

75

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x

If both of them work hard, then agent i = R, F will find himself with a lot of fruit (from wages and profits) but with little leisure (point A). If while j works hard i chooses to work a little, he will find himself at point B. He will have less fruits (because his wages go down but he still gets a high level of profits as the other still works hard) but much more leisure. It is easy to see that the self-interested agent (whose preferences are represented by u) would prefer B over A, which means that he would rather work a little when the other one is working hard ( u1 > u0 ). The instrumentally socially minded agent whose preferences are represented by u, and for whom the value of leisure is diminished due to the implications it would have for the other, would prefer to be at A and work hard when the other works hard too ( u0 > u1 ). It is important to emphasise that the difference in preferences is over the same outcomes. What would be Robinson’s best response if Friday chose to work a little? This is given in the second column in the shaded area of the table above. We can see that if Robinson worked hard, he would get p R + w R ; Le R , but if he worked a little too, he would get p R + w R ; Le R . This is very similar to the previous situation. When Friday works a little and Robinson works hard, Robinson will have more fruits and little leisure (point D)76 but will have more leisure and less

( (

) )

 For simplicity of exposition we assume that p R + w R = p R + w R .

76

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fruits (point C) if he, too, chose to work a little. Namely, it is a similar case as the move from A to B in the above diagram and the same analysis will apply here. If Robinson is a self-interested instrumentally rational utility maximiser, he would prefer point B or C and would therefore choose to work a little. Had he been a socially minded instrumentally rational utility maximiser, he would have preferred to be at A or D and, therefore, work hard regardless of what Friday does. The same kind of considerations should apply to Friday. We have thus adjusted our story to the more or less standard representation of the problem of the prisoner’s dilemma. The received view of the self-interested rational utility maximiser suggests that both agents would choose to work a little. This would lead them to a Nash equilibrium where each one of them finds himself at point C. While C is clearly better for the self-interested individual than point D, it is clearly inferior to point A where both of them worked hard. This is indeed a form of the prisoner’s dilemma. It is easy to see that no such dilemma would emerge had the two individuals been socially minded instrumentally rational utility maximisers. In such a case, their best response to whatever the other agent is doing would be to work hard, or, in our previous terminology, to co-operate. As a result, the equilibrium would have been at point A, which is the best each one of them can hope for in this set-up. Therefore, it is easy to see that a set of outcomes which may appear to generate a prisoner’s dilemma for one type of individuals will not be such for another. Thus, by attributing social preferences to the instrumentally rational agent, we can see why agents would choose to co-operate (work hard) in such a game. However, we can also see that such a choice is what the self-interested rational utility maximiser would have actually liked to have made had he been able to trust the other. Namely, even though we used social preferences to get to point A, such an outcome is also the desire of the self-interested individual. As we said before, it is difficult to distinguish between the two types of individuals. Naturally, the ease with which one can make the transformation from the self-interested to the socially minded nature of the individual relies heavily on the ability to capture both in the form of instrumentally rational utility maximiser. In one swoop, we seemed to have solved two fundamental problems facing the paradigmatic core. Competitive interaction

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is indeed beneficial and utility maximisation is sufficiently broad to capture more than just self-interest. But is it really true that the shift from the one type of behaviour to another within the context of the instrumentally rational utility maximiser suggests a meaningful transformation in the conception of the individual? As we said before, the difference between a genuine socially minded individual and a self-interested one will not be expressed through the nature of their preferences over outcomes but rather through the way in which they act on them. If we perceive sociality in its expressive form (i.e. a commitment to social principles in which immediate personal benefits count less than the collective benefits embedded in the habitual practice of a specific action), then the menu of actions—the strategies space—the agent would be willing to consider will be significantly limited; at the time the agent makes the consideration of what to do, the possibility of ‘work little’ may not even be contemplated and, therefore, his choice is not determined by his preferences over the immediate outcomes. In our case, the difference between the socially minded individual and the self-interested one came through the shape of the indifference curve. Namely, the socially minded individual had his leisure spoiled by the thought of what it does to the other. As the marginal utility of leisure was low, there was a need for only little fruit to compensate for a loss of one unit of it (the flat shape of the indifference curve). But we would have the same kind of problem if these two types of preferences were attributed to two self-interested individuals. One of them loves his leisure (represented by u) and the other finds it difficult to be on his own or in unstructured social environment and, therefore, likes leisure much less than the other (therefore, his preferences are expressed by u). In short, the attitude towards leisure is indeed a question of taste and two individuals may have totally different, yet fully self-serving, approaches to leisure. This means that we will end with a prisoner’s dilemma if both agents had the former kind of preferences and with a good outcome if they had the latter. It also means that the ‘good’ outcome, the one which seems to be observed in experiments, simply suggests a variation in the nature of self-interest rather than a transformation into social caring beings. But even if we supposed that u represents a socially minded individual, imagine now what would happen if we slightly changed the values of the returns in each case:

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It is easy to see that the socially minded individual (captured by u) will behave here in exact same manner as the self-interested one. They would both prefer B over A (which means that if the other one works hard, they would rather work a little) and they would both prefer C over D (which means that if the other one works a little, they too would rather work a little). Therefore, we get the outcome where both of them work a little and for neither set of preferences this would constitute a prisoner’s dilemma. In fact, we will not be able to distinguish between the behaviour of a socially minded instrumentally rational utility maximiser and a self-interested instrumentally rational utility maximiser. This means that there is something in the rational utility maximisation framework which makes all agents alike and which, therefore, precludes its use for the purpose of representing such a fundamental distinction between the ways in which individuals behave. In the initial game, we saw that the ‘socially’ minded individuals would end up choosing to work hard (point A), which was the most preferred outcome of all possible four outcomes. The self-interested agents—who find themselves at point C—not only face a prisoner’s dilemma because A (where both of them work hard) is preferred over the outcome C, but also find themselves in a situation where that which they prefer most (point B) is not possible as it requires the other one to work hard while

536 

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the actor works a little. This, perhaps, is quite becoming the preferences of a self-interested character. However, in the adjusted case which is depicted in the above diagram, though there is no prisoner’s dilemma in the sense that to work a little will be the best outcome possible, even the socially minded individual would prefer the case of B where the other one works hard while he works a little. This is an extraordinary situation to be in for someone whose leisure is ruined by the guilt of what it does to the other yet he would rather see them work hard instead of him. Therefore, the question that arises is whether the attempts to change the conception of the individual from the self-interested person to a socially conscious one had been conducted in a proper manner. Clearly adding the other into one’s utility function—and in so doing, preserving the instrumental nature of rationality by expanding the domain of one’s considerations—leads to serious difficulties. We noted earlier that such an agent, in response to a change in the cost of leisure, would be willing to harm the others more than the self-interested person who does not think about them at all. We also saw that what may appear as socially minded and distinct from self-interested behaviour in one set of rewards will be indistinguishable in another. Moreover, we saw that the preferences of a socially minded agent could lead to an internal contradiction when he would choose to work little and prefer the other to work hard. But if indeed we accept that though the process of forming social values may be complex, once they have been established, acting on them is independent of the immediate consequences, and then the move from a selfinterested to a socially minded individual is not a question of the domain of one’s preferences. Instead, it is a rule of action, a duty-bound action; it is expressive rationality. In our original case, it will be as we stated in the previous section. Namely, if both Robinson and Friday were aware of the significance of their interdependence and subsequently felt bound by social values (or morality)—whichever way formed—to act hard to ensure that they fulfil their social obligation, then their choice of leisure will be low and will not change even when wages change. They will not respond to the fall in the cost of leisure by increasing its amount through the withdrawal of labour which will adversely affect the other. In such a case, where some choices are made in a way which is not responsive to market values, one would need to reconsider the role of markets altogether.

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In the case of the prisoner’s dilemma, the implication of the expressive form of rationality will not be for the nature of preferences over immediate outcomes but rather for the admissibility of actions. In other words, it will be in delineation of the strategy space. A self-interested individual may consider the options of ‘work hard, work a little’ as their strategy space as they have no difficulty to consider either forms of action. Neither of these actions contains any intrinsic reason why it should not be considered, and as all decisions are based on consequences, the only reason not to choose one of these options will be based on one’s preferences over the outcomes proposed by the two types of actions. A socially minded individual who is aware of social and economic interdependence and would therefore feel that it is his or her social duty to work hard will not even consider the option of ‘work a little’ as part of his or her strategy space. This means that the ‘game’ degenerates into the following situation: Friday’s Action Work Hard Robinson’s Action Work Hard

(

+

;

) ,(

+

;

)

There is clearly no prisoner’s dilemma here and the outcome would have also been consistent with the findings of experimental economics. However, the outcome here is not a result of any game which the agents had played. Nor is it a result of a realisation that by co-operating and working hard, each one of them is guaranteed to satisfy his self-interest. Instead, by acting expressively, individuals are not behaving in what economics defines as a competitive manner. Such behaviour, in terms of standard economic analysis, is manifested in the lack of response to changes in prices; in game theory terms, it is manifested in the realisation that the agents are not really playing a game. In other words, the agents do not behave in any opportunistic manner. When they choose to work hard because they believe this to be the right action, they do not alter it the moment they observe a change in the immediate return on the action. In fact, they do not even contemplate the possible outcomes of behaving differently.

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All of this leads to the inevitable conclusion that there is something profoundly wrong with attempts to socialise the instrumentally rational utility maximiser. Firstly, there is the basic problem that such an attempt requires the expansion of the domain of considerations to such an extent that it is almost inconceivable that an individual would be able to calculate or even properly assess the effects of his or her action on all those about whom they care. Secondly, there is the problem of opportunism whereby an agent is perfectly happy to inflict harm on (or, to be more precise, to withdraw benefits from) the other once the direct cost to him or her changes. Moreover, the considerations one has for the other can easily be traded for any alternative personal benefits. Thus, in our case, the response of a socially minded rational utility maximiser to an increase in his or her income will lead to a withdrawal of labour—and, therefore, adversely affecting the other—even though the person is aware of the consequences of his or her action to the others. And thirdly, there is the other aspect of opportunism whereby means do not really matter. The agents involved in the game we described above would weight actions solely on the basis of their proposed consequences with no regard at all to the possibility of an intrinsic value that could be embedded in some actions. If indeed it is the case that we cannot capture a socially minded individual by means of instrumental rational utility maximisation, then it means that people are more concerned with the propriety of their actions, which is derived from a cognitive mechanism through which they create social norms and ethical values, than they are with the immediate consequence to them. This seems to be borne by some anecdotal evidence that we provided at the beginning of this chapter. However, the implications of this are far reaching. When people act for other reasons than the immediate effects of their actions, their behaviour is less responsive to market signals. As these are the mechanisms through which markets yield a desired form of social organisations, they do not seem to be effective in a world of genuine social beings. But this is not the end of the argument. Many economists would agree with the assertion that individuals are self-interested in their behaviour. Therefore, they all act with consequences in mind. They respond to market signals and market systems will yield a good outcome when individuals behave according to some basic rules of interaction. This, they argue, does not preclude the sociality of people. It is simply that the spheres of social and economic interactions are totally separated and there is no point

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in trying to introduce human sociality into economic analysis. This should also mean that there is no point in introducing economic analysis into the social sphere but, as we know, economists are less particular about this.77 So the last question we would like to address here is whether this kind of reasoning—which allows us to treat only one aspect of human motivation in segregation from the other—makes any sense and still allows the conception of the individual as an instrumentally rational utility maximiser to be preserved as it is. In other words, we will ask now whether using the concept of the rational utility maximiser as a depiction of only one sphere of social interaction makes any sense in a world where agents are socially minded in a non-functional manner.

7.5 The Problem with Homo economicus So far, we have been mainly concerned with the general characterisation of human behaviour and motivation. In this context, we juxtaposed two extremes: at the one end we had self-interested individuals whose interest in the other is limited to the way they affect their own wellbeing. This was (and still is) the standard conception of the individual in modern economic analysis (which is traditionally captured by the rational utility maximiser). At the other end, we had the socially minded individuals who are concerned about the effects of their actions on the others. We distinguished here between the case where these concerns were expressed in a form of preferences over specific and immediate outcomes (the socially minded instrumentally rational utility maximiser) and the case where such con This has taken many forms (considered today by many as ‘economic imperialism’). There is Coleman (1993) in sociology, where it has now reached an unprecedented expression in the form of Gintis and Helbing (2015) who took the idea to an extreme when they suggest a rational utility maximiser basis for a new analytical core for sociology. Becker is perhaps the most well-known example of this. In his Nobel Prize lecture, he said: ‘An important step in extending the traditional analysis of individual rational choice to analyse social issues beyond those usually considered by economists is to incorporate into the theory a much richer class of attitudes, preferences and calculations’ (Becker 1996, p. 139). So he is both in favour of using the rational utility maximiser in social analysis and in favour of socialising the rational utility maximiser. Tullock (2002) provides a rationale for the development of Public Choice Theory in his essay ‘People are People: The Elements of Public Choice Theory’. The entire collection of his essays entitled Economics and Government (2005) is dedicated to the connection between the Homo economicus and Homo politicus. 77

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cerns were expressed in more general, or universal, manner (expressively rational). We concluded that in the former form, there seemed to be an inherent inconsistency between the characterisation of the individual as socially minded and the opportunistic nature of the rational utility maximiser. In the latter form the concerns over the others would be expressed by attributing certain values to actions according to a belief about their proposed social significance in case of their habitual and widespread practice. What we would like to do now is to dwell on the question of whether we can abandon the general description of human character and, instead, compartmentalise it. This would mean that we view individuals as made up of a distinct set of motives (say, for instance, own-regarding and other-­ regarding, though one may opt for a far more delicate and detailed disaggregation) which will allow us to analyse each set, in separation. This, of course, may open the door for an apparent independent study of economic interactions based on a restricted notion of self-interest which could not be construed as a statement about the sociality of humans.78 Naturally, it will also be far more difficult in such a case to characterise the individual or give a general tenor to their behaviour based on the way they act in one sphere of social life. But such an approach will nevertheless require that we address the question about the nature of the relationship between the various components of human character. Inevitably, the question of compartmentalisation relies on the ability to effectively separate the spheres within which individuals operate in terms of both motivations and outcomes. When we addressed this question in the previous chapter, we were mainly concerned with whether it is possible to separate the social from the economic on the grounds that the social and economic interactions can be viewed as two almost mutually exclusive sets. We suggested that if sociality is self-serving and society functional, then the separation of the spheres should anyway be possible simply because there is nothing of substance to distinguish between social and economic interactions. The people we deal with economically are equally distant from us as those with whom we interact socially. They all are there to serve our own (though different) interests. In such a case, the model of the instrumentally rational utility maximiser without any inter Which is exactly what modern economics consider itself to be: universal and appropriate to any form of sociality or social organisation (see Chaps. 1 and 2). 78

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est in the others is a good depiction of human behaviour not only within the economic realm but also in their social one.79 When sociality is intrinsic, then the question of the separation of the spheres becomes more difficult. Even though there may be a difference in the social distance between people who interact socially and those who interact economically, the difference is unlikely to be sufficiently large to dictate a complete disregard of the effects of one’s action on the other.80 In the previous section we asked whether it is possible to adjust the economic agent in such a way as to allow his sociality to influence his or her actions outside what may appear to be his or her immediate social concern. We, sort of, asked whether the sociality of individuals will intrude on them when they economically interact with others with whom their sense of social affinity is much reduced.81 More to the point, we asked whether we can do this through the use of the socially minded instrumentally rational utility maximiser. Our conclusion was that this is not very likely as the rational utility maximiser entails an inherent self-­interested feature, and if there were to be an influence of human sociality on their economic behaviour, it would be through the value individuals attribute to actions due to their general social significance rather than their immediate and specific effect on the actor.82 In the mind of many economists, Adam Smith is the father of the independent study of economic interaction. They see in his The Wealth of Nations a complete and independent conceptual framework which analyses economic interactions based on a notion of self-interest which, to distinguish it from Mandeville’s selfishness, is a more moderate and universal  Which is very much the traditions of Becker, Tullock, Coleman and most of what is considered nowadays as modern political economy. 80  Recall that the relationship between the spheres and within them is a function of technology, the nature and extent of the social bond (abstract cognitive development) and its distance from the natural social association. Initially, the social and the economic, and, subsequently, the civic, are the same group of people. As abstract cognition develops (and with it, technology), the social and the economic no longer overlap but they are now bound together through the notion of civic society into which the more abstract sense of sociality is now mapped. In such a case, social distance in both the social and the economic will be dominated by the effects of the more abstract notion of sociality: the civic society. 81  As the abstract and cognitive sense of sociality expands, people whom we do not know personally but with whom we may interact economically may still belong to the group with which we identify as our social group. 82  In the context of more abstract cognitive association, we are more likely to consider the value of an action in terms of its logical and universal effect on society rather than through its direct effects on individuals with whom we do not have any real personal relationship. 79

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expression of the universal pursuit of one’s ‘own-regarding’ aspects of life. This analysis, so it seems to many of them, is conducted without much reference to any other aspect of social life. However, as I have mentioned before, this kind of reading of Smith’s work has long been discredited among Smith’s scholars. Not only was The Theory of Moral Sentiments an important part of Smith’s project, he quite explicitly defined his project as comprising a theory of morals, a theory of jurisprudence (which is the transition from the formation of morality to the formation of law) and a theory of policy of which economic organisation had a major role. All these elements construct the intertwined building blocks of his social theory. It is, therefore, true that Smith did offer a separate analysis of economic interaction but what is not true is that such an analysis is conducted without any reference to—or even independently of—the other components of his social theory. We already briefly referred to how experimental economists found shelter in Smith’s The Theory of Moral Sentiments in an attempt to rescue presumed predictions based on his The Wealth of Nations. To put what they discovered in the more general language of some Smith’s scholars: it is only in a world of ethical beings can the instrumentally rational agents behind The Wealth of Nations produce the natural order which is so beneficial to society.83 Namely, the working of the economic sphere is predicated on a particular working of the social-­ moral spheres though there does not seem to be an expectation that the latter may, in turn, influence the former. There can be little doubt that the development of classical economics from Smith onwards was dominated by what may be called a separate study of the realm of economics.84 But it was not without criticism and,  This is true both to the paradigmatic core, where the competitive outcome is predicated on some hidden assumptions about the willingness of rational agents to uphold laws and to avoid harming or cheating the others, and to game theory. In terms of behavioural economics, only when people co-operate will their pursuit of self-interest be successful. This co-operation, they would like to claim, is a result of Smith’s notion of sympathy, though, as we argued, this would have been equally commensurate with naked selfishness. In terms of the terminology of Chap. 1, The Wealth of Nations produces a synchronic order. The fact that it is supported by The Theory of Moral Sentiments in the sense that the self-interested agents of the WN are ethical beings (described in the TMS) suggests that this order is also diachronic. I, of course, dispute this claim and interpretation of Smith’s work and we will discuss this in the next chapter. 84  Hollander (1985), for instance, is an example of a prominent historian who draws a direct methodological line from Smith and Ricardo through J. S. Mill to Walrasian neoclassical economics. 83

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in particular, the one emanating from positivism (a la August Comte) and historicism (like that of Schmoller and the German School in the continent and Leslie in Britain). According to this point of view, the social phenomenon cannot be broken down to separate components and the purpose of science is to study (empirically) the general laws of motion that govern the evolution and development of this phenomenon (society), in its entirety, over time. J. S. Mill is the classical economist who seemed most involved in this controversy and it was with him that the concept of Homo economicus had firstly been associated. Mill, who wrote extensively on logic as much as he did on economics, was not a great supporter of deductive reasoning but he nevertheless objected to this criticism and suggested that under some conditions it may indeed make sense to examine one aspect of the social phenomenon in separation.85 This defence gave further impetus to the isolated study of economics, though not much attention has been given to the conditions under which this may be meaningful or to the context within which it were supposed to be examined. Mill, and almost all classical economists, would agree with the idea of the separation of the spheres but would not accept the idea of independence. In the case of Mill, there are two distinct elements in his position which are still relevant today though only one of them is explicitly used by modern economics, though not in the sense proposed by Mill. The first, which is in the context of what he would call static analysis, is the notion of Ceteris  Hausman (1992), for instance, provides a modern take on this Millian justification but for him this gives rise to what he calls the ‘inexact science’ of economics. But Mill’s position was more complex than is being supposed. In part, the complication regarding Mill’s position on this question was derived from the controversy over Mill’s attitude towards laissez-faire, which seemed to have changed since the time he wrote the Principles of Political Economy. To some, like, Leslie (1969 [1870]) or, more recently, T. W. Hutchison (1978) and P. Schwartz (1972) the only way to explain Mill’s criticism of laissez-faire is by his shift away from the Ricardian orthodoxy based on an isolated economic analysis towards the historical school which emphasised social dynamics. There is more about the English methodenstreit in, for instance, G. C. G. Moore (1995, 1999). Hollander (1985) was right to point out that this is not a plausible explanation as most of Mill’s social ideas already exist in the Principles of Political Economy (1848). However, his interpretation suggests that the explanation for Mill’s apprehension regarding the competitive paradigm rests entirely on what may be called ‘disturbing causes’. I disagree with both interpretations of Mill’s position towards the laissez-faire and believe that the answer lies in what one may call the distinction between the static and the dynamic (see, Witztum 2005a). But whatever is the case, Mill of the logic definitely defended the conditional and separate study of economics. The issue was then, as it is now, whether such separation also means independence. 85

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Paribus and it is this one which modern economists would find familiar. The second relates to the distinction between static and dynamic analysis but not in the way it is understood by modern economists. It is in this respect that Mill can be seen as trying to accommodate Comte’s criticism. The idea of ceteris paribus—which simply means ‘all other things being equal’—implies that while Mill accepted the methodological relevance of analysing the economic motive in separation of all other social motives, such an analysis would not be conducted under the presumption that the other motives are not there, or are irrelevant. Instead, the separate examination of the realm of economics is conditioned on the contents and values of those other motives. Economists normally use the term ‘ceteris paribus’ to distinguish between partial and general equilibrium. This means that if, for instance, the demand for each good is determined by the prices of all goods in the economy (i.e. general equilibrium), the analysis of the effects of a change in one price on the quantity demanded is conducted under the assumption that all other prices (or any other variables which make up the system) remain unchanged (ceteris paribus). In more general terms, as all prices are endogenous variables in the sense that they are determined within the system, ceteris paribus here means holding constant some of the endogenous variables. By implication this seems to suggest that when we discuss general equilibrium—which is the separate economic domain in its entirety— nothing is really held constant other than the exogenous variables (which are usually tastes and endowments parameters). But this is not what Mill had in mind and this is not what is relevant to the methodological question which we are discussing here. What matters for the separate study of economics is that the edifice of the entire economic system itself (namely, the exogenous variables which, in turn, determine, in general equilibrium, the values of all the endogenous ones), depends on all other motives remaining constant but it is not independent of what these motives are. In other words, the way in which individuals execute their desire for wealth is not independent of the way they behave in other spheres of social life. Suppose, for simplicity of exposition, that the different motives can be segregated in a meaningful and well-defined manner such that we can denote them by Mi ( i = 1, ¼ ¼ , n ) . It is therefore self-evident that a social state at any point in time will be the consequence of the sum total of human interactions in all spheres of social life. If we define a social

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state at time t, St , to mean a certain measurable (and aggregate) outcome of social interactions,86 we can then write it as:

St = j ( M1 , ¼ ¼ , M n )



This is a formal way of saying that the social state at any point in time is the outcome of the aggregate interactions based on the set of all motives which govern individuals’ behaviour. Compartmentalisation in this context basically means that one can study the effects of one set of motives on the social state without any reference to the other sets of motives. If, for instance, we identify the motive with which economics is dealing as the desire for material wealth (say, M1 ), then we assume that we can analyse only the effects of M1 on S while assuming that all other motives ( M 2 , ¼ ¼ , M n ) are not only given but also held constant ( M , ¼ ¼ , M n ) (ceteris paribus).87 If we also identify the desire for wealth with the pursuit of one’s own interest, we end up with an isolated analysis focused on how the self-interested pursuit of the desire for material wealth affects the social state. If this were indeed possible, it would give rise to a partial conception of an individual who is motivated by one set of motives alone and who has become the original Homo economicus— which really does not mean that humans are economically driven but rather that there is a part in all humans which is economically driven. As the pursuit of wealth is driven by one’s ‘own-­regarding’ sentiments, there will be other motives emanating from the ‘other-regarding’ sentiments which may exist in all humans but are not necessarily universal in nature. However, the question that will immediately follow is whether this separate analysis of how one set of motives affects the social state also means independence (and, subsequently, universality and neutrality).  This can be a complex measure comprised of income, distribution of income, social cohesion (alienation), crime rates and other variables contributing to the social sense of wellbeing. Naturally, one of the questions that will follow is whether this aggregate can be separated according to the influence of each type of motives. At this stage we assume this not to be possible; namely, the level of material wellbeing cannot be separated from the level of income distribution and, subsequently, crime and social cohesion. 87  Note that here, there exists a system of general equilibrium which explains how M1 , expressed by all members of society, leads to a particular social state given the other motives and sentiments. This ‘general’ equilibrium is, in fact, partial equilibrium if we take all other motives into consideration. 86

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Suppose that we can group all motives into two sets of motives: own-­ regarding ( M1 ) (of which the desire for wealth is an expression) and otherregarding ( M 2 ) (which are the social motives from which the pursuit of justice as well as benevolence will arise). Suppose, too, that the social state function is a real-number function with the relevant properties.88 When we say that we analyse in separation the influence of own-­regarding consideration on the social state (i.e. the subject matter of economic analysis), we are notionally talking about the existence of a partial derivative of the social state function with respect to own-­regarding motives:



¶St ( M1 , M2 ) ¶M1



It tells us, as a rule, how the ‘own-regarding’ motive affects the social state. In modern terms it will tell us how the pursuit of one’s own interest will lead to both an efficient outcome and the maximisation of the value of the material things people seek. But as a partial derivative of a function also depends on the values of other variables (in our case, other motives) it means that the influence of the own-regarding motives on the social state depends on the nature of the own-regarding motive as well as on the nature of the other-regarding motives. Namely, if M 2 and M 2 are different expressions of other-regarding, or social, sentiments or motivations then:



¶St ¶S M1 , M 2 ) ¹ t ( M1 , M 2 ) ( ¶M1 ¶M1



It means that the way the own-regarding motives ( M1 ) will influence the social outcome (S)—which seems to be what economics is about— will depend on the nature of the other-regarding motives or sentiments. It is important to emphasise that the derivative here represents the way the own-regarding motives affect the social state and not the actual value of it. Economists will be the first to admit that if the ‘other-regarding’ sentiments motivate people to insist on a certain initial distribution of  Which means that both S and the various motives can be captured by real numbers. The purpose of this exercise is not to make this claim but simply to try to derive some logical insight into the significance of the isolation of one variable from the others in the study of functional relationship. 88

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assets or a particular final distribution of income commensurate with their ethical values, the outcome in terms of allocation, distribution and prices (and, therefore, the value of the outcome of economic activity [i.e. GDP]) will be different. Namely, St = j ( M1 , M 2 ) ¹ St = j ( M1 , M 2 ) but they will also insist that that this does not means that ¶St ¶S M1 , M 2 ) ¹ t ( M1 , M 2 ) , suggesting that the way the economy ( ¶M1 ¶M1 operates does not depend on the nature and level of ‘other-regarding’ sentiments and motivations. Indeed, the essence of the two welfare theorems which we discussed in Chap. 2 is to state exactly this: it does not matter what society prefers in terms of initial or final distribution, in the presence of lump-sum transfers the way in which competitive decentralised decisionmaking leads to the economic outcome (i.e. equilibrium) is always going to be the same! Naturally, the absence of lump-sum transfer will trigger other problems but they are all dealt with in the context of the unyielding competitive mechanism governed by a stubborn form of individual self-interested behaviour. Namely, even if people feel that there is a need to redistribute income through taxation (which are not lump sum and, therefore, affects their choices), their response to the redistributive policies will be that of selfinterested individuals who are seeking to promote their own private wellbeing. As discussed in Chap. 2, notwithstanding the developments in theory which reflect a recognition that there are obstacles in achieving the benchmark of a competitive outcome, the benchmark itself has not really shifted, and the meaning of it is that economists are not willing to recognise that different ‘other-regarding’ sentiments will affect not only the specific numerical values of the outcome but, more importantly, the way in which the economic system operates. In terms of the logical reference to the functional relationship in the context of a real-number function, the meaning of such a position is that the social state function must be weakly ¶St ¶S separable. Namely, for M1 , M 2 ) = t ( M1 , M 2 ) , we must have ( ¶M1 ¶M1 that the general function will have the property of:



¶St ¶q ( M1 , M2 ) = 1 ( M1 ) ¶M1 ¶M1



This also implies that the social state function itself must be of the form:

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St = j ( M1 , M 2 ) = q1 ( M1 ) + q 2 ( M 2 )



In such a case, not only can we separate the motives but the social influence of each set of motives becomes separated from the others. If the own-regarding motive leads to wealth creation through the institutions of competition and other-regarding motives determine social institutional set-ups (like distribution of wealth or income), wealth creation must and can be separable from social institutions. In other words, while both sets of motives determine the outcome, only one set of motives determines not only how that set of motive affects the social state, but also it affects only one aspect of social wellbeing. We have thus completely isolated an independent Homo economicus, whose motivation not only explains the way in which material wellbeing is created but will not have an effect on any other aspect of social life. This is exactly the view held by scholars like Friedman when they argue that charitable activities are separable from and independent of the self-interested interaction.89 It means that, for instance, the nature and amount of voluntary work will only affect the level of care in society (if we had a parameter for this as part of the index quantifying the social state) and not the way in which we conduct our economic affairs.90 That is, if the index of social state pertaining to the level of care is captured by q 2 ( M 2 ) , the index of the social state (S) will increase with an increase in voluntary activities according to the function: q 2 . The value of q1 ( M1 ) will not be affected by it at all. Conversely, the effects of the production of material wellbeing ( q1 ( M1 )) is entirely unaffected by what happens in the domain of social activities. But does such an approach make any sense? Can we really divide the notion of social wellbeing, or the social state, in such a clear-cut manner between completely separated domains? To have a feel about the full significance of this approach let us go back to our example from the previ In the bicentenary of Smith’s The Wealth of Nations, to remind the reader, Friedman declared that the invisible hand of Adam Smith not only successfully directs self-interest in the creation of wealth but also directs sympathy which governs charitable activities. 90  Some may argue that care too is an economic question. While this may be true as some of it is desirable and scarce, there are some aspects of care which are not necessarily part of the economic problem as they may not be scarce. 89

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ous section and the story of Robinson and Friday. Suppose that both Robinson and Friday are self-­interested (i.e. they do not consider the effects of their actions on the other) but one of them is less keen on leisure than the other. This means that the following outcome will emerge:

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In the bottom diagram, we see that the fact that Friday cares less about leisure made his indifference curve considerably flatter than the one which represents Robinson’ preferences.91 Both Robinson and Friday have the same preferences now as before they entered society: they are both selfinterested and they gain from entering the social arrangement. This is expressed in their move from point A (the pre-social allocation) to point B. However, unlike the case we discussed in the previous section, here, Friday earns in terms of fruits (remember that both types of fruits are interchangeable) much less than he effectively contributes to the collective output (which would be point B′).92 The yellow lines depict that part of what his labour produced which goes as profit to Robinson and the green line is the part of wages he earns. He also earns profits from his ownership of the apple groves where Robinson works and which is denoted by the vertical red line on the right. Robinson, on the other hand, who is on the top diagram, will work less than he did before entering the social frame and he clearly gains more in terms of utility than Friday. An expression of this can be seen in the fact that his income exceeds (in terms of fruits at point B) his contribution to the collective (point B′). We can also see the competitive outcome of this asymmetric selfinterested entry into society in the following diagrams:

 Notice that this is another expression of the inadequacy of the notion of the socially minded instrumentally rational utility maximiser. We could have explained these two indifference curves as representing the preferences of socially minded individuals who care about the effects of their actions on the other (and thus reduces their utility from leisure), but instead we say that their initial attitudes towards leisure differed considerably. In other words, the self-interested individual is virtually indistinguishable from the socially minded one. 92  The quantity each one of them produces is denoted by the blue line and it is higher than their original production line because of the division of labour which allows them to concentrate in that in which they have a comparative advantage. However, while point B′ denotes the quantity of fruits produced by each one of them, there is another factor of production involved (either land or the managerial skills of the owner—the return for which comes in the form of profits [or rent]). This means that one could say that the blue line represents the combined effort of the owner (of land, or business) and the worker and, hence, it does not really reflect the exact contribution of each worker. Still, if we consider the fact that labour here is the major factor of production, the blue line may be treated as mainly the contribution of labour. Alternatively, we could say that both of them contribute equally in their capacity as owners or managers but the one who contributes more labour gets less than the one who contributes less labour. Either way, the point made here is not predicated on this interpretation but merely requires the presence of inequality. Robinson has clearly gained much more from the move to society (A to B) than Friday. 91

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where the flatter slope of the supply of labour offered by Friday represents his lower enthusiasm with leisure relative to Robinson. Here we can clearly see that Friday’s income (wages  +  profit) is clearly lower than Robinson’s income (=his wages + profit) even though Friday works more than Robinson. The total amount of fruits produced ( x A + x B ) plus the total amount of leisure constitute together, in our story, the outcome of the pursuit of self-interest (or the desire for material wellbeing [i.e. the effects of M1 on St , or q1 ( M1 )] ). It can be captured either through some index which allows to quantify and aggregate consumption of fruit and leisure time or through the utility generated by the outcome. It is easy to see that in both methods, the two agents are better off in their self-interested social arrangement than they were before. However, once they entered the social arrangement, even if they are not interested in the other and are not taking into consideration the effects of their actions (choice of leisure in our case) on the other, they cannot help but notice what the consequences of their economic interaction mean for the other in relations to what it means to them. What they will see in this case is that while both of them entered the arrangement for the very same reason and both have similar functions in their society (owners as well as workers), the conse-

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quences to them of their economic interactions are different. In other words, they will realise that there is here a problem of inequality. But in the world of separable domains, the mere comparison which they conduct of their respective outcomes is already in a different domain to that which generated the material wellbeing. It will be the domain of the other-regarding sentiments which would, first of all, record a level of disaffection, or a sense of injustice, which in itself constitutes part of the index of social wellbeing. Hence, we can immediately observe that the expectation of a weakly separable social state function (i.e. complete separation of social spheres) is not very sensible as the sense of equity (which should be the separable measure of q 2 ( M 2 ) ) is clearly a function of the outcome of the activity of wealth creation (i.e. q1 ( M1 ) ). Therefore, in reality, the approval rate of the society is a function of both the own-­ regarding and other-regarding sentiments and motivation: q 2 ( M1 , M 2 ) and not as we assumed it to be just a function of M 2 . Equally, if people consider the outcome of the own-regarding activity as unacceptable in terms of the other-regarding sentiments, would they act on the ‘own-­ regarding’ sentiment in exactly the same manner as they would if they considered the outcome as acceptable? It is clear in this case that the question of equity cannot really be separated from that of the working of the economic system. The unequal outcome in terms of the distribution of income would emerge even if we supposed that the initial distribution of ownership is equal (i.e. the apple grove and berry lands are of equal size and productivity) and the efforts of both agents in their capacity as owners were the same. What drives the inequality here is the difference in the preferences (but not nature) between the two individuals. But there is a much more sinister aspect to it. Friday, who is more work minded and cares less about leisure, ends up earning less  (recall our discussion in Chap. 4). Alternatively, the economic system suggests that he who works most earns less. The meaning of this is that we have in front of us a group of individuals who would like to acquire material wellbeing in their care for themselves (own-regarding) but are also aware of the other and care enough about them to wish society to be equitable. The outcome of the latter sentiments would be to set up institutions which reflect this idea. In our case, this would mean an equal allocation of resources (the initial

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distribution of land and economic function). The consequence of the former sentiments would be the distribution of income that emerges once the agents engage in economic interactions. A reasonable expectation here would be that the outcome would also be equitable. But this is not what happens. While it is true that any change to the initial allocation—reflecting difference in attitudes towards the other— will affect the resulting distribution of income (and hence St = j ( M1 , M 2 ) ¹ St = j ( M1 , M 2 ) ), here, the problem is that whatever initial or final distribution we will have, it will always suffer from the fact that he who works more earns less. If just desert is part of one’s conception of equity, the effects of one set of human motivations and sentiments will consistently offend the other set of human sentiments and motivations. Surely there must be something profoundly wrong about such a conception of the individual or society. Of course, economists would say that once society realises that there is a problem with the characteristics of the final distribution, it may set into place the institutions that would correct it. Namely, the other-regarding sentiments will lead to the creation of institutions that would not only allocate resources in an equitable way but also correct the outcome to be consistent with whatever it is that people think is right. In our example of Robinson and Friday there may be a question of whether equality of income is the desired equitable outcome (as one of them is putting more work into the system than the other). But whatever it is, this will require a transfer of income from Robinson to Friday. However, given that lump-sum transfers are not feasible, the way society will achieve such a correction would be through the taxation of Robinson and the transfer of these tax revenues to Friday. According to standard theory, such a policy will create inefficiency. The tax which will be levied on the earnings of Robinson (say, for simplicity sake, his wages) will reduce his net wages and will thus make leisure (which he particularly likes) less expensive for him. Consequently, he will choose to work less than he already works. Hence, his gross wage will increase but as at any given level of wages, his net wages will be lower, the overall effect will be a fall in the supply of labour offered by Robinson. Friday will receive an income supplement which would increase his income, and, therefore, as leisure is a normal good even though he is less excited about it than

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Robinson, he would want to have more of it the more income he earns. Therefore, he too will reduce the supply of labour he offers:

Points B in the above diagrams depict what will happen as a result of society’s attempt to correct the natural effects of self-interested-based economic interaction. In the right-hand diagram, Robinson works less and his wages (the red rectangular) is clearly smaller than the one he had at A. But so is the profit which he generated for Friday who owns the apple groves. In the diagram, we can see that the shaded blue rectangular is the income transferred to Friday but as one can see only part of it (below the broken line) comes from what used to be Robinson’s wages. The rest of it (above the broken line) comes from Friday’s own profits. In other words, the overall increase in Friday’s income will be relatively small. In the left-hand diagram, we see Friday working less and as a result his wage income will fall (we assumed that the elasticity of the demand for labour is greater than unity) even though the wage per hour increased. Robinson’s profits will definitely fall relative to what they used to be at A. So, in general, the scheme will succeed in reducing Robinson’s earning (both his wage income and profits fall) but it will also likely to reduce

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Friday’s earning as his wage income will fall too as would his profits.93 What may be corrected here is the gap in their earning as the falls for Robinson are clearly greater than they are for Friday. The reason why the overall earning falls is depicted by the green areas in the above diagrams which can be generally described as the efficiency loss due to this redistributive scheme. The policy will lead to an overall fall in the total amount of material wellbeing produced by this economy. However, the improvement in equity may suggest that this is a price worth paying to satisfy the other-regarding sentiments and motivation of society. In a nutshell, this is the nature of what is known as welfare economics. What we mean by this is that welfare economics seems to be the kind of social economics that would emerge if we accepted the idea of the separation of the spheres. On the one hand, there is an economic system which is governed by the self-interest of its agents. On the other hand, there is a society—presumably made up of the very same people—who are now only forming an opinion about the outcome. They then have to consider a way that will allow to direct the economy towards the desired outcome without upsetting the economic game. Namely, all policies have to take into account that the agent in the system is not the very same one who has passed a judgement about the outcome. This leads to something which cannot be described as anything but an absurdity. The reason why the redistributive policy leads to loss of output (efficiency cost) is because the agent who agreed to pursue it responds to it in a way which adversely affects its success. Why would anyone who thinks that they need to pay tax so that the society they live in will be consistent with their other-regarding sentiments, withdraw their efforts and adversely affect the other when the policy is implemented??? In our case, Robinson had to agree to transfer some of his earning to Friday because his other-regarding sentiments were unhappy about the clear injustice, whereby Friday worked harder than him but ended up  Diagrammatically, Friday’s net loss of profits will be the small triangular between A and B in the right-hand diagram + the green rectangular attached to point A in the left-hand diagram which used to be part of his wages before the change. His gains are the part of the shaded blue area in the right-hand diagram which is below the broken line from A. In the left-hand diagram, his gains are the red rectangular above the broken line from A. As we assumed a higher elasticity than unity, we know that his wage income will fall, though it is not clear whether his profit income (including the transfer) will increase and if it did whether the increase will be sufficient to offset the losses in wage income. 93

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with much less. Yet, when he is about to deliver this share of his income, he withdraws his effort, which will both reduce the amount transferred and adversely affect the profits which Friday makes (which, in the context of our framework, means that he will make a choice which will clearly harm the other). Why would the own-regarding Robinson do something which contradicts the wishes of the other-regarding Robinson? Equally, why would Friday, who might feel that he had been let down by the system, respond to the attempts to correct the injustice by withdrawing his efforts and thus harm those who are trying to make amends? Is the own-­ regarding Friday in dissonance with the other-regarding Friday? Naturally, in a world of lump-sum transfers one could have achieved the required outcome without any costs. In our story, it would have meant the transfer of part of the ownership of the berries-bushes from Robinson to Friday. This will increase Friday’s income and will lead to a fall in his labour supply but this will be offset by the increase in Robinson’s labour supply due to the fall in his income.94 However, to do this one would need to know beforehand who intends to work hard and who has stronger preferences for leisure. This, of course, is impossible and may not be independent of the initial allocation of resources. Namely, a society that believes in equity will not be able to allocate initial ownership in any other form than equality when agents are identical except in their preferences. If it were to allocate differently, it is not inconceivable that the attitudes which individuals would have had towards leisure could have been influenced by their initial ownership even though economic theory supposes that both (taste and resources) are equally exogenous to the system. But the main problem which is exposed here is the logical inconsistency of the human character when one attempts to disaggregate it in the manner modern economics proposes. Through the analysis of what is called welfare economics, economists are trying to persuade societies that the other-regarding sentiments can always adjust the outcomes of the own-regarding behaviour either without costs (in the case of lump-sum transfer) or with some costs but with an overall benefit (the second-best approach). This, again, is the heart of the presumed neutrality and uni This is so if we assume that the profits are simple rents and not a reward to the managerial skills of the owner/manager. If it were the latter, then such a transfer will have similar effects as the taxation on wages. 94

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versality of the paradigmatic core. But for this to hold, the other-­regarding sentiments must be entirely focused on either the initial allocation of the final distribution but not on what happens in between. Namely, if other-­ regarding sentiments demand equity, we can always either adjust the initial allocation or rearrange the final distribution to achieve the desired outcome. What we cannot do, is eliminate the property of the competitive system where there seems to be an inverse relationship between contribution (effort) and reward which emanates from the own-regarding behaviour of individuals. The own-regarding behaviour of individuals in a competitive environment consistently offends the other-regarding sentiments of the same type of individuals. Of course, if individuals were to be self-interested both in their economic and in their social dealing, such a problem will not arise. The other-regarding aspect of this kind of individuals may require fair play but not more than that. It is important to notice that fair play, in spite of the reference to ethics encapsulated in the word ‘fair’, has nothing to do with the other or even with justice. As individuals care only about themselves, they demand fair play as a way to ensure that they are not disadvantaged. The fact that this also means that the other should not be disadvantage is just ethical collateral. For such individuals (in the context of our tale) the only requirement will be for the initial ownership to be equally divided—as they are both equal in all except tastes—and nothing more. The fact that the final distribution is unequal is a result of the free-­ willed actions of those individuals and they have only themselves to blame for any outcome. Equally, if people’s sociality was to be expressed through expressive rationality, it would have meant that their choice of hours worked (their supply of labour in terms of our specific tale) will be independent of wages or income and will reflect their sense of commitment towards the others and the social arrangement. They will see value in the action of working hard as it positively affects the others. They may, of course, have different visions about what exactly is meant by hard work. This may lead to an unequal distribution of income but the attempts to correct it will not lead to any loss of output or any other adverse effect as neither of them will respond by withdrawing their labour just because of a change in the market signals (like wages or income).

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In other words, while an identification of the nature of a complete character suggests internal consistency—though different consequences—the separation of spheres to the degree suggested by economic theory (with weak separability) opens the gate to inherent inconsistencies. Indeed, one cannot but ask one’s self why would an agent who thinks that there is a need to redistribute outcomes, because the natural one offends one’s sense of decency, then retaliate, as it were, by repeating the same pattern of behaviour which generated the undesired outcome. The answer, in our view, is embedded in the fact that the separation of the spheres as presumed by economics is nothing but a myth. Within the standard conception of the individual in economic analysis, he or she will derive income either from the results of their direct efforts or from the results of other people’s effort. In the context of Robinson and Friday, each one of them derives income from profits (or rent), derived not from what they do but rather from what they own and what their employees do, as well as income (wages) from their own-effort contribution. Therefore, the mere choice of leisure (hence, labour) already entails an attitude towards the other. How would an agent response to that which derives from other people’s effort, in relation to the way they respond to that which they derive from their own effort, must reflect what that agent thinks about the other. In other words, the idea as if the domain of economic can be depicted as a reflection of own-regarding sentiments alone ( q1 ( M1 ) ) such that the effects of the own-regarding sentiments can be analysed independently of the other-regarding senti¶St ¶q ments (i.e. ( M1 , M2 ) = 1 ( M1 ) ) is completely vacuous. ¶M1 ¶M1 In the same way that income from profits represents the effects of other people’s effort, so do transfer payments. So when Friday receives income from what used to be Robinson’s wage income, if he responds by withdrawing his labour, he is expressing a view about his attitudes towards Robinson’s effort. It is true that in this case Friday may feel that Robinson did not deserve this high level of return in the first place but he must be aware of the fact that Robinson did not do anything unethical. He behaved in exact same manner as Friday except that his preferences were different. The twisted outcome in the distribution of income is therefore not a result of his own action as it is a feature of the system which they

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both agreed to operate. Therefore, even from a simple perspective of how one views other people’s attempts to comply with what they consider to be just, the response to the transfer is a reflection of the attitudes towards the other. So when we say that there is an efficiency cost to the redistributive policy which is trying to correct that which both agents perceive to be an injustice, we are actually saying that people have no interest in the other and not that the interests in the other are captured in a different spheres ¶St ¶q of social life. We are actually saying that ( M1 , M2 = 0 ) = 1 ( M1 ). ¶M1 ¶M1 This is not a separation of spheres but an argument that people are self-­ interested in all their dealings and that society is entirely functional. One should hasten to say that this kind of attitude towards the other is not an inherent feature of the rational utility maximiser. Suppose that an individual consumes a composite good y and exerts effort (ε) to generate earnings. His income is comprised of an ‘unearned’ element A, which is independent of his effort contributions, and an earned element, which is dependent on his effort contribution ω(ε). The choice variables for the individual are therefore ε and y, and the constraint the individual confronts is A + ω(ε). Compatible with price-taking behaviour, we assume the effort rewards function to be linear. The difference in attitudes of the agents  towards the other, presents itself through the way in which they perceive their effort contribution (which will also affect others).95 The simplest approach would have been to assume that some enjoy their effort contribution while the other dislikes it. However, this would create analytical problems which lie at the heart of the universal assumption in economics that agents’ decision about work is merely a residual of their decision about leisure. So the only way to distinguish between the two types of agents would be through their marginal disutility from effort. For one agent, we shall assume that every extra unit of effort is equally painful. For the other agent, the more involved he gets, the less painful he considers an extra unit of labour.  This is consistent with the meta-economics literature developing from neuroscience, which demonstrates that social pain is captured by the same part of the brain as individual pain. See, for instance, Lynne (2006). 95

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Suppose too that effort inputs are limited by, say, E. When an agent chooses his or her level of effort (ε), it leaves some effort for other (leisurely) pursuits. The way they perceive this could either be linear (E − ε), which represents the constant marginal disutility of effort, or be (E/ε), which represents the case of growing enthusiasm. This means that in the linear case every extra unit of effort would have the same impact on the ¶2 ( E - e ) = 0 ), while for the other person, every rest of one’s effort (i.e. ¶e 2 extra unit of effort would diminish the decline in the remaining effort ¶2 ( E - e ) > 0 ). The former is the self-interested or self-reliant agent (i.e. ¶e 2 who treats effort as a means to an end, while the latter is the case of the more socially minded rational utility maximiser where being involved at work does not diminish his enthusiasm. The self-interested problem: max U ( y,e ) = a ln y + g ln ( E - e ) y, e

s.t y = A + w (e ) = A + be

The first-order conditions are:

a -l = 0 y g + lb = 0 E -e A + be - y = 0



where λ is the Lagrange multiplier and which leads to

l=

a g = y b(E - e )

and e * =

a a A Ea +g a +g b



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Bearing in mind that A captures the income derived from other people’s efforts (either the income from profits or other forms of ownership) and b represents the return for a unit of one’s own effort, one can think of (A/b) as a measure of social reliance. The greater is this expression, the more, relatively speaking, one is relying on other people’s efforts. Clearly, in the above simple case of the standard self-interested rational utility maximiser, own-effort contributions would fall with an increase in the social reliance measure (A/b). In other words, when one gets income which is the result of other people’s effort, one would reduce his own-­ effort contribution. This means that the other, as such, plays no role in the considerations of the agent. He or she feels neither grateful to nor resentful of the other whose efforts has benefited them. The other, therefore, does not exist. The socially responsive rational utility maximiser’s problem:



max æEö U ( y,e ) = a ln y + g ln ç ÷ y, e èe ø

s.t y = A + w (e ) = A + be

Again, the first-order conditions would be:



a -l = 0 y g - + lb = 0 e A + be - y = 0

which would lead to

l=

a g = y be

and e * =

g A a -g b

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Here, effort is proportional to the level of social reliance. The more the individual receives from other people’s effort, the more that agent will contribute in terms of his or her own effort. It means that the individual appears to be grateful to the other for benefiting from their efforts. It is evident that in such a case the effects of the redistributive policies will be very different indeed. Moreover, the institutional set-up which governs successful economic interactions of such individuals will be very different from the one that would suit the purely self-interested one. It is important to note here that all our reservations about the ability to capture sociality through the model of the rational utility maximiser still hold. The fact that the individual may be grateful to the others does not really mean that the agent is a real social being. After all, the agent is still opportunistic and would readily withdraw his effort for the same level of other people’s effort if the return to his own-effort contribution (b) were to increase. Nevertheless, what we see here is that for the attempt to separate the spheres to be taken seriously, it will have to be based on the presumption that the other-regarding sentiments are relevant in the analysis of each sphere including the one dominated by the own-­regarding sentiments. In other words both St = j ( M1 , M 2 ) ¹ St = j ( M1 , M 2 ) and ¶St ¶S M1 , M 2 ) ¹ t ( M1 , M 2 ) must hold. Meaning that the nature of ( ¶M1 ¶M1 the other-regarding sentiments not only affects the values of social wellbeing at any point in time, but also, the way in which the own-regarding sentiments and motivations influence the level of social wellbeing (i.e. the discipline of economics) depends on the other-regarding sentiments. An economic theory based on the purely self-interested individual— which assumes that others do not matter at all—will be very different from the one based on self-interest but where agents are more socially responsive in the sense that they will express gratitude or resentment towards the others in the way in which they affect their own returns. The upshot of this is that Mill’s response to the criticism raised by positivists and historicists defending the deductive use of a Homo economicus, that was based on the principle of ceteris paribus was, on the whole, misinterpreted by modern economics. The separation of the spheres may be allowed but this does not mean that they do not affect each other.

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Individuals do have an own-regarding sentiment and motivation to act but the analysis of its effects on society cannot be conducted without an understanding of what are the other-regarding sentiments and motivations. The idea of ceteris paribus in this context means that these sentiments, or motives, do not change while we analyse the effects of the own-regarding drive. But they cannot be ignored. The paradigmatic conception of the individual in modern economics is either false by assuming that one can completely separate the spheres (a la weakly separable social state function) or misguided by supposing that the other-regarding sentiments do not exist. But there was a second element in Mill’s defence of the separate (though not independent) study of economics: the recursive nature of the system. This aspect of the analysis of Homo economicus has been completely lost in modern economic analysis and it raises questions about the uniformity and the universality which economics attributes to the idea of the self-interested rational utility maximiser. If we go back to the original depiction of a social state as a function of a set of motives:

St = j ( M1 , ¼ ¼ , M n )



We must add a time index to the various motives or sentiments. Namely, the correct depiction of the social state function should be:

St = j ( M1, t -1 , ¼ ¼ , M n, t -1 )



Namely, the social state at time t is a function of motives defined at the previous period. If we follow Mill’s own writings on ethology (the theory of character formation) and progress we will find that in his view the expression of any motive at any particular point in time is itself a function of past social circumstances (or states). That is to say that each set of motives at, say, time t -1, is a function of the social state in the preceding period: Mi , t -1 =  ( St -2 ) for all i. Hence, social states will influence individuals’ sentiments and motivation which, subsequently, will influence social institutions, which, through interaction with the current set of motivations, will shape the new social state.

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This interdependence between social states across time is quite evident in Mill’s writings and constitutes his notion of dynamics which is ­different from the way the term is used in modern economics but closer to the concept of diachronic order which we used in Chap. 1. Although Mill argues that the laws governing production have the characteristics of physical laws, and are thus universal in the sense that they are the same everywhere and at all times, distribution and exchange are entirely within the domain of social institutions which are clearly dependent on time and place. ‘The distribution of wealth’, writes Mill, ‘depends on the laws and customs of society. The rules by which it is determined are what the opinions and feelings of the ruling portion of the community make them, and are very different in different ages and countries; and might be still different, if mankind so chose’ (Principles of Political Economy (PPE), p. 200, my italics). However, according to Mill, ‘[t]he opinions and feelings of mankind, doubtless, are not a matter of chance. They are consequences of the fundamental laws of human nature, combined with the existing state of knowledge and experience, and the existing condition of social institutions and intellectual and moral culture’ (PPE, p. 200). In other words, if over time, opinions and feeling are determined by social institutions and social institutions are determined by opinions and feelings, at any given point in time social institutions may be said to be exogenous to the static study of economic interactions. But over time, the actual economic environment to which these institutions give rise will feed back into the opinions and feelings of the people and, thus, may produce an institutional change.96 Thus, it seems that Mill has produced a recursive system, where economic outcomes influence the institutional set-up within which economics is operating. Subsequently, the static analysis of the economic system—in the sense of consistency of institutions and expression of motives—will have to change too. Even if M1 is a universal own-­regarding sentiment and motive, both its manifestation and the values of M 2 , ... ... , M n will no longer be the same over time. It is this evolutionary view of society that lies at the heart of Mill’s political economy (which is really the study of the function   above) and not the explora Which is also consistent with Mill’s notion of the ‘train of reasoning’ as a means to overcome the problems of deduction in the social sciences. For a full discussion of these issues, please consult Witztum (2005a). 96

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tion of the static relationship between what is conventionally considered as distinct economic variables (the function j from above). In this connection, it would be interesting to note that Mill’s pursuit of redistributive policies—which seemed a puzzle within the tradition of liberal classical economics—cannot be simply interpreted as aiming at amending the exogenous conditions in order to allow competition to flourish. Rather, it aims at changing the social circumstances in such a way as to alter entirely the set of motives which dominate the pursuit of wealth, to change social institutions in the name of justice and, subsequently, to change the entire language of economic analysis.97 Indeed, the main mechanisms, which tie together the performance of the economic system and its evolutionary process, are ethics and ethology (the theory of character formation). Ethics in Mill, as in Adam Smith, is an important factor in the analysis of the economic system. It is so because in both cases individual behaviour is a reflection of moral conventions. In the case of Smith, ethics influences human behaviour through a sympathy-­ based socialisation process. The moral stock, generated by such a process, is an important element in determining productivity. When the division of labour reaches a point where it generates a dumbing effect on labourers, the productive powers of labour may be seriously reduced.98 In Mill too, the morality of agents is relevant to the performance of the economic system. Even though the laws of production are as universal as any other law of physics, this does not mean that productivity is of the same nature. ‘The moral qualities of the labourers’, writes Mill, ‘are fully as important to the efficiency and worth of their labour, as the intellectual’ (PPE, p. 110). For Mill, the benefits of these qualities come from the mutual trust that they generate and the subsequent increase in productivity. Such trust is also at the heart of his social theory: ‘The advantages to mankind of being able to trust one another, penetrates into every crevice and cranny of human life: the economical is perhaps the smallest part of it, yet even this is incalculable’ (PPE, p. 111).  Lipkes (1999) observes that in similar circumstances—Mill’s attitudes towards the aristocracy— ‘[t]he morality of a people came to be more important for Mill than its prosperity’ (p. 20). It is quite evident that in Mill’s view the morality of the people is a precondition for their prosperity. 98  See, for instance, Rosenberg (1990), West (1996) and Witztum (2000). 97

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The origin of this trust is in Mill, as in Smith, the social dimension of one’s character as manifested in the ability to feel sympathy with an increasing number of individuals in society.99 The degree to which we can feel sympathy with people outside our immediate close circle is a determinant of both our moral commitment and the way in which we interact with other agents in the economic sphere. While this sentiment is clearly perceived by Mill to be a natural and powerful sentiment, it is clearly an evolving one: ‘the desire to be in unity with our fellow creatures, which is already a powerful principle in human nature, … [tends] to become stronger, … from the influences of advancing civilization’ (Mill 1969a, p. 231).100 Had the process, which increases our ability to sympathise with a growing number of individuals, been a natural development (i.e. only dependent on time), there would be no obvious reason for Mill to either criticise competitive structures or demand changes in them. Moreover, there would be no need to develop a theory of character formation as this, in principle, was preordained. But Mill was critical of competitive structures and was seriously concerned with its development. He was also concerned with the direction in which human character seemed to develop and by no means saw the development of trustworthiness and subsequently, co-operation, a natural necessity. There is a need, therefore, to study more carefully the interaction between character formation and social circumstances. Indeed, that which connects individuals’ morality (or character) with economic outcomes is what Mill calls ethology. Unfortunately, Mill does not properly develop this theory and we are left with bits and pieces that we must glue together if we wish to understand how the economic environment interacts with itself. Nevertheless, there is clear evidence in Mill’s writings to show how, in his view, material reward—the consequence of economic interaction—may influence the development of the human character.101 Coupled with Mill’s fairly elaborate discussion of  Which was also the subject of our discussion in the previous chapter.  Peart and Levy (2003) provide an insightful account to the role of sympathy as the distinguishing factor of classical economics. 101  See, for instance, Mill’s discussion of remedies to poverty (PPE Chap. 9 book 2). There is also an interesting discussion on the role of reciprocity in the formation of sympathetic attitudes in Peart 99

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progress, we may indeed be able to derive some insights into how circumstances may help encourage, and, at times, arrest, the development of human character and, in particular, its sympathetic capacity. Based on these, one may conclude that if things were left to themselves, the competitive system may reproduce itself by generating a distribution of rewards which is not in favour of other-regarding elements in human nature. Thus, it will not be conducive to changes in character. However, a change in social circumstances brought about through intervention (i.e. redistribution of income and wealth) could bring about a meaningful change in agents’ deposition and, subsequently, could influence their behaviour. Consequently, the static nature of the theory will have changed too as the behavioural premises move towards the more co-operative form of interaction. ‘The form of association’, writes Mill, ‘which if mankind continue to improve, must be expected in the end to predominate, is not that which can exist between a capitalist as chief, and work-people without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations’ (PPE, pp. 772–773, my italic). Thus, whether we wish to consider the human character in its entirety or compartmentalise human motives, the focus of our attention must be the conditions which will allow mankind to continue to improve. Some may argue that the main method of achieving this is through the redistribution of ownership. But this in itself may not be consistent with technological development and with the development of reciprocity (and sympathy) which is closely associated with interdependence (PPE, pp.  762–763). Will the mere redistribution of ownership lead it to a world of shared, or communal, ownership102? One may say that this is indeed the case as no one agent will have sufficient property to ‘go it and Levy (2003). In Witztum (2005b) there is a discussion of a similar point in Smith. There, however, it is not so much a question of character formation as that of different manifestations of rational behaviour. 102  Which, for Mill, is what would happen if people became more co-operative: ‘In [increased co-­ operation] or some such mode, the existing accumulation of capital might honestly, and by a kind of spontaneous process, become in the end the joint property of all who participate in their productive employment: a transformation which, thus effected, … would be the nearest approach to social justice, and the most beneficial ordering of industrial affairs for the universal good, which it is possible at present to foresee’ (PPE, pp. 791–792).

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alone’ and the need to rely on others will increase. However, in Mill’s analysis, a prerequisite for such development is the moral development of individuals and their trustworthiness. However, this, in turn, will be strongly affected by the distribution of income, which is the real source of either encouragement or discouragement for the development of other-­ regarding elements in one’s character. Individuality, for Mill, means the development of one’s own self, which can only be achieved when people are free to do so. This will happen when people can command the results of their actions, or efforts, and have access to education.103 When scholars puzzled over Mill’s criticism of the competitive system, they seem to have overlooked the dynamic (or rather diachronic) nature of the system. Mill’s criticism of laissez-faire is based on two related principles: the first is that competition is unjust as it generates a distribution of income and wealth, which are not conducive to the development of individuality and character and, therefore, perpetuates itself. The second principle is that when individuality develops, according to Mill, sympathy will become a more dominant element in human character, co-operative rather than competitive behaviour will become dominant even in the pursuit of one’s own-regarding sentiments and the competitive paradigm may cease to be the appropriate form of social organisation. A society, which is just and provides people with the ability to develop, will face individuals who are increasingly aware of each other and of their social network. They will thus be able to understand the benefits of co-­ operation. Competition is the first step in that direction as it removes the stifling effects of custom. However, can competition without intervention really provide the freedom to develop? The answer which Mill provides is negative. According to him, even if the system of private property was given a fair chance (a balanced initial distribution), it would not produce the distribution of income that is conducive to individual development. Thus, if things were left to themselves, it is far from obvious that  Ownership could give people full command over the fruits of their efforts but only if there is no interdependence. Once people depend on each other, the command one has over the fruits of one’s effort depends on other social arrangements. Moreover, Mill proposes to alter the habits of the labouring people by working on their intelligence (education) and poverty (income) (PPE, p. 380). Giving them ownership over a plot of land will not necessarily solve the problem. For the connection between his views on ownership in agriculture and the future of the labouring classes, see PPE, pp. 762–763. 103

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‘mankind will continue to improve’. If so, the engine of change will fail and the competitive paradigm will remain the most suitable form of economic organisation. The upshot of this second element in Mill’s defence of the separate study of economics is that even if one can isolate the own-regarding sentiments and motives, the expression of them will change over time depending on the social states which they create. As we saw in our case of Robinson and Friday, the other-regarding aspects of human character may wish to set up institutions to deal with the proposed consequences of, say, a self-interested and socially unaware pursuit of own-regarding motives. However, these institutions may lead to a change in the way individuals pursue their own interest as well as the way in which they see the others. This, in turn, will lead to a change, in the nature of economic interactions and a change in the institutional set-up, which will be generated by the now-changed, other-regarding sentiments.

7.6 Conclusion After concluding from the discussion of the previous two chapters that humans are intrinsically social, we posed the question of whether this fundamental characteristic has made its way into the conceptualisation of the individual in modern economic analysis. The focus of our attention was, of course, the standard model of the rational utility maximiser which lies at the heart of economics’ paradigmatic core. We began our investigation by accepting the methodological necessity to create an abstraction of human behaviour which is based on reason. However, we discovered that reason does not necessarily lead to the concept of rationality which has been adopted by modern economic analysis. By looking at anecdotal evidence and with the help of Weber’s analysis of human action, we identified at least one other contender for rationality—expressive rationality—and one more for reasoned action, though not necessarily rational in the same manner (tradition). Juxtaposing instrumental rationality and expressive rationality with the notion of human sociality based on the concept of social distance, we identified the conditions under which both instrumental and expressive rationality will yield to the idea of non-functional human sociality. The

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first observation we noted is that instrumentally rational individuals will always judge by direct and immediate consequences, while expressively rational agents are more likely to attribute values to actions which, in some reasoned and abstract analysis, are deemed socially desirable irrespective of their immediate consequences. Consequently, for the instrumentally rational agent, being social meant that the domain of their considerations (concerning the consequences of their actions) must be at least as broad as their interest in the others. For the expressively rational agent such extended and repeated considerations were not necessary. Instead, such agents will rely on some rationalistic exploration of the proposed theoretical outcomes for the whole of society of the habitual practice by everyone of a particular action. Based on this analysis, they will value actions regardless of their immediate effect on themselves or on others. By way of illustration, we hinted at either a Smithian process of moral evaluation based on the concept of the impartial spectator or the Kantian process of the universal test. Both are mechanisms for conventions which, among other things, provide the means for attributing intrinsic values to actions. We then explored the way in which rationality is modelled in economics and asked whether such a model can be deemed as social. Our conclusion was that this is not the case and we demonstrated this by showing that the way economics would have modelled a lone-wolf agent is fundamentally identical to the way it would model the same agent in a social setting. As it is clear that the move from a lone-wolf state into a social state introduces new aspects of human relationships both in terms of the influence of one’s action on the other and a sense of equity about their relative position in society, the fact that the way economics models the individual has not changed suggests that such an individual cannot be deemed to be a social being. The immediate question which followed was whether or not it would be possible to make the corrections and turn the instrumentally rational utility maximiser into a genuine social being. The answer which we reached with regard to this question was negative. The main reason for this conclusion had been the opportunistic nature embedded in the notion of the rational utility maximiser. No matter how much care the individual takes in considering the effects of his or her actions on the others, in the end there are always equally good actions which may be more harmful to the others but for which there is compensation in the private

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gains of the individual. Even when we employ a certain limit on the harm which is acceptable, the notion of substitutability between the wellbeing of the others and one’s own wellbeing suggests a functionality of the other rather than a genuine intrinsic sociality. As a final attempt to justify the use of the instrumentally rational utility maximiser in a world of humans who are intrinsically social, we investigated the idea of compartmentalisation. Namely, we examined the possibility of perceiving the agent within the economic system as the expression of one aspect of human character—the own-regarding aspect—which allows the sociality of humans to be expressed in other domain of social life. This, as we explained, was the rationale behind Homo economicus. However, we argued that separation of the spheres does not mean independence. Namely, even if it is conceivable to segregate the various component of human character, they will nevertheless influence each other. This means that if there are potentially different expressions to the other-regarding sentiments in different societies, then the expression of the own-regarding sentiments and motives (i.e. economics) will also be different. This means, among other things, that economics cannot really be considered as universal or ethically neutral. Throughout the discussion we noted something which is worth emphasising. The importance of the instrumentally rational utility maximiser to the role of markets as the allocation mechanism cannot be overstated. As instrumental rationality implies competitiveness (in the absence of any serious form of other-regarding which is consistent with it) and as markets are the expression of natural liberty in such a case, the responsiveness in behaviour to the slightest changes in market values is the essence of the way the system works. However, the moment we move towards the expressive form of rationality, we notice that agents—who attribute intrinsic values to actions—will not respond to changes in market signals. This means that both the competitiveness may not be the right depiction of human interaction and that markets will not be the mechanism of allocation.104  Note that we are not arguing that even when people are expressively rational there are no decisions that they will take which are more akin to the way an instrumentally rational agent will behave. What we are saying is that in actions where there is a clear potential effect on the other, expressive will be the form of rationality. As the efficient working of markets is predicated on all markets being competitive, this will not be the case when agents behave expressively in some parts of the economy. 104

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8 The Classical Alternative

Synopsis: Thus far we have exposed the two sides of the betrayal of liberal economics. On the one hand (the first four chapters), we discussed the betrayal in the sense of the false promise generated by the pretence of a universal and ethically neutral system of competitive decentralised decision-making. On the other hand (Chaps. 5, 6 and 7), we explored the betrayal in the sense of the misconception of the idea of liberal economics given the inability of economics to capture the sociality which is embedded in human nature. In this chapter, we ask what could be the possible meaning of liberal economics had we integrated human sociality into the foundation of our economic analysis. In so doing, we explore a third aspect of the betrayal: the misinterpretation of liberal classical economics. We argue that what is known as liberal classical economics is indeed a form of liberal economics where the sociality of agents plays a significant role. Therefore, while the modern belief that classical economics is merely a primitive form of modern economics suggests an intellectual betrayal, it also offers an opportunity to examine what liberal economics could look like. By examining some aspects of classical economics, we uncover the difference between a conceptual framework of liberal economics which is organically social and the one which is entirely functional. In the former framework, economic analysis is a consequence of social interaction, while in © The Author(s) 2019 A. Witztum, The Betrayal of Liberal Economics, https://doi.org/10.1007/978-3-030-10671-3_4

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the latter society is the consequence of economic interactions. At the same time, the analysis of natural liberty—the system of competitive decentralised decision-making—is, in the one case, measured against its purely economic success in producing plenty, while in the other case it will be measured against the ability of the system to service the social drive behind it. As Adam Smith is the focal point for both the belief in continuity between classical and neoclassical economics and the dissenting voices about the sociality of agents in economic analysis (experimental economics), we develop his theory in more details to show the manner in which sociality affects economic analysis. We find that in the Smithian system the most dominant desire is the desire to be socially approved. This desire, which is an expression of the natural tendency people have to seek harmony of reason and sentiments with the others, is the foundation of both the division of labour and the way in which people form moral opinions. At first, individuals are sovereign in the sense that they do not depend on the others for survival. But the search for social approbation led to exchange of gifts, which also led to the realisation that individuals can acquire their subsistence—a socially constructed material benchmark—more easily by specialising and trading. Smith’s famous invisible hand is a mechanism which ensures the distribution of life’s necessities even if the process of specialisation leads to an uneven appropriation and, subsequently, distribution of wealth. This process of acquiring life’s necessity through specialisation and trade, together with social developments, suggest that people become increasingly dependent on others with whom their social distance is greater. But as the domain of the social consciousness increases too, the desire to be socially approved also extends to those people with whom there is a greater social distance. Consequently, the ability that agents have to feel proper sympathy—that harmony of sentiments with the other experienced through an imaginary exchange of places—in a society where social distance is heightened becomes increasingly difficult. It is here where nature interferes by creating something which Smith calls a deception. According to Smith, the nature of things (nature of the physical world) has its own agenda (the multiplication of the species), while the nature of humanity has a different one. This corresponds well with what we discussed in Chap. 5 with regard to the development of human cognition and sociality beyond that for which evolution initially fitted the human brain. This difference allows for the fact that human/social judgement and the natural course of things may not coincide.

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As nature is interested in the multiplication of the species, the creation of plenty would be its objective. The deception to which Smith is referring leads agents to confuse the pleasure they find when they imagine themselves in place of someone rich, with social approbation. In simple terms, feeling as a rich person would, had you been that person, is a very pleasant feeling. As people would like to see good behaviour rewarded, they attribute moral goodness to those traits in human nature which are most conducive to the production of plenty. It is a deception because proper morality or a properly executed exchange of places—through the idea of the impartial spectator—will reveal that there is nothing in such behaviour that should command any social approbation. The fact that Smith treats this as deception, however, is the most fundamental expression of the difference between socially embedded liberal economics and its functional form. While in the latter case the mere ability of the system to deliver the plenty which it ostensibly promised should be enough to ensure its sustainability (diachronic order), in the former the sustainability of the economic system is conditioned on its moral and social acceptability. Moreover, it also allows for the possibility that a tension may exist between what people may actually think is morally good and what they would have considered as such had they been exposed to the logic of the argument. Thus, when the social domain expands as does the level of specialisation, the search for social approbation has turned into a search for conspicuous consumption. In this sense, the equivalent of the modern rational utility maximiser in Smith’s economic system is the agent who seeks to better his condition, which means to become socially approved. However, while a rational utility maximiser may find the accumulation of wealth a satisfactory result, the agent seeking social recognition may fail to achieve his or her objectives. Because there is a difference between the course of nature and that of human sociality, Smith distinguishes between outcomes which may serve nature but not humanity. In his economic analysis, Smith makes a clear distinction between natural and market prices. The latter corresponds to modern days’ equilibrium prices; the former represents prices where there is equality in consumption (though not in income) because every participant in the production process receives the socially constructed subsistence bundle and, therefore, growth is maximised. Naturally, because there is equality in consumption, individuals can no longer acquire social approbation through conspicuous consumption and they will have to seek it through that which should command

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approbation: proper behaviour. In this way, both nature’s objective (growth maximisation) and human objectives (social approbation for all) will coincide. However, Smith also claims that most of the time this will not happen and that market prices rather than the natural rates will be the ones that will prevail. As such, the system of natural liberty is more often than not failing nature’s as well as humans’ objectives. Nevertheless, there is a reason why such failings do not lead to a collapse of the system (namely, the unexpected presence of a diachronic order). In a world of self-interested individuals—who are nevertheless seeking social approbation—people may confuse the harmony of sentiments with the sense of harmony people get from what Smith calls utility. It is a sense of harmony derived from aesthetics or the observation of a well-contrived machine. This means that in a world of self-­interested individuals the co-ordination powers of natural liberty (i.e. the existence of equilibrium even in terms of market prices) will impress people to believe that the apparent beauty of the system (in a form of harmony through equilibrium) is evidence of its moral goodness. Naturally, one of the most significant questions that will follow such an analysis is the ground upon which Smith draws a distinction between that which people think and that which they should be thinking. If people actually believe that they can acquire social approbation through wealth accumulation and they stand in awe of the beauty of natural liberty, how can we say that they deceive themselves? How can we deem such judgements corrupt? One immediate answer is, of course, its internal inconsistency. For wealth to be the cause of respect and admiration, it has to be unevenly distributed. There will be nothing particularly pleasant or unpleasant in an exchange of places between two individuals who have the same levels of material ­wellbeing. Neither of them will find the position of another particularly admirable or commanding respect. Hence, when prices are at natural rates and the objectives of nature have been reached, material wellbeing could not be the cause of social approbation as everyone will consume the same (the socially constructed subsistence level). On the other hand, if there is inequality, many people will not be able to command any respect and admiration as they are poor and as people judge them by their material lack of success. In such a case, it may indeed be the corruption of the moral sentiments (the beauty of the system) which will make people believe that they too, will be able to make it

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(for instance, the American dream) but if everyone makes it, how will they be able to find in material wealth the social approbation they seek? But there is a more serious reason why we may call into question the presumed harmony between that which we observe people do and that which they ought to have done. In spite of the empiricist nature of Smith’s work, he does construct an ideal which for him is a reference point rather than a description of reality. Moreover, this reference point is constructed by a logical extrapolation of what he observes people to do in reality. Hence, he observes that people have a tendency to put themselves in other people’s shoes and form an opinion about the other’s behaviour based on whether they would have done the same had they been in place of the subject of approbation. So he takes this to a logical limit by asking how would someone who is impartial and knowledgeable form an opinion in such a case. This opinion is, of course, the benchmark. In reality, people may fail to reach the same conclusion either because their own character interferes in their judgement or because their own character may make them susceptible to the deception by nature and the corruption of moral sentiments. Namely, if someone genuinely cares about the other, he or she will never conflate the pleasure of harmonious sentiments with anything else. But when someone cares about the other only in terms of what they think about them, one may more easily conflate the pleasures of luxury or the beauty of the system with the pleasure they would have derived from an imaginary change of places and the agreements of sentiments and reason. To some extent, this is very similar to what modern economics is doing. Based on observing how individuals and market operates, we have constructed a logical limit to competitive interaction between rational agents. This logical limit is what we call Walrasian general equilibrium. In reality, however, prices are never at their Walrasian values yet we attribute to them the ­characteristics of this equilibrium. Namely, we know that the reality is different from the ideal and we conflate the one with the other. In Smith, on the other hand, he realises that there is a difference between the reality and the ideal but he does not conflate between them. He simply uses the ideal to form a judgement—calling the actual way people judge a deception or corruption—over the reality of moral judgements. Based on this distinction we then embark on exploring why it is that Smith was so apprehensive about the social significance of natural liberty (market economy). Given the nature of Smith’s conceptual framework, the success or

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failures of the economic system are not measured by how well it serves the objectives of nature but rather how well it serves social-human objectives. So the question becomes whether or not the deception and corruption of moral sentiments justify the crowing of natural liberty as an ideal form of social organisation. By analysing the economic system based on the ideal of moral judgement, we can provide an answer to this question. * * * In the introduction to this book we talked about the ambivalence which resides in the charge of the betrayal of liberal economics. On the one hand, there is a question of whether liberal economics has betrayed us, individuals and society, by making false promises. On the other hand, there is the question of whether or not we have betrayed the idea of liberal economics by conceiving it wrongly; something which would subsequently lead to the first form of betrayal. In the first four chapters of the book we dealt mainly with the former meaning of the betrayal: the false promise of economics. This, as we have endeavoured to demonstrate, was based both on theoretical fallacies and on empirical irrelevance. We showed that the promise according to which decentralised competitive interactions (natural liberty) universally resolve the economic problem is fundamentally flawed; that the smokescreen in the form of the shift from co-ordination towards growth has been a poor substitute and has, in fact, already run its historical course; and that the empirical realities in terms of both the share of non-market activities in the economy and the increased difficulties with which agents can access national income through markets have made the theoretical promise—even if correct— empirically vacuous. We also endeavoured to expose the fallacy of the fig leaf association between markets and freedom as a means—a form of a Deus-Ex-Machina—to persuade the public that there are multitudes of benefits hidden within competitive institutions. In the subsequent chapters, we began to move towards the other aspect of the betrayal: the question of whether we have betrayed the idea of liberal economics by wrongly conceiving it. By examining the question of human sociality and juxtaposing it with the conception of the individual

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(and society) embedded in modern economics, we were able to argue that there are sufficient grounds to the belief that we have actually betrayed the idea of liberal economics which, of course, could be the reason for its false promise. If the conception of the individual in modern economics does not reflect one of the individual’s most fundamental traits—their sociality—then it cannot possibly reflect a meaningful notion of liberal economics. Liberalism seems to be all about the individual but if individuals are intrinsically social, their social needs must also play a significant role in the definition of liberalism and the application of it to economics. The concern for the individual, in such a world, cannot be limited to his or her physical wellbeing; it must also be concerned with their cognitive wellbeing which, as we have concluded from Chaps. 5 and 6, is intrinsically social. In other words, as modern economics, either by commission or by omission, chose to ignore the social dimension in the conception of the individual, it was both a betrayal in the sense of a false promise and a betrayal in the sense of failure to conceive the idea, where the latter is probably the reason for the former. The question which immediately follows is whether it is at all possible to conceive an idea of liberal economics which will be consistent with the intrinsic sociality of agents. Naturally, to answer such a question one would need to re-examine the way we model the genuinely social individual and what we can learn from it about the way such individuals behave and interact; we would also need to inquire about the economic problem which such individuals will have and whether natural liberty is indeed the right organisational framework for them. This is, of course, an enormous task for which this work is only a trigger. However, what exacerbates the betrayal of liberal economics by modern economics is the fact that there had already been a conception of liberal economics which is predominantly social and consistent with the finding on human sociality. It is called liberal classical economics. So, what we are going to do now is to investigate this form of economic analysis and examine in what way it can offer us an alternative conceptual framework to the way economic analysis should be conducted. Inevitably, the fillings of the new details for such a theory will have to be done in the future but it would be useful to learn from how this was done in the now-forgotten (or mis-interpreted) past.

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By liberal classical economics we are referring to all those classical scholars who approached the subject from an individualistic perspective. It is the stream of thought emanating from the physiocrats and represented by prominent scholars like Adam Smith, David Ricardo and John Stuart Mill. We use the term liberal classical economics, as it is important to recognise that there were other approaches within the classical traditions which departed from the individualistic line of thinking and which one may call collectivist. In general, the socialist tradition is very much in this vain and has been represented by those surrounding the works of Marx.1 To many modern economists, the idea that liberal classical economics is an alternative way of thinking about economics will come as a great surprise. After all, in their view of the world, liberal classical economics is merely the precursor of neoclassical economics or, as some would have it, a primitive version of contemporary economics. What is the Wealth of Nations if not a poor relative of the glorious system of general equilibrium with its two attached welfare theorems? From such a perspective, it would clearly make no sense to seek in classical economics different answers to the question of social or economic organisation. The problem is, of course, that this is more a reflection of the sad lack of scholarship among modern economists than a valid statement about the nature of liberal classical economics. The reality is that the differences between classical economics and neoclassical economics are sufficiently great to render the two as alternative ways of thinking about the economy and society rather than as a linear progression of human thought. Needless to say, this mistaken view of a supposed linear progression between classical and neoclassical economics led to a neglect of the study of the real classical economic system. Instead, all efforts have been sunk  It is important to say that we are not referring here to socialist ideas but rather the method employed by scholars like Marx. J. S. Mill writes sympathetically and at some length about socialist ideas and even communism in his very liberal oeuvre Principles of Political Economy but his methodology is individualistic at the core. Marx, on the other hand, begins his study with the nature of commodities and the notion of abstract labour. It is difficult to interpret this as an individualistic approach. There is, of course, the additional epistemological distinction between rationalism and empiricism but while there is an interesting question regarding the influence of epistemology on the nature of one’s social theory, we have not used this as a distinguishing marker. 1

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into this huge black hole called neoclassical economics with its pretentious formalism and questionable empiricism. But this does not alter the fact that liberal classical economics offers a distinctly different conception of the individual, the economy and society, a conception which seems much more in line with what appears to be human nature. As such, it is not only an alternative conceptual framework but also, most probably, a better way of thinking about the economy and society. If one had to summarise the essence of the difference between the two conceptual frameworks it would be something along the following lines: Alternative conceptual frameworks Neoclassical economics.

Ethics

Classical

Individual

Individual

Economy

Society

Society

Economy

Ethics

We begin with the more familiar story of neoclassical economics. The meaning of the scheme is quite straightforward and was partly demonstrated in our story about Robinson and Friday. The neoclassical perspective begins with the individual who is engaged in pursuing his, or her, ‘own-regarding’ interests either alone or through the use of others. As we demonstrated in the previous chapter, the conception of the individual is unaffected by whether such a pursuit is dependent on the other or not and, therefore, stands independent of the other components of the system. Moreover, these ‘own-regarding’ interests seem to be almost entirely confined to material wellbeing or stuff, the provisions of which are limited

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by nature (scarcity); they are also deemed to be a natural necessity.2 In other words, the first stage of the neoclassical scheme is the relationship between the individual and the world of matter and not with the world of others. Society, in this scenario, is more like an afterthought. It may emerge because others may be instrumentals to the resolution of the problem each individual faces vis-à-vis nature. It may emerge for other reasons too but whatever they are, they should never interfere with the ability of individuals to resolve their own-regarding problem. Indeed, if the pursuit of one’s material affairs constitutes a universal natural necessity, and if the free rein of such a pursuit universally allows all members of society to solve their individual own-regarding problem, surely all other things must be secondary.3 Consequently, the idea of society must be built on the foundation of economic institutions that are necessary for the solution of the, presumed universal, individual economic problem. Society, according to the organisational principle derived from the paradigmatic core, must therefore comply with the necessary freedom of the markets. On the whole, this is a code name for what one may term as the minimal society. A society with as little intervention as possible and where the institutions of the economy (like property rights) are religiously guarded by law. It is a concept of society that corresponds well to the idea of the civic society which we have discussed in earlier chapters. Such a society exists to keep the peace and facilitate prosperity. As we said earlier,  while we may all agree on what ‘peace’ means, the minimal nature of the civic society presupposes that we are also agreed on what is meant by prosperity. It seems that other than ensuring material wellbeing, all other aspects of social life must find their resolution on a  There is, of course, no doubt that some of the material provisions (like food and shelter) are indeed natural necessity but it does not follow that the individual will find them through an independent search (i.e. the dominance of the own-regarding interests). It is not difficult to imagine that natural other-regarding inclinations could help resolve this natural necessity. In the age of hunter-gatherers, according to Henry Maine, there was no conception of the individual at all. Humans were part of a group in which they had distinct functions. The provision of their life’s necessity came from their participation in the group and not from an independent search for these provisions. Adam Smith held a similar conception of society except that he never removed the individual from his considerations. We shall say more about this later in the book. 3  It is important to emphasise here that by material affairs we are not referring to the need to subsist. We are referring to the almost-unbound desire to acquire material wellbeing which is embedded in the modern conception of the individual. 2

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voluntary basis within the supposed freedoms—generated by the economic system—that such a society provides.4 As society is a concept built upon the structures of the economic system, ethics seems as remote from economics as modern economics would like it to be.5 In the end, ethics is about the relationship between people and the conventions regarding these relationships are created in the social sphere and are dominated by the other-regarding sentiments and motivation of individuals. However, in the neoclassical story, the ‘own-­regarding’ domain does not really need any ethics. People interact with one another only in as much they serve each other’s interests. There are natural reasons why they would refrain from harming each other and one can even think of such reasons that may lead to a degree of co-operation.6 This means that whatever is the nature of society, its ethics seems subservient to this natural arrangement which allows all individuals to perform the most natural and universal act of all: to care for themselves through an unbounded acquisition of material wellbeing. Indeed, as we have discussed in the previous chapter, society seems to be allowed to have a view only about the initial or the final distribution. It must not have an ethical view about the mechanism through which the economic system produces its efficient order. In other words, the way  One should not confuse the concerns which many have raised regarding the freedom facilitated by the working of competitive institutions with a rejection of the notion of the minimal society (or civic society). One can mention in this context the rise of the capabilities approach (see Nussbaum and Sen). However, what is at stake here is the correction of either initial conditions or final distributions so that within the competitive paradigm, such freedoms will indeed be granted. This is very much in line with the discussion we had in the previous chapter about the role of welfare economics as a correcting mechanism based on competitive institutions and not an attempt to contain or restrict competitive practices. 5  Indeed, as we mentioned earlier this was very much an important part of Robbins’s argument for the neutrality of economics (Robbins 1935). Following Wicksteed (1933[1910]), he too felt that it stands to reason that whatever society may wish to achieve can be better accomplished in a world of plenty than in a world of shortage. This, of course, could potentially be true if one measures things only by their consequences. However, if consequences are perceived in a broader sense than immediate ones, then it is far from evident that the process of producing that plenty will not have a detrimental effect on what one may wish to achieve in the social domain. For a more comprehensive discussion, see Witztum (2011). 6  In other words, whatever behavioural code is necessary for the maintaining of the natural order, it would not develop from social interaction as it would be a result of expediency considerations. In terms of our previous discussion we are referring here to what can be called I-mode of co-operation. 4

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ideal markets work is outside the domain of ethical considerations. As the consequences of markets are socially desirable when they are allowed to work, the only ethical imperative seems to be the facilitation of such workings. By altering initial or final distributions society is allowed to adjust such workings to, ostensibly, a great variety of ethical principles. This line of ordering is reflected in the above diagram. The sequence from the individual through the economy to society reflects the order of importance. The first and most important element is the individual and this, of course, is in line with the liberal nature of the theory. But then, the second most important element is the economy which is the domain devoted to the pursuit of one’s own interests. This may indeed include others but only in as much as they serve the individuals’ own interests. The others beyond those serving the immediate interest of the individual only appear in the last element of the sequence: society. It is difficult to attribute such a structure to anything but the self-­ interested individual (the one representing the evolutionary idea of individual fitness) and the entirely functional society (civic society). But in the light of our findings in previous chapters, this structure is based on a conception of the individual which seems to be misguided. It does not seem to reflect the fact that individuals are intrinsically social (representing the broader evolutionary notion of inclusive fitness), society is not entirely functional and, subject to the development of cognition, society has organic elements to it as well. In other words, while the line of liberalism requires that we begin the analysis with the individual and we put him or her at the origin of our considerations, the subsequent element may not be the economy but rather society. Not surprisingly, if we divert our attention now to the classical alternative depicted in the right-hand side of the above diagram, we will find a conceptual framework which is (a) fundamentally different and (b) far more appealing both logically and in its consistency with the evidence about human sociality. The clear difference here is in the conception of society and, subsequently, the role of economics in it. We stick with the individualistic approach but the main difference between the two ways of thinking is that in the liberal classical traditions the individual is first and foremost a social being for whom the other is part of the end rather than just a means. The ensuing social drive is perceived as a natural desire no

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less, if not more, than the desire for material wellbeing. As we observed before, even in J. S. Mill’s essay ‘On Liberty’, which is one of the foundations of modern liberal conceptions of the individual and the economy, he clearly states: ‘I am the last person to undervalue the self-regarding virtues; they are only second in importance, if even second, to the social’ (On Liberty, p. iv.4). In fact, as both Mill and Smith reject the idea of a social contract and suppose the social state to be the natural form of human existence, one could say that society is not a product of individuals as is suggested by the above diagram but rather the origin of the entire analysis. However, while such views were held elsewhere—and Henry Maine whom we have briefly mentioned before is one such example— both Mill and Smith always think of society as a collection of individuals. It therefore makes sense to put the individual ahead of society but it would make no sense to put the economy ahead of society. Through the progress of society over time, both Smith and Mill suggest changes in the expression and nature of human sociality. In the more explicit analysis which one would find in Smith, individuals primarily seek social approbation and it is this pursuit that leads to the division of labour. With it, the number of people on whom one depends increases and so does the social distance between individuals. Yet while one realises that there are additional benefits to the division of labour, the drive for social approbation is still the main force behind the system. This, in turn, leads to the evolution of the modern idea of the economic system the working of which is conditioned on the fulfilment of the main social drive. Unlike modern economics, the pursuit of material wealth is not an end in itself (and, hence, not unbounded) as it is a means in the pursuit of social approbation. The successes and failures of such a system, therefore, cannot be measured by its success in the provision of plenty as it is by the distribution of the social approbation to which it gives rise. It is for this reason that careful readers find Smith’s The Wealth of Nations such a puzzling theory. As we shall explain below, even the importance of growth in Smith’s theory is derived more from moral distributional considerations rather than from the benefits of plenty. Similarly, in Mill, growth (the provision of plenty) is only a temporary goal in the development of society and the ideal future, according to him, rests in economic stagnation.

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So in the classical case it is the economy which is more of an afterthought to the social which is exactly the opposite of the approach entailed in modern economics. The economy here is a consequence of social desires and it is therefore society which delineates its domain and dictates the nature of interactions that dominate it. Needless to say, as the social arrangement precedes the economic one, the ethical system generated by society—which precedes the expediency considerations of natural liberty—determines the limits and the purpose of the economic system. The apparent natural working of the economic system is no longer a prerequisite to that which is socially desirable nor is it a benchmark for ethical interactions. Instead, natural liberty in the economic sphere must be tamed and contained in exact same manner as all other aspects of society subjugate natural liberty to norms and conventions which may form naturally but which are, in essence, an attempt to control that which is natural. Hence, economic organisations too must be subjugated to social objectives and their ethical derivatives—whichever way construed (i.e. not necessarily based on efficiency)—instead of constraining by them. This is clearly in stark contrast to the modern view as expressed through Robbins-Wicksteed’s idea that the priority and neutrality of economics stems from the fact that every society would like to operate from the position of plenty. If sociality means that people have social objectives other than their material wellbeing (like, for instance, social approbation or, a sense of association, or even the Aristotleian idea of the good life), then it is far from obvious that plenty is a prerequisite for that which is socially desirable. If the process of generating plenty does not lead to the universal fulfilment of individuals’ social objectives and if it violates ethical principles associated with these objectives, then plenty cannot really be a necessary condition for what is socially desirable. It is important to emphasise that this does not mean that classical economists did not understand the actual working of natural liberty— decentralised competitive interactions—in a similar manner to that of modern economics. It is indeed the case that for many in modern economics, Smith’s The Wealth of Nations is nothing but an early version of the Walrasian system of general equilibrium perfected by Debreu and Arrow. But the fundamental difference between the two schools is the

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context of these understandings. For neoclassical economics, the system of natural liberty is an ideal which is not chained by any social or ethical values and has a universal role in line with functional human sociality: we must first care for our material wellbeing before we can play social. For Adam Smith, and other classical economists, natural liberty is more a depiction of a reality than an ideal. They clearly preferred it over Mercantilism and saw the support for it as a good way of combating mercantilism but this does not mean that they saw in it an ideal which fulfils the purpose of social organisation. For some of them, natural liberty would lead to an outcome which, in the light of the social project and its ethical values, falls well short of the social purpose. It would therefore need to be corrected, controlled and directed. To put it in more modern terms, it is the difference between what one may call market failures and what are, in fact, failures of the market. In the former case, reality tempers with the ideal of decentralised competitive interaction and the objectives of society are to help markets fulfil their purpose. From the classical perspective, the problem is that even when markets work well, they may fail to fulfil their social purpose. It is, of course, difficult to talk about classical economics as a single analytical framework as there were differences in the way the various scholars approached the subject. Nevertheless, there are common themes (or, if you wish, a paradigmatic core) which are shared by most of the dominant writers. In order not to lose sight of our main purpose in this book, we will not dwell too much on the differences within the classical school but treat Adam Smith and J. S. Mill as the main protagonists who define a paradigmatic core that can be named as liberal classical economics. In fact, we will mainly focus on Adam Smith who is perhaps the only one to have produced a comprehensive theory of society, ethics and economics, but we will also make references to Mill who is significant to our analysis as he is most closely associated with the current interpretations of liberalism and liberty. For both Smith and Mill, there is a clear tension between that which prevails when things are left to themselves (natural liberty) and that which society—through its cognitively established moral edicts—expects. In the case of Adam Smith this tension appeared in the form of the distinction between nature (with lowercase n) and Nature. The former

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represents the nature of the material world of which humans are an integral part, while Nature represents the dynamics of the human spirit (or, cognition). In an extraordinary foresight, Smith provides an almost Darwinian perception of the ways of nature. He argues that nature’s aim is the multiplication of the species and, as such, it has to ensure that humans produce plenty of material wellbeing so that they can propagate well. The Nature of human spirit has developed different objectives like fellow feelings and social approbation which, though naturally formed, have their own dynamic (through sympathy and the role of the impartial spectator).7 The tension between these two natural forces is most present in what one may generally term the ‘distributional consequences’ of the system. Quite early in his writings Smith observes that ‘nature’ would always favour the industrious knave, while human Nature would prefer the indolent wise person. The former clearly serves nature by producing plenty but is not necessarily consistent with what humans’ morality dictates.8 He writes: ‘man is by Nature directed to correct, in some measure, the distribution of things which [nature] herself would otherwise have made’ (The Theory of Moral Sentiments, p. 168). But while this may be a comment about the outcome of natural liberty, there is a far more serious question regarding the ability of natural liberty to deliver the social approbation which is the underlying principle that leads to the ­commercial society depicted in The Wealth of Nations and in modern economic analysis. Mill too does not seem to associate the system of natural liberty based on competitive interaction with the moral objectives of humanity. For one, there is the difficult question of becoming sovereign individuals

 We can see that such an approach fits well what we said in Chaps. 5 and 6. The role of nature is in setting the brain such that humans can form social bonds that will increase their survival probabilities. The way humans achieve this is by forming abstract cognition and language which is facilitated by the brain. However, the development of such cognitive abilities leads to the creation of technology and the expansion of one’s sense of association well beyond that which nature (in lowercase n) intended. What Smith refers to as Nature may well be related to this cognitive development. 8  Which corresponds to the Mandevillian dilemma. It is important to say, however, that Smith did not agree with Mandeville and the characters inhabiting the economic systems are not really those of the ‘industrious knave’.

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which is the key for being the object of liberty.9 Achieving this requires individual development and education, which the competitive system by no means guarantees. It neither ensures the income distribution which may facilitate the acquisition of the needed education nor provides the education itself. This is not to say that Mill does not recognise the benefits of competition but these are mainly transitory and focused on the removal of custom, which is one of the main obstacles for individual development and sovereignty. But Mill’s disaffection with the free rein of the decentralised competitive system comes to the fore on two other important occasions. Firstly, when Mill argues unequivocally that a communist order would have been preferred over the competitive one had the public acquired sufficient education to fully grasp its significance and act in a way which is consistent with its success. Secondly, and not unrelated, Mill believed that with education there will be an increase in co-operative behaviour which would make the competitive order redundant. Moreover, the more educated the public becomes, the less interested they will be in material wellbeing and the prognosis of stagnation in the acquisition of material wellbeing is the bright future of a population that would like to direct its attention to things less materialistic in nature. In other words, for Mill, the competitive system is a price which society must pay in order to be able to evolve into the more co-operative and less materialistic organisation commensurate with the nature of the human spirit. Although there are clearly differences in the way Smith and Mill see the shortcomings of the decentralised competitive system, neither of  ‘It is, perhaps, hardly necessary to say that this doctrine is meant to apply only to human beings in the maturity of their faculties. We are not speaking of children, or of young persons below the age which the law may fix as that of manhood or womanhood. Those who are still in a state to require being taken care of by others, must be protected against their own actions as well as against external injury. For the same reason, we may leave out of consideration those backward states of society in which the race itself may be considered as in its nonage. The early difficulties in the way of spontaneous progress are so great, that there is seldom any choice of means for overcoming them; and a ruler full of the spirit of improvement is warranted in the use of any expedients that will attain an end, perhaps otherwise unattainable. Despotism is a legitimate mode of government in dealing with barbarians, provided the end be their improvement, and the means justified by actually effecting that end. Liberty, as a principle, has no application to any state of things anterior to the time when mankind have become capable of being improved by free and equal discussion’ (On Liberty, p. I.10). 9

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them see in it any ideal that sits well with what they perceive to be the nature of humanity. They both recognise that it is a natural system, namely that if things were left to themselves this is how the economy—at the stage of development in which they observe it—will operate. But society’s objectives or needs are not necessarily best supported by allowing the natural system its free rein. In the case of Smith, it was clear that most of the time the free rein of decentralised competitive system based on self-interested individuals (who are nonetheless social) is very likely to offend morality. In the case of Mill, such a system may not provide the support needed (in terms of education)10 for individuals to develop their individuality and, as such, constitutes a moral affront as well. What is also interesting in both of these pillars of classical economics is that both of them saw the potential of the flawed system to perpetuate itself. In the case of Adam Smith, this is a result of what he calls the deception by nature. As the search for social approbation leads people to adopt behaviours with which they feel they can identify (in the sense of finding harmony of sentiments with people who behave like this), nature has planted in people a tendency to find such harmony with the rich. This, in turn, leads people to attribute good personal qualities to the pursuit of plenty even though an impartial spectator—which corresponds to their conscience—suggests otherwise. As a result, people will conflate the pursuit of wealth with the pursuit of social approbation. Even when their expectations are frustrated—because the distribution of income will prevent many from achieving the approbation they seek—the apparent utility of the system (the beauty of the natural order) may lull people into believing that the system is also morally good even though such judgements will not correspond to what their conscience is telling them. In the case of J. S. Mill, the distribution of income generated by the competitive system and the absence of public provision of education will prevent the development of the individuals and, therefore, stifle the development of their co-operative streak. This will leave society in the competitive stage for a very long period of time.

 Either through the failure of income distribution to allow all agent access to education or through the collective failure to provide education publicly. 10

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8.1 The Smithian Narrative When economists find the roots of the modern economic paradigm in Smith, they usually base their observation on three elements in Smith’s The Wealth of Nations: (a) the division of labour (the equivalent to the modern concept of specialisation and trade); (b) the motive of self-­ interest (the famous quote about the Brewer and the Baker which is equated with the rational utility maximiser); and (c) the unintentional social benefits of such a system (the invisible hand as it seems to appear in The Wealth of Nations). How can this be different from the modern claim that the system of natural liberty based on rational utility maximiser both works and is socially desirable? But this is only an appearance. A proper examination of Smith’s works will reveal that while these terms were indeed present in The Wealth of Nations, their significance was very different to their use in modern theory. One obvious reason for this complication is the context within which economic analysis is conducted. It is one thing when the division of labour is a result of a calculated—rational—decision by an agent to become dependent on the others to serve his, or her, own interest and quite another when such a decision is, as it were, an afterthought resulting from the fact that individuals are already interdependent for other, more social, reasons. Adam Smith published two major works during his lifetime: The Theory of Moral Sentiments (TMS) in 1759 and The Wealth of Nations (WN) in 1776.11 The order here is of great significance. The TMS is Smith’s more general social theory, which entails the nature of social ­existence, the process of socialisation which, not surprisingly, is closely associated with the development of moral norms that support the social structure. This theory is predominantly based on the nature of people’s other-regarding disposition which, according to Smith, is dominant in human nature. The WN, published much later, is the exposition of how people, in a social context, go about serving another natural drive: the  His other writings or pronouncements (unpublished during his lifetime) are collected in three volumes: Lectures on Jurisprudence (LJ), Essays on Philosophical Subjects (EPS) and Lectures on Rhetoric and Belles Lettres (LRBL). On the face of it there seems to be a clear division of labour here. 11

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care for themselves. It is the study of the nature of own-regarding dispositions. To some extent, one could even say that the TMS is the analysis of what Smith calls ‘Nature’—which is the course of humanity or human cognition—and the WN is the analysis of the course of the world of matter (‘nature’). But the important observation should be focused on the sequencing of Smith’s works, which is consistent with our assertion that in classical economics social theory logically precedes economic analysis. This means that one cannot really understand the WN without a proper examination of the TMS or, which is even more important, one cannot really understand the WN without exploring its role within Smith’s social theory, that is, the TMS. On this issue, we already mentioned in Chap. 1 that Smith (a) acknowledges that people are dependent on one another, or, as he puts it, they are in need of others’ assistance, but (b) that he also distinguishes between the different ways in which such assistance is being provided. The nature of the social state that emerges depends on whether such assistance is provided out of disinterested motives or mercenary exchanges. The former leads to a happy social state and the latter to an unhappy though viable social state. There can be little doubt that in the eyes of Smith that which determines the outcome of any interdependence is the other-regarding faculty which governs the nature of human interaction. It is also evident that the WN is an exploration of the second—unhappy though viable state—rather than the first of these social states. It is thus quite surprising to discover that many would think that the WN is a prelude to the modern ideas of general equilibrium and the unintended benefits captured by the first and second welfare theorems. One must conclude that this can only be a result of a very partial—and uneducated—reading of the WN with no insight at all into Smith’s other writings.12 For those who read the WN in its entirety and are also prop Alas, the majority of economists seem to fall into this category. It is worth repeating here parts of the footnote from Chap. 1 with the quotes from the bicentennial of The Wealth of Nations. J. M. Buchanan wrote: ‘Adam Smith’s system of natural liberty, interpreted as his idealized paradigm for social order, embodies justice as well as economic efficiency’ (Buchanan 1978, p. 77). G. Stigler is quoted to have said: ‘I bring greetings from Adam Smith who is alive and well and is living in Chicago’ (in Meek 1977, p. 3). R. Meek, who quotes Stigler, goes on to say: ‘Smith’s great message of good cheer-that competitive capitalism is, if not the best of all economic systems, at any rate the 12

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erly familiar with Smith’s social theory from the TMS, it becomes considerably less so.13 In part, the lack of proper exploration of the relationship between the TMS and the WN is a result of an unnecessary and long detour brought about by what became to be known as Das Adam Smith Problem. At first, some German scholars14 thought that there is a fundamental inconsistency between the TMS and the WN which would suggest that the two are competing social theories rather than complementary ones. The discrepancies between the two theories were perceived to be a problem of premises. They thought that in the TMS Smith assumed people to be predominantly benevolent. By the time he wrote the WN (and after spending time in France under the influence of the physiocrats), they claim he must have changed his mind. Now he thought individuals to be self-interested. However, the Germans’ position can be easily dismissed on the grounds that had Smith really changed his mind he would not have edited the sixth edition of the TMS in 1790—14 years after the publication of the WN—without changing its major premise. The generally accepted view with regard to this question among some Smith’s scholars15 has been that the TMS and the WN are perfectly consistent in their premises with regard to human nature because they are based on entirely different, and apparently unrelated, features of the human character. The TMS is an analysis based on ‘sympathy’, that is, people’s disposition best of all possible systems’ (ibid., p. 4). M. Friedman, who was clearly aware of Smith’s other writings but whose support of natural liberty needs no further proof, has taken Smith’s ideas ad absurdum: the invisible hand organises well not only the pursuit of material wellbeing but also, through sympathy, the distribution of charitable activities. Hence, both self-interest and sympathy should be governed by markets, (Friedman 1978, p. 18). 13  For instance, Viner (1927) felt that Smith writings could provide material that ‘would suffice to provide ammunition for several socialist orations’. Similarly, Meek (1977)—after describing the received view—argued that some of Smith’s writing is ‘distinctly radical and Marxian in character’. Heilbroner (1982), for instance, went as far as to say that Smith’s theory cannot be seen but as a reiteration of Mandeville’s ‘Private vice, Public benefits’. 14  Notably B. Hildebrand (1848), Carl A. G. Knies (1853) and Witold von Skarzinski (1878). 15  Macfie (1967), Campbell (1971), Winch (1978), Skinner (1979) and Raphael (1985).

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to put themselves in other people’s place (what today we might call empathy); the WN on the other hand is an analysis based on people’s motivations to act. Motivations and dispositions are, according to this line of reasoning, not the same thing and, therefore, there cannot be any inherent contradiction between the two theories which are merely explorations of different elements in Smith’s perception of the human character. But this is all too convenient and quite misleading as well as playing into the hands of those who seek the foundations of modern economics in the WN. Even if one accepts that the TMS and the WN are exploring different aspects of human character, there must be some connection between them. Dispositions and motives are not independent components of human character. Nor, as we discussed in the previous chapter, are own-regarding and other-regarding motives. The real challenge, therefore, is not to claim that there is no inconsistency between the TMS and the WN but rather to find the nature of the relationship between them.16 To argue that they are just separate and unrelated theories is inconsistent with Smith’s general social theory as expressed in the TMS—and which firmly locates the WN in the unhappy but viable social state—as well as with Smith’s intellectual drive to search for unity.17 The richness of Smith’s social theory suggests that the relationship between its various components is quite complex and deserves a full and separate treatment. But as we consider this to be an alternative conceptual framework for economic analysis, we will attempt at exploring at least the most important parts of it pertaining to the context within which economics is portrayed in Smith’s theory. We will begin with a general outline in which we will juxtapose Smith’s narrative with the modern one. After that, we will delve a bit deeper into Smith’s analysis to find the reasons behind Smith’s unique and fascinating conceptual framework.

 There is an enormous body of literature dealing with Das Adam Smith Problem but what dominates the received view is an attempt to reconcile the morality of the system of natural liberty. This led to the conclusion that ‘only in a world of ethical beings would the system of the WN work’. I shall deal with these issues directly further down the line. 17  I shall explore this aspect further below when I will discuss Smith’s methodology. 16

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8.1.1 T  he Modern Narrative: From Interdependence to Co-ordination (Equilibrium) Though we have explored modern economics in some details in Chap. 2, it will be useful to remind ourselves, briefly, of its narrative so that the difference between it and the Smithian one becomes clearer. Recall that at the heart of modern economics lies the presumption that the subject matter of economics consists of all those things which are simultaneously scarce and desirable. Scarcity delineates, for a given technology, the world of feasible bundles from the non-feasible ones while desirability implies that individuals would always prefer more to less. This combination of scarcity and desirability forces us to formulate a distinction between those things which are merely feasible and those things which constrain our wants. We call the latter (productive) efficient allocations. The nature of the subject matter of economics also defines the problem we are trying to solve, that is, how to reconcile unsatiated wants with scarcity. Evidently, only productive efficient allocations may solve the problem, but, given the individualistic nature of the theory,18 we must also apply the concept of efficiency to the distribution of benefits. Thus, we select an allocation, which is Pareto-efficient from the set of productive efficient allocations. There are two fundamental implications, which can be derived from this basic set-up. Firstly, that given the natural differences in people’s abilities it is in the interest of rational agents to specialise and trade. Namely, specialisation and trade are logical conclusions which should be reached by individuals who seek to solve their personal economic problem. Secondly, if all agents face the same economic problem and if all agents follow reason and choose to specialise and trade—and, thus, become interdependent—the only way to ensure that their individual problem is solved in a manner which is consistent with the solution of the collective problem would be to allow competition to reign free. In other words, specialisation and trade would not resolve the economic problem if because of it the collective feasible set would shrink.19 We are thus seek In the sense that there is no collective solution which is not based on each individual solving his or her problem. 19  In the absence of competition, market prices may not reflect the true opportunity costs and, subsequently, agent may choose the wrong specialisation. 18

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ing the institutional arrangement, which would simultaneously solve the individual and the collective problem. Competition, where no agent is sufficiently powerful to affect the outcome on his own, would, in principle, produce such a solution. In terms of our scheme from the previous section (with a bit more details), we have the following structure: Neoclassical economics Individual

The economic problem

Economy Specialisation and trade

Competitive systems

Ethics

Society

The story begins with an individual who faces a very specific economic problem. Like the case of Robinson Crusoe in the previous chapter, whose problem itself is independent of whether or not he is a member of society. The economic problem (derived from the definition of the subject matter of the discipline), therefore, is the main driving force behind the theory and the rest constitutes a logical exercise in trying to address the problem. The implication of it for the individual is that he or she should specialise and trade. Naturally, the individual can only decide on specialisation and trade when there are other individuals around.

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However, from the perspective of economic analysis, the relationships between the individuals are purely of economic nature. Namely, individuals realise that they can make use of the others to better solve their own, personal, economic problem and are therefore willing to form a society in which they become interdependent. At the same time, when individuals choose to specialise, they are also taking a certain risk. If on their own they can solve their economic problem by directing their own resources to the production of different goods which they would like to have, in the presence of others, they focus on producing only part of their desired bundle expecting to receive the rest from the fruits of other people’s labour (or, more broadly said, employment of their resources). Whether or not they get what they expect from the other depends on the mechanism in which they trade. Therefore, the logic for solving the individuals’ economic problem suggests that society should adopt competitive institutions. These institutions resolve the problem by facilitating successful co-ordination. Successful co-ordination will first and foremost remove the ‘risk’ from specialisation and trade. Agents could be assured that by focusing their attention on that which they are good at, they will be able to command more of the other goods than they would have been able to command had they produced them all by themselves. In other words, they will be able to resolve their private problem, in the sense that they are now better off (materially) than they were before they chose to specialise and trade, and that they cannot improve their position beyond this, without harming someone else. It is also the solution to the collective problem as the fact that everyone specialised to the limit of their abilities means that the economy has fully utilised its resources for any given technology.

8.1.2 T  he Smithian Narrative: From Socialisation to Growth The first and most important distinction between Smith and the modern narrative is that he does not begin with the identification of a problem which needs to be solved. Instead, Smith’s story begins with an observation about the natural sociality of people and how they tend to behave.

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The significance of this is that at the beginning of his analysis individuals already reside in society, which means that what has brought people together and made them interdependent is not their functional usefulness to one another. Unlike modern economics, in Smith specialisation is under no circumstances the result of a rational choice. Instead, as we said earlier, it is a natural development resulting from a particular expression of human sociality: the propensity to truck, barter and exchange. ‘We cannot imagine’, writes Smith about the division of labour, ‘[for it] to be an effect of human prudence’ (LJ, p. 492). Nor is it, according to Smith, because of the differences in people’s abilities: ‘This disposition to barter’, he claims, ‘is by no means founded upon different genius and talents’ (LJ, p. 492). Instead, ‘[t]he real foundation of it is that principle to persuade’ (ibid.). From an early age, Smith tells us, humans have always felt a need to persuade and make other people think or feel like them, or with them.20 One of the means at their disposal to achieve such harmony was the endowments of presents. Hence, a hunter may give as a gift some of the things he acquired above that which he needs to survive. Naturally, those things, which he is likely to acquire in abundance, above what is needed for survival, are bound to be those in which he is relatively good in acquiring.21 Hence, if one finds it easy to forge an arrow from wood, he can easily make plenty of them and bestow some as presents on another. In return,  Harmony of sentiments, as we shall see later on, is also the origin of moral approval and, hence, social approbation. 21  This is not necessarily a basic talent as the hunter could have become good at hunting through unspecialised experience (or, perhaps, through an Aristotelian intra-household division of labour to which Smith does not refer explicitly). However, it is important to say that even for Smith talent does matter. While it is true that the philosopher and the porter were very similar until the age of eight, the difference between them became apparent from that point onwards (WN, pp. 29–30). These differences may be the result of education and environment but not necessarily of any prior division of labour. In other words, there is an element of confusion here as the WN seems to suggest that it is the division of labour which generated specialisation. However, even there Smith admits that the division of labour is a result of the desire to persuade which, in turn, has been manifested in the exchange of gifts. Surely, that which one can exchange is only that which one does not need. Hence, even though at early stages people were similar as they produced everything, there were still some differences between them which facilitated the initial exchange of surpluses. Another possible explanation can be based on Smith’s account of the power and significance of persuasion in the TMS (pp. 336–337). There, the main implication of the need to persuade is the development of language which, in part, may explain how a basic initial division of labour (in particular, within a household) could take place while society may still be in an autarkic state. 20

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and for exactly the same reason, he would receive as presents those things, which the other has acquired, above his or her need for subsistence. There are two unintended results from this process. Firstly, people will realise that by exchanging their surpluses they can actually acquire a great deal more than if they alone tried to acquire their needs directly from nature.22 Secondly, they will realise that the process of exchange is a mechanism through which one reaches agreement, or harmony of sentiments, with people with whom one may not have had close relationship. In modern analysis, we assume that people want more things and that they differ in their abilities. By logical means, we conclude that they should specialise and trade to resolve their individual problem. In Smith, people specialise and trade because it was the natural consequence of their desire to be socially approved through persuasion and finding agreement with other people. The material benefits of this trade were, initially, unintentional. In other words, in Smith, specialisation and trade are first of all reflections of individuals’ interest in the others. This is distinctly different from the modern position where it is a mechanism for addressing individuals’ personal concerns and desires for greater material wealth through mutual exploitation of one another. This mechanism has no social dimension other than its pure functionality. One may argue that this is all very well but once people realise that through specialisation and trade they could improve their material wellbeing, the two theories reach an agreement. Namely, in both theories people specialise and trade and in both they seek to increase their material wellbeing. Indeed, when Smith describes, in the WN, the behaviour of the hunter who makes bows and arrows, he repeats the point made in the LJ (above). Namely, that he ‘frequently exchange them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them’ (WN, p. 27). But then, he adds something quite different which may chime well with the modern story: ‘From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief  ‘By this disposition to barter and exchange the surplus of one’s labour for that of other people … he will live better than before and will have no occasion to provide for himself, as the surplus of his own labour does it more effectually’ (LJ, p. 493). 22

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business, and he becomes a sort of armourer’ (WN, p.  27). In other words, Smith does believe that while the initial drive to specialise and trade was that of persuasion (or ‘exchange with companions’), the realisation that one can use it to get more than one could have achieved directly by himself—or to acquire the same at less exertion—turns it into a business: a self-interested one.23 However, to say that this puts Smith’s motivation on a par with the modern notion of utility maximisation would not be a correct reading of Smith’s conception of human behaviour.24 While it is perfectly true that what prevailed in the age of the hunters may no longer be dominant, Smith does not leave this question open. Both the methodology of The Theory of Moral Sentiments and the substance of his argument about human motivation leave the social dimension in individual behaviour firmly in control. From the methodological structure of the TMS we derive that ‘sympathy’ is the most dominant principle in human nature and it is the power behind his social theory. Namely ‘[h]ow selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others’ (TMS, p. 9). And from the description that Smith provides for the universal motive to ‘better one’s condition’, we can easily deduce that the social connection remains one of the most important drives in his theory. To ‘better our conditions’, which is in Smith’s theory the equivalent of utility maximisation, is nothing more than the search for social approbation.25 This, apparently, is what makes individuals naturally social beings. ‘Nature’, writes Smith, ‘when she formed man for society, endowed him with an original desire to please and an original aversion to offend his brethren’ (TMS, p. 116). It is thus, in Smith, that even when one realises that through specialisation and trade one could gain material improvement, one does not lose the underlying social  ‘In a tribe of hunters of shepherds’, writes Smith, a person ‘excels in making the frames and covers of their little huts or moveable houses. He is accustomed to be of use in this way to his neighbours, who reward him in the same manner with cattle and with venison, till at last he finds it in his interest to dedicate himself entirely to this employment, and to become a sort of house-carpenter’ (WN, pp. 27–28, my italics). 24  For a more systematic analysis of this issue, see, for instance, Witztum (2005b). 25  See, for instance, TMS 50. We will return to this issue further below. 23

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dimension which triggered this kind of behaviour.26 Therefore, when Smith says that it is the hunter’s own interest to specialise, he is actually saying that through such a process he may be able to ‘better his conditions’ or achieve greater social approbation. However, whether or not this will be achieved by bestowing presents on others, by other forms of good behaviour, or through a more mercenary exchange and the misleading nature of wealth itself is one of the main questions which will help in understanding the fundamental difference between Smith’s narrative and the modern one. It may also help in shedding a different perspective on today’s understanding of the economic system. Naturally, when the purpose of the system is to provide people with the ability to improve their material wellbeing, the test of the system is in its ability to do so and provide plenty. Indeed, the modern paradigm almost prides itself on the fact that through specialisation and competitive trade each individual in society will be able to improve his or her material wellbeing relative to a position where he or she either do not specialise or do not engage in competitive exchange.27 But when the main purpose of individuals is to seek social approbation and where the generation of material wellbeing is either an afterthought or a means towards this end, the test of the economic system becomes dual. On the one hand, it has to ensure that people who seek to ‘better their condition’ through specialisation and trade do not find themselves materially worse off than they would have been had they not engaged in this activity. On the other hand, it has to produce outcomes which provide all agents with the social approbation they are eagerly attempting to achieve.28  There is a certain similarity here with Aristotle, who also discusses the importance of the division of labour within the household (which is what he calls ‘efficiency’) but who rejects the division of labour across households. The purpose of the division of labour is to supply individuals with their needs but any further specialisation for the purpose of want-satisfaction will lead to excesses which are inconsistent with the good life or the just society. Namely, one can have a division of labour as an instrument which supports social objectives rather than the material wellbeing to which it may give rise. In Plato—which is a different story altogether—we already have a social division of labour which is there merely to support the just organisation of society. 27  Naturally, we assume here complete sovereignty of the individual in the sense that they can refuse to participate in the economic game if they feel that it is not helping them. We discussed this issue at length in Chap. 4. 28  This, of course, is reflected in the scheme we proposed in the first section of this chapter. The fact that society precedes the economy means that unlike the modern scheme specialisation is the con26

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So, while in modern economics the focus of our analysis is the success of the competitive system in solving individuals’ economic problem, for Smith the question is whether the economic drive does not undermine the social objectives from which it arose. The two, of course, are not unrelated. To see how this works in Smith, we shall begin by slightly decomposing the process which gives rise to the economic system we observe in the WN: The Smithian System I Social drive Confirmation of the common drive

Exchange of gifts Specialisation and trade (a)

Sustainability Ensuring life's necessities

Bettering our condition Wealth creation Division of labour as ‘business’ specialisation and trade (b)

In the left-hand side of the above diagram we describe the initial social drive and how it leads to a social-economic problem. At first, people exchanged gifts or services to persuade, socialise and establish their position in society (to achieve social approbation). They also realised that by further specialisation they can extend the process of exchange not only to enhance their sense of harmony (through agreements reached in exchange) clusion of individuals’ sociality and, as such, the premise of the economic system. This is very unlike the modern scheme where specialisation is the logical conclusion of the desire for more material wellbeing. It is interesting to note that there is something here which resembles what Mill calls train of reasoning. As he objected to deductive reasoning but recognised its necessity in what he calls moral sciences (or social sciences), the idea that the conclusion of one aspect of the theory is the premise of the other makes deductive reasoning more appealing. In particular, as specialisation is an observed conclusion of the social  life, one can argue that the premise of the economic system, that is, people seek social approbation through the division of labour, is learnt inductively.

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and, hence, sociality, but also to better satisfy their material needs.29 Had such exchanges among one’s immediate neighbours been sufficient to provide for life’s necessities, this is where, in principle, the story would have ended and we would have probably never entered the domain of an economic system. Namely, through a certain degree of specialisation, both life’s necessities and one’s social standing would have been satisfied.30 Notice that the specialisation which takes place in this part of the social scene is not aimed at maximising material wellbeing. It is only aimed at achieving social approbation without harming the ability individuals have to provide themselves with the basic bundle. We call it specialisation and trade (a). However, the moment people become dependent on others for their subsistence they cannot really rely on gifts and friends alone to satisfy all their needs. It means that once people realise that they can use the surplus above their need of that thing in which they specialise, not only to connect with others but also to provide for all their needs, they become increasingly dependent on others who may not be their immediate friends. In other words, they become dependent on others with whom their social distance is somewhat greater.31 Indeed, Smith is quite clear that exchange of gifts—or the specialisation, which is motivated by the desire to persuade—would not be sufficient to supply us with our needs. ‘In civilised society’, he writes, man ‘stands at all times in need of the ­co-­operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons’ (WN, p. 26).  Here we are referring to what one may need to subsist. Better satisfy their needs does not mean to have as much as possible from everything but have a better way (less exertion, more socialising) to get that which one needs. The notion of needs—or subsistence—should not be taken here literally as reflecting physical survival. We are referring here to a bundle which allows people to function socially. What is contained in such a bundle may vary over period and with the wealth of society in general. 30  The cycle begins with the social drive, goes through exchange of gifts or surpluses to specialisation and trade and feeds back through the broken line which proposes a confirmation of one’s social standing through the exchange of gifts or surpluses without harming one’s ability to satisfy his or her needs. This is the first aspect of the sustainability of the system in the sense that the attempt to acquire social approbation through specialisation has been successful. For Smith, the empiricist, the fact that people did not revert back, in the past, to autarky is the ultimate proof of this. 31  This is all in line with our argument about the role of cognition and the increase in the size of social group. It will inevitably have an effect on the social distance among members of the same society. 29

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This, in turn, may create a problem which is the beginning of the economic domain in his analysis. When the circle of people on whom one depends to fulfil his needs increases, the risk that he may not be able to obtain in the process that which he would have procured directly by himself increases too. Therefore, for specialisation to deepen, or even take place at all, people must have some confidence that by doing this—in order to achieve their social objectives—they will not become worse off materially than they would have been had they not specialised. They must have confidence in the process of exchange for specialisation to take place: And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business. (WN, p.  28, my italic)

The empiricist nature of Smith’s investigation suggests that he thought that at least this first part of specialisation and trade works. Namely, the confidence which people have that by specialisation they will not undermine their own ability to acquire life’s necessities has been quite high. But Smith also provides a more universal reason for this. It is the ‘invisible-­ hand’ mechanism which is mentioned in the TMS. It suggests that the stomach of the rich is never greater than that of the poor; the fact that through specialisation the same labour time can produce more output means that subsistence would always be distributed in exactly the same manner had all individuals cared for themselves without dividing their labour (see TMS, p. 184 and in the LJ, pp. 194–195). It is, in modern terms, what one would call a trickledown theory. To demonstrate this point we should look at one of the main causes for concerns about the distribution of life’s necessity in the age of specialisation, and that is the problem of appropriation. The way in which Smith describes the evolution of society suggests that as society evolves from the age of hunter-gatherers to the age of shepherds, the idea that people spe-

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cialise and trade also meant appropriation.32 If, hypothetically, someone normally hunts for his subsistence, he would not catch more animals than he needs. In such a state, from a purely economic perspective, there would have been almost complete independence and each individual would have more or less the same access to life’s necessities. However, as they nevertheless live within a social environment, if he wishes to make a gift or, to take advantage of his, say, deer-hunting skills, he would hunt more than he needs for subsistence. In such a case, his acquisition of more game than he needs reduces the availability of game for the others and makes the art of surviving more difficult. The move beyond the state of gift exchange and into the procurement of life’s necessities—as the by-product of the social drive—created a great deal of economic dependency. ‘The age of shepherds’, writes Smith, ‘is … [the] time … that men become in any considerable degree dependent on others. The appropriation of flocks and herds renders subsistence by hunting very uncertain and precarious’ (LJ, p. 202). Even worse, ‘[t]hose who have not any possessions in flock and herds can find no way of maintaining themselves but by procuring it from the rich’ (LJ, p. 202). This means that appropriation of herds could reduce the amount of free game available below that which would be sufficient for the subsistence of the property-less people.33 We thus see that the social drive to specialise which leads to appropriation may create a difficulty for some people to access that which they would have been able to access had there been no specialisation (or appropriation).34 Smith’s invisible-hand mechanism proposes that in spite of these appropriations people will never find themselves short of that which they could have had had they been able to care for themselves alone. Even if someone acquired a great deal of something and another is unable to acquire it from nature, that person will sell his or her services  In WN 277 Smith emphasises that without accumulation there can be no division of labour.  Theoretically one could argue that if, for instance, there are two individuals and two goods, then each one of them will appropriate one of the goods and the relationship between them is equal. But there are more individuals and many who seem to be good in hunting one particular animal. When the process begins, some may be quicker in appropriation than others, which will lead to those people who are good in hunting this particular animal, with a reduced ability to acquire their own subsistence let alone enough animals to generate a surplus which they can then exchange. 34  Indeed, for Rousseau, the beginning of property is the end of equality. Smith’s discussion in the TMS of the ‘invisible hand’ is, to some degree, a response to Rousseau’s concern. 32 33

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to the rich who is going to use that which is above what he or she needs for subsistence to acquire additional services. As a result, all the surplus will be distributed and all people will get their subsistence. It is important to note, however, that while everyone will get their subsistence regardless of how society is organised, this does not mean that the search for social approbation—the respect of our equal one’s rank in society—will be equally successful for all. It could, no doubt, be connected to the distribution of income, which, of course, will not be equal. When the process of specialisation leads to appropriation, then some people will be able to command a great deal more of other people’s labour than others. It would mean that those who were slow to appropriate may find it more difficult to obtain social approbation in the same manner as those who have appropriated. While those who appropriate exchange their surplus for more than just their own subsistence, those who have not appropriated will exchange their labour for subsistence only. They may still be able to create some surplus in the good in which they seem to have an advantage so that they may be able to exchange it but this will not be enough. They will therefore have to sell their labour to the rich in order to acquire the remainder of their subsistence. This means that their labour is directed away from acquiring things from nature (that which Smith would call productive labour) to acquiring things from other people in return for services (unproductive labour) rather than goods. Whether the inequality in income—where some obtain only their subsistence and others additional services—should have an influence on whether or not people can acquire social approbation is, of course, a key question. We will elaborate on Smith’s moral theory—and the principles of social approbation—later, but at this stage we should say that in principle the answer should be negative. In general, in Smith’s theory, approbation means that people approve of one another through a process of sympathy in which they feel that they would have felt and behaved in the same way had they been in place of the object of approbation. This should not be related to the distribution of income. However, we have already mentioned the deception by nature and the fact that it planted in people the tendency to find harmony of sentiments with the rich more often than with the poor, to promote its own agenda of the multiplication of the species. This would mean that in a society which is sufficiently large so that the social distance between individuals is insufficient to generate

  The Classical Alternative 

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an informed opinion about the actions of the other (which is what is required for sympathy), accumulation of riches may become a way in which one can gain greater command of other people’s admiration than if one were poor. In this sense, when specialisation leads to appropriation—as it evidently does—then the invisible hand guarantees life’s necessity but not the social standing, the desire for which gave rise to the whole process. The question that arises is whether in such a case specialisation and trade constitute a sustainable order. We know that from the point of view of acquiring life’s necessities it is indeed a sustainable order but if some people fail to acquire social approbation, why should they continue to play along? The answer to this is complex. In part, it has to do with the lack of real sovereignty in the sense that individuals cannot really opt out of the game once they started playing it.35 In part, as we shall later show, it is an element of the corruption of moral sentiments which may be typical of self-interested people—according to its Smithian definition—who may opt for easy substitutes for the expression of their interest in the others. Such an attitude may not only lead to the association of wealth with virtue—which will drive those people to further specialisation in a desperate attempt to catch up with those who have already become wealthy—but also make them believe in the goodness of the system because of the beauty of its design.36 It is at this point that the system we described in the above diagram shifts to its second cycle (the part on the right-hand side of the diagram). At the end of the first cycle individuals have specialised and traded and are capable not only of commanding their life’s necessities at greater ease but even more than that. However, social approbation keeps eluding a great number of them. It is at this point the Smithian story enters the domain of modern commercial society, the subject of the WN.  Social development, as we discussed in Chaps. 5 and 6, which leads to an ­expansion of society due to cognitive (and technological) developments, only exacerbates the situation. As the ability to opt out and the ability to find harmony of sentiments with an increasing number of socially distant individuals diminishes, what seems to be left for them to do is to further  We discussed this issue in the context of modern economics in Chap. 4.  In the same way as we admire the beauty of nature as a complex system which works without clear organiser, we may admire a social system which seems to naturally generate plenty without any guidance. We shall discuss below how in Smith such a corruption of sentiments can take place. 35 36

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divide labour (increase specialisation) in the hope of ‘bettering their conditions’. It is where specialisation and trade become, so to speak, a ‘business’ (to use Smith’s own words). Indeed, as we said earlier, without elaboration, according to Smith, the motive of ‘bettering our condition’ which is the motive behind the WN (the second cycle: the right-hand side of the above diagram) is not very different from the motive which stood at the heart of the first cycle: From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by the great purpose of human life which we call bettering our conditions? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. (TMS, p. 50)

Given the context of Smith’s general theory of morals and society— which we will explore further below—this leads him to the following conclusions regarding the way in which such an objective can be achieved: We desire both to be respectable and to be respected. … To deserve, to acquire, and to enjoy the respect and admiration of mankind, are the great object of ambition and emulation [i.e. bettering our conditions]. Two different roads are presented to us, equally leading to the attainment of this so much desired object; the one, by the study of wisdom and the practice of virtue; the other, by the acquisition of wealth and greatness. Two different characters are presented to our emulation; the one, of proud ambition and ostentatious avidity; the other, of humble modesty and equitable justice. (TMS, p. 62)

Moral and social approbation, in Smith, are the result of the natural tendency which people have to find harmony of sentiments between them and the others (sympathy). A proper examination of such a process suggests that the road to social approbation should lead to wisdom, ­virtue, humble modesty and equitable justice. However, as we said before, nature, which is concerned with the production of plenty and the multiplication of the species, distorts this logic and lures individuals to the second form of behaviour:

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Though it is in order to supply the necessities and conveniences of the body, that the advantage of external fortune [material wealth] are originally recommended to us, yet we cannot live long in the world without perceiving that the respect of our equals, our credit and rank in the society we live in, depend very much upon the degree in which we possess … those advantages. The desire of becoming the proper objects of this respect, of deserving and obtaining this credit and rank among our equals, is, perhaps, the strongest of all our desires. (TMS, p. 213, my italics)

So now we have a very different situation to the one we faced in the first cycle. If before we sought approbation while easing the way we acquire life’s necessities, now we want to acquire more goods in order to receive recognition. We call this kind of specialisation and trade, type (b), in the diagram below. The question which then follows is whether or not this pursuit is fruitful. Will people who get into a race of acquiring material wealth succeed in doing so as well as achieve the admiration from the others and the social rank to which they aspire? The focus thus shifts from mere sustainability to a question of diachronic order. This is depicted at the bottom right-hand side of the diagram below: The Smithian System II Social drive Confirmation of the common drive

Exchange of gifts Specialisation and trade (a)

Sustainability (TMS invisible hand)

Ensuring life's necessities

Bettering our condition Wealth creation

Diachronic order Division of labour as ‘business’ specialisation and trade (b) Coordinated economic and social outcomes (natural rates)

Uncoordinated social outcome and co-ordinated economics outcome

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The expression of Smith’s ambiguous attitudes towards the outcome of natural liberty is embedded in the distinction he draws between two concepts of equilibrium, or co-ordination. One is when equilibrium prices are at their natural rate and the other when equilibrium rates are market prices which deviate from the natural rates. We claim that the former represents an outcome where natural liberty has not managed to harm society and the objectives of both nature and those of humans are fulfilled. Any market prices equilibrium which deviates from the natural rates is where there will be economic co-ordination but where the deception by nature will fail most individuals in their desire to acquire social approbation. It is an outcome that should offend human conscience. The difference between the modern approach and that of Smith is that the former would only be interested in whether people can acquire the wealth they seek given their circumstances, while in Smith the question is whether that which they acquire will provide them with the social recognition they desire. When Smith discusses the purpose of political economy—in an attempt to juxtapose it with Mercantilism—he clearly states that it is: ‘to provide a plentiful revenue or subsistence for the people … and … to supply the state … with a revenue sufficient for the public services’ (WN, p. 428). While this may seem consistent with the modern approach of maximising values, this is not entirely so. The first thing we must notice is the equivalence between the provision of plenty to individuals and to the state. This is very much in line with Smith’s basic argument that the course of humanity and that of nature are not necessarily consistent with one another and that commercial society is where mutual assistance is provided through mercenary exchanges which suggests and unhappy social state. Consequently, society, as a collective, has to be well positioned to rectify the natural outcomes which offend its social sensibilities. Secondly, when Smith suggests that the purpose of the system is to provide plenty of revenue or subsistence, it seems that he is referring to the distribution of life’s necessities rather than the maximisation of overall output. The sentence here does not mean either plenty of revenue or subsistence; it means that plenty of revenue is equivalent to subsistence. It is important to bear in mind that while in his own days subsistence may have been something more akin to physical survival, this should not be

  The Classical Alternative 

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taken so literally. The way Smith uses the term ‘subsistence’ is more like a concept of a basic bundle which allows people to function as social beings. Plenty of revenue as equivalent to subsistent must mean a higher level of subsistence. As such, it is a relative concept which changes with the progress of society and it is a concept which is applied to all members of society. There is, therefore, an element of what one may deem equality in consumption as part of the objective of political economy according to Smith. There is nothing of the sort in modern analysis. Indeed, though one directly seeks material wellbeing in the economic exchanges, the purpose of it is nevertheless social approbation. Therefore, this is another reason why it cannot be just the production of material wellbeing which matters, but also its distribution. ‘According therefore’, writes Smith, ‘as this produce … bears greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessities and conveniences for which it has occasion’ (WN, p. 10). Clearly here Smith talks about the output (actually, consumption but we shall assume for simplicity sake that the one is used as a proxy for the other) per person but the presumption behind it is that every member of society gets more or less the same. It is difficult to imagine that if only a few consume the total product and the rest go hungry (which would mean that the produce stands in high proportion to those who consume it)—that the nation could be considered better off than  had the same output been distributed over the entire population (lower proportion). Now equality, as we already hinted in our discussion of the first part of the cycle, means that the attempt to acquire the respect and admiration of others through material success will fail. Why would anyone be particularly struck by the economic success of one agent if everyone were equally successful. People of equal means cannot use them to command the respect and admiration of the others. It is the fact that someone has more means, that will make the others feel great pleasure imagining themselves in his, or her, position and, therefore, provide him, or her, with the respect and admiration which they expect. Consequently, in such a society, the only road which is open to be noted, admired and emulated is through wisdom, virtue, humble modesty and equitable justice. Therefore, if because of nature’s deception people seek material success but the system leads them

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to a point where they are all equally successful, then the question of social approbation is returned to its true domain which is the impartial spectator’s guided sympathy with other people’s behaviour. Assuming, as does Smith, that social approbation is the origin of the social drive, then it is clear that in the absence of alternatives, good behaviour is something most people are likely to pursue. In this sense, both nature and Nature will succeed. The circumstances which are more likely to produce such an outcome, according to Smith, are those when the system reaches an equilibrium where prices are at their natural rate. What Smith means by natural rates is the return on a good, or service, that provides for the maintenance of those involved in the production process. ‘A man must always live by his work’, writes Smith, ‘and his wages must at least be sufficient to maintain him’ (WN, p. 85). If a worker cannot find subsistence in an occupation, he will change his specialisation.37 Equally for profits. ‘His profits’, writes Smith, ‘is his revenue, the proper fund of his subsistence. … [U]nless they yield him this profit’; he goes on to say, ‘they do not repay him what they may very properly be said to have really cost him’ (WN, p. 73, my italics). Unless the return on profits is enough to allow the capital owner to subsist and provide the capital needed, the capital will be employed elsewhere. There are, therefore, two elements behind the concept of natural rates, both of which are related to the ability to reproduce the goods (and, hence, one aspect of the sustainability of the system). The first is, that it is a rate in which all participants in the production process receive what is needed for them to perform their work; they receive subsistence which, as we said before, must not be understood literally but rather as a social measure of some kind of a norm reflecting society’s standard of living.  In fact, this is not just about maintaining the person during the production but also about the stability of occupational choice. Namely, it is also the price in which the cost of acquiring an occupation will also be taken into account. ‘A man then’, says Smith elsewhere, ‘has the natural price of his labour when it is sufficient to maintain him during the time of labour, to defray the expenses of education, and to compensate the risk of not living long enough and of not succeeding in the business’ (LJ, pp. 495–496). This means that there is a certain differential in what is required to maintain different occupations but these differences are there to ensure that the expected return will be at the general subsistence level, broadly defined. 37

  The Classical Alternative 

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The second is, that it is a rate that will make the business of specialisation stable in the sense that people will have no reason to move away from an engagement with this kind of a production process (i.e. an equivalent to a desire to change specialisation). There has been some confusion about the meaning of the natural price which, we believe, could have been the result of overlooking the dynamic nature of Smith’s system. It is evident that the value of what is being produced is always divided between wages paid to workers (W), profits paid to those who provide capital (π) and a residual which we will call rent (R). In the typical examples of a wheat, or corn, economies, the rent is considered to be that which is paid to the landlord, but one can simply generalise this and say that rent is what will be paid to the owners of the enterprise—or the agent who does the hiring of the labour and capital— if they are not also the owners of the capital. Hence, we have the following equation, or, perhaps, identity:

p × x = W + p + R

The value of what has been produced is, by definition, divided between all three involved parties. This leads to Smith’s basic claim that:



p=

W +p + R x

Namely, that the price of a good dissolves into these three components. This, of course, does not mean that the price of the good is determined by these three components—which was the subject of disagreement between Smith and Hume and later, Ricardo—but this is not the main issue here. Modern take on this was that the natural price is the price that will emerge when there is no rent in the sense that the return to workers is the market wage rate and the return to capital is the going market rate of return. In such a case, there are no profits above what is known as ‘normal profits’ (i.e. R = 0). This led to the conclusion that Smith was referring to what we nowadays call the long-run equilibrium price where market price equals the minimum of the average costs.

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But this is wrong on two accounts. Firstly, in Smith the natural rates of wages or the return to capital are not exclusively market dependent. They are based on a social norm which defines a subsistence bundle. The fact that in modern economics the long-run equilibrium price is such that workers receive their market wages and the return to capital is a market return does not tell us much whether these market-determined returns are sufficient to command the socially defined subsistence bundle. Secondly, this line of reasoning ignores the fact that the dynamic context of Smith’s analysis, means that the value of the output in one period will be divided between its usages in the next period where the quantity produced may be different. Namely, the price in one period will be dissolved into the usages of that output in the new production scheme where it will be spent on hiring labour and capital needed for the reproduction of the previous quantity (or not) plus the usage of the rent—the surplus—in either hiring productive or unproductive labour (the latter is equivalent to consumption). The way we spread the usage of the output will have an effect on the quantity produced at the end of the next period as well as the price of the good. Suppose for a moment that you are an owner of land who is also the entrepreneur here. At the end of the last period, you had, say, 100 kg of wheat (the outcome of last year’s work in the form of harvest). To ­produce 1 kg of wheat, one needs 0.5 units of labour and 0.25 kg of wheat (which is, in our case, capital; or as Smith would call it, circulating capital). Suppose too that subsistence means that to maintain 1  unit of labour throughout the production period one would need to advance 0.5 kg of wheat. Hence:

0.5 kg × 0.5 + 0.25 kg ® 1 kg

This means that one would need 0.5  kg wheat to produce 1  kg of wheat. Hence, to produce 100 kg, you employed 50 labour (whom you paid 0.5 kg as subsistence wage) and you advanced 25 kg of wheat in the form of seeds or circulating capital (which also includes your own subsistence). By the end of that process and the beginning of this period, you have the harvest of this operation which is 100 kg of wheat. If you merely

  The Classical Alternative 

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wish to reproduce the same amount, you will advance 50 kg of your stock by way of subsistence wages and capital needs but you will have a surplus of 50 kg. This surplus, which is the equivalent of rent that will always be present even if you and the workers (or, more generally speaking, all who are involved in the production process) earn their socially determined subsistence level. According to the modern interpretation, it means that we will never reach the natural rate. But the truth is that what is really meant by the natural rate is not the existence or otherwise of a surplus in the production process but, rather, the use to which this surplus is being put. If the entire surplus is being used to forward circulating capital (i.e. seeds) and to hire more labour at subsistence level, this will lead to an increase in the amount of wheat we have.38 As you need 0.5 kg of wheat to produce 1 kg, with the 50 kg surplus you will be able to hire 50 more workers whom you will pay 0.5 kg each (25 kg altogether) and advance the remaining 25 kg as circulating capital (including your own subsistence and the subsistence of anyone whom you may have added to the team to deal with a larger operation). This means that by the end of next year, total output will be doubled to 200 kg of wheat. In fact, this is the maximum growth which can be achieved; it is achieved when the entire surplus above that which is needed for the maintenance of all involved in creating the surplus is directed as the maintenance of those involved in the production of additional output. Of course, one could have used the surplus differently. One could have used it to hire what Smith calls unproductive labour like, for instance, hiring a butler, or a cook or entertainer. This, of course, is the mechanism through which the invisible hand ensures that the entire surplus will be distributed as subsistence to all members of society. In such a way, though everyone earns their subsistence, the owner of stock will consume much more than anyone else: he will consume these additional services. If all the surplus was used in this manner, then the overall level of output would not increase at all. But not only that, while the distribution of life’s necessities (the socially constructed subsistence bundle) will be equal, the 38

 Both directly and through technological improvements through learning by doing.

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distribution of income will not. The owner of the surplus will be rich (with all the additional services he hired) while everyone else will live at subsistence level. This means that the prices are at natural rates if the produce of the previous period has been used in its entirety to pay subsistence for productive services39:



p*t -1 =

W *t + p *t + R *t xt -1

where R*t means that the entire surplus was used on productive services rather than consumption. It means that at natural rates, the price of the good dissolves into the payment of subsistence to all those involved in the production of the next period which, of course, will be higher. Clearly, if only part of the surplus will be used for productive services, then the total output of the next period will be lower and, therefore, the price in the next period will be higher for any given demand. If, on the other hand, we pay individuals less than the subsistence level and use it to increase production, then the output will be greater in the next period and the price will go down (for a given demand). The problem with this situation is that people will leave this occupation and the outcome will not be sustainable. All of this means that only at the natural rate would an equilibrium emerge where the outcome of the second cycle of specialisation and trade (b) will lead to a sustainable and co-ordinated outcome in the sense that  all individuals will both acquire material wellbeing which will be reflected in the progress of the socially determined subsistence bundle and have to acquire social approbation through virtuous behaviour as their consumption levels (not income) will be more or less the same. The additional attribute of the natural price which suggests that at this rate, growth will be maximised, is stated quite clearly by Smith: ‘As what rises the market price above the natural one diminishes public opulence,  The price here is meaningful only if there are other goods too and in such a case this becomes a problem of general equilibrium. It should not be difficult to construct such a system but it is beyond of what interests us here. The interested reader may consult Witztum (2009). 39

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so what brings it down below it has the same effect’ (LJ, p. 498). But the question that arises is why is growth also part of the condition for the social success of the economic system. While according to this analysis, it is quite possible for the system of natural liberty to generate an outcome which is consistent with the social drive which lies at its core, Smith is quite sceptical about the way in which natural liberty effectively works. Yes, he does suggest that the natural rates are those prices to which all prices tend to gravitate but he is also quite clear that the deviations from the natural rates can last for centuries. Unlike modern economists, Smith looks at natural liberty as a phenomenon rather than an ideal. He recognises that there is a logical limit at which the system produces a desirable outcome but he is also aware of the difficulties arriving there. Unlike the difficulties we had with modern economics where the logical limit of the ideal was institutionally impossible (the problem of missing markets), in Smith it is impossible because of human character. As we have appropriation it means that the unequal distribution of income will make it highly unlikely that those who have greater income will use all their surplus to hire productive labour, increase output and provide plenty revenue or subsistence to everyone. They are much more likely to wish to use some of it for ostentatious consumption in order to command the admiration and social approbation that goes with it. So as the system is unlikely to reach the right equilibrium, we are facing a situation which is similar to the second-best principle in welfare economics. While the attributes of the equilibrium in natural rates are, in principle, consistent with the social objectives behind the economic system—or, at least, do not create conditions which allow for the corruption of the moral sentiments—the properties of systems which have not reached this point are alarming from moral and social perspectives. The main feature of the system which is the cause of moral concerns is, of course, the distribution of income (which, with nature’s deception, is the source of inequality in consumption). The natural inclination to specialise and trade together with the emergence of private property create a natural distribution of things which is, according to Smith, inconsistent with proper (rather than corrupt) morality. Recall that ‘[M]an is by Nature directed to correct, in some measures, that distribution of things

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which she [nature] herself would otherwise have made’ (TMS, p. 168). Elsewhere he writes: ‘Thus he who as it were supports the whole frame of society and furnishes the means of the convenience and ease of all the rest is himself possessed of a very small share and is buried in obscurity’ (LJ, p. 341). Therefore, it seems clear that, for Smith, the natural evolution of specialisation and trade leads to a society where there is no real relationship between contribution and reward. The reason why the pursuit of growth becomes a social necessity in such a situation is because growth benefits those who are worse off in society. We must not forget that the main purpose of this exercise is not the material wellbeing itself but rather the social approbation that may come with it. While the rich succeed in commanding the respect of others—due to nature’s deception—the poor, who are effectively the edifice of this system, are not only incapable of using income to command respect, but they are barely noticeable and, therefore, cannot even command respect through virtuous behaviour. This means that a system of natural liberty which is not at natural rate equilibrium will prevent a great deal of its members to achieve that for which they chose to specialise and trade. Moreover, as will be demonstrated below, within the proper standards of moral evaluation the system is bordering the unjust when the poor cease to benefit from the economic arrangements. It is for this reason that Smith reaches an almost Rawlsian conclusion with regard to the morality of the system. He associates the fate of the worse off in society with the morality of the system. He notices: ‘The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth’ (WN, p. 91). And adds: Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to society? … No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of people, should have a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged. (WN, p. 96)

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Hence, unlike modern economics where the social problem seems to be an extension of the individual’s economic problem, in Smith the social-economic problem—of output maximisation and growth—seems to have been devised to offset some of the natural consequences of specialisation and trade. In other words, whereas in modern economics natural liberty reconciles the private with the social, in Smith the course of nature seems to upset the course of humanity. It is the deception of nature that leads people to ‘commercially’ choose to specialise and trade and it is the same deception that prevents the system from reaching the outcome which would have preserved the social integrity of the system. Consequently, as prices deviates from their natural rates as a matter of routine, the one thing which may help the system from becoming unjust—and, thus, unsustainable—is the improvement of the lot of those who are worse off. This can be best achieved by promoting growth which, in Smith’s system, necessarily means an increase in wages. Nevertheless, it is important to emphasise that this is a second-best strategy where the expectation that the system would fulfil its social purpose has been all but abandoned. In terms of the broader agenda of this chapter—to demonstrate an alternative conceptual framework to modern economics—what is clear from the Smithian story is that the powers of natural liberty work mainly in the service of nature (the world of things) itself but not so much in the service of human morality. The reason for this difference is that in Smith the economic system is the result of a social drive and its test is therefore measured in terms of the social drive rather than pure economic success. There can be little doubt that Smith believed that the competitive systems would be effective in generating material wellbeing. What he was less convinced about was the merit of this pursuit and its ability to provide individuals with that which they really want. Competition will have the tendency to push prices towards their natural rates but as long as people believe that they can command other people’s respect and admiration through wealth, this process will be undermined. Market prices, unlike natural rates, have a potential of creating material progress, stagnation or even regression as well as are always less effective than natural rates in offering opulence. So the working of natural liberty—or com-

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petitive decentralised decision-making—is not an ideal to aspire for but rather a flawed reality that needs containment and corrections. While the corrections which we have mentioned so far were focused on the distribution of income, this does not mean that this is the only thing which needs correction. Unlike modern welfare economics—and even Keynesian economics—which seems to accept that there is no problem with the working of the system of competitive exchanges if only one could direct the entire structure to a more desirable position, the lessons from the Smithian analysis is that the problem lies in the extent of specialisation and with its ability to uphold the social purpose of society. If people sought moral approbation through virtuous behaviour, the accumulation of material wellbeing would not have become such a dominant individual or social objective and competitive interaction may not be the main characteristic of human interaction.40 And even if one would like to have plenty in addition to social approbation which is generally distributed to the whole public, there will have to be serious limitations on approbation or the use of the surplus in case—as it seems to be—that appropriation is a necessary condition for the division of labour.41 Having said all this, it is important to emphasise that there can be little doubt that Adam Smith saw merit in the working of competition. But it is important to bear in mind that Smith wrote at the beginning of the industrial age—or commercial society—and against the dominant beliefs in the power of gold accumulation (Mercantilism). He definitely thought the system of natural liberty to be superior to Mercantilism but though he could not have envisaged all its malaises, he was acutely aware of the dangers hidden in it given that one cannot examine the economic system only from the perspective of its ability to generate material wellbeing. One example for such a concern is, of course, his criticism of the devas This, of course, is similar to J. S. Mill’s view, according to which the developed individual will become increasingly more co-operative and this, in turn, will lead both to a change in the form of economic organisation and to a change in the long-term objective which he thought would be stagnation. 41  The evidence for this line of reasoning can be found in Witztum (1997, 2005a) and Witztum and Young (2011), where Smith’s theory of distributed justice is discussed in great length. The upshot of this is that, according to Smith, the acquisition of property lays a responsibility on those who own property towards those who remain property-less. 40

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tating personal cost involved in extended and prolonged specialisation. Therefore, the fact that natural liberty was better than Mercantilism in generating material wealth does not mean that it should become an ideal. For this to be so, one must argue that the whole purpose of social existence and organisation is also governed by the relentless pursuit of material wellbeing.

8.2 The Moral Benchmark I: The Individual In the discussion, so far we have emphasised that in Smith the commercial economic system developed as a combined expression of both the need to acquire life’s necessities and the want to be socially recognised through the pursuit of material wealth. It was the idea of the invisible hand which convinced Smith that the inequality which resulted from the deception by nature and the subsequent appropriation which facilitated further division of labour did not pose any threat to the ability of all members of society to acquire life’s necessities. However, whether or not they could all also acquire the social recognition they sought remained questionable. So, in some sense, this has been predominantly a question of expediency. Accepting that people, as a matter of fact, may seek social approbation through wealth accumulation, we found that for this to be even partially true many people will have to have their desires frustrated even though they may still benefit in terms of their material wellbeing when society progresses. For anyone who chooses to ignore the social context of Smith’s analysis, the system of natural liberty is merely a system for wealth production. As such, even though growth may not be maximised at market prices, it seems to be much more effective in generating material wellbeing than the mercantile system. Such readers cannot really be blamed for thinking that Smith’s theory is a glorification of competitive decentralised decision-making. Yet, as Griswold (1999) puts it so aptly: ‘Smith forces the reader to put commercial liberal society into question even as he elucidates it and argues for its virtues’ (p. 261). The reason for this is ethics.

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Smith’s critique of commercials societies comes not only from the fact that within a social context the successes of the system are very limited indeed (the expediency argument), but also, and perhaps even more so, because it offends morality when this is properly construed. The question which we wish to explore now is the nature of this moral objection. Namely, if we ignore the failures of the system in as much as social motivation is concerned, would the system of natural liberty—which could, sometimes, be successful in generating plenty—be a system that is also consistent with moral principles of a well-informed and impartial observer? In other words, we are conducting here a sort of an exercise. In order to better juxtapose the Smithian narrative with the modern discourse, we bring the Smithian idea of natural liberty closer to its modern counterpart by removing its social context and using Smith’s moral theory to form a judgement on the ethical value of such a system. By doing this we intend to show that the system of natural liberty, even if it had nothing to do with the social expectations of its elements, would still fall considerably short of what may be considered as a morally good system or what would justify treating it as an ideal. However, in line with Smith’s notion of a less-happy though viable social state, it may satisfy his principles of justice but only if there is growth in the system, a conclusion which further strengthens the significance of the natural rates as Smith’s idea of an analytical benchmark. Much of the debate surrounding the moral significance of commercial society in Adam Smith has been focused on the legitimacy of the self-­interested character and the beneficial unintended consequences proposed by its free rein. If self-interest is a morally approved motive and the consequences of its applications are beneficial to society, it seems difficult to imagine on what grounds one can question the morality of such a system. In this respect, some viewed Smith’s work as a rejection of Mandeville’s paradox. Both Smith and Mandeville seem to agree on the beneficial outcomes (‘public good’) of allowing people to do what they naturally like to do. But if such behaviour is deemed morally repugnant (as selfishness seems to be), then we have a problem. If the natural behaviour which leads to these beneficial outcomes can be distinguished from selfishness and be called, instead, self-interest, it may be possible to argue that it is not a private vice. This, in the eyes of some, is what

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Smith’s achievement has been: not only has he poured contents into how this natural liberty achieves these benefits, but he has also morally legitimised it. Yet, as we mentioned earlier, Smith’s reservations about the moral dimensions of commercial society are well documented and have been a cause of many disputations.42 These, ultimately, have been confined to the general debate stemming from what came to be known as Das Adam Smith Problem with regard to the nature and morality of the human character43 and, to a lesser extent, with regard to the consequences of natural liberty as is expressed in what came to be known as the moral/social stock (i.e. long-term social benefits).44 The accepted resolution of Das Adam Smith Problem, which we briefly discussed earlier, led scholars to consider the fuller character of the self-­ interested person as opposed to the mere drive for self-preservation which could be construed as selfishness. Thus, sympathy and the ‘other-­ regarding’ dimension of individuals’ character became an important component of human nature which—in its entirety—is given free rein in natural liberty. This led some to argue that in Smith ‘human beings are equally motivated by selfish, unsocial and social passions’ (Werhane 1991, p. 31) and, subsequently, that ‘[a] system of economic liberty and natural jurisprudence can provide the best kind of political economy’ (p. 20). Others conclude that ‘only in a world of ethical beings can the coordination of markets function smoothly’ (Evensky 1993, p. 396). In other words, ‘[w]ithout a modicum of habituated virtue (moral and intellectual) in the citizens, the invisible hand behaves like an iron fist’ (Griswold 1999, p. 295). At the other end of the spectrum, the beneficial consequences, we find that in spite of the West-Rosenberg debate about the degrading effects of excessive divisions of labour, there seems to be a general agreement about  We have already mentioned, Viner (1927), Meek (1977), Heilbronner (1982) and Griswold (1999) but there is, of course, a great deal more of it within the literature on Das Adam Smith Problem, some of which we mentioned earlier in this chapter as well as surrounding the debate about the real benefits of the system which we will mention below. 43  See, for example, Davis (1990), Evensky (1987, 1989, 1992), Pack (1991), Witztum (1998), Montes (2003) and Force (2003). 44  Rosenberg (1965, 1990) and West (1964, 1996). 42

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Smith’s commitment to the unintended ‘public good’ created by the free reign of self-interest.45 Therefore, conditioning the free rein of self-­ interest—the ‘own-regarding’ aspect of human character—by sympathy and the ‘other-regarding’ component of it, seemed sufficient to resolve Smith’s apparent half-hearted moral advocacy of liberal commercial societies. Namely, liberal commercial societies, in principle, can produce the good society through natural liberty. Smith’s ambivalence towards laissez-­ faire, accordingly, should be interpreted as a mere qualifier rather than a fundamental frustration with the outcomes of natural liberty. Notwithstanding the difficulties of accepting this line of reasoning once the economic system becomes embedded in the social one, there are enough flaws with the argument to render the moral absolution of the system unacceptable. Firstly, as we shall endeavour to show, the self-­interested character in Smith—the one inhabiting the WN—may not be a private vice but he could certainly not be crowned as a private good either. Secondly, an economic system is a system of actions and interactions. As Smith provides a comprehensive theory regarding the moral evaluation of such a system, the question that arises is not only whether the character of those who act is morally acceptable but also whether the outcome they produce, and in particular, when unintended, generates the kind of moral approval that would justify an idealisation of it.

8.2.1 Human Character and Morality According to the received view about the resolution of Das Adam Smith Problem, the character behind the WN—the self-interested character behind the idea of competitive exchanges—is a depiction of only one aspect of the human character: that which deals with the natural desire to preserve one’s self. This does not preclude that such people will have an  This idea has been reiterated in more recent times by Force (2003), who argues that, notwithstanding the principles which guide the sovereign, ‘it allows the power of individual self-interest to be harnessed for the common good’ (p. 251). Griswold (1999), who examines in detail the corruption of moral capital, claims that according to Smith, the social benefits of self-interest can be protected through proper attention to the development of virtue (pp. 291–301). 45

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‘other-regarding’ capacity in which their sociality and morality may be dominant. This view, as we said before, puts Smith’s conceptual framework in the same position as the modern one and in contradiction with the idea that we cannot really separate social spheres in our conception of Homo economicus. However, in the case of Smith, such a position raises the question about the relationships between the different aspects of human character. Must the pursuit of one’s own affairs necessarily relate to a particular— and not very generous—form of interest in the others or is it possible that both care for one’s self and interest in the others will have different forms of expression? In other words, this raises the question of whether Adam Smith would not have been concerned about the unity of the human character. I discussed this issue at length in Witztum (1998) and reached the conclusion that, firstly, there are good reasons to apply the principle of unity to the way in which Smith conceives and describes the human character.46 Secondly, if we apply to Smith’s conception of human nature the principle of unity, we shall find that ‘self-interest’ is indeed a form of ‘selfishness’ which no ‘impartial spectator’ could deem as virtuous. This, of course, does not mean that such a character is vicious or immoral and, in that sense, Smith did not reiterate Mandeville’s paradox of ‘private vice, public good’. Yet, the character which seems to stand behind Smith’s WN is not a character which is consistent with Smith’s idea of virtue, nor can the system of natural liberty which is based on it, as we shall see later on in the context of the moral analysis of actions, become a morally preferred social organisation. In other words, ‘self-interest’ based natural liberty cannot be conceived as an ideal of social organisation.  Whether or not ‘unity’ mattered to Smith can be derived from the way in which Smith describes the human character. There are three such methods (all explored in the Lectures on Rhetoric and Belles Lettres): (a) ‘Direct Method’: when a character is presented as a set of features which are described by their intrinsic value rather than by their effects on others; (b) ‘General Indirect Method’: when a character is described by the cumulative effect it creates on the observer; (c) ‘Particular Indirect Method’: when the cumulative effect that the character creates on the observer is broken down to the effects on the observer that is created by the various aspect of the character. It is only the ‘direct method’ which corresponds with the received view about the resolution of Das Adam Smith Problem, but the fact of the matter is that when we decompose the concepts of sympathy as a capacity and self-interest as a motive, this method generates a contradiction in terms. Hence, the only possible coherent way of interpreting the method which was actually used by Smith is to adhere to the third method where the coherence of the cumulative effect is dominant. 46

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Does this mean that there is after all an inherent contradiction in Smith’s work? I do not think so. The TMS is not a book about a single character. It is a book about how diverse tendencies and dispositions generate a system of complex socialisations and where ethical judgements and behaviour interact.47 The WN, on the other hand, is an analysis of that specific character which Smith believes to be the most prevalent. Therefore, it is highly unlikely that one will find an inherent contradiction. However, it is equally unlikely that the resolution of the tension between the two books can lead to the upholding of the idea of ‘self-­ interest’-based natural liberty (or the competitive paradigm) as a social ideal. Recall once more a point which we have made on a few occasions and which is of great significance to what we are analysing here: in the TMS Smith argues that human beings are naturally social creatures who ‘stand in need of each other’s’ assistance’ (TMS, p.  85). But it is the way in which this ‘necessary assistance’ is being provided which will reveal the character of individuals and the kind of society that will emerge. Smith proposes two possible frameworks of social organisation which are both natural and viable. The first is where the ‘necessary assistance is provided from generous and disinterested motives’, and the second is where such assistance is provided for its utility, by means of ‘mercenary exchange’ (in other words, from interested motives). The former is an ‘agreeable and happy state’ and the latter much less so. A third, non-viable state is when individuals are willing to hurt each other at all times. Smith has thus produced a moral ranking of social states which is based entirely on the kind of interest individuals have in each other. From the morally bad state where the others mean so little that one is willing to hurt them at all time through a viable, yet not so happy a state, where interest in the others is confined to how they serve one’s own interests, to the most happy of states where individuals have a genuine positive interest in the fortune of others. There can be little doubt that WN is an exploration of the ‘mercenary exchange’ rather than the ‘reciprocally afforded’ assistance ‘from love,  I do not contest here the role of ‘sympathy’ as the premise of Smith’s theory. But ‘sympathy’ too can be employed in different ways according to individuals’ character. 47

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from gratitude, from friendship, and esteem’. It is therefore a description of the less happy of the only two viable states. Indeed, the thrust of the attempts to resolve Das Adam Smith Problem was to rescue his apparent support for the competitive paradigm in the WN by making the character behind the competitive system socially conscious and morally good. But it will be difficult to defend the view according to which the economic interdependence which is explored in the WN is not in the domain of the mutual provision of ‘necessary assistance’. But can one really engage in ‘mercenary exchange’ of ‘necessary assistance’ for its utility and at the same time be generous and provide at least some of the ‘necessary assistance’ in a disinterested way? According to some, like Friedman (1978) or Evensky (1993, 2005), an ethical being—which is a necessary condition for the working of natural liberty—is someone who has a balance between the selfish and benevolent sentiments. For Friedman, this is exactly what natural liberty is all about: ‘the invisible hand of the market was far more effective than the visible hand of government in mobilizing, not only material resources for immediate self-seeking ends, but also sympathy for unselfish charitable ends’ (Friedman 1978, p. 18). But this glorious treatment of self-interest co-existing with the best in ‘other-regarding’ aspect of human character has not been widely shared. Rosenberg (1990) and Werhane (1991) argue that in Smith, ‘self-­interest’, or the moderate care for one’s self, is perfectly consistent with justice in its ‘commutative’ sense. This only means that ‘self-interested’ people are likely not to be engaged in causing each other ‘real injury’. But such a view confines the system of natural liberty to the lesser happy of the two viable social states. It is merely a restatement of the viability condition of a society of ‘selfish’ individuals. But can such a society ‘flourish’ like the one where ‘necessary assistance is provided from generous and ­disinterested motives’? Yes, only if the pursuit of one’s own affair is totally unrelated to one’s attitude towards the others. Indeed, for the received view to work there is a need to distinguish self-­ interest from selfishness. The latter is clearly morally condemned by Smith and if it were the character behind the WN this would have amounted to an almost repeat of Mandeville’s edict. So what is being proposed is to substitute self-interest per se with what Smith calls ‘pru-

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dence’. Prudence, according to Smith, is the ‘virtue’ of caring for one’s self. ‘The care of the health, of the fortune, of the rank and reputation of the individual, the objects upon which his comfort and happiness in this life are supposed principally to depend, is considered as the proper business of that virtue which is commonly called Prudence’ (TMS, p. 213).48 However, Smith does not think that we can treat different aspects of human character in isolation of the rest. When he discusses human character, he decomposes the analysis into two main components: ‘When we consider the character of any individual, we naturally view it under two different aspects; first, as it may affect his own happiness; and secondly, as it may affect that of the other people’ (TMS, p. 212). This means that both own-regard and other-regard are different expressions of the same character. Prudence, quite clearly, belongs only to the category of the ‘own-regarding’ aspect of human character. It is evidently better judged than selfishness but while the latter is a description of an entire character, prudence is only a description of one aspect of it. Indeed, when Smith comes to assess prudence directly, his judgement seems to be quite reserved: ‘Prudence, in short, when directed merely to the care of the health, of the fortune, and of the rank and reputation of the individual, though it is regarded as a most respectable and even, in some degree, as an amiable and agreeable quality, yet it never is considered as one, either of the most endearing, or the most ennobling of the virtues. It commands a certain cold esteem, but seems not entitled to any ardent love or admiration’ (TMS, p. 216, emphasis added). Obviously, the unity of human character suggests that the moral judgement of a character must also take into account its ‘other-regarding’ component. Indeed, the description of the virtuous man follows precisely this qualification: ‘The man who acts according to the rules of perfect prudence, of strict justice, and of proper benevolence, may be said to be perfectly virtuous’ (TMS, p. 237). That is, perfect prudence describes the person’s virtuous behaviour so far as it affects only his own happiness.  Note that ‘virtue’ here does not represent a moral judgement. It denotes a certain feature of human character that may or may not be virtuous. (This can easily be proved for at some point Smith discusses the ‘improper’ and the ‘proper’ prudence. Obviously, if prudence can be ‘improper’ it cannot be at the same time virtuous by definition). So self-interest, according to this approach, is that part in our nature that directs us to the care of those things which affect us. 48

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Proper benevolence and strict justice, on the other hand, describe his virtuous behaviour in as much as it affects the others’ happiness. But can a person be perfectly prudent and improperly benevolent? If so, what would be the moral assessment of such a character? Moreover, can a person, as a matter of fact, be perfectly prudent and perfectly benevolent? Is there not a hidden impossibility in Smith’s description of the virtuous character? Or, perhaps, perfect prudence means to have a very moderate interest in one’s own happiness. In that case, is it really self-interest? The fact that prudence alone (i.e. a person’s behaviour as far as his own happiness is concerned) is not sufficient to generate the virtuous character is only too obvious in Smith’s own analysis of it. When he comes to pass a moral judgement on it, he is obliged to distinguish between three ‘sorts’ of prudence. Prudence that is ‘directed merely to the care of one’s self ’, prudence that is ‘directed to greater and nobler purposes than the care for one’s self ’ (which he calls ‘superior prudence’) and prudence which is ‘the mere want to take care of one’s self ’ (which he calls ‘imprudence’). By doing so, Smith had actually incorporated into the one aspect of human character the circumstances of the other. Thus, he distinguishes between three sorts of characters who are prudent, in different manners, in their ‘own-regard’ and who also differ in the ‘other-regard’ aspect of their character. The ‘superior prudence’ is when ‘prudence is … combined with many greater and more splendid virtues, with valour, with extensive and strong benevolence’ (TMS, p.  216). Prudence as such (or mere prudence) prevails when the person’s full intentions are ‘directed to the care of the health, of the fortune, and of the rank and reputation of the individual’. And ‘imprudence’ is when a person’s intentions are concentrated on ‘the mere want of the capacity to take care of one’s self ’. Superior prudence is clearly identified by its ‘strong benevolence’ which is clearly a feature of the ‘other-regarding’ aspect of human character. But also, mere prudence and imprudence differ in terms of their considerations of the others. Mere prudence means that one cares about his reputation and would therefore do nothing to hurt the others or to cause them to dislike him. Imprudence, on the other hand, means that

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the person only cares for himself and has no regard whatsoever to rank or reputation. Thus, he may be inclined to hurt the others if they come between him and the successful implementation of his own happiness. Note however that in all three cases the person is still considered as prudent in terms of his care for himself. Even ‘imprudence’ (which is somewhat confusing) means that as far as his own happiness is concerned the person is prudent. ‘The artful knave’, writes Smith, ‘whose dexterity and address exempt him … from punishment or distinct detection, is too often received in the world with an indulgence which he by no means deserves’ (TMS, p.  216). That is to say that the fact that someone is industrious and frugal (in short, prudent) does not make him good, bad or mediocre. It is the ‘other-regarding’ aspect of his character that determines the moral value of his character. In the following diagram, I propose to outline the possible consistent characters which are based on the coherent relationship between their two main components: the ‘own-regarding’ and the ‘other-regarding’. We will measure the difference between ‘superior’, ‘mere’ and ‘improper’ prudence by the intensity of the care for one’s self. This will go from low intensity, which would mean that one is not putting the care for himself above anything else, to high intensity, which would mean that one puts the care for himself above all else. On the ‘other-regarding’ side we will use the degree to which one is interested in the fortune of the others as a measure of one’s other-regarding capacity. According to Smith the ‘otherregarding’ aspect of human character is indeed defined in terms of what a person intends to the others: ‘The character of every individual, so far as it can affect the happiness of other people, must do so by its disposition either to hurt or to benefit them’ (TMS, p. 218). By measuring the ‘otherregarding’ capacity through the degree of interest in the others, we can accommodate these distinctions by measuring it from low (or zero) to high. When one has a low level of interest in the others it may also mean that he or she would not mind hurting them. When one has a high level of interest in the others, one would never wish to harm them and will be constantly willing to benefit them. Moderate interest in the others would then mean that one wishes neither to harm nor to benefit the others:

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Consistency of human character

High Selfish

Self-interested

Benevolent

Low Low

R0

High

Interest in the others

The three characters which Smith identifies correspond well to his three social states. The selfish one is the one associated with the state in which individuals are willing to harm one another if they are in their way as their level of interest which they have in them is very low. A society comprising mainly of such individuals will lead to an unsustainable and miserable social state. The self-interested character is the one behind the mercenary exchange and, therefore, the state which is sustainable but unhappy. The benevolent character is the one behind the good, happy, social state. Notice that all of this is in line with Smith’s general statement that all individuals have some interest in the fortune of the other though the level of this interest may vary. Such a view is, of course, also consistent with our findings from previous chapters about the fundamental sociality of agents. There, we argued that the brain structure (R) suggests that the level of interest which humans will have in the other is relatively high (point R0 in the above diagram). Naturally, when we say that the human brain supports a sociality which corresponds to a level of interest in the other (IIO) of R0, we mean to say that this will be the mean of the

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­ istribution of interest in the others. Namely, assuming a normal distrid bution around the mean of R0 we suggest that this level of IIO is most common. This does not mean that other levels of IIO are not present in society. According to the above diagram and if indeed the distribution is normal, the more typical social agent is likely to be nearer to the selfinterested kind but there would be many more benevolent people in society than selfish ones. This means that, as Smith implicitly suggests, the selfish character is unlikely to be the reality of Homo sapiens as human beings have a sufficient level of interest in the other to produce sustainable social orders. Therefore, one can conclude that Smith did not consider the self-­ interested character—the one with moderate care for himself and a moderate interest in the others—as a virtuous character. As this moderate interest in the other means that one is concerned about their own rank and reputation, namely about how the others see them, it does not mean that one cares much about what happens to them other than the way in which they serve one’s social desires. In terms of fellow feeling of an impartial spectator, surely there will be less of it than there would be had someone actually meant to do good to another. The correspondence of such a pattern of behaviour with the less-happy social state suggests a consistent approach on the part of Smith.

8.2.2 H  uman Character, Moral Judgement and Nature’s Deception So far, we focused mainly on what Smith, the observer, has to say about the different compositions of human character. But this does not explain how do we end up, as we did in the previous analysis, with ideas such as deception by nature and corrupt sense of morality? Would some characters, more than others, be more susceptible to the deception by nature or more prone to the corruption of moral sentiments? In other words, is it possible for commercial society to be both misguided and oblivious of its moral failing because of prevailing human character? Beyond the question of what may constitute the idea of the good or bad character, the novelty of Smith’s approach is that he had offered us a theory of morals which is not just about what it is that is good, or just,

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but more importantly, it is a theory about how such conventions are being formed.49 To this end, the conception of the human character becomes crucial not only for the purpose of assessing its moral fit but also to provide the explanation for how moral values may evolve in a way which is not necessarily consistent with a judgement that an impartial spectator would pass. It is indeed the practice of morality, as opposed to its ideal, which is where many of the apparent anomalies in Smith’s work appear. We saw that one of the most important factors in both the development and sustainability of commercial society—those mercenary unhappy exchanges— is the deception by nature. In a world where people form their moral opinions, as well as adjust their behaviours, according to a highly sophisticated and engaging process of sympathy, it is difficult to see why there will be such a divergence between the practice of morality and its ideal. Clearly, the reasons for a divergence must be either that there is something which interferes in the process of sympathy and directs it away from the opinion of a real impartial spectator or that there is a divergence from sympathy as a mechanism for forming moral opinions altogether. Given that sympathy is an expression of one’s ‘other-regarding’ faculties, and given that these faculties are expressed differently in different types of human character, it stands to reason that the judgements of a benevolent person would be different from those of a self-interested or a selfish character. Consequently, the expression of these dispositions in the form of behaviour will also be different. To understand how this works let us first say more about this whole idea of sympathy as the origin of our moral judgement and our socialisation process. The interest which we have in the other (IIO) as expressed through sentiments, in Smith’s analysis, is the tendency to identify with the sentiments of the other. ‘That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it’ (TMS, p. 9). But ‘[a]s we have no immediate experience of what other men feel’, we do so by an imaginary change of places with the person we observe. We consider ourselves in his position and we try to experience through our own senses what he might be feeling. We find harmony, 49

 See an example of this in Witztum (1997, 2005a). Some of the issues will be explored here too.

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which is pleasing, if our sentiments coincide and dissonance if they do not. As sympathy works both ways, it means that when we experience sorrow or joy, the knowledge that others may feel those sentiments with us ameliorates the pains of sorrow and enhances the pleasure of joy. It is this mutual fellow feeling that we all have a natural tendency to feel, which is the origin of both our moral judgement and socialisation. We always want to behave in a way that will be morally approved by the others and we find what this means by observing them. In other words, we seek to behave in a way that will make other people feel sympathy (i.e. harmony of sentiments) with us and we will try not to do things that will invoke dissonance in our observers. Equally, we approve of others according to those things which invoke our sympathy and disapprove of those which do not. We would adopt as norms, behaviours which habitually generate sympathy and avoid those which do not. This, of course, raises the question of whether behaviour in Smith is in line with expressive or instrumental rationality but we shall come back to this a bit later. However, the effects of harmony (or dissonance) that are felt by the person who observes depend, to some extent, on his own natural constitution. ‘The imaginary change of situation … is but momentary. The thought of their [“the observers”,] own safety … continually intrudes itself upon them’ (TMS, p. 21). That is to say that a person’s experience of the imaginary process is entirely dependent on his own disposition. And in particular, it depends on his disposition towards (or interest in) the fortunes of the other. Hence, whether or not the harmony—in the sense of coincidence—we discover with the sentiments of another is agreeable to us depends on the nature of these sentiments as well as on our own disposition towards the fact that the other is experiencing them. For instance, whether or not we feel harmonious with the other’s sorrow or joy depends on the existence, or absence, of envy. ‘If there is any envy in the case … our propensity to sympathise with sorrow must be very strong, and our inclination to sympathise with joy very weak’ (TMS, p. 44). Suppose that person A observes person B act in a way that affects person C.  What would be the judgement of A with regard to the action taken by B and the sentiments felt by C? The answer is, actually, quite complex and we shall conduct this analysis properly when we discuss the

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economic system in the next section, but at this stage we merely want to see how a person’s character may interfere in the moral judgement. Whether or not person A will approve of the way B acts depends on what he feels towards person C. Suppose that the action performed by A generated a beneficial outcome for C which made him duly happy (joy). If there is no envy, and A puts himself in the position of C, he will ask himself two questions: (a) Is this feeling deservedly felt? Namely, has the action by B been justified? (b) Would I have felt the same as C had I been in his place? So, there are two coincidences of sentiments here. Firstly, there is the question of whether A would have acted the same as B did (which we may call ‘technical harmony’), and, secondly, whether he would have felt as C does. If there is no envy and A feels that he would have acted as B acted, had he been in his place, then he would experience a certain pleasure from feeling harmony of sentiments (recall that if he does, he knows that others would be in agreement with him if he acted in the same manner). If then A feels that in such a case he too would have felt the joy which C feels, he would then experience a second harmony of sentiments. However, whether or not the harmony of sentiments with C will be pleasant for A depends on what these specific sentiments mean for A. As we are in the case of no envy (which would also be the position of an impartial spectator), we will share in the joy which C feels, and experiencing it ourselves will enhance our sense of pleasure from the harmony we found with the action of B and its effects on C. Consequently, we will approve of the action which B took and deduce from it that such an action will be approved by others too. Equally, had the effect of the action taken by B on C been harmful, the harmony which we may feel with him, if we feel that his pain is duly felt, would be painful to us and thus create a dissonance in us that will offset the possible pleasure we could have felt if we agreed with the reasons for B to take this action. Consequently, as the pleasures of these harmonies are offset, we will not approve of such an action. If, however, there was envy, the opposite will happen. The joy which C feels, if we think that he duly feels it, will be unpleasant to us—we are envious of his good fortune— and this will create an unpleasant feeling in us which will offset the pleasure of harmony we might have felt with B acting the way he did. This

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means that an envious person may not approve of an action, or behaviour, which a person without envy will approve. Similarly, if C felt pain, and A thought that this is duly felt, the schadenfreude which he would feel will increase the pleasure A already feels from agreeing with the action which B took. Hence, the envious person will deem as good behaviour something which a person without envy (including an impartial spectator) would have condemned. The implications of all this for both moral analysis and the practice of morality is that the way an individual sees the other—which would also be the cause of envy or the lack of it—is detrimental to the way he or she will form their moral opinions or adopt patterns of behaviours. We can also see from here the notion of the ideal of moral judgement as it appears in the form of the impartial spectator. He is, as it were, the disinterested observer. But, as we shall see later on, there is much more to this than simple neutrality. The story about envy is not a suggestion that only this can distort the way in which people draw conclusions from the process of sympathy or the search for harmony of sentiments. Instead, it is merely a demonstration of how fragile are moral judgements and how sensitive they are to the disposition which an agent would have towards the others. As the three characters we highlighted above differ in their disposition towards the others, their judgements will also be different whether it is because of envy or something else which influences the way in which the others play a role in their lives. For instance, we know that all seek social approbation but there will nevertheless be a difference between the way a self-­interested and a benevolent person approaches the subject. For the benevolent person, social approbation is merely an afterthought. An individual who is genuinely concerned about the wellbeing of his fellow human being would adopt behaviours which truly make the others feel better. The harmony which he feels with their pleasure is indeed a harmony from which he drives nothing except the pleasure of seeing it (TMS, p. 9). The self-­ interested individual, on the other hand, is interested in the joy of the other only in as much as it recommends him to them and, thus, enhances his own social standing. Therefore, a benevolent person would always contemplate the pleasure of the other in terms of whether or not it is duly felt, while the self-interested person would not be particularly concerned

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about this if, in the end, the sentiments of the other elevate his own position. So how will all of this translate into a form of habitual behaviour in commercial societies in which social distance increases and how would the deception by nature come into play? Let us consider this in the context of the general forms of rationality which we depicted earlier: The rise of social distance and socialisation Interest in the others (R)

Expressive rationality B

A

IIO(R0)

l

na

B’

ly

tal

n me

io rat

A’

tru

Ins

D1

Irrational

D0

Domain of considerations

If we use the same framework we used in previous examination, then on the vertical axis we denote the IIO—which is normally distributed around the innate sociality we extracted from comparative neurology and which we denoted by R0—and in the horizontal axis we measure the ‘domain of considerations’ which here will mean the length to which individuals are willing to go in choosing how to act according to the effects of their actions on all those about whom they care. In our previous analysis, this referred to the arguments in one’s utility function which suggested the extent to which one takes into consideration the effects of one’s actions on the others. In our case, it is very similar. In the Smithian analysis people’s choice of action—which is based on its morality and,

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subsequently, the social acceptability—depends on the sympathy felt with all those affected. Suppose then that we start with two types of individuals (distributed around a level of interest in the other corresponding to R0) who are benevolent (point A-somewhat above the mean level of IIO) and self-­interested (point A′—somewhat below the mean level of IIO). If we begin at early stages of society, then at points A and A′ society is small enough and everyone is aware of the effects of his or her actions on everyone else and cannot really ignore it. In this early stage, individuals find that they can acquire a surplus in that in which they have an advantage over the others and they now have to choose how to use it. When a benevolent person observes that people who receive gifts feel joy with which he, or she, sympathises, he, or she, will approve—and, hence, adopt—behaviour in which an agent provides another with gifts to make them happy. It is important to emphasise that the benevolent agent acts here in a purely expressive form of behaviour. He is not giving gifts to seek social approbation and his action, therefore, cannot be construed as instrumental. The social approbation is simply a by-product of the behaviour which generates harmonious feelings with the others. The self-interested person, on the other hand, cares about the other only in as much as they provide him with social approbation. He also observes that receivers of gifts feel joy which prompts them to feel gratitude towards their benefactor and it is this, and not their joy as such, that will suggest to him that giving gifts is a good way of acquiring social approbation. These are clearly instrumental considerations. As society expands and we move to the more commercial phase where social distance increases and most people on whom one depends for subsistence are strangers, the ability to experience sympathy with others diminishes. This will be true for both types of agents. So how do people choose how to act or behave? Well, even though social distance with a great number of people increased, individuals still have their immediate domain with whom they are able to exercise sympathy as they can put themselves in place of the other whose circumstances are much more familiar to them i.e. socialisation). This means that the benevolent person, when imagining the exchange of places with people whom he knows, will learn from this experience which type of actions lead, in his view, to sympathetic approval and which not. He

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or she will then adopt these patterns of behaviour as a rule of behaviour without testing each time the effects of their actions on the others with whom social distance is much greater. This means that though the process started with proper application of sympathy, that which guides behaviour is now an expressive form of rational action. We act according to those things we think will be approved by the others because they are genuinely beneficial had we chosen to go through the whole process of finding sympathy with actions and the sentiments to which our actions give rise. This process is depicted as a move from A to B. They are both expressive form of rationality, though at A—due to small social distance—each action could have been measured in terms of its expected benefits on specific individuals. At B, the action has become a rule and, therefore, one does not consider the effects it may have on people who are socially too distant from them. The self-interested individuals, however, is a different story altogether. From the outset, he cares about the other only in as much as they contribute to his rank and reputation (being socially approved). As social distance increases and we move away from a world of gift exchanges to a world of interdependence, our self-interested agent would seek to find that which, in general, will make the others respect him. Naturally, the respect of the others will be obtained if by putting themselves in his position they would feel a sense of harmonious pleasure. As one cannot help observing, people tend to find it easier to identify with the rich than they do with the poor. The general rule is that an imaginary change of places with someone who lives in luxury is much more rewarding and pleasant than such an exchange with a state of hunger and deprivation. Bearing in mind that sympathy is about sentiments which are duly felt, the question that arises is whether the fact that people find it more pleasant to sympathise with luxury also means that they will approve of the actions which produce it. It is here that the deception by nature takes hold. Social approbation came from the fact that people felt a pleasant harmony of sentiments exchanging roles with the person who acts. Part of this pleasure came from the sentiments invoked by the consequences of the action to the others. When they exchange role with luxury—the outcome of actions—they also feel a pleasant sense of harmony. This may lead them to think that they would have approved of behaviour which produced this luxury; the thought of which invokes such pleasure in their

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mind. In other words, they are reversing the process of sympathy. Normally, one would go from approving the behaviour to approving the outcome and the combination of the two generates the final moral judgement. Here, the opposite happens; they approve of the outcome so they approve of the action. ‘Magnanimity, generosity, and justice’, writes Smith, ‘command so high a degree of admiration, that we desire to see them crowned with wealth, and power, and honours of every kind’. But, he argues, wealth and power are nature’s rewards to different sorts of human qualities altogether. Wealth and power, according to Smith, are ‘the natural consequences of prudence, industry, and application; qualities with which [magnanimity and generosity] are not inseparably connected’ (TMS, p. 167). This is all part of nature’s deception to promote the multiplication of the species through the provision of plenty. But while a benevolent person will never fall into this trap as he, or she, would go through a proper sympathy exercise and would never find an agreement of sentiments with actions which merely produce material wellbeing, the self-interested agent may find it convenient and suitable to follow this line. Namely, a self-interested individual will take advantage of the fact that people find it easy to identify with, and approve of, the rich regardless of the way in which their wealth has been acquired, to command respect and reputation not through good behaviour but through behaviour which generates wealth. Hence, the increase in social distance in commercial society will lead the self-interested individual from point A′ to point B′ where he substitutes one misguided form of sympathy (based on the gratitude of the others) with another (based on the deception by nature). But while B— the position of the benevolent agent—represents a codification of a rule established through proper application of sympathy in a small circle but applied as rule of behaviour (expressive rationality) to society at large, B′ represents a shift from the actual process of trying to feel as others would had one been in their place, to a simple observation according to which maximising one’s material wellbeing will provide the social approbation one is seeking regardless of what a proper exercise of an imaginary change of places will produce. In some strange sense, the rational utility maximiser of modern economics is nothing but the expressively rational

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behaviour of the socially minded self-interested individual in Adam Smith. It is expressive because it is a rule of generating material wellbeing irrespective of its effect on the others, assuming that it will provide one with not just the material outcome but also the respect and admiration they desire.

8.2.3 The Corruption of Sentiments On the face of it, ‘sympathy’ is an expression of our interest in the fortunes of others. Because we care about them, we endeavour to share their experience by trying to feel as they would, had we been in their place. Nevertheless, is spite of the fact that there might be a genuine interest in the others which causes ‘sympathy’, there always seems to be some benefit to the observer. ‘Whatever may be the cause of sympathy … nothing pleases us more than to observe in other men a fellow-feeling with all the emotions of our own breast’ (TMS, p.  13). In other words, it is not inconceivable that it is OUR expected pleasure from the harmony of sentiments which dominates all other possible causes to our practice of the imaginary change of places. However, Smith believes that the mere pleasure of harmony is unlikely to completely override interest in the fortunes of others as the cause of ‘sympathy’. This is so because the actual process of ‘sympathy’—the effort involved in putting one’s self in the position of another—is a not a trivial exercise. One needs to ‘exert’ one’s self considerably to understand the circumstances of the other and to do it only for the pleasure of harmony is, in Smith’s view, highly unlikely. Consequently, he rejects the view that ‘sympathy’ can be driven by self-interest (TMS, pp. 13–14). But he does allow the confusion of the interest in the others with the pleasure of harmony in the case of ‘utility’. Smith claims that ‘we are sometimes eager to promote the happiness of our fellow creatures (genuine interest in the others) from a view to perfect and improve a beautiful and orderly system (aesthetic based pleasure of harmony) rather than from care to what has befallen them’. Therefore, both ‘interest in the fortunes of others’ and the ‘pleasure of harmony’ may be present in ‘sympathy’ as well as in ‘utility’. Smith finds

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it difficult to believe that the ‘pleasure of harmony’ can override the ‘interest in the others’ in the case of ‘sympathy’ but finds it possible in the case of ‘utility’. Consequently, ‘self-interested’ people are more likely to be dominated by the sense of ‘utility’ rather than by ‘sympathy’. The little bit of interest which exists in them is the one which is associated with their own rank and reputation. Hence, if we are to consider the two sentiments underlying both ‘sympathy’ and ‘utility’—‘interest in the others’ and ‘pleasure of harmony’—it is more likely that such people will have a much greater interest in the ‘pleasures of harmony’ than in the ‘interest in the fortunes of others’. As the ‘pleasure of harmony’ cannot substitute the ‘interest in the others’, according to Smith, in the case of ‘sympathy’ but it can, in the case of ‘utility’, it is unlikely that a person with little interest in the others will employ ‘sympathy’. Moreover, if one is only interested in the ‘pleasures of harmony’, why should one exert one’s self to an imaginary change of places when one can simply derive it from ‘utility’? There is direct evidence to suggest that ‘sympathy’ and ‘utility’ may be substitutes in a person’s character. Smith makes this point clear with reference to the origin of authority: ‘Men in general follow these principles [“sympathy” and “utility”] according to their natural disposition. In a man of bold, daring, and bustling turn the principle of utility is predominant, and a peaceable, easy turn of mind usually is pleased with a tame submission to superiority’ (LJ, p. 402).50 The implications of all this for the ethical dimension of Smith’s works are considerable. It means, first of all, that there are, in practice, competing methods of moral evaluation: ‘sympathy’ and ‘utility’. There can be no doubt that Smith considered propriety (coincidence of sentiments)— and not pleasure as such—as the key notion of moral approbation.51 However, it is still through the sense of pleasure that we get from har Submission to authority is explained by ‘sympathy’: The principle of authority ‘arises from our sympathy with our superior … we admire their happy situation, enter into it with pleasure, and endeavour to promote it’ (LJ, p. 401). 51  But it is not only that Smith finds the judgement that is based on ‘sympathy’ as different from the one that is based on ‘utility’. He also argues that one of them—‘sympathy’—is more legitimate than the other. He insists: ‘it seems impossible that the approbation of virtue should be a sentiment of the same kind with that by which we approve of a convenient and well contrived building’ (TMS, p. 188). Yet he admits, as we have shown before, that on many occasions people do tend to confuse the two. 50

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mony of sentiments that we approve of things. It is therefore difficult to see how the pleasure we get from a well-contrived machine, or system, can really be distinguished from the pleasure we get from the harmony of sentiments. Indeed, Smith’s entire part 4 is devoted to ‘the Effect of Utility Upon the Sentiment of Approbation’ (TMS, p. 179). This means that Smith explicitly considered the possibility that individuals might confuse the sense of pleasure they get from the beauty of the system with the one they would have got from experiencing harmony of sentiments. But not only that, he tells us that ‘so far as the sentiment of approbation arises from the perception of this beauty of utility, it has no reference of any kind to the sentiments of others’ (TMS, p. 192). This seems to suggest that only when one has little interest in the fortunes of the others will one use ‘utility’ as a means of approbation. This, of course, fits perfectly well the ‘self-interested’ character. The following diagram summarises Smith’s complex conception of human character and the means by which they are likely to morally judge: Interest of care for one’s self

Corruption of moral sentiments and human character

Moral judgement

Sympathy

High Selfish K

T Self-interested

Benevolent

K

T

Utility

Low Low

R0

High

Interest in the others

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The heavy diagonal from top left to bottom right is the consistent character line as depicted in the previous diagram. It depicts, in a continuous manner, the relationship between own-regarding and other-­ regarding behaviour, which would constitute—according to Smith as well as reason—consistent combinations. We now add a new vertical axis on the right which measures the origins of one’s moral evaluation. This varies from ‘utility’, which means that a person only judges by the pleasure derived from the beauty of the system, to ‘sympathy’ where an individual judges only through a complete and impartial imaginary change of places. The green line from bottom left to top right represents the relationship we mentioned, according to which the greater is the interest a person would have in the others, the more likely they are to judge according to sympathy. The areas K and T in the above diagram depict the consistency conditions between interest in the others, intensity of care for one’s self and the method one is likely to use to form moral opinions. T suggests a high intensity of care for one’s self which must correspond to low interest in the others and, therefore, a corrupt sense of morality based on utility, or the beauty of the system. Area K suggests an interest in the other and a method of moral evaluation which is consistent with human’s natural uncorrupted tendencies. Smith was clearly of the view that most people tended to behave like the self-interested person and they are more likely to employ the corrupt method of approbation. Consequently, the beauty of natural liberty as a natural order which produces co-ordination even in market prices could lead such individuals to morally approve of the system even though many of them will fail to achieve the social approbation they seek as income distribution, and hence consumption, will be unequal. In terms of our generalised framework, what we see in this process, of first the deception by nature and then the corruption of moral sentiments, is a convergence to the modern economic take of human behaviour:

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The rise of social distance and socialisation Interest in the others (R) Expressive rationality B

A

IIO(R0) al

ion

B’

A’

l nta

me

tru

Ins

at ly r

Irrational

C

D1

D0

Domain of considerations

We started with a low social distance where people employed sympathy as a mechanism for establishing what is right and good so that one will acquire social approbation. We saw that the self-interested individuals would use sympathy in a mercenary fashion but nevertheless, the ­feelings of the other will play a role in his or her considerations. The increase in social distance associated with the rise of commercial society would allow nature’s deception to lead the self-interested agent to act in a way that will materially enrich him but for the purpose of commanding admiration and respect. The difference between this and the modern rational utility maximiser is that here riches have another, social, purpose. With the corruption of moral sentiments, the other disappears from one’s considerations altogether and we move from B′ to C, where we behave like the true modern rational utility maximiser. We seek the best means to achieve the end which is material wellbeing and the moral approbation is derived from the beauty of the system. Such behaviour, being corrupt, is a distortion of human sociality. In some ways, one can see much of it in today’s world. The admiration which people may have of the working of markets is captured by the

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aesthetical admirations they have towards the expression of markets. Many stare in awe at the skyline of financial districts of big cities. They see in the beauty of the buildings an ultimate expression of the beauty and success of the market system. They all want to be part of it because they know that if they were, they will not only succeed in acquiring material wealth but also be the object of these adoring and admiring sentiments. This sense of awe and trust in the system will not be much diminished if, as is more likely to be the case, they find themselves living a difficult life of unnoticed poverty at the foot of these towers of success. Obviously, this needs further study and goes beyond the objectives of this book but one cannot help thinking of how relevant Smith’s complex system of morality is for today’s world.

8.3 T  he Moral Benchmark II: The Analysis of Systems and Distributions Not to lose sight of what it is that we are trying to achieve here allow me to remind the reader that the reason we delved deeper into Smith’s moral theory was to explain how it is that the system of natural liberty, though driven by the nature of things and working in its service, is nevertheless undermining the course of humanity. We saw first that though natural liberty may, in principle, produce an outcome in which the objectives of nature and those of humanity may coincide (natural rate equilibrium), such an outcome is highly unlikely to materialise. While competition may push prices towards their natural levels, the deception of nature which taught people to acquire their social position through wealth accumulation will ensure that surpluses are never fully utilised in the hiring of productive labour (i.e. investment). Hence, we argued, there was an expediency reason why natural liberty fails to deliver if we focus on the social context—the search for social approbation—of the system. But if we only look at the production of material wellbeing, the co-ordinating power of the system will produce an impressive outcome which is clearly better than that which is offered by mercantilism. We then claimed that even if we overlook the expediency issue, there are

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other moral considerations which undermine the working of natural liberty in the sense that it will both delude people into believing that it is morally good as well as fail the test of moral approbation when based on the idealised process of moral evaluation guided by a truly impartial spectator. We noticed that the claim—held by modern economists—that Smith proposed the system of natural liberty for its morality as much as for its expediency is based on the analysis of the two ends of the system. If the system is driven by a morally good character (the self-interested one is not a selfish character) and produces beneficial outcomes (even if unintended), there can be nothing wrong about it. In the previous part we claimed that while it is true that self-interest is not the same as selfishness, it is nevertheless not a character which would be deemed as an ideal of human behaviour or the manifestation of that which is morally good. At the other end of the economic system we noticed that in spite of the beneficial outcomes in terms of the production of material wellbeing, Smith was greatly concerned about the distributional consequences of such a system. This means that at both ends of the system what we have is something which clearly falls short of that which is morally good. However, the fact that something is not morally good does not mean that it is morally bad. There is one additional level in between which we may call just. The system may not be morally good but it could, in principle, be just. From the social perspective, there is a question of whether society should aim at things which are merely just or endeavour to find that which is morally good. This is a question which we will not explore here but we will want to establish whether or not the system is indeed just and, if so, are there any conditions which must be fulfilled for this to hold true. Naturally, in order to resolve Smith’s apprehension about the natural distribution of things and claim it to be at least just, we must establish what is meant by justice. If justice means individual freedom and ‘adventitious but perfect rights to property’,52 then it contains no distributional elements and one cannot defend the natural distribution of things as 52

 See Werhane (1991, p. 179) and Salter (1994, 2000).

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being just. This means that by saying that commercial societies, which are based on self-interest, are just, the distributional concerns of Smith become merely a matter of optional niceties (equivalent to Smith’s own distinction between benevolence, which seems optional, and justice, which is compulsory). They cannot be the source of serious misgivings regarding natural liberty. In part, the shift among Smith’s scholars towards the ‘just’ and away from the ideal of the ‘good’ could be a reflection of the state of moral theory in the latter part of the twentieth century and subject to the influence of Rawls.53 However, there are two obvious difficulties with this approach. Firstly, while Smith’s ethics is clearly not utilitarian, it is by no means deontological. As was demonstrated elsewhere,54 there is only one process of moral evaluation in Smith. The distinction that is subsequently drawn between justice and moral goodness is really a question of degree rather than a question of substance. Secondly, and not unrelated, it is far from obvious that one can restrict Smith’s notion of justice to individual freedom and property rights construed as the right to what is one’s own (ius in re) while ignoring completely what is one’s due (ius ad rem).55 This is particularly strange given the mostly overlooked claim by Smith that the voluntary nature of benevolence (as opposed to the compulsory nature of justice) is only relevant among equals. Benevolence too may become compulsory under some circumstances and the question one would need to address is whether economic interaction was perceived as an interaction among equals. In any case, the question we face now is whether Smith’s reservations regarding commercial society could be attributed to the failure of natural distributions to satisfy some moral criterion. In Smith, human sentiments are focused on the ‘degree of merit and demerit’ of either virtue or vice when it comes to establishing the moral appropriateness of distributions. Thus, it is by no means sufficient to establish whether one’s charac In his Theory of Justice, Rawls proposes to counter the often-difficult-to-defend reign of Utilitarianism as the predominant moral theory. Utilitarianism is a teleological theory in which the right is derived from the good. Rawls’s attempt is deontological where, in broader a term, that which is right is determined independently from that which is good (see a discussion in his Chap. 7). 54  Witztum (1997). 55  Witztum (2005a). 53

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ter is morally good or not in order to find whether the distribution of things is morally acceptable.56 For this, we would need to examine one’s actions in order to establish the degrees of merit. This means that the moral evaluation of the economic system cannot be based on the analysis of the two ends of the process. The morality of selfinterest or the beneficial consequences are not enough to pass moral judgement over the system of natural liberty. Instead, it must depend on the analysis of the process in which the beneficial outcomes are produced and the way it is being distributed among its actors (very much in line with our critique of justice in modern economics in Chap. 4). There are two main reasons why I believe that the clue to Smith’s moral ambiguity regarding commercial societies may be found in the analysis of distributions and actions. Firstly, the moral analysis of actions is a cornerstone in Smith’s moral theory. It deals with the application of the principle of moral evaluation to the most obvious subject of moral examination: human interaction. It provides the criteria for both the propriety of actions and that of desert (the merit and demerit of reward and punishment). Given our duty to correct nature’s distribution, the nature and status of merit (and demerit) must surely lie at the centre of his moral theory. Indeed, it seems that there is a complete correspondence between the categories of moral judgements created in his theory of actions and his famous articulation of the three possible social states representing the nature of human interdependence. Secondly, an economic system is really a system of actions and interactions where agents act and—to use Smith’s terminology—are being acted upon. Hence, it is surprising how little attention has been given to the analysis of action in trying to understand Smith’s reservations about commercial society. Young (1986) attempted to deal with the morality of natural liberty from the point of view of interaction by examining the moral significance of exchange. This is clearly a step in the right direction. However, his reference point was not the analysis of actions but the judgement of an ‘impartial spectator’ with a social conscious who is concerned with the good of society. This again, leaves us with a somewhat

 Had the knave, in Smith’s example, not been industrious, should he have been given anything at all? Equally, had the indolent man not been a man of virtue, would he deserve reward? 56

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general conclusion, which is not altogether different from the view which sanctions natural liberty for its proposed unintended benefits. Therefore, in this section we will examine Smith’s analysis of the action cycle and attempt to extrapolate from it the principles for the moral evaluation of a set of actions which is, after all, what the system of natural liberty is really about. I will endeavour to show that the moral value of an action depends not only on the propriety of motives to act but also on the propriety of the sentiments invoked in the person who had been acted upon. This will produce three types of moral assessments. Firstly, we have the actions where there is propriety in motives, appropriate choice of action and proportional benefits to the person who had been acted upon. This is an action where an ‘impartial spectator’ would expect (a duty?) the person who had been acted upon to act on his sense of gratitude and reward the cause of his good fortune (i.e. redistribution). Secondly, there are those actions where the ‘impartial spectator’ does not share the sentiments of either gratitude or resentment. They would therefore, not require any redistribution. The third type of actions is where the ‘impartial spectator’ approves of resentment. This means that punishment (or possible retribution based  redistribution) should be administered. This category of actions clearly fit the category of commutative justice. The significance of this last type of actions cannot be overstated. The received view with regard to what constitutes justice in Smith is that only the violation of the rights, which people have as people, are within the domain of commutative justice. Hence, there is no role for distribution in the analysis of justice. This interpretation has been questioned recently from the point of view of the analysis of property rights. This last type of actions opens the door to a different justification for matters of distribution to become part of commutative justice. In many respects, Smith’s analysis follows that of Aristotle, although this is not clear from his own account.57 Aristotle distinguishes between ‘distributive’ and ‘rectificatory’ (or, corrective) justice. The former is concerned with ‘the distribution of honour or money or such other assets as are divisible among the members of the community’, and the latter ‘rectifies the  There has been a revival of interest in the general influence of Aristotle on Adam Smith. Berns (1994), Vivenza (2001) and Fleischacker (1999) are a few examples. 57

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conditions of transaction’ (Aristotle 1953, pp.  176–177). Distribution, argues Aristotle, should be based on merit, which is derived from the political culture of society and is not dependent on specific actions. But it is rectificatory justice, which is the concept most relevant to economic analysis as it treats all agents as socially equal and solely focuses on their actions. In terms of the later distinction between commutative and distributive justice, it is clear that both of Aristotle’s definitions of distributive and rectificatory justice are present in both concepts of commutative and distributive justice. Given that the first two parts of the TMS are devoted to what Aristotle calls ‘rectificatory’ justice, it is particularly unclear on what grounds have distributional matters been excluded from the question of justice.

8.3.1 The Moral Analysis of Actions Smith’s theory of actions and their moral evaluation is spelt out in the first two parts of the TMS.58 The lengthy and sometime complex analysis of how to evaluate properly the cause and effects of an action may hide the very simple foundation upon which Smith conducts his analysis. It is nevertheless revealed explicitly towards the end of his analysis: Whatever praise or blame can be due to any action, must belong either, first, to the intention or affection of the heart, from which it proceeds; or, secondly, to the external action or movement of the body, which this affection gives occasion to; or, lastly, to the good or bad consequences, which actually, and in fact, proceed from it. These three different things constitute the whole nature and circumstances of the action, and must be the foundation of whatever quality can belong to it. (TMS, p. 92)

In other words, the moral evaluation of an action depends on the composite relationship between the motive to act, the choice of action and the outcome. This means that looking at motives or outcomes alone does not constitute a complete judgement of an action cycle. 58

 Section 3 of part 1 till the end of part 2, to be precise.

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Let me begin by presenting Smith’s idea of an action through this proposed decomposition of it. The first part of the action cycle, which broadly deals with the motive to act, is the subject matter of what Smith calls propriety. It is important to note that by motive here Smith is not dealing only with the general question of what drives human character. Instead, in the analysis of action, he looks at the manifestation of these general motivations in the performance of particular actions. In other words, he is looking at the manifestation of general motivations in the face of specific circumstances. The second part of the action cycle is the subject of what Smith calls Merit or Demerit. This part deals with the response of the person who had been acted upon. Here, there are two dimensions to the problem. Firstly, there is the question of whether the sentiments invoked in that person are justified. This, according to Smith, would depend on the nature of the outcome and the extent to which the person who acted was responsible for it. Secondly, the question arises whether the person who had been acted upon should himself act on the sentiments invoked in him. Namely, should he reward or punish the actor and is this form of desert optional? Ultimately, the moral judgement of the action would rest with the ‘impartial spectator’s’ approval of the sentiments invoked in the person who had been acted upon.

Propriety The first stage of the cycle is the subject of what Smith calls propriety.59 Here we examine the relationship between (a) circumstances, (b) motives (sentiments) and (c) the subsequent action: The sentiment or affection of the heart from which any action proceeds, and upon which its whole virtue or vice must ultimately depend, may be considered under two different aspects, or in two different relations; first,  As a matter of fact Smith’s entire moral theory is based on the principle of ‘propriety’. However, following his own structuring, I distinguish between propriety and merit, although in both cases the measure of moral approval can be said to be propriety. 59

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in relation to the cause which excites it, or the motive which gives occasion to it; and second, in relation to the end which it proposes, or the effect which it tends to produce. In the suitableness or unsuitableness, in the proportion or disproportion which the affection seems to bear to the cause or object which excites it, consist the propriety or impropriety, the decency or ungratefulness of the consequent action. (TMS, p. 18)

To draw conclusions that are more general from the above, we note that as far as actions are concerned we are interested in motives in as much as they affect the others.60 Hence, to make the analysis meaningful we shall look at motives in terms of what they propose for to others, that is, they will range from benevolence to malevolence.61 The self-interested motive (to distinguish it from the self-interested character), on such a scale, means that the actor intends nothing for the other. Equally, actions too are defined in terms of their proposed  consequence to the others. That is to say, they range from the beneficent to the harmful. The key words in propriety are ‘suitability’ and ‘proportion’, namely whether the sentiment that was invoked by certain circumstances stands in some proportional relation to these circumstances. To establish this, we must bring ourselves to a position of an ‘impartial spectator’. Then we can see whether we would have felt the same had we been in place of the subject of approbation. If there is a coincidence of sentiments between the ‘impartial spectator’ and the subject of approbation, then there is ‘suitability’. In other words, a sentiment is suitable to the circumstances that invoked it only if everyone, in that position, would have felt the same.62 However, this is not the only ‘suitability’ that is required by propriety.  Which, I believe, is also consistent with Smith’s analysis of the three types of passions which rests in all humans: the social, unsocial and selfish (see TMS, pp. 34–42). This distinction between them seems to be based on the attitudes towards the others which are embedded in each type of sentiment. 61  Notice, however, that Smith’s analysis is in the discrete form. Namely, there are no degrees of benevolence or malevolence. 62  With respect to Smith’s analysis of action, the idea of the ‘impartial spectator’, as we hinted before, seems to resemble the Kantian notion of the ‘Universal test’ (see Kant, Ground Work of the Metaphysic of Morals, p.  88). Kant also uses explicitly an idea of the ‘impartial spectator’ in his ‘Reflection on Anthropology’. There, however, he describes the ‘impartial spectator’ as the observer 60

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Once it is established that a person’s feelings were reasonable in relation to the circumstances that had invoked them, we must also ask whether an ‘impartial spectator’ would have acted in the same way. This corresponds to what Smith’s refers to as ‘the external action or movement of the body’ (TMS, p. 92) as one of the three determinants of the action’s moral value. We must examine whether the choice of action was suitable to the sentiments, which drove the person to act as well as to its proposed consequences. In other words, we must again ask ourselves whether or not, had we, or anyone else, been in place of the subject of approbation, we would have acted (not just felt) in the same way. The importance of design and intent in Smith’s analysis of the morality of actions cannot be overstated.63 This, of course, may shed some light on the real significance of unintended consequences as Smith, the observer, is acutely aware of the tendency that people have to attribute good fortune or harm to the immediate objects which tend to generate them. However: Before any thing, therefore, can be the complete and proper object of either gratitude or resentment, it must possess three different qualifications. First, it must be the cause of pleasure in the one case and of pain in the other. Secondly, it must be capable of feeling those sensations. And, thirdly, it must not only have produced those sensations, but it must have produced them from design, and from a design that is approved of in the one case, and disapproved of in the other. (TMS, p. 96)

But what exactly is meant by the approval of design? Evidently, Smith is referring here to the ‘impartial spectator’ who would not only have felt the same as the subject of approbation but would have transformed these feelings into the same kind of actions. However, while it is quite easy to comprehend the approval of an ‘impartial spectator’ with sentiments and motives, it is less obvious with regard to actions. who views things from the point of view of society without giving any account of how this spectator formulates society’s point of view. 63  ‘To the intention or affection of the heart, therefore, to the propriety or impropriety, to the beneficence or hurtfulness of the design, all praise or blame … must ultimately belong’ (TMS, p. 93).

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In the case of design, it must mean that the observer has some knowledge of the proposed consequences of various possible actions.64 This knowledge, in turn, is inevitably composed of two elements. Firstly, the observer must be able to establish whether the action that was chosen had a reasonable chance to bring about a proper manifestation of the sentiments which invoked it. In such a case, when a good intention turns harmful we can attribute it to fortune rather than a mistaken choice of action. Secondly, the observer must also be conscious of what might be the likely consequences to society if this kind of action habitually followed these kinds of sentiments. For instance, on many occasions we may feel that we could sympathise with the anger of another person. We would approve of such sentiments in relation to the circumstances that invoked them. However, anger, when transformed into action, may result in harming someone—the cause of that anger. Naturally, the ‘impartial observer’ must first consider whether the choice of action (in terms of its proposed consequences) stands in some proportion to the sentiment from which it sprang.65 Namely, we must be quite sure that, say, shaming that person in public will indeed harm him according to our intent or, that it may snowball into such a state in which the whole family is affected and the person must leave town. But in the case of transforming sentiments into actions, there seems to be another proviso. The ‘impartial observer’ must examine whether allowing a free transformation of such sentiments into such actions may prove dangerous to society as a whole.66 For instance, in the case of resentment and hate, Smith believes that an ‘impartial spectator’ may feel ‘sympathy’ with the subject of approbation (i.e. everyone would have felt the same). Nevertheless, as far as transforming this hate, or resentment, into a harming action is concerned, Smith is quite adamant.  This knowledge, in Smith, probably means that the action that would have been taken by someone who is not directly involved and thus whose judgement is not clouded by emotions. 65  The discussion of resentment and the general problem with unsocial sentiments can be found in TMS, pp. 34–38. 66  Here too we may find some resemblance to the Kantian idea of the ‘universal test’. For the ‘impartial spectator’s’ approval of sentiments we needed a universal test in the sense that all would have felt the same had they been in place of the subject of approbation. Here, however, we are concerned with action. The ‘universal test’ means to ask ‘what if everyone acted in this way?’ which is perhaps even closed to the Kantian idea and use of the Universal test. 64

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‘There can be no proper motive for hurting our neighbour … which mankind can go along with’ (TMS, p. 82). Namely, although we may approve of someone’s feelings in certain circumstances, we confront, all of a sudden, a sort of a Kantian ‘categorical imperative’. It is a kind of ‘categorical imperative’ because the reason Smith believes that an ‘impartial spectator’ will never consider a harmful action as suitable to the approved resentment is its ‘universal test’. ‘Society’, writes Smith, ‘cannot subsist among those who are at all times ready to hurt and injure one another’ (TMS, p. 86). Obviously, the reason for rejecting the harmful action is not the absence of suitability between it and the resentment or hate behind it, but rather its global significance. If everyone would act in such a way habitually (i.e. at all times), society could not subsist. In other words, in Smith’s system, the ‘suitability’ of an action to the sentiment that invoked it is examined at two different levels. At one level, there is the question of whether or not the particular action fits the sentiments, which gave rise to it in the sense that it would produce (with high probability) the intended outcome. The other level is the global significance of such an action. Namely, what would be the effect on society if all individuals acted similarly in response to certain sentiments? Notice that this question is also related to our earlier discussion of expressive rationality and the mechanism through which, patterns of behaviour are followed irrespective of the specific consequences of an individual action. 

Merit and Demerit In the beneficial or hurtful nature of the effects which the affection aims at, or tends to produce, consists the merit and demerit of the action, the qualities by which it is entitled to reward, or is deserving of punishment. (TMS, p. 18)

The second stage of the action cycle is the subject of the theory of desert (or merit and demerit). It is the analysis of the propriety of the sentiments that are felt by the person who had been acted upon. As such, it is where the final judgement on the action is proclaimed. As we said earlier both intention (motives) and outcomes are measured in terms of what they propose to the other. The sentiments of the actor

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range from benevolence to malevolence and the outcomes to the person who had been acted upon range between beneficence and harm, and that upon the beneficial or hurtful effects which the affection proposes or tends to produce, depends the merit or demerit, the good or ill desert of the action to which it gives occasion. (TMS, p. 67)

However, according to Smith there are only two types of sentiments invoked in the person who had been acted upon. They are gratitude or resentment. These sentiments are in themselves the ‘motives’ for a subsequent action called desert. As they so narrowly defined, so are the actions that comprise desert. They are either reward, punishment or no action at all. In broader economic terms, whenever there is a sanctioning of either reward or punishment, there is an implicit call for redistribution. When neither reward nor punishment is approved, the natural distribution of things should be left untouched. Gratitude is a feeling that would be felt by the person who had been acted upon when the outcome of the action was beneficial to him. Resentment would be felt when the outcome was hurtful.67 Desert, therefore, is [t]o be the proper and approved object either of gratitude or resentment, which naturally seems proper, and is approved of … when the heart of every impartial spectator entirely sympathizes with them. (TMS, p. 69)

However, whether gratitude, or resentment, is duly felt depends primarily on whether or not the action that has brought about those outcomes was ‘proper’. Namely, whether the sentiments that invoked it were ‘suitable’ to their circumstances and whether the choice of action was appropriate: ‘It is to be observed’ writes Smith, ‘that, how beneficial soever on the one hand, or how hurtful soever on the other, the actions or intentions of the person who acts may have been to the person who is, if I may say so, acted upon, yet if in the one case these appears to have been no propriety in the  Obviously it is possible to consider situations where individuals behave differently, that is, they might feel resentment in spite of a beneficent outcome. It will be up to the ‘impartial spectator’ to determine whether or not the particular circumstances of the person who is being acted upon allow a reversed respond from what an innocent observer might expect. 67

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motives of the agent, if we cannot enter into the affections which influenced his conduct, we have little sympathy with the gratitude of the person who receives the benefit; or if, in the other case, there appears to have been no impropriety in the motives of the agent, if, on the contrary, the affections which influenced his conduct are such as we must necessarily enter into, we can have no sort of sympathy with the resentment of the person who suffers.’ (TMS, pp. 71–72)

Hence, to understand desert and, thus, the moral evaluation of the action, we have to consider the cycle of action in its entirety. We are now confronted with four possibilities: The moral evaluation of actions Impartial spectator’s judgement Impartial spectator’s Consequences to the person who had been on the sentiments invoked in judgement of the the person who had been motives and choice acted upon and the acted upon sentiments invoked of action Approve

Beneficent—Gratitude Harmful—Resentment

Approve—Reward Disapprove—No action

Disapprove

Beneficent—Gratitude Harmful—Resentment

Approve—No action Disapprove—Punishment

The approval or disapproval of gratitude and resentment is somewhat more complex. It represents the ‘impartial spectator’s’ approval (or disapproval) of the second person’s response in action. Namely, the ‘impartial spectator’ may feel that he would have felt the same as the person who was acted upon due to this person’s own circumstances. However, given the nature of the action and the objective nature of the outcome, he might not approve of the second person’s acting on his sentiments. There are three values of desert: reward, punish and no action. The first two suggest redistribution of sort while the last suggests no intervention (is this how we should treat the outcomes of natural liberty?). These three values of desert generate, in principle, three moral categories. These correspond nicely to Smith’s own distinction between the three possible social states that we have mentioned before: It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human

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society stand in need of each others assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy. … But though the necessary assistance should not be afforded from such generous and disinterested motives, though among the different members of the society there should be no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved. Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; … Society, however, can not subsist among those who are at all times ready to hurt and injure one another. (TMS, pp. 85–86, my italic)

Naturally, there is a distinction between the evaluation of a single action and the analysis of a social state. While the outcome of a single action may be accidental, the social state is about the habitual practice of agents in terms of their motives to action, their choice of actions, the effects on others and the others’ response. I use this social ranking benchmark merely to confirm that in my formulation of the action cycle I have not departed from the principles which guide Smith’s analysis. However, the insight we can derive from the analysis of actions is much greater. We shall now examine in more details how each of the general states of society can emerge.

The Morally Good Action and the Morally Good Social State In the good social state, ‘the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem’. Consequently, society flourishes. The actions, which would dominate such a social state, must therefore be those where: 1. the impartial spectator approved of the motive and the subsequent choice of action (i.e. propriety); 2. the action was beneficent to the person who had been acted upon and invoked in him a sense of gratitude; and

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3. the impartial spectator approves of the gratitude felt by the person who had been acted upon. As such, one may say that such an action reached the peak of approval and, therefore, commands the highest moral value of, say, a good act. However, Smith does not leave the story at this. As the person who had been acted upon experiences gratitude, which is approved by an ‘impartial spectator’, there is an expectation that the person who had been acted upon should now act on his own sentiments and reward his or her benefactor. This reward is, in fact, a form of redistribution: ‘To reward is to recompense, to remunerate, to return good for good received’ (TMS, p. 68). Given the significant role of proportionality in propriety, it would not be farfetched to interpret reward as having to be proportional. After all, the action of reward can be construed as a separate action, the approval of which depends on the propriety of the reward-action. It is true that Smith makes clear that failing to reward one’s benefactor turns one into an ‘object of hatred’ but not of resentment (TMS, p. 79).68 It is also true that Smith believes that such an appropriate response could not be extracted by force. However, Smith does qualify this to the ­relationship amongst equal: ‘Even the most ordinary degree of kindness or beneficence, however, cannot, among equals, be extorted by force’ (TMS, p. 80). But this is not the same when people are not equal. ‘The civil magistrate’, writes Smith, ‘is entrusted with the power not only of preserving the public peace by restraining injustice, but of promoting the prosperity of the commonwealth, … he may prescribe rules, therefore, which not only prohibit mutual injuries among fellow-citizens, but command mutual good-offices to a certain degree’ (TMS, p. 81). This means two different things. Firstly, it means that the duty of someone in power is to ensure that in some cases and to a certain degree reward should be as compulsory as punishment is in the case of injury. In other words, even among equals the duty of recompense may be enshrined in law if there is someone who may be able to force it.69  For Smith, resentment is within the domain of justice while hatred is not.  In Witztum and Young (2006) we show how politics interfered with the transmission of what would constitute justice in the eyes of an ‘impartial spectator’ onto law. 68 69

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Secondly, there is an implicit admission here that when there is inequality between the two agents, the duties of the one with greater power are greater than those who are without it. This, I will later show, becomes an important issue when we come to investigate economic interactions in the presence of property rights. So will the good social state remain good irrespective of whether the good action generated reward? Naturally, if the beneficial action were intended to generate reward, it would lack propriety and, thus, would not fall into the category of the good state. However, if there had been propriety and reward did not follow, it means that some agents have become the object of hate and as such this cannot constitute a state of harmony and good fellow feeling. Indeed, Smith quite clearly claims that the good state is that of gratitude as a motive to action and reciprocity. The call for a higher authority—with power—to enforce reward seems to be in line with the centrality of reciprocity for the good social state to emerge. In other words, a good social state is where there is propriety of actions and appropriate reciprocity (i.e. redistribution) as the natural distribution of things (the unintended consequences) may be inconsistent with moral expectations.

 e Subsisting Social State: The State of Morally Acceptable Th Actions In this state, ‘though the necessary assistance should not be afforded from such generous and disinterested motives, though among the different members of the society there should be no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved’. We saw already that even a good action, where there has been no reward, might cause hatred and unhappy feelings. This means that even a benevolent action may slip into Smith’s second state of unhappy subsistence. In this sense, what distinguishes the good social state from the subsisting state is that in the former due reward is distributed while in the latter it is not. Failing to act on the demand for reciprocity is a lower moral state to the one where the impartial spectator approves of

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the behaviours of both those who act and those who are being acted upon. Recall that the difference between the discussion of a single action and a social state is that while an action is an ad hoc event, when we refer to a social state, we refer to the habitual nature of actions. Namely, in the socially good state, people usually act out of proper motives (thus there is propriety in most actions) and choose actions which reflect these motives. They generate intended beneficence such that most people who had been acted upon act on their sense of gratitude and reciprocate. When a good action slips into the subsisting state, it is, again, because of the habitual refusal by those who benefit to reward their benefactor. This creates a continuous state of disharmony between most members of society. However, there are other cases where there is no reward (or punishment), a situation which is typical of the subsisting state. Unlike the previous case of failing to reciprocate when reward was due, in these cases an ‘impartial spectator’ has not sanctioned desert (either reward or punishment). There are two such cases. Firstly, we have the case where gratitude is not sanctioned because of the lack of propriety (i.e. the motive or the choice of actions have not been approved by the impartial spectator). This is a somewhat delicate and complex case. As was described above, Smith’s terminology here is a bit imprecise. At first, Smith talks about propriety as the ability of the ‘impartial spectator’ to sympathise with the motives of the actor. However, he does recognise that the outcome of actions may not be intended and, therefore, implicitly he extends the idea of propriety to the design. In the action described above the ‘impartial spectator’ disapproves of the first element in the action cycle (i.e. the relationship between circumstances, sentiments and choice of action). As we saw earlier, this means either that the motive to action was not appropriate to the circumstances which invoked it or that the choice of action was inappropriate to the intention. The action chosen generated much more beneficence than was intended and, therefore, according to Smith, gratitude is not sanctioned. In part 2, section 3, of the TMS, Smith conducts a lengthy discussion about the influence of fortune on the sense of merit and demerit. His conclusion is that for something to be the object

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of desert ‘it must not only have produced those sensations [of pleasure or pain], but it must have produced them from design’ (TMS, p. 96). In other words, for a beneficial outcome to generate approved gratitude, the beneficial outcome must stand in some proportion to the intention behind it. Thus, when we say that the first part of the action cycled is disapproved, this does not necessarily mean that the motives behind the actions were inappropriate. It could be simply that the kind of action which serves the approved motive generates an unintended benefit. As it was not intended, the sense of gratitude is not approved and there should be no reward. We may call such an action appropriate or proper but in spite of the possible propriety of the sentiments, which invoked the action, its moral position is inferior to that of the good action. It is conceivable that there are many actions, which are appropriate for a particular end and may generate unintended consequences. If the pursuit of those ends is habitual, we may end up with a social state in which beneficence is generated yet no reward—no redistribution—is sanctioned. Equally, a clear case of impropriety is also possible. In such a case, an ‘impartial spectator’ may disapprove of the motive to action and the choice of action. However, such an action can accidentally generate benefits. Naturally, the sense of gratitude would not be approved. The outcome of both cases is the same but the difference between them is that the previous case is more typical of a habitual state than the case of an accident. If a malevolent intention accidentally produced beneficence, it is unlikely to happen again. Such an action will not habitually fall into this category. The second case of disapproved desert is when the outcome of the action was hurtful. Here, the impartial spectator does not approve of the sense of resentment, which was raised in the person who had been acted upon because there was propriety in the action (the impartial spectator approved both motive and choice of action). Because the choice of action was approved, it means that the reason for failure must be accidental; thus the action, again, is appropriate or proper but it cannot gain ‘full approbation’ as it invoked resentment in the person who had been acted

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upon. The propriety of the first part of the action cycle suggests that acting on the resentment felt by the person who had been acted upon will not be justified. Another possible explanation is that a person may feel resentment even if the approved action was successful. The reason, then, for the resentment, is due to the second person’s circumstances. In such a case, the ‘impartial spectator’ may approve of the actual resentment in the sense that he might have felt the same. But he will not approve of person 2’s acting on it. However, the habitual practice of such actions is unlikely to leave us in the same position. If the harm was created by fortune, habitual practice of actions with propriety will normally be beneficial and thus command reciprocity. In such a case, it will fall into the category of the good actions.

The Bad Action and the Unjust State The two previous cases represented the forms of social interaction, which, according to Smith, may subsist for a long period in spite of being characterised by actions which command different degrees of morality. The good state was that in which there was a considerable amount of harmony between agents who approve—through the idea of the ‘impartial spectator’—of the behaviour of both actors and those who had been acted upon. The morally inferior state is the one where society may subsist but at a considerable lower level of harmony either because there is a universal disapproval of the failure of agents to reciprocate or because of the absence of proportionality between design and outcome (unintended consequences). The unjust case is that case where the actions of individuals threaten the existence of society. As before, the disapproval of the first element in the action cycle may be due to either impropriety of intentions or the failure in the choice of action. Naturally, if there were impropriety in the sense that there was an intention to harm the other, the resentment, which is felt by the person who had been acted upon, would be approved.

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This means that an ‘impartial spectator’ would allow the person who had been acted upon, to act on his resentment and punish the actor. Both the good and the bad actions have something in common. In both cases, the ‘impartial spectator’ expects and sanctions the response of the person who had been acted upon. The apparent difference between the two is that in the case of the good action the reciprocity appears to be optional, while in the case of the bad action it seems to be compulsory. The reason for this is quite obvious. Failing to reciprocate on approved benevolence would be a source of unhappiness but will not endanger society. Failing to punish acts of malice might endanger society as there will be no deterrent from wanting to harm others. ‘Resentment’, writes Smith, ‘seems to have been given to us by nature for defence, and for defence only’ (TMS, p. 79). Smith’s analysis of actions produced four types of actions, which seem to fit well into his three possible moral states of society. What typifies the different social states from the point of view of actions is the value of the reward. The good social state was the one in which rewarding the benefactors is sanctioned. The inferior yet viable second state is the one where desert is not sanctioned and the bad state is the one where punishment is sanctioned. The need to activate desert is essential. Without punishments in the bad case, society may not exist and without reward in the good state, society may not flourish.

8.3.2 The Self-interested Action Like any other action, the moral significance of a self-interested action depends on its propriety as well as its consequences. Self-interest, as a motive, means that the actor is seeking to benefit himself while intending nothing at all for the others. Hence, a successful implementation of this intention would mean exactly this: that the actor benefited himself while producing neither benefit nor harm for the others. On the face of it there seems to be a paradox here. If we approve of the motive to preserve one’s self and it is executed in complete accordance with its intentions, this must be a good action. From the point of view of propriety, one can easily imagine the circumstances where a person feels

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that he wants to do only for himself and nothing for the others. After all, according to Smith, this is one of the strongest natural urges. It is therefore quite plausible that an ‘impartial spectator’ would have felt the same in such circumstances. As for the other part of propriety—the appropriate choice of action—it too indicates propriety. When the outcome was neither beneficial nor harmful to the others, the choice of action is proportionate to the proposed outcome and, thus, reflects well the motive (intentions). There is, however, one obvious difference between what we considered as morally ‘good’ and this particular action. The self-interested action seems to raise neither gratitude nor resentment. Hence, to some extent, such an action has no moral dimension at all, as it has not affected anyone but the actor himself.70 However, apart from the lack of any sense of gratitude or resentment in the system, there is the question of whether the successful implementation of the self-interested motives depended on what others were doing. It is not inconceivable that a successful implementation of a self-­interested motive depends on, say, others being self-interested as well. It is clear that the idea of natural liberty as a harmonious machine is precisely the general interdependence between members of society. In such a case, we cannot really think of the successful implementation of one’s intention in an isolated manner. If all individuals are self-interested in a similar manner, then we might say that each of them acknowledges the others’ contribution to their success in implementing their own intentions. However, as there was no intention to help the other, any sense of gratitude would have been dismissed by an ‘impartial spectator’. Thus, a ‘self-interested’ action that satisfies one’s expectations but does not produce any benefit for the others will, at best, be considered merely as a proper action in the sense that there is propriety but gratitude, such as there is, could not be sanctioned. Therefore, the habitual practice of self-interest which does not produce any benefit for the others will not take society beyond its viable stage and into the happy and flourishing one.  In TMS, p. 96, Smith specifies what is required for moral evaluation. Someone feeling either gratitude or resentment is one of the conditions. 70

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Quite often the argument about the morality of a self-interested system is focused on the unintended benefits that are generated by its free reign. However, paradoxically, in Smith’s theory, it is precisely such benefits which undermine the morality of the self-interested system. If the pursuit of self-interest is manifested through an action that has a high probability of benefiting the others, its proposed outcome stands in no proportion to the motive. As the beneficence of the outcome cannot be attributed to the intention, any sense of gratitude felt by those who had been acted upon would not be approved by an ‘impartial spectator’. There are, therefore, three possible situations which may arise when the sentiment of self-interest is approved by any ‘impartial spectator’. The difference between them is in terms of the proposed consequences of the choice of actions: (i) there is unintended beneficence in the outcome; (ii) there is unintended harm in the outcome; (iii) there are no effects on the other. In the case of (iii) it seems that there is no moral dimension to the problem as people act upon themselves. If we do allow the implicit assistance of other people’s behaviour, then the gratitude is felt by the actor and not by those who had been acted upon. As no one intended to generate this gratitude, it would not be approved by an ‘impartial spectator’ and the action fails to become a good action. In case of (i) the unintended beneficence will raise gratitude in those who had been acted upon (directly or indirectly) but the lack of intention will cause the ‘impartial spectator’ to disapprove of such sentiments. The overall reduced level of harmony suggests that such actions will only yield the socially unhappy state of mercenary exchange of the necessary assistance which we all require in a world of interdependence. In case of (ii) the outcome of the self-interested action was harmful to the others. Evidently, as the pursuit of one’s own interest in a moderate fashion is a motive with which an ‘impartial spectator’ would approve, the harmful outcome must be accidental. The harm was not intended

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and the resentment raised in the person who had been acted upon is not sanctioned by an ‘impartial spectator’. However, as we are focused on a habitual practice of self-interest, both benefits and harm are potentially a regular unintended side effect of such an activity. An action may have a whole host of side effects which are obviously unintentional. If, for instance, there is only one way of pursuing one’s own interest but the side effect is beneficial, the fact that we repeatedly act in the same way does not mean that at some point  we begin intending the side effects. Consequently, the gratitude of unintended consequences, according to Smith, will never be sanctioned. But what about a harmful side effect? In principle, the analysis should be symmetrical in the sense that repetitive use of a successful measure to serve one’s own interest which generates a harmful side effect does not mean that at some stage the actor begins to mean that harm. But, according to Smith, while society may subsist even when gratitude is not sanctioned, it may not subsist with the regular generation of harm. Thus, in such a case, while there may be only one course of action to fulfil the pursuit of self-interest, if it habitually generates a harmful side effect (even unintended), there is no more propriety in the action and the action sinks into the status of a bad action in an unjust social state. Hence, the nearest to the morally good action that a self-interested motivated action can get is when it does not produce any beneficial outcome to anyone except the actor himself. In such a system, there will be complete harmony of sentiments as the impartial spectator would approve the action and there will be no discord associated with disapproval of false sense of gratitude. Yet, as we said before, the system may, in fact, become morally neutral, which is, of course, what modern economics expects it to be.  When there is an unintended consequence which is beneficial to the others, the disapproval of the ‘impartial spectator’ of the sense of gratitude felt by the others turn this action to the one which was typical of the unhappy, yet viable, social state. When harm is the unintended consequence of the regular pursuit of self-interest, the action falls into the domain of the unjust even though the moderate wish to pursue one’s own interest may be a sentiment with which an ‘impartial spectator could identify.

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8.3.3 A Case Study: The Problem of Exchange To see how the principles of the moral analysis of actions work in a particular case, which is examined by Smith, consider the case of the deer and beaver exchange: If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day’s or one hour’s labour. (WN, p. 65)

Why should they be exchanged according to the relative labour inputs required to bring them to market? And would such an exchange suggest the happy and flourishing state? The first thing we must do is deconstruct the story into specific actions and identify who acts and who, as it were, is being acted upon. Each of the hunters was motivated by their self-­ interest to go out and hunt. Presumably, the typical basket of needs requires both a deer and a beaver. The deer hunter realised that he is good at it and therefore hunts for more than he needs in order to exchange it for the beaver. So, does the beaver hunter. What they bring to the market is that which is above their needs (their subsistence). The deer hunter comes to the market to exchange a deer with beavers. His objective is to pursue his own interest by supplying himself with the appropriate bundle for consumption (and maybe to impress his neighbours). This visit to the market is the final component of his more ­elaborate action of hunting for exchange. Namely, to begin with, the hunt for the animal brought to the market was a self-interested action. He did not hunt the extra animal to benefit anyone except his own family. It took him, say, two hours to hunt the deer. The equivalent story must be told about the beaver hunter. It took, say, four hours to hunt a beaver. If the beaver hunter were to accept one deer for his beaver, the deer hunter would smile. There would be a clear benefit to him. If it took the beaver hunter four hours to hunt the beaver (and presumably he has specialised in this), it would take the deer hunter longer than that to hunt a

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beaver. Yet, he seems to be getting a beaver for half the time of the expert (two hours). Namely, had he tried to hunt the beaver in order to get the desired bundle that would fulfil his physical needs and command the respect of the others, it would have taken him over four extra hours (as he is not an expert). Instead, he now gets the beaver for two hours of his own work. The deer hunter should definitely feel gratitude towards the beaver hunter. Would the impartial spectator approve of this sense of gratitude and demand that the deer hunter reward the beaver hunter? According to Smith’s analysis of actions, gratitude should be approved of only if there was an intention to benefit the other. Our beaver hunter did not intend to benefit the deer hunter and, therefore, there would be no approval of the sense of gratitude which might have been felt by the deer hunter. This means that in such a case, if such actions were habitual, we would find ourselves in the unhappy state of mercenary exchange. Had the beaver hunter exchanged his beaver for three deer, for the equivalent reasons the deer hunter would feel resentment. At six hours per beaver, he might have hunted one himself even without the expertise of the beaver hunter. However, the impartial spectator would not approve of this resentment (and, thus, not sanction any punishment) as there was no impropriety in the action. The beaver hunter did not intend to harm the deer hunter. Evidently, a habitual recurrence of this situation (where harm is caused), after a while, would cease to be unintended. The beaver hunter would have plenty of time to realise that his actions cause hurt. An impartial spectator would no longer accept that there was no intention to harm the deer hunter. Hence, the only situation where the self-interested action was successful for both protagonists and did not create any unintended outcome is when they exchange two deer for a beaver. In such a case, while neither actor intended any good for the other, there was no obvious cause for any of them to feel either gratitude or resentment. The absence of these sentiments prevents the social state from being lifted into the happy and flourishing one in spite of the fact that there was full propriety in the actions and no harm in the outcome. Nevertheless, there is a sense in which both would feel gratitude towards one another. The beaver hunter would be implicitly grateful to the deer hunter who, through the division of labour, saved him time. By

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hunting, say, two animals, he was able to exchange one for two deer. Had he invested the same time in hunting both deer and beavers he would be unlikely to kill as many. In the four hours he invested in hunting the second beaver—the one he had used for exchange—he would not have been able to hunt two deer, which is the output of the professional. Hence, there is a sense in which both individuals are grateful to each other for assisting them in the pursuit of their self-interest. If we accept this implicit sense of gratitude, then the question, which arises, is whether this will call for redistribution. In principle, the impartial spectator would wish the person who feels gratitude to reward the actor. Both deer hunter and beaver hunter feel gratitude, so they must both reward each other. However, they have already been rewarded (the savings in hunting hours) so in a sense their rewards are cancelled out. From the point of view of the impartial spectator, this is the same as the fulfilment of the rules of reward. As such, the self-interested actions become morally good and consistent with the happy, flourishing social state even though mutual assistance is not delivered out of direct benevolence. All of this seems to suggest that self-interested actions have the potential of becoming good actions if the exchange rate reflects the relative difficulties in production. The clear absence of intention to benefit the others raises serious doubts whether Smith would have considered such actions as morally good. It is only with a very generous interpretation of the sense of gratitude one may feel towards the other who—through his own self-interest manifested in the division of labour—helped one’s own pursuit of self-interest to bear fruits that self-interest may become morally good. But in a way, this sense of gratitude is derived from the perception of the system rather than the specific individual who had been acted upon. ‘We are sometimes’, writes Smith, ‘eager to promote the happiness of our fellow-creatures [genuine interest in the others] from a view to perfect and improve a beautiful and orderly system rather than from any immediate sense or feeling of what they either suffer or enjoy’ (TMS, p. 185). The conclusion derived from all of this is that exchange generates its greatest moral value when there is proportionality between one’s own contribution to the production process and the market value of what one

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has produced. When these conditions are not fulfilled, one side would inevitably feel grateful and the other resentment. While the habitual practice of a rule does not necessarily make the unintended outcomes intentional, in case of a harm, this will amount to what one may call negligence and hence, could be deemed intentional. An exchange where there is deviation from proportionality will reduce exchange into an unjust action as the impartial spectator would approve the resentment felt by one of the actors and, thus, sanction punishment. Recall that in our earlier analysis we noted the importance of the natural price as the benchmark which will ensure a more or less equal distribution of consumption as well as growth maximisation. It meant that people could no longer use luxury as a means for acquiring social approbation and will have to resort to genuinely morally good behaviour which, through sympathy, would provide one with the respect and admiration they desire. But we also said that in a world of selfinterested individuals, it is unlikely that the surplus will ever be devoted in its entirety to the hiring of productive labour (investment); they will need, through the deception by nature, to use consumption to command the respect of their peers. Therefore, the conditions which we stipulated here on the prices are an additional element of the meaning of natural rates. As the natural rates are unlikely to be met, the secondary frontier is to ensure that the system does not become unjust (if it cannot become morally good). For this to happen prices must be morally acceptable in the sense that they represent proportionality which is consistent with the more or less universal principle of desert.

8.4 S  pillover and the Beneficence of Natural Distributions When we move to investigate the moral significance of a set of actions comprising the economic system, we must carefully identify (if possible) those who act and those who had been acted upon. The Walrasian system

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of contemporaneous simultaneity implies that all agents act and are being acted upon at the same time. Moreover, as all of them are equally rational utility maximisers, there is complete symmetry in the position of agents in the system. No action of a particular agent is the cause of the outcome to another and, therefore, there can be not real debate about morality within the interactions of the Walrasian system. Outcomes are determined by exogenous variables and that is why discussions of ethics in modern economics—as we have examined in Chap. 4—have been confined almost exclusively to the two ends of the system: initial allocation and final distribution. In Smith, I claim, the story is very different indeed. Let us begin by specifying what we mean by economic actions that could become the subject of moral assessment. The first two things that come into mind are exchange and production. But while relationships between the different agents (or social classes) that are involved in the process of production seem to be a natural (or perhaps traditional) subject of moral debate, exchange as such seems to have been more difficult to analyse. Can we really say that in an action of exchange there is a person who acts and another who is being acted upon? According to J. Viner (1927), there is not much point in a moral analysis of exchange in the framework of Smith’s analysis. The reason is that exchange is a very impersonal action. The ‘social distance’ between the participants is so great that none of them will feel ‘sympathy’ with the other. Namely, neither of the bargaining side will have the tendency to feel as the other had he been in his place. Hence, as moral judgement depends on ‘sympathy’, no moral opinion will be formed. Young (1986), on the other hand, argues against Viner’s assertion. In his view, even when the ‘social distance’ is large, ‘sympathy’ may still be felt by strangers provided that they meet face-to-face. Consequently, a sense of moral approval or disapproval will emerge at both ends of the deal. In my view, however, there is a stronger case for morally assessing exchange even though the ‘social distance’ may be great. The ‘impartial spectator’ is an ideal as much as it is a description of how people actually form a moral opinion. Namely, it is a model of how to form a ‘proper’ moral judgement about anything at all. As such it may very well be applied into situations where people do not have an immediate sense of ‘sympathy’ or morality. Viner’s argument is that there is no moral value in exchange

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because the actual participants do not employ ‘sympathy’. This, however, does not mean that we cannot conceive an ‘impartial spectator’ who would pass a judgement on both sides of the bargain. When a burglar breaks into a house, he probably has no idea of who lives there. Does this mean that because of his social distance from the people who, as it were, are being acted upon his action is now value free?

8.4.1 Beneficence A person, say the capitalist, from self-interest, advances materials to the action of production. Another person, the labourer, again, from self-­ interest, brings his labour to the process of production. Both of them act and are acted upon at the same time, and the outcome of their interaction is a certain level of wealth. Suppose now, that they produced wheat, does the mere extraction of wheat from the land indicates a beneficial outcome to their action? Surely not; not even in terms of nature’s plan for the preservation of the species. The first thing we should inquire is whether this quantity is more or less than it takes to reproduce it. Surely when we began the action, we must have had some quantity of the product; otherwise we could not have produced it.71 If the quantity that came out of the act of production is less than what is needed for its reproduction, the action cannot be considered as beneficial. In this particular action, the amount of seeds and subsistence of the next period cannot remain the same. If we do not cut subsistence, then we must reduce the seeds; hence, the next period will yield even less ­output. At some stage, we shall have to give up some of our food as well. In the long run, if the trend continues, neither the capitalist nor the worker would be able to maintain the same level of consumption; thus, though wheat is still extracted from the land, the action of its production cannot be considered beneficial in its outcome. From nature’s point of view (the multiplication of the species), it is disastrous as well. With less wealth than earlier, the species would disappear.  In our case we needed the wheat to serve as seeds as well as the food for the capitalist and labourer during the period of production. By food to the people involved in the process of production, I mean the level of physical subsistence. 71

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When the quantity produced is exactly sufficient to what is needed for its reproduction (including the subsistence of the labourer and capitalist), we may say that the action has had no effect.72 From nature’s point of view, this action will preserve the species but will not multiply it. Only when surplus is produced, it is guaranteed that the species will advance in quantity. However, from the moral point of view the question of whether the action can be considered as beneficial is not yet settled. For that we need to explore more carefully the question who acts and who is acted upon.

8.4.2 O  wnership and the Distinction Between Acting and Being Acted Upon If a surplus has been produced, the person who initiated the action, the capitalist, (who, for reasons that are not under consideration at present, owns the outcome) can decide to consume the whole surplus himself. He will, obviously, be able to increase his family and advance the human race but the other person, the labourer, will remain in the same state as before (he might even be worse of, according to the capitalist’s whim, if he was above subsistence in the previous period). Hence, the action will certainly raise the feelings of gratitude in the capitalist and, at the same time, it might even raise the resentment of the labourer if his level of consumption decreased.73 On the face of it, the situation seems undetermined. However, we must look again into the description of the action in order to solve this problem. If indeed we had two persons who act and are being acted upon at the same time, the question of who owns, or who ought to have received, nature’s remuneration (i.e. the total produce) should have been left open or at least discussed more carefully. However, we have an  Note that we are examining the beneficence of the action, which is a dynamic concept, rather than the beneficence of the situation. Someone may feel grateful for what he has in comparison to what he might have had. Nevertheless, the action itself has not brought about any change in his conditions. There is no reason to suppose that as a result of a stationary state a person will attribute his position to actions which merely preserve what he has already been enjoying before. 73  I shall assume that when surplus prevails, no capitalist will reduce his labourer’s wages below subsistence. 72

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exogenous constraint that dictates that the produce of the action ‘belongs’ to the initiator of the interaction (the capitalist). The distribution of it becomes a separated action, an action where the person who acts is clearly the capitalist, and the person who is acted upon is clearly the labourer. In other words, the capitalist’s benefits are mainly due to the work of nature which is not an object of morals. Those of the labourer depend on nature as well as on the decisions of those who command the produce of nature. Therefore, whether an action of production, of which the ‘action’ of distribution is an integral part, is beneficent or not depends on the labourer’s feelings. As he is the one who is ultimately acted upon, it is his sense of gratitude which indicates a beneficent outcome. As the complete produce goes through the capitalist, it is unlikely that he will bestow benefits on the labourer, while harming himself. Hence, the beneficence of the worker necessarily implies the beneficence of the capitalist but it does not hold the other way around. We may return now to the question of whether an action where the capitalist (the initiator of the action), who was rewarded by nature for his dexterity and who leaves the wages of his labourer at their previous (or even subsistence) level, is beneficent or not. The answer, I feel, depends on the use that the capitalist will make of his surplus. He might not share it with his labourer, the one that participated in the production of his surplus, but, at the same time, as his stomach is not larger than that of the poor person, he is bound to share the surplus with another labourer whose services he might require.74 Does this mean that the outcome is beneficent? To begin with, we must acknowledge that the analysis of the relationship between those who are involved directly in the action is insufficient  ‘It is to no purpose that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his bretherns in imagination consumes himself the whole harvest that grows upon them. … The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare in the nicest manner, that little which he himself makes use of. … The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor. … They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants’ (TMS, pp. 184–185). 74

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to determine the real effect of the action. If the capitalist does not share his surplus with the person who was involved in producing it, there must be another action involved: the action in which he exchanges the surplus for some sort of labour, which Smith named as unproductive labour. Obviously, the outcomes of both actions (the production and exchange of surplus) are interdependent. Therefore, we shall have to extend the framework of analysis so that we can measure the complete effect of the actions of production and exchange.75 In short, as the beneficence of a single action may spill over beyond the direct participants in the original process, we have to consider these effects as well. On the one hand we have the initiators of actions, those who own the benefits that are bestowed by nature. On the other hand, we have the labourers (of all kind) who are engaged in either mere exchange (in the case of the unproductive labour) or in a complex action of production and remuneration. Now, as we consider the complete system, the question is whether or not the process of the invisible hand guarantees a beneficent outcome to the production of surplus. Consider now the following case. In an economy there are 20 capitalists and 80 labourers, and the sole product is wheat. A unit of wheat is produced by 0.1 units of labour, and 0.5 units of wheat. In order to subsist through one period of production, a person needs 1 unit of wheat. In the initial state, the economy was producing 200  units of wheat. This means that 20 labourers are productive and 60 are unproductive, if employed at all. From the point of view of reproduction, to maintain the same level of output, the capitalists will have to put aside 100 units of wheat as seeds and 20 units of wheat as subsistence for the required labour input. Adding to it their own subsistence (20) the surplus that remains is 60 units of wheat. If the capitalists will use their surplus for ‘luxurious’ consumption, they can employ 60 unproductive labourers. Note, however,  By the action of production I also mean the productive labourer’s remuneration. I refer to it as part of production because the subsistence of the productive labourer is part of the reproduction of the whole process. Obviously, the capitalist can share the surplus with his own labourer, and increase his wages above subsistence, but, as it might affect production (in terms of productivity) I shall not discuss it here. This sort of analysis must be carried out in a more complete model of Smith’s economic system. For the moment, we may distinguish between the remuneration of the productive labour, as part of production, while the unproductive labourer receives his remuneration in the process of the exchange of surplus. 75

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that no one can subsist on ‘luxurious’ consumption. Indeed, though wealth is unequally distributed (80 people in the economy have only the level of subsistence, and 20 have, in terms of wheat, their subsistence + other trivial convenience), necessities of life (subsistence) are equally distributed (everyone, at the end of the process of production and exchange, has only 1 unit of wheat). This economy will not be able to maintain more people in these circumstances. This economy can subsist for a long period of time assuming that productivity remains unchanged. This picture is an outcome of a set of repeated actions where agents act and are being acted upon simultaneously. As we assume that all acted out of self-interest, we shall assume that there is propriety in all the actions. Is the outcome beneficent? Is there any place for gratitude in the system? At first sight, the only reason for gratitude on part of the labourers is that they are alive and have something to eat. However, as time elapses, in this stationary state there is no room for any more gratitude. The first set of actions (the functioning of the system at the first period) raised gratitude because it changed the labourers’ position from hunger to subsistence. But once they have reached subsistence, there seems to be no reason for gratitude, as the system merely reproduces itself in each period. Furthermore, one can argue that even the initial provision of subsistence through the offer of their labour should not generate gratitude among the workers. To see this, we must ask ourselves what would have been their lot in a different form of social organisation. If, for instance, the alternative to the current, commercial, stage were a state of autarky, the workers would have been clearly better off. If every member of society had 2 units of wheat (equal distribution of wealth), he would be able to produce, as an independent producer, 2 units. Though he only works 0.2 of his time, he needs for subsistence 1 unit of wheat as well as 1 unit of wheat as seeds (half of 2). Hence, he is being left with no surplus. From the point of view of those who were labourer in the previous situation, this must be a much better state of affairs. Under equal distribution of wealth with no division of labour (autarky), they will receive the same net income (subsistence) as before but with much less work on their part.76  In the previous case 20 workers produced 200 and now 100 ‘worker’ produce the same quantity. 76

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While they gain in working hours, workers cannot earn more than what they were used to earn under the previous arrangement. So, it is clear that under equal distribution of wealth and autarky those who became workers in the commercial stage were either as well off or even better off than they became under the interdependent commercial stage. From the point of view of the ex-capitalists, they are now clearly worse off. Though they still have their subsistence as before, they simply cannot have any extra convenience. Luxury consumption and unproductive labour would not be available. Thus, it is clear that against the alternative of autarky, the capitalists are better off while workers are not better off in this stage of interdependence. Hence, there is no obvious reason why labourers should feel gratitude by being offered the opportunity to subsist through employment by the capital owner. To summarise this point: in the stationary state described above, workers will not feel gratitude because their wages remain constant at subsistence level as well as because their lot would have been the same or better under a different form of economic organisation. To see clearly that the moral fate of the system must rest with the sense of gratitude felt by the workers, consider the effect on the system of a decision by the capitalist to invest. Recall that in our example the surplus of 60 units went as subsistence to the unproductive labourers. Thus, 80 workers had been employed. If, instead, the capitalists would want to invest it in order to increase output for the next period, they would need some of the surplus to be used as circulating capital (raw material: seeds). Consequently, there would not be enough subsistence left for all the labourers in the economy. If, say, they wish to increase output by 80  units of wheat, they will need 40 as seeds and 8 workers who should get subsistence of 8. Thus 48 units of the surplus are taken by the investment, leaving 12 for unproductive workers. Thus, the total demand for workers shrinks from 80 to 28  +  12  =  40. If there is one labour market, the wage rate would fall below subsistence and some of the workers may be unable to find subsistence. Whether this means that they themselves might die or that they would be unable to raise a family, they are bound to feel resentment. Moreover, it is evident that this outcome is entirely due to the action taken by the capital owners. Hence, in spite of the apparent symmetry in the sense that all agents are equally self-interested, the institutional set-up

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may give extra power to some agents. This means that in terms of the entire picture some agents clearly act while others are clearly acted upon. Naturally, we must acknowledge that the above decision by the capital owners would, in the end, benefit everyone as it would increase output in the next period and, thus, increase the surplus and the demand for workers. However, I was trying to demonstrate how the fate of the workers depends on the decision by the capital owner in a way which is not symmetrical. We could have equally described a case where the capital owner uses a greater proportion of his surplus in an unproductive way. This, in the following period, will cause a collapse of output and inevitably lead to a fall in wages. It is true that workers by propagating may affect the wage levels in the economy but this, in the end, affects them more than it affects (in Smith) the decision of the capital owner with regard to the use of his surplus.77 From all this we may conclude that the mere production of surplus (wealth) is by no mean in itself a beneficent outcome. The fact that it may distribute subsistence in an equal manner is completely insignificant to the question of beneficence, which is dynamic in nature. Thus, the selfinterested economic action may create harm even though it was not intended. If the decisions by the capital owners with regard to the use of their surplus are repeatedly harming the workers and raising their resentment, there should no longer be propriety in the actions of the capital owners. Their motive (self-interest) may be approved by an ‘impartial spectator’ but their choice of action (their decisions regarding the allocation of surplus between productive and unproductive labourers) is rejected. In such a case, even a surplus-generating economic system (i.e. a growing system) may produce a social state which is unjust in the sense that the impropriety of actions together with the resentment felt by those who had been acted upon should call for reprisal. There is no doubt that in the TMS Smith is trying to make the case for the beneficence of the invisible-hand mechanism. However, this case is being reviewed and modified in the WN, where he very simply argues that the beneficence of the system is possible, but it does not lie in the  A discussion of whether there is symmetry in the rationality of agents can be found in Witztum (2005b). 77

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mere creation of surplus (or by the mere division of labour). Indeed, we can find an intriguing correspondence between the three social states in the TMS and the three economic states in the WN. In the former society may flourish and be happy, may subsist but be unhappy or may become unjust and cease to be viable. In the WN we have the corresponding state of progress, the stationary and the regressive state. It is quite significant to note that what distinguishes these three economic states, according to Smith, is the fate of the workers. It is all based on a presumption made by Smith in the WN, which is perfectly consistent with what we have established through the analysis of actions. In the WN Smith reiterates the significance of the workers’ disposition to the evaluation of society: Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. (WN, p. 96)

Again, perceiving beneficence as a dynamic concept Smith notes that ‘[i]t is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour’ (WN, p. 87). He then goes on to discuss with great detail how the rise in demand for labour (determined by the decisions of the capital owners) allows workers to propagate and live a long life, while in the stationary state there is nothing for them to be grateful about as wages remain at their subsistence level. In a decaying state, Smith quite clearly points at famine and death which would be an obvious cause for resentment.

8.5 Summary of Moral Argument Most moral philosophers ponder the question of how do we recognise and, by implication, what makes things, good or just. Smith went one step ahead by building a framework—a model, if you wish—for moral

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judgement which is sufficiently universal to allow both the relativity of ethics and the potential for ethical self-delusion. After identifying the fundamental principle which governs the sociality of mankind, we saw how that which governs our judgement may depend on our character and the circumstances in which we operate. This means that a self-interested character may judge things differently from a benevolent one. The impartial spectator, however, would properly judge like the benevolent person simply because such a person will have enough genuine interest in the other to properly experience fellow feelings with that person. In turn, this opens the possibility that the deception of nature has worked so well as to completely blur people’s ability to properly judge the outcomes of their system. To be sure that such conclusion does not rest alone on the commonality of that which governs the economic system and that which provides the grounding for our moral judgement, we expand the analysis to examine the ethical evaluation of a system of actions and interactions. The traditional way of looking at the morality of natural liberty—which seems more becoming modern economic analysis than classical economics—is focused on the two ends of the economic cycle: motives and outcomes. In modern economics, as we saw in Chap. 4, this is so, in part, because of the simultaneous nature of interdependence where it seems difficult to assign specific outcomes to specific actions. But in Smith this is not the case. While Smith clearly recognises the notion of interdependence and perhaps even the simultaneity of individuals’ action, he has clearly not abandoned the thread of causality. This can easily be seen through his elaborate study of the moral evaluation of actions. Here, the ideas of proportionality and reciprocity—very much in line with Aristotle’s corrective  justice—are pivotal to his ethical discussion. We discovered that there are basically four types of actions and three moral states. What distinguished one moral state from the other was the approval, or disapproval, by the ‘impartial spectator’ of the sentiments raised in the person who had been acted upon. When there is intended beneficence, gratitude is approved and the ‘impartial spectator’ expects reciprocity (i.e. reward). When reward is administered, society will flourish and be happy (according to Smith’s conception of the three social states in the TMS).

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When there is no correspondence between intention and outcome (including unintended benefits), the ‘impartial spectator’ disapproves of the sense of gratitude or resentment which was raised in the person who had been acted upon. This disharmonious situation corresponds to the second social state where society may subsist but in an unhappy state. The third situation is where the ‘impartial spectator’ approves of the resentment felt by the person acted upon due to the malicious intentions of the actor. The habitual practice of such actions will bring to a social demise and corresponds to the third, unjust and unviable, social state. We then looked at the implications of this for the moral evaluation of a self-interested-based system of natural liberty. We noted that an economic system is characterised by a set of actions rather than by a set of characters. Even if all agents are motivated by self-interest and act simultaneously, it is possible to establish who acts and who is being acted upon. This is due to the particular ownership structure and the legal arrangements according to which it is capital which hires labour. We have shown that, paradoxically, self-interested actions will be consistent with the moral good only if there is no unintended beneficence. Once we consider such beneficence, where gratitude is not sanctioned, the self-interested actions become merely proper. These three categories of moral value of actions were found to be consistent with Smith’s explicit moral ranking of the three social states in the TMS. While considering the question of a system of actions where all agents may be equally driven by self-interest, I have tried to show that the notion of interdependence does not blur the distinction between those who act and those who are being acted upon. The key definers of these relationships are the distribution of ownership and the legal system (i.e. whether capital is hiring labour or it is the other way around). We saw that in the Smithian system where capital hires labour, the workers are those who, in the end, are being acted upon. Consequently their resentment due to their pay conditions, which may be the result of the rational behaviour of the capitalists, deems the capitalists’ actions as unjust. In this way, it becomes apparent that both distributional matters are within the domain of justice and that justice is not the only moral issue in the analysis of natural liberty.

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There is an interesting anecdote I wish to note here. Samuelson’s (1977) ‘vindication’ of Smith’s economic model ensures that in the long run, at the stationary state, the economy will reach the state in which no beneficence will occur and the habitual practice of self-interest will become ‘suitable’ to its outcome. If indeed this is true, then the Smithian dynamic is such that it will bring efficiency and morality together (mainly in the sense that the system will be at least just). But whether or not Samuelson has managed to capture the essence of Smith’s economic and social systems is another matter altogether.

8.6 Conclusion The purpose of this chapter was to suggest that there is an alternative way of thinking about economics: that there is an alternative conceptual framework to the one which is embedded in modern economic analysis; a framework, we argued, that would be more in line with our understandings of the sociality of humans. It is inevitably a framework where the economic problem is subjugated to, rather than dominate, a much broader social agenda. Consequently, it may no longer be possible to measure the performance of the economic system without proper referencing the social agenda. Sure, since the early days of the twentieth century (notably, with the writings of Pigou), there have been serious attempts to align economic outcomes with socially desirable ones but one cannot fail to be astonished at the tiptoeing around the economic agenda. Nothing we do to fulfil social objectives should ever interfere with the promise of economic theory and the apparent criteria of its delivery (efficiency). Even if we dare depart from efficiency—as we do in second-best considerations—we must only do this if we can demonstrate quantitatively that the efficiency price we must pay is less than the social gain, implying thus, that they can both be easily calculated and compared. In other words, any attempts to realign outcomes with social considerations must assume the supremacy of economic considerations. It also meant that anything social must also be both consequentialist and efficient and, therefore, subjected to the measures and criteria of the economic paradigm. Economics delineates the social domain by allowing society to select outcomes only from the

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set of outcomes which are in line with the resolution of the economic problem. The treatment of the social as an afterthought is consistent with the way economics conceives the individual and the role of society but it is not consistent with our conclusions from the examination of human sociality. In part, the dominance of economics is a result of the separation of the spheres which is associated with the functional nature of society (civic society). But while functionality may be associated with the absence of human sociality, it may also be a result of such sociality when social distances become too large. However, in the presence of sociality the degree of functionality will be limited and, as a result, the separation of the spheres will also be limited. The way modern economics relates to the social is only consistent with extreme functionality and, therefore, with the absence of human sociality. We argued that if one considers the nature of human sociality, the conceptual framework within which economics should be analysed is the one in which the economy, rather than society, is more of an afterthought. It is a system where social bonds are neither based on economic expediency nor weaker than the bonds created by functional interdependence. Moreover, as social bonds precede economic relationships the forming of moral ideas—which are a natural fabric of human society based on the development of cognitive abstraction—precedes economic organisation. Hence, ethics is a constraint on the economic system rather than the other way around—manifested in welfare economics—where economic expediency is a necessary condition for ethical arguments. But while there may be a need to think afresh about forming the appropriate conceptual framework, we felt that a lot can be learnt from the fact that such a framework already lay at the foundation of classical economics. The reason why this is significant is twofold. Firstly, because modern economics considers itself a natural and linear progression from the classical school yet has completely failed in recognising its conceptual framework. In this respect, this will give rise to the argument that the modern framework is the anomaly rather than the one we propose here. If throughout history economics had been seen as a subset of the social problem, then the onus of defending the modern conceptual framework lies on modern analysis. Secondly, since the classical school’s conception

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of internal economic relationships was indeed similar to the modern one, we can see how the significance of economic arguments may change when we put them in a different conceptual framework. We claimed that the fundamental difference between liberal classical economics and modern economics is that the former saw in the market system a useful reality but one which needs to be contained and corrected according to social-ethical criteria. For Adam Smith, for instance, it was an important antidote for the fallacies of mercantilism; for J. S. Mill it was a mechanism to cleanse society from debilitating customs which stood in the way of individual development. Such developments, according to Mill, which are essential for liberty to be meaningful, would lead to co-operative behaviour and the inevitable decline of the role of market economy. For modern economics, the markets became an ideal, something to which all social organisations should aspire. As modern economics sees itself, in many ways, as a continuation of Adam Smith, and as he is (wrongly) considered by many as the point in history where economics parted way from other aspects of social life, we focused our attention on his writings to establish the possible effects of introducing social context to economics analysis. We showed that in Smith one of the most dominant features he identifies in human nature is the interest which people have in the other. In this respect alone, Smith already sits well with the conclusions we derived from evolutionary biology and comparative neurology. In turn, this interest which people have in the fortune of others defines a social objective which can broadly be described as the desire to be socially approved. And it is this desire which, according to Smith, stands behind the story of economics. The desire to be socially approved, which is an expression of the natural tendency people have to seek harmony of reason and sentiments with the others, is the foundation of both the division of labour (i.e. economics) and the way in which people form moral opinions and, therefore, social norms. At first, according to Smith, individuals are sovereign— within society—in the sense that they do not necessarily depend on the others for survival.78 But the search for social approbation led to exchange  The question of whether Smith’s speculative evolutionary tale is entirely correct is irrelevant to the argument. The key point here is that even if people were part of a collective (the hunter-gatherers, 78

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of gifts, which also led to the realisation that individuals can acquire their subsistence—a socially constructed material benchmark—more easily by specialising and trading. Smith’s famous invisible hand is a mechanism which ensures the distribution of life’s necessities even if the process of specialisation leads to an uneven appropriation and, subsequently, distribution of wealth and income. This process of acquiring life’s necessity through specialisation and trade associated with social developments suggests that people become increasingly dependent on others with whom their social distance is greater. But as the domain of the social consciousness increases too, the desire to be socially approved also extends to those people with whom there is a greater social distance. Consequently, the ability that agents have to feel sympathy—that harmony of sentiments emanating from the interest people have in the others and which is experienced through an imaginary change of places—in a society where social distance is heightened becomes increasingly difficult. It is at this point where nature’s interference, which Smith calls a deception, comes into play. According to Smith, the nature of things (nature of the physical world) has its own agenda (the multiplication of the species), while the nature of humanity has a different one. It is interesting to note that this corresponds well with what we discussed in Chaps. 5 and 6 with regard to the development of human cognition and sociality beyond that for which evolution initially fitted the human brain. This difference allows for the fact that human/social judgement and the natural course of things may not always coincide. As nature—Smith’s take on evolutionary biology—is interested in the multiplication of the species, the creation of plenty would be its objective. The deception to which Smith is referring leads agents to confuse the pleasure they derive from identifying with luxury with the social approbation of the behaviour which creates it. In simple term, the tendency people have to feel as others had they been in their place suggests that feeling as a rich person would, had you been that person, is a very pleasant feeling. Believing that goodness should be rewarded, falsely leads for instance) in which there had been a social division of labour, their interest in the others was not, in essence, economical.

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people to attribute virtues to those traits in human nature which are most conducive to the production of plenty and riches.79 It is, however, a deception because proper morality or a properly executed exchange of places—through the idea of the impartial spectator—will reveal that there is nothing in such behaviour that should command any social approbation. The fact that Smith treats this as deception is, perhaps, the clearest expression of the difference between socially embedded liberal economics and its functional form. While in the latter case the mere ability of the system to deliver the plenty which it ostensibly promised should be enough to ensure its sustainability (diachronic order), in the former the sustainability of the economic system is conditioned on its moral and social acceptability. Moreover, it also allows for the possibility that a tension may exist between what people may actually think is morally good and what they would have considered as such had they been exposed to the logic of the argument. Thus, when the social domain expands as does the level of specialisation, the search for social approbation has turned into a search for conspicuous consumption as a means for acquiring the respect and admiration of the others (i.e. social approbation). In this sense, the methodological equivalent of the modern rational utility maximiser in Smith’s economic system is the agent who seeks to better his condition—namely, become socially approved—through the acquisition of wealth. However, while a modern rational utility maximiser may be content with the wealth he or she acquired given their constraints, the agent seeking social recognition will only be content if such an acquisition provides him with the respect and admiration of the others. This, however, does not depend on whether he or she best used their resources to achieve the best possible outcome in terms of material wellbeing. It also depends on whether they have been able to acquire significantly more than the others. Because there is a difference between the courses of nature and that of human cognition, Smith distinguish between outcomes which may serve nature but not humanity from those which serves both. In his economic  In the context of Mandeville’s paradox this is a very dim resolution of it. Smith actually claims that though there is nothing about the greed which leads to plenty that is morally acceptable, the public will, through the deception by nature, deem it as such. 79

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analysis, Smith makes a clear distinction between natural and market prices. The latter corresponds to modern days’ equilibrium prices; the former represents prices where there is equality in consumption (though not in income) because every participant in the production process receives the socially constructed subsistence bundle and, therefore, growth is maximised. Naturally, because there is equality in consumption, individuals can no longer acquire social approbation through conspicuous consumption and they will have to seek it through that which should command approbation: proper behaviour. In this way, both nature’s objective (growth maximisation) and human objectives (genuine social approbation for all) will coincide. However, Smith also claims that most of the time this will not happen and that market prices rather than the natural rate will be the one that will prevail. As such, the system of natural liberty is more often than not failing nature’s as well as humans’ objectives. Nevertheless, there is a reason why such failings do not lead to a collapse of the system (namely, the unexpected presence of a diachronic order). In a world of self-interested individuals—who are nevertheless seeking social approbation—people may confuse the harmony of sentiments and reason with the sense of harmony people may derive from what Smith calls utility. It is a sense of harmony derived from aesthetics or the observation of a well-contrived machine. This means that in a world of self-interested individuals the co-­ ordinating powers of natural liberty (i.e. the existence of equilibrium even in terms of market prices) without any guidance and interference will impress people to believe that the apparent harmonious functioning of the system is also evidence of its moral goodness. This, however, is something which Smith calls a corrupt sense of morality. As we said before, the skyline of commercial centres in cities around the world is generating an aesthetical awe which corrupts people’s sentiments to confuse this with moral goodness. Naturally, one of the most significant questions that will follow such an analysis is the ground upon which Smith draws a distinction between that which people think and that which they should be thinking. If people actually believe that they can acquire social approbation through wealth accumulation and they stand in awe of the beauty of natural liberty, how can we say that they deceive themselves? How can we deem

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such judgements corrupt? One immediate answer is, of course, its internal inconsistency. For wealth to be the cause of respect and admiration, it has to be unevenly distributed. There will be nothing particularly pleasant or unpleasant in an exchange of places between two individuals who have the same levels of material wellbeing. Neither of them will find the position of another particularly admirable or commanding respect. Hence, when prices are at natural rates and the objectives of nature have been reached, material wellbeing could not be the cause of social approbation as everyone will consume the same (the socially constructed subsistence level). On the other hand, if there is inequality, many people (most?) will not be able to command any respect and admiration as they are relatively poor and as people judge them by their material success. In such a case, it may indeed be the corruption of the moral sentiments (the beauty of the system) which will make people believe that they too will be able to make it (for instance, the American dream) but if everyone makes it, how will they be able to find the social approbation they seek? But there is a more serious reason why we may call into question the difference between that which we observe people do and that which they ought to have done. In spite of the empiricist nature of Smith’s work, he does construct an ideal which for him is a reference point rather than a description of reality. Moreover, this reference point is constructed by a logical extrapolation of what he observes people to do in reality. Hence, he observes that people have a tendency to put themselves in other people’s shoes and form an opinion about the other’s behaviour based on whether they would have done the same had they been in place of the subject of approbation. So he takes this to a logical limit by asking how would someone who is impartial and knowledgeable form an opinion in such a case. This opinion is, of course, the benchmark. In reality, people may fail to reach the same conclusion either because their own character interferes in their judgement or because their own character may make them susceptible to the deception by nature and the corruption of moral sentiments. Namely, if someone genuinely cares about the other, he or she will never conflate the pleasure of harmonious sentiments with anything else. But when someone cares about the other only in terms of what they think about them, one may more easily conflate the pleasures of luxury or the beauty of the system with the pleasure they would have

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derived from an imaginary change of places and the agreements of sentiments and reason. To some extent, this is very similar to what modern economics is doing. Based on observing how individuals and markets operate, we have constructed a logical limit to competitive interaction between rational agents. This logical limit is what we call Walrasian general equilibrium. In reality, however, prices are never at their Walrasian values yet we attribute to them the characteristics of this equilibrium. Namely, we know that the reality is different from the ideal and we conflate the one with the other. In Smith, on the other hand, he realises that there is a difference between the reality and the ideal but he does not conflate between them. He simply uses the ideal to form a judgement—calling the actual way people judge a deception or corruption—over the reality of moral judgements. Based on this distinction we then embarked on exploring why it is that Smith was so apprehensive about the social significance of natural liberty (market economy). Given the nature of Smith’s conceptual framework, the successes or failures of the economic system are not measured by how well it serves the objectives of nature but rather how well it serves social-­ human objectives. So, the question becomes whether or not the deception and corruption of moral sentiments justify the crowing of natural liberty as an ideal form of social organisation. By analysing the economic system based on the ideal of moral judgement, we can provide an answer to this question. The traditional way of socialising the economic system in Smith has been to show that self-interest is morally good and that the system generates unintentional beneficial outcomes. In our analysis of Smith’s works we showed that both the self-interested character and the unintentional beneficial outcomes are actually the source of problem rather than a solution. We showed that Smith could not have considered the self-interested character as a morally good one. This does not mean that such a character is bad but it does mean that in terms of Smith’s three social states, the self-interested character is more becoming of a system of mercenary exchange which yields a sustainable but unhappy social state. We also saw that the notion that a self-interested character will have the degree of interest in the others which would make him or her socially desirable is inconsistent with Smith’s search for unity.

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We then applied Smith’s analysis of actions to examine the economic system conceived as a string of actions where agents act and are being acted upon simultaneously. We showed that in such a system unintended beneficial outcomes lower the morality of the system as it gives rise to undeserved rewards. A self-interested system, therefore, can be morally good only if it does not produce any unintentional consequences. When it does, it becomes an acceptable system but not one which could be deemed as morally good. Nevertheless, when we explore who acts and who is being acted upon in such a system, we uncover a Rawlsian principle in Smith, according to which the moral acceptability of a self-­interested-­based system of natural liberty depends on making the worse-off people better and this can only be achieved when there is growth. Consequently, growth, in Smith, is not another mechanism of solving the economic problem of wealth accumulation but rather a mechanism to ensure the moral sustainability of a system that is never morally good but can easily become unjust.

Bibliography Aristotle. (1953). Ethics (The Nichomachean Ethics), Thomson’s translation, Allen & Unwin. Berns, L. (1994). Aristotle and Adam Smith on Justice: Cooperation Between Ancients and Moderns. Review of Metaphysics, 48(1), 71–90. Buchanan, J. M. (1978). The Justice of Natural Liberty. In F. R. Glahe (Ed.), Adam Smith and the Wealth of Nations: 1776–1976 Bicentennial Essays (pp. 61–82). Boulder, CO: Colorado Associated University Press. Campbell, T.  D. (1971). Adam Smith’s Science of Morals. London: Allen and Unwin. Davis, J. R. (1990). Adam Smith on the Providential Reconciliation of Individual and Social Interests: Is Man Led by an Invisible Hand or Misled by a Sleight of Hand? History of Political Economy, 22(2), 341–352. Evensky, J. (1987). The Two Voices of Adam Smith: Moral Philosopher and Social Critic. History of Political Economy, 19(3), 447–468. Evensky, J. (1989). The Evolution of Adam Smith’s Views of Political Economy. History of Political Economy, 21(1), 123–145. Evensky, J.  (1992). Ethics and the Classical Liberal Tradition in Economic. History of Political Economy, 24(1), 61–77. Evensky, J.  (1993). Adam Smith on the Human Foundation of a Successful Liberal Society. History of Political Economy, 25(3), 395–412.

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Evensky, J. (2005). Adam Smith’s Moral Philosophy: A Historical and Contemporary Perspectives on Markets, Law, Ethics and Culture. Cambridge: Cambridge University Press. Fleischacker, S. (1999). A Third Concept of Liberty: Judgment and Freedom in Kant and Adam Smith. Princeton, NJ: Princeton University Press. Force, P. (2003). Self-Interest Before Adam Smith: A Genealogy of Economic Science. Cambridge University Press. Friedman, M. (1978). Adam Smith’s Relevance for 1976. In R. G. Fred (Ed.), Adam Smith and the Wealth of Nations: Bicentennial Essays 1776–1976. Boulder, Colorado: Colorado Associated University Press. Griswold, C. L. (1999). Adam Smith and the Virtues if Enlightenment. Cambridge University Press. Heilbroner, R. (1982). The Socialization of the Individual in Adam Smith. History of Political Economy, 14(3), 427–439. Hildebrand, B. (1848). Die Nationaloekonomie Der Gegenwart und Zukunft, Frankfurt. Knies, C.  G. A. (1853) Die Politische Oekonomie Vom Standpunkte Der Geschichtliche Methode, Braunschweig. Macfie, A. L. (1967). The Individual in Society. London: Allen & Unwin Ltd. Meek, R. (1977). Mr. Sraffa’s Rehabilitation of Classical Economics. In Smith, Marx and After (pp. 119–136). London: Chapman & Hall. Montes, L. (2003). Das Adam Smith Problem: Its Origins, the Stages of the Current Debate, and One Implication for Our Understanding of Sympathy. Journal of the History of Economic Thought., 25(1), 63–90. Pack, S. J. (1991). Capitalism as a Moral System: Adam Smith’s Critique of the Free Market Economy. London: Edward Elgar. Raphael, D. D. (1985). Adam Smith, Oxford University Press. Robbins, L. (1935). Essay on the Nature and Significance of Economic Science. London: Macmillan. Rosenberg, N. (1965). Adam Smith on the Division of Labour: Two Views or One? Economica, 33, 127–139. Rosenberg, N. (1990). Adam Smith and the Stock of Moral Capital. History of Political Economy, 22(1), 1–18. Salter, J. (1994). Adam Smith on Justice and Distribution in Commercial Societies. Scottish Journal of Political Economy, 41(3), 299–313. Salter, J. (2000). Adam Smith: Justice and Due Shares. Economics and Philosophy, 16, 139–146. Samuelson, P. (1977). A Modern Theorist’s Vindication of Adam Smith. American Economic Review, 67, 42–49. Skarzinski, W. von. (1878). Adam Smith Als Moralphilosoph Und Schoepfer Der Nationaloejonomie, Berlin.

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Skinner, A. S. (1979). A System of Social Science, Paper Relating to Adam Smith. Oxford: Clarendon Press. Viner, J.  (1927). Adam Smith and Laissez-Faire. Journal of Political Economy, 35(2), 198–232. Vivenza, G. (2001). Adam Smith and the Classics: The Classical Heritage in Adam Smith’s Thought. Oxford: Oxford University Press. Werhane, P.  H. (1991). Adam Smith and His Legacy for Modern Capitalism. New York: Oxford University Press. West, E.  G. (1964). Adam Smith’s Two Views on the Division of Labour. Economica, 31, 22–32. West, E.  G. (1996). Adam Smith on the Cultural Effects of Specialisation: Splenetics versus Economics. History of Political Economy, 28(1), 83–105. Wicksteed, P.  H. (1933 [1910]). The Common Sense of Political Economy. London: George Routledge & Sons Ltd. Winch, D. (1978). Adam Smith’s Politics: An Essay in Historiographic Revision. Cambridge: Cambridge University Press. Witztum, A. (1997). Distributional Consideration in Smith’s Concept of Economic Justice. Economics and Philosophy, 13, 242–259. Witztum, A. (1998). A Study into Smith Conception of the Human Character: Das Adam Smith Problem Revisited. History of Political Economy, 30(3), 489–513. Witztum, A. (2005a). Property Rights and the Rights of the Property Less: A Note on Adam Smith’s Jurisprudence. Economics and Philosophy, 21(2), 279–289. Witztum, A. (2005b). Social Circumstances and Rationality: Some Lessons from Adam Smith. The American Journal of Economics and Sociology, 64(4), 1025–1047. Witztum, A. (2009). A Smithian Notion of General Equilibrium. In J. Young (Ed.), Elgar’s Companion to Adam Smith. London: Elgar. Witztum, A. (2011). Ethics and the Science of Economics: Robbins’s Enduring Fallacy. Journal of the History of Economic Thought, 33(4), 467–486. Witztum, A., & Young, J. (2006). He Neglected Agent: Justice, Power, and Distribution in Adam Smith. History of Political Economy, 38(3), 437–471. Witztum, A., & Young, J. (2011). Utilitarianism and the Role of Utility in Adam Smith. European Journal of the History of Economic Thought, 20(4), 572–602. Young, J. (1986). The Impartial Spectator and Natural Jurisprudence: An Interpretation of Adam Smith’s Theory of the Natural Price. History of Political Economy, 18(3), 365–382.



Epilogue: Quo Vadis

My book is now complete—‘my charms all overthrown’—and what is left to do is both reflect on its main message and summarise it. We shall begin with first reflections, which are nothing more than an afterthought, on what all this could possibly mean. There is no doubt that after arguing for a change in the conceptual framework within which economics should be analysed, there is now a need for a systematic attempt at pouring analytical contents into this proposed alternative. Having argued that liberal classical economics got it right from the start, this may be seen as a call to reinvent classical economics in modern terms which are more faithful to its superior (and more accurate) conception of humans and society. What exactly will be entailed in such a theory and what organisational implications will be derived from it, I cannot say with certainty at this stage. But I know that in this day and age of immediate gratification—in itself, perhaps, the result of cultural erosion from at least half a century of intellectual exaltation of excessive individualism and material-functional sociality—many readers may ponder over the more immediate implications of this book for current issues which lie at the heart of the public discourse. Purism should have prevented me from attempting to address these expectations but I do feel that even before the new theory has been © The Author(s) 2019 A. Witztum, The Betrayal of Liberal Economics, https://doi.org/10.1007/978-3-030-10671-3

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constructed, there are some things we could say about today’s issues in the light of what has been discussed in the book. They will not constitute a rigorous analysis and they are not part of the book itself but, even in the form of mere reflections, they are part of the book’s general message. We shall therefore begin with these reflections and afterwards discuss the summary of what we have said in the book.

 eflections on the More Immediate R Implications of the Book One of the main purposes of the book was to argue that modern economics is incompatible with human sociality. This has far-­reaching consequences both in terms of our understanding of economic organisation itself and in terms of understanding the relationship which it has with the broader social context. What typifies modern economics is that it is predicated on a self-interested individual with a purely functional perception of society. Consequently, its recommended principle of organisation is that of competitive decentralisation, the true benefits of which will only materialise when it has been introduced to all areas of human interactions. However, as we argued (in Chaps. 5 and 6), this form of functional sociality represents a particular conception of sociality which we believe to be profoundly false. Instead, we tried to show that individuals are intrinsically social, which means that their conception of society is more organic in nature than functional. Nevertheless, the degree to which our views of the others shift between the organic and the functional also depends on the social distance which exists between members of society. This, in turn, depends on the way in which human cognition and its application to technology evolve relative to the natural sociality for which the human brain seemed to have been initially designed. But given the evidence on the latter, it is quite clear that the form of functionality envisaged by modern economics is an extremity which is far beyond the range of what would be becoming the nature of human sociality.

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In a purely functional society, where everything is measured in terms of how it serves individuals’ personal interests, competitive decentralisation may indeed be a natural way in which humans interact and it is for this very reason that there is no clear distinction between economic and other forms of social interactions. Hence, the way we conceive economic relationships could in principle be extended to all forms of human interactions. This, of course, is the underlying reason why economic reasoning has been so successful in penetrating most other forms of social examination.1 Moreover, when economic theory claimed that in such a functional society everyone can fend for themselves (given some initial conditions) in the sense that they can accomplish that which they rationally want, it is evident that there is no obvious role for society or the collective other than keeping the peace and upholding the law. Perhaps, on occasion, society may need to intervene to help ensure the socially required initial conditions but it must always work in a way which is consistent with the promise of the decentralised system. Such a view of the role of society is, in fact, a necessary condition for the idea of modern liberalism, as is manifested in the modern notion of the civic society, to subsist. When there is no real difference between social and economic interactions and when there exists a principle according to which such interactions can be co-ordinated, society is nothing but a (hollow) framework which aims merely at facilitating the working of this highly individualistic world. Society, essentially, has no real duty to us beyond the maintaining of order, nor do we have any real duty towards it. Therefore, when we claim that human sociality is such that it does not lend itself to this functional conception of society, problems will arise across the board. There will be problems with the social context of economics as well as with the question of whether the principle of competitive decentralisation should remain the overriding mechanism for human interactions. While the questions of the social context and the nature of interactions are closely related, we will not say much about the former. Indeed, we have refrained all along from saying much about the  This is what some would call ‘economic imperialism’.

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implications which our conception of human sociality will have for questions like the meaning of liberalism but this is not because we have nothing to say but rather because the topic is sufficiently complex to require a separate investigation which we aim to pursue in the future. Nevertheless, we would like to say something more general about the possible implications of our conclusions about human sociality, for the question of economic organisation. We must, of course, recognise that there have been many others who saw a tension between the free rein of competitive decentralisation and social objectives. But, as we explained in the introduction to the book, there were two distinct characteristics to the more common forms of complaints which are different from what we are saying here. These characteristics are either that the need to intervene was guided by the understanding that there are problems, in the real world, for the universal application of competitive decentralisation or that there is a need to interfere with some distributional matters to help the system live up to the promise of the second welfare theorem. The latter approach falls into the domain of what has been known as welfare economics. Here, the principle of second best has been employed to help society approximate that which it desires by allowing competitive decentralisation to thrive. The former is where competitive decentralisation is given a helping hand either in the form of Keynesian interventions, where we try to compensate market failure through government activities, or through notions that institutions, like the corporation, are there to compensate for other forms of market failures (missing markets), or in the form of Ordoliberalism, where the government is supposed to help markets become what they should (i.e. emulate competitive decentralisation). But there is no greater submission to the overriding powers of economics’ organising principle than the idea of market socialism. In any case, in none of these approaches one can find a critique of the actual idea of competitive decentralisation. This is either because it is believed to be a natural order or because it is believed to be a socially desirable one, or both. The reason why this is so, in our view, is because of the failure of these approaches to take on board the full meaning of human sociality and its implications for the questions of economic and social organisation. They all seem to accept that the principle of competitive decentralisation

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(markets) is a universal force for the good if properly managed. However, if we accept that the inappropriateness of the functional conception of society is based on the difference in the presumed sociality of individuals, then we must accept that what will constitute the natural form of human interaction, and its extent, will also be affected.

Sociality, Rationality and Markets Recall that in Chap. 7 we discussed the possible effects on market interactions that will result from a difference in humans’ sociality. After discussing the connections between sociality and forms of rationality, we compared the behaviour of the instrumentally rational individual—representing the functional end of the spectrum—with that of the expressively rational one who is probably more of a representative of the more organic view of society. We argued that both in the context of regular competitive markets and in the equivalent game theoretic framework, the expressively rational individual will act according to some rule, or norm, which is appropriate to the circumstances and reflects social values rather than simply respond to market signals. This means that if faced with other such individuals, the notion of equilibrium—the way in which competitive decentralisation produces a co-ordinated outcomes—becomes obsolete. Thus, in a public good type of games where agents can choose between paying in full or freeride, an expressively rational individual will not consider freeriding as a possibility at all. Hence, if all agents are like this, the game degenerates and the term ‘equilibrium’, which may be used to describe the outcome, will be to a great extent a misnomer. In other words, if it is indeed the case that the different forms of rationality reflect the differences in the nature of human sociality, then it is not clear whether ­competitive interaction, where agents only consider the implications for themselves, is indeed the natural form of human interaction. If it is not, then indeed the concepts of competitive decentralisation and equilibrium, as a benchmark for social organisation, become redundant. However, this does not mean that there will be no markets or prices. After all, even socially minded individuals need to sell and buy things but the difference would be in the mechanism which determines the rate at which things would exchange

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against one another.2 Moreover, it is also possible that markets will exist where there is a difference between the sociality of agents. In the end (as we discussed in Chaps. 7 and 8), when we claim that people have a certain level of interest in the other, we allow for the fact that not all people will have the exact same level of interest. In other words, there will be a distribution of levels of interest which people have in the others around that level, which means that some people may be closer to a functional view of society than others and some may have stronger organic view of society than others. This will translate into a world where most people would behave in an expressively rational way commensurate with the mean level of interest which people have in the others, but there may be enough who could still be more instrumentally rational. In a world where expressively rational individuals meet instrumentally rational ones, the market outcome will be such that the latter takes advantage of the former. If some people seek to work a certain number of hours because they think that this is the right thing to do in their society, and the people hiring them are instrumental profit maximisers concerned about the value of their assets (shares) in another country, the wage that will be paid is not going to be the equilibrium that would have emerged if both were instrumentally rational. Instead, one would think, the level of wage would be much lower than that.3 Equally, when an instrumentally rational agent plays the public good game with an expressively rational individual, the outcome will be that the former will freeride and the latter pay in full and receive much smaller net benefit.4 In such a case,  Even without thinking about different social dispositions, game theory has clearly drawn a distinction between what they call co-­operative and non-co-operative games. The former has different allocating mechanisms (solution concepts like the Shapley Value or the Nucleolus) to the equilibrium (Nash) concept used in the latter. And if this is true, in spite of the fact that in both cases agents are equally self-­interested, it must surely be true if people have different forms of behaviour representing their different social disposition. 3  Some may interpret this to mean that principled people, or people with values, have a weaker bargaining power when they are dealing with people who have no such constraints. 4  Some may argue that this would not be a sustainable situation as the expressively rational will realise that they are getting a raw deal. The problem is that they may realise this but may not think it worthy to behave in a way which they deem in appropriate. We must bear in mind that the evolutionary story of adjustment would only be relevant if the only thing individuals were interested in was to get a good material deal for themselves. As socially minded, they may care less about this than they care about the good of society. We also assume that even when they get a raw deal 2

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though markets may be a natural phenomenon—in the sense of being the ‘meeting’ place of people who seek to trade particular economic goods—its free operation is unlikely to be crowned as a model to be emulated and expanded to all areas of human interactions. Nor would society wish to leave such markets unregulated. Naturally, the greater is the intrinsic sociality of humans—as expressed in the evolution and design of the human brain—the more likely it is for the greater faction of the population to behave in a manner consistent with expressive rationality. This would mean that competitive interactions may be receding.  However, there will always be a sufficient number of people who lurk in parts of the distribution of social attitudes whose behaviour will be more consistent with that of the instrumentally rational agents. Equally, even people with great social interest conduct some of their interactions in a space where social considerations are less obvious. In such set-ups, they too, may act in a way which is more instrumental, but this instrumentality is likely to be of the socially minded one rather than that of the self-interested one (see our discussion at the end of Chap. 7). There are two immediate implications which this understanding must have for the way in which we see markets. The first is that market solutions may not be captured through the concept of equilibrium if all agents are expressively rational. The second is that when there is competition in the market, it is more likely to be characterised by heterogeneous agents in terms of their sociality. Namely, competitive interactions will almost always involve individuals with different levels of sociality and, therefore, with different forms of behaviours be it expressive, socially minded instrumentality or self-­interested instrumentality. Consequently, the presumption as if the equilibrium of such interactions can be deemed as efficient does not seem to be very persuasive.

Spheres of Human Interactions To explain what the organisational implications of this may be, we should return to the distinction we drew between the various spheres of human this may still be a sustainable level of existence which will ensure that such people will not physically disappear.

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interactions (see Chap. 6). We mentioned the economics, the social and the political spheres as the three circles within which individuals may interact in society. In early stages of hunter-­gatherers, all three circles overlapped. The people you worked with were the people with whom you socialised and with whom you made organisational decisions. All economic interactions, in such a world, would be of social significance as everyone’s work was in the service of the group. As societies grew—due to increased abstract human cognition and technology—so did the social distance among those who are now members of society. As a result, the spheres, as it were, began to drift apart. Now, the dynamic of these changes is, in our view, an important aspect of all social theories but as we said earlier, we are not discussing this here and we intend to examine these developments in a follow-up book. At this stage, we are going to leave aside the very important question of the political sphere and say something very general about the other two. It is evident, when the notion of society expands, that not all economic interactions will now have direct social dimensions nor would all the people with whom one interacts economically have the same social significance. At the extreme end of the highest level of social distance—which would typify the completely functional society—the social and the economic circles (denoted by the letters A and C, respectively) to which the individuals relate would be completely separate and the only common element to both of them would be the individual himself, or herself (the picture on the right below). At this extreme point of functionality, the social set may, in fact, be fairly empty as the distinction between interactions involving things which are scares and desirable (economic goods) and other forms of interaction may be blurred. But even if we accept that in a purely functional society there are social interactions, like, say, friendship, they will nevertheless be handled in a mercenary way which is similar to the way in which economic affairs are conducted. One thing would definitely be clear: the economic domain can be treated in complete separation from the social one as there is no social dimension to any economic interaction. This is exactly the picture presented by modern economics.

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C A

B

Non-functional Sociality

A

C

Functional Sociality

In such a society, competitive interaction may be a natural form of interaction but competitive decentralisation (i.e. the freedom of the markets) will not produce a co-ordinated outcome in the sense of having the properties of Walrasian general equilibrium prices. This is true for the wrongly conceived self-interested rational utility maximisers (see our discussion in Chaps. 2–3) and certainly true for a society of socially minded individuals. As we demonstrated through the story of Adam Smith, such an arrangement for a society of people who are socially minded (and, hence, society not purely functional) would lead to a deception and a social failure. For a higher level of interest in the others, or sociality, overall social distance would be much reduced. This means that in all human interactions, both social and economic, there will always be a social dimension to such interactions. This means that if at the early stages all spheres overlapped, the increase in social distance in a society where there is a high level of interest in the others will not lead to the extreme case of the functional society where the social and economic spheres completely separate. But this will nevertheless lead to some separation of the spheres. This is represented in the picture on the left. Now, recall that this is a society where sociality is intrinsic. This means that there is always a social dimension to all interactions with all members of society whether these are economically directed or socially directed interactions. However, the extent of society is such that there will be a certain increase in overall social distance among individual members of society and that the social distance one feels towards different groups of people within society will be different. This would definitely be the case when economic activities expand beyond the group towards which an individual feels affiliation. So, if we look at the picture on the left, we can see that there are likely to be three types of interactions in such a society.

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The first one, in area A, delineates the purely economic interactions where the social distance between the individual and the people with whom he or she interacts is relatively large. When we say that the social distance is relatively large, we mean two things. The first is that the people with whom one is interacting may be complete strangers (even though they are members of the same society). The second is that the object of their interaction is devoid of any obvious social context. Thus, when we buy bread in a supermarket or anything online, neither the ‘person’ from whom we bought the good is known to us nor does bread have any social connotation. Nevertheless, recall that we are discussing such interactions in a world where agents are socially minded. This means that even in this setup, they will definitely not interact according to the standard model of the rational utility maximiser as they both consider the other person with whom they deal as a member of their society as well as because they are aware of the social circumstances which brought the good into the market (which would bring into consideration issues like fair trading, exploitation, etc.).5 They may behave according to expressive rationality but if there are no major issues associated with the production of bread, it is not clear what should be the principle, or norm, which they should follow. A possible way to model this behaviour would be the socially minded instrumentally rational agent whom we discussed towards the end of Chap. 7. We said there that while this form of behaviour still suffers from the opportunistic nature of the standard rational utility maximiser and, in this respect, cannot properly represent the behaviour of socially minded individuals, it still reflects the fact that the agent is not oblivious of society. So, what we are saying here is that while we expect socially minded individuals to behave in a manner more akin to expressive rationality, there may be some domains of their interaction in which their behaviour may be more akin to the instrumentally functional agent. However, in such a case, it will have to be the form of the socially minded instrumentally rational agent. Such an agent, it is important to emphasise, while may have the competitive streak of the traditional rational utility  As we discussed in Chap. 5, the sense of association is normally based on abstract concepts which reflect the development of abstract human cognition. This means that people may be identified as related (in the Hamiltonian sense) even if one has no direct individual relationship with them. 5

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maximiser, would not respond to all economic signals in the same manner as would the self-interested, functional, instrumentally rational utility maximiser. Nevertheless, as the interaction between such agents would be competitive, markets, as we have come to know them, would still be the natural form of economic organisation. In other words, when the prime purpose of the interaction is economic without any social dimension (area A), it means that there will be a form of competitive interaction which, in a decentralised manner, will lead to an equilibrium price that will serve as the co-ordinating mechanism. However, here, too, there will be nothing about this equilibrium that will have any of the appealing characteristics we attribute to Walrasian general equilibrium prices. We could, in principle, rely on such competition to generate, within its domain, an efficient use of resources (productive efficiency and, hence, plenty) but we should remain concerned about its distributional effects. As we argued in Chaps. 2, 3 and 4, we should always be suspicious of competitive outcomes, but in our case we must add to this the concern which emanates from the fact that an economic encounter may be an encounter of people with different forms of behaviour. This means that there may be encounters between agents who are all socially instrumentally rational but there may also be a possibility of encounters between agents who behave like this and some who are expressively rational. Therefore, even though we suggest that there will be a sphere of human interaction where competitive decentralisation may produce a productively efficient outcome, we still hold the view that this will lead to a failure of markets from the distributional perspective. This means that we would need a considerable amount of regulation to prevent such markets from offending the values created by society. In area B, we have those economic interactions that have a direct social dimension. These kinds of interactions may include those we conduct with people with whom we share a closer social connection but, more importantly, it will also include economic interactions pertaining to things which matter to society as a group. In the former category, we may need to re-examine the role of alternatives to the typical shareholder-based corporations, in the form of organisations more akin to co-­operatives. Thus, while buying bread in a supermarket, or in a bakery, does not seem to have any social dimension  (hence, firmly in A), producing the bread in the

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bakery suggests that the social distance between those involved in the production process will, almost inevitably, be much smaller than the social distance perceived between the buyer and the seller. This will raise questions about the appropriate form of organisation which, unlike modern economics, will not be predicated on markets’ failure (i.e. missing markets), but, rather, on the social values shared by all participants. In the latter category, we may count areas where there are economic considerations associated with things of clear social significance like education, health, culture and law. What makes education a social issue is quite self-evident, though in recent years it has been completely twisted by the extremely functional perception of society. When the spheres are completely separate, it means that education—which clearly has economic dimensions as it is both desirable and scarce—is a commodity. People will buy education because it would give them skills and the means to acquire greater material wellbeing or, in other words, it will serve their personal interests. In other words, education becomes a form of training. Society too, functional as it is, would have an interest in providing such skills to individuals so that the overall production of material wellbeing is enhanced (i.e. to facilitate growth). But in a society which is not functional, there will be a certain level of collective consciousness associated with the abstract cement of society. Such a society would have accumulated over time a stock of intellectual and cultural heritage. It is not unreasonable, therefore, to think that the transmission of this stock of heritage from one generation to another—with, of course, contemporary perspectives—would become a social duty.6 Becoming acquainted with it is partly how individuals become members of society. This means that education is not a means to an end (other than the Aristotelian notion of the good life [eudemonia]) but an end in itself. Yet, it has the characteristic of an economic good (in the sense of being scarce and desirable) and, it certainly makes use of resources and, therefore, it is in the economic domain—as it is in the case  Recall that one of the main attributes of our humanity, which we discussed in Chap. 5, is our cognitive ability and, attached to it, our ability to remember and transfer knowledge from one to another. Therefore, ensuring that we connect to what has been the cognitive product of humanity is part of the remembering process which will allow us to progress in the real sense of the word. 6

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of the functional society—but as it goes beyond training it has a social dimension which goes beyond those individuals who are specifically involved in the interactions. Culture too would be in a similar position. Whereas in the functional society culture is a commodity to be purchased in the market as a form of either entertainment or social status (which serves one’s personal interest by facilitating greater command of other economic goods), in the more organic society it is part of the social heritage and is, in a way, an end in itself. There may still be an entertainment dimension to culture but most of it would be devoted to the interaction between society’s heritage and the contemporary experience of its current members. They will therefore draw from it as well as contribute to its development. Hence, even though culture requires economic resources, it has a clear social dimension to it. Health is less of an obvious component of the economic interactions with a social dimension. Here, however, the social dimension emanates from a social obligation—which is only relevant in a non-functional society—that society may have towards the good life of all its members. Equally, law is also part of such a provision. After all, law is about the codification of social conventions and the way people live under it is a social issue and not just a private transaction. By law I am referring to the legal profession and it is ­evident that in a non-functional society the collective may have a certain responsibility to help individuals resolve disputes and other difficulties which they may have with norms that have been legislated in society. In a non-­functional society, the amount of such norms that would reach the statutory book is likely to be higher. As it is part of the pulse of the collective, there may be a reason to expect society to ensure that the public has easy and fair access to mediation services untarnished by commercial considerations. The kind of behaviour we expect people in this domain (B) is more likely to be expressively rational because of the clearer social dimension of such interactions. The way people are going to approach the desire to learn artistic expression, medicine or law is less likely to be instrumental. When someone wants to be a teacher, an academic, a doctor, a nurse or an artist, one is less likely to respond to market signals and is more likely to act according to what he or she deems to be the right thing to do (in other words, a genuine sense of vocation). I have not mentioned lawyers here because at the moment law is entirely in the market domain so

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people can see the mercenary side of becoming a lawyer. But in a world where law was not in the domain of the market, it would not be less of a vocation—the pursuit of justice—than the desire to be a teacher, a nurse, a doctor or an artist. The other reason why these areas of economic interaction have a clear social dimension is the fact that interactions in these areas are less anonymous than those which take place in the purely economic domain. Again, when we buy bread in a supermarket or even in a bakery, our relationship with the seller is fleeting and almost anonymous. But when we acquire education, health, culture or the services of law, there is a greater proximity between the provider and the recipient. This means that the social distance between those involved in the interactions is likely to be lower than the general perception of such distance given the level of human sociality. With a behaviour dominated by expressive rationality, competitive decentralisation is unlikely to be the desirable form of interaction. This means that there is a large domain of economic activities where the institutional set-up must be different from the one we would like to adopt in other parts of the economy. While at this stage I cannot say exactly what would be the best way in which one should organise these activities and interactions, it is evident that one should not evaluate these institutions with the same criteria which one uses to evaluate those economic interactions without a direct social dimension. In particularly, one would find it difficult to quantify the output of such institutions and, therefore, one would not be able to apply efficiency considerations in a meaningful way. But the reason why efficiency should not be applied is not merely computational; it is because these institutions are unlikely to have the objective of maximising economic value and, hence, this criterion of economic performance becomes irrelevant (see our discussion of efficiency in Chap. 2).

Organisational Implications So, what does it all mean for the question of economic organisation? In a nutshell, it means that we must develop a new way of thinking about

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economics, which is predicated on two fundamental principles: the first is that humans are intrinsically social and the second that this sociality is expressed differently according to circumstances. With reference to this second point we should reiterate that for whatever level of human sociality, there is bound to be a degree of dispersion of such sentiments in every society. This means that even in the most social of all societies there will still be some people who can be distinctly identified as self-­interested or even selfish. The issue then is not whether such people exist but whether the entire system is subjugated to their conditions. In very broad terms this means that we must think of an economy in which there are at least two parallel systems. One is, in principle, market dominated, where the rules of competitive decentralised interaction prevail but where the presumption is that the outcomes, while potentially beneficial in terms of material wellbeing, are more likely to offend social sensitivities than promote them. The other domain is that where direct social implications are involved and where competitive interactions— decentralised or otherwise—are not necessarily natural and should therefore be avoided. Not only this, but there should be no attempts at conflating the two or expect the socially driven aspect of the economy to conform to organisational principles or criteria which dominate the competitive domain. In short, we have to begin thinking about the economy as a dual system. It is true that the idea of a dual system was used in the past but then it was used—in development analysis—to allow for developing economies with different sectors which were developing at the different rates. It is also true that even today, there exists a public sector in the economy but the raison d’etre of this public sector is ultimately the support of the competitive decentralised system. In our case, this is not a question of development, nor is it about the support for  markets, but rather a clear separation of the economy into two completely different systems. We may call it the Social Duality of the Economic System (SDES). There are series of issues which arise from such a separation and which require considerable amount of attention. Here, alas, we are only going to outline some of them and consider possible generalised solutions. The first issue pertains to the competitive section of the economy. This section, as we said before, involves the kind of interactions we identified in area A, namely interactions where neither the object has any obvious

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social dimension nor is the social distance between the participants sufficiently small to merit clear social considerations. But it also involves some elements from the other—more social—areas of economic interaction (area B). We are referring here to the production process. When we simply refer to the idea of exchange (i.e. a buyer, a seller and an economic good of no clear social significance), then the notion of competitive decentralisation as a principle of organisation is quite selfevident even if the agents are not self-interested instrumentally rational but rather socially minded instrumentally rational. However, when we consider produced goods, we have to take into consideration the fact that most production processes involve people who spend considerable time together and between whom there may well be a lower degree of social distance than that which exists between their representative,7 who sells the good, and the buyer. While this may have no implications for the principle of competitive decentralisation in these markets, a question may arise with regard to whether such a form of organisation will be conducive to the greater sociality involved in the production process. Imagine a market for a good that can be produced by corporations as well as by some form of organisation which is more socially contrived like, for instance, the idea of true co-operatives.8 The former shuns all expressions of sociality as the interests of the corporation are entirely subservient to the interest of people who do not participate in the production process and with whom the social distance (of those involved in the process) must be relatively great. Given that the social distance among those who actively participate in the production process is relatively small, the social cost of serving the interest of those who are outside the production process may be much greater than is assumed in standard neoclassical models. Namely, if the objective of the corporation is profit maximisation (the interests of the shareholders), then this may dictate the  This lower level of social distance is not a reflection of these individuals having greater sense of belonging to the large collective (society) as it is a mere consequence of the fact that these people spend a great deal of their time together as well as have some imposed common interest (the success of their organisation). 8  This is more a take on J. S. Mill’s notion of co-operatives than it is a reference to existing ones. In Mill, co-operative behaviour will be the natural outcome of individuals’ development. This, in turn, should lead to more co-­operative forms of organisation. What exactly this means will have to be explored in the new theory. At present, there are, of course, numerous forms of co-operatives but we are referring only to the notion that they are run to serve the interests of those who are directly participating in the production process. 7

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need for flexibility in the way the labour force is treated. In other words, corporations will tend to hire and fire people simply to serve the profit maximisation edict.9 For the people who move in and out of the corporation, the costs are enormous as they could also be for those staying behind. For those who leave, the cost is high as these people will now need to find a new job or change their occupation altogether. As we noted in Chap. 4, the presumption of such mobility being costless is an absurdity as well as a violation of sovereignty if indeed it will lead to a change in occupation. But there will also be costs for those staying behind. If the composition of the labour force within the corporation is steady most of the time, the social bonds between the participating individuals are going to be greater which, for socially minded individuals, will serve as an impetus for greater productivity. When someone leaves, the effects on those remaining is going to be high not just because of the loss of the sense of job security (which is what a self-­interested person would be primarily concerned with) but also because of the break of social ties which have been created between the departing employee and the remaining ones. Some would argue that if these issues translated into clear efficiency effects for the corporations, surely tenure or job security would have been the interest of the corporation.10 But even if it did not, the effects on socially minded individuals of the loss of social ties and the need to embark on a journey to reassert their position in a society about which they care represent social costs which the corporation is not taking into considerations but society cannot really ignore. Naturally, if the turnover of the labour force is high in the first place, no social bonds will be created  What is hidden behind this statement is a distinction within economic theory between the short and the long run in the considerations of corporations. The long run is where everything can be varied, and in the short run only one aspect of production is flexible enough to be changed. As there are, in general, two broad categories of means of production (capital and labour), the question that is hidden in the above statement is that labour is the most flexible means of production. When we need to vary things in the short run, we do not touch capital but we are ready to willy-nilly change labour. This is a serious matter which deserves greater attention but would also be a distraction in terms of our purpose in this book. But we would like the reader to reflect on this question. After all, what is hidden behind such a position is that contracts with capital are more important than contracts with labour. It is not obvious that this is how things should be in a society where most people are dependent on their labour. 10  I discuss some of these issues in Witztum (2008). 9

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but the social, as well as private, costs for those who need to look for another job or change occupation are still high and not taken into consideration by anyone. Now, a great deal is being said about what came to be known as corporate social responsibility (CRS) but this is usually discussed with reference to the effects a corporation would have on its environment (both physical and social); it is less focused on the responsibilities which a corporation has towards the people it employs.11 From a social perspective, this is a fairly straightforward dilemma: either society provides individuals with a transitional cushion or it forces the corporations to do so, not under the voluntary act of responsibility but under legal obligations.12 In this way, the social costs become part of the corporations’ costs rather than a way to use undistributed profits. The reason why this question matters is related to the point we are trying to raise about the alternative forms of organisation which, for lack of better word, we call co-operatives (or perhaps,  social co-operatives:  so-­ operatives) but not necessarily the one we observe today.13 The nature of true co-operatives, or so-­operatives—which may have numerous forms and is a growing form of organisation—is that, in general, they would shift the focus of considerations from people who are not involved in the working of the organisation to those who are closely associated with it. This means that such co-operatives—as organisations—are more likely to behave in a manner which is more consistent with expressive rationality than the instrumental rationality engraved in the profit maximising principles of corporations. They will, as it were, internalise the social costs associated with  There were interesting discussions about some of these issues from the perspective of the corporations’ own interest. This came to be known as the Stakeholder debate. However, the focus of interest here was to demonstrate that it is in the profit maximising interests of the corporation to take into considerations the benefits from long-term relationship it has with its employees and suppliers. 12  Normally, corporate social responsibility is funded by some of the retained profits. It is, thus, optional. Had there been a legal duty for firm to bear the social costs, behaving responsibly would have meant less profits altogether. 13  One of the main tasks for the theory which needs to be developed on the basis of the conceptual framework offered by this book would be to propose ways to organise production or provision of non-social economics goods (within domain A), which is based on both the nature of sociality of those who participate in the organisation and the social objectives of society. 11

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the fate of those involved in their operations. Consequently, as we highlighted earlier, in the meeting between instrumentally rational agents (now, the corporations) and expressively rational ones (the true co-operatives), the former will be able to take advantage of the latter. More specifically, it is evident that if the true co-­operative does not respond to market fluctuations through a flexible approach towards the people who work in it while the corporation finds it easy to hire and fire at will, then the true co-operative may find it difficult to compete in a market where corporations operate as well. Theoretically, if there are no productivity effects to the difference in attitudes towards the workforce in the two types of organisations, this should lead to the disappearance of true co-­operatives and the complete takeover of markets by corporations but there is evidence that some forms of co-operatives seem to proliferate rather than disappear. The reason for this could be attributed to an important aspect of markets which is, perhaps, one of the most obvious indications for their failure. The reason why a true co-operative should disappear in a competitive world where their actual costs are higher (because of their social considerations) and where competition actually works is because profits in the long run should be reduced to what is referred to the normal rate where the corporation itself makes no profits.14 However, what we see in reality is that corporations compete in their ability to increase profits rather than just make profits. As we said in Chap. 2, the most staggering evidence of market failures is the monumental self-celebrating skylines of commercial and financial districts in city centres. If competition did to profits what it was supposed to have done, there would be no money left for such extravagant idolatry. Consequently, as profits are not driven to their normal rate, it means that true co-operatives can still operate in these markets with a lower level of profits. As they may not depend on acquiring capital from the markets, the changes in their rate of profit is less of an issue. Naturally, if there were clear productivity effects to the way one treats the workforce, it seems that true co-operatives should be able to  The corporation is separate legal entity from its owners. Normal profit means that the owners receive a return on their money, which is the same as the one they would receive everywhere else in the market. The corporation, then, retains no profits and it is the long run because capital will no longer be attracted to this industry. 14

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become more efficient than corporations and this, in normal competition, should lead to the disappearance of corporations and the rise of true co-operatives. Going back to the presumption that there are no efficiency i­mplications to the way the workforce is being treated, the fact that true co-­operatives have to compete with corporations is clearly an unfair situation from the social perspective. By taking care of those who participate in their operations, they relieve society from its duty of care towards them. At the same time, corporations pass on to society the care for those whom they use as pawns in their socially subversive competitions. Had society forced these corporations to internalise the social costs, it is more likely that true co-operatives would become the evolutionary successful form of organisation in the supply of those economic goods that have no intrinsic social dimension. However, in the name of efficiency, society is paradoxically being prevented from recouping the social costs from corporations in the form of corporate tax. Now, one may argue that the competition for a higher increase in the rate of profits—and, thus, a world of corporations rather than true cooperatives—is more conducive to technological development and growth. This may well be the case but as we argued repeatedly, growth is not necessarily the main business of a socially minded society. Nevertheless, if society has created the dual system we discussed, it may be sensible to allow the activities in area A—where there are no explicit social considerations—to generate a higher rate of growth in material wellbeing. In such a case, one has to make sure that society is taking on itself the care for those people who are thrust into the uncertainty and social instability associated with working in area A of the economy. This will have great implications for the question of how society is funding its activities and to the level to which it will have to interfere, to make sure that corporations contribute their share to offset the social costs which they create. Alternatively, and in a more Keynesian spirit, society may take over— within area B—the subject of technological development (i.e. a variation on socialising investment). In such a case, extracting most of the corporations’ profits may not have such great effect on growth or productivity). So, in summary, what have we said about the question of the organisational principle of the part of the economy which involves the production and exchange of goods that have no intrinsic social dimension (area A in our pictures above)? On the one hand, we suggested that while

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competition may be the rule of the day in exchange,15 the production of those goods in true co-operatives is, perhaps, the form of organisation which is more consistent with the rationality we attribute to the level of sociality that humans seem to possess. On the other hand, we noted that the nature of competition and the sensitivity of productivity to the form of organisation are important feature in the determination of the ability of true co-operative to emerge and subsist. When people are socially minded, whether instrumentally or expressively, it stands to reason that their productivity will be based predominantly (though not exclusively) on their motivation and less on the incentives they face (and which are closely tied with market signals). This means that true co-operatives are more likely to have higher productivity than corporations and in such a case, in normal competition,16 they are likely to emerge as the dominant form of organisation behind the production of goods that are trades in area A. However, corporations that compete for a higher change in the rate of profits will probably lead to greater adoption of new technologies and, therefore, have efficiency gains which may help them offset the disgruntlement of their labour force. Either way, it is evident that from a social perspective true co-operatives are serving society better by internalising the social costs of those who participate in them. Had society forced corporations to pay their share of the social costs they inflict on society (by internalising their so-called social responsibility), they may not be able to generate the growth which they currently do in their competition for higher rates of profits. But as we discussed in Chap. 2, there is something suspicious about the shift in the agenda of the discourse about economics from the efficiency of allocation (the distributional element of the solution to the economic problem) to growth. We are constantly warned against the interference in the kind of competition that emerges in what we called  But even here we are referring to behaviour which is based on the socially minded instrumental rationality rather than the self-­interested one. Nevertheless, we must allow for the fact that there may be a good number of people in every society who are selfish—and, therefore, behave according to self-interested instrumental rationality—and who would more naturally congregate towards area A of the economy. This means that we need to pay greater attention to the possibility that people who behave like this may take advantage of the others who are more socially minded. 16  When corporations compete to maximise their level of profits. 15

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area A of the economy lest we affect growth. The idea of ‘non-­extracting institutions’, which we mentioned in Chap. 1, seems to claim that successful economies must allow people to command the fruit of their entrepreneurial and innovative activities but not necessarily the fruits of their labour, which is not distinct.17 But is the success of the economy the same thing as the success of society? Are we not facing here something more akin to a sophistry of growth? The social agenda, according to this sophistry, is the attempt by the weak to take from the strong that which is by nature due to them. It may not be deceitful, in the general terms of sophistry, in the sense that if we do not intervene in markets to help, say, true co-operatives or force corporations to share in the burden of the social cost they create, there may indeed be more growth.18 But it is sophistry in the sense that we should favour those who are a-social and willing at all times to take advantage of those who are not weaker than they are but simply more socially minded. The idea of having area A of the economy dominated by true co-­ operatives, or so-operatives, at the expense of growth is something which some liberal classical economists have already contemplated. J. S. Mill was adamant that when individuals develop and realise the meaning of their sociality, they will naturally become more co-­operative. This, he thought, will alter the way production is organised. But it will also shift the focus away from the production of plenty to a world of stagnation where the produce of a country is what they need so that they can direct their attention to the development of those aspects of human life which are less material. The commitment to growth in contemporary debate is another form of the way in which we betrayed liberal classical economics. Having discussed at some length the possible implications of what we have explored in this book about the question of how to organise area A of our economy where the objects of exchange have no obvious social  As discussed in Chap. 4, equating wages to marginal cost says nothing about whether individuals recoup the real fruits of their labour. The idea of ‘non-extracting institutions’ which ignores the right which ordinary people have to the fruit of their labour seems to uphold a dangerous principle. 18  It is, of course, deceitful in pretending the growth constitutes a solution to the economic problem that we posed in Chap. 2. 17

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dimension, we can now move on to discuss what should happen in area B. Now, before we continue and as we said before, some may think that the idea of dividing the economic sphere into areas A and B is nothing else than discussing the presence of a public sector in a market economy. While there is some truth in it, there are also some fundamental differences. Normally, the role of the public in a market economy is to deal with market failures (i.e. public goods or natural monopolies). The purpose of these activities is to support the working of markets and facilitate, in theory, a path towards the efficiency of the markets themselves.19 In our case, this is very different as the distinction between the areas has nothing to do with market failures as they have to do with social responsibilities and with a distinction between economic goods according to their social significance. This also means that unlike modern economics where area B helps A to flourish, here area A is supposed to help B flourish. This is exactly the distinction between social objectives being subservient to economic consideration—which is typical of the functional society—and the economy being subservient to social objective which is typical of the more organic view of society.20 So, what would happen in area B and in what way is it different from area A? Recall that area B includes two distinct elements. The first is the production side of some of goods in area A where the social distance between those involved in production is smaller than those who are involved in exchange.  The second type of elements in B are those associated with economic goods which have a distinct social significance. We mentioned here education, culture, health, law and order but the list may vary across societies. What typifies these goods—apart from their obvious social significance—is the fact that they are not simple economic goods which we can quantify and evaluate in the same manner that we could do with economic goods in area A. To say, therefore, that we would like to have as much of them as possible with the existing amount of resources we have is an empty statement. Consequently, they fall outside the usual domain of the way the economic problem is defined in modern analysis. We do  As we said earlier, in principle, public ownership of natural monopolies, in modern economics, would lead prices nearer to their marginal costs, which will allow allocative efficiency to prevail. This is, of course, if there are no productive efficiency issues. 20  See a discussion in Chap. 8. 19

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not simply want endless quantities of them given an amount of available resources and this is not because they are public goods. In fact, it is not evident that any of them is a public good at all, though externalities are clearly associated with their levels of provision. Nevertheless, they will all be part of the social problem. It is true that in a purely functional society this may not be an issue. As we said before, if education is merely the acquisition of skills and culture is no more than just entertainment, there is nothing special about these economic goods. But in a society where education and culture are part of the transgenerational social duties, the value of those goods cannot simply be determined by individuals’ willingness to pay. An individual without education or culture has no ways of conceiving what they may or may not be willing to pay. They may be able to do so once they realise the nature of the benefits provided by being connected to the stock of society’s intellectual and cultural heritage but not beforehand. Therefore, without going into the question of what form of organisation should dominate the provision of goods in area B,21 we can say that the criteria of evaluating the performance of such provisions cannot be the one we use in area A or for other economic goods that have no obvious social dimension. In other words, we should not ask whether a school, a hospital, a university, a theatre and the like are efficient. We need to devise alternative ways of assessing whether a particular way of organising these provisions is serving their social purpose. We realise that this is a complex question and we do not have a clear answer to it at this stage, but we think that by removing the question of efficiency from the discussion about the way these economic goods are provided, we are introducing a necessary delineation between the two components of our dual economy. It probably stands to reason that people who would work in the provisions of these goods are more likely to be socially minded who behave expressively rational. Therefore, it would make sense if they were all some form of civil servants or organised in publicly supported co-operatives.  Which, again, is one of the main tasks of future theoretical developments. Like the idea of sooperatives, the social disposition of those who inhabit the organisation should be taken into account. But unlike the so-operatives, here, there are well-defined social objectives which would have to take precedent over other considerations. 21

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As these social goods form part of the commitment of the collective towards the individuals in society, it also stands to reason that some of them should be provided freely (like education or health) while others should be priced according to needs of provision rather than willingness to pay. This, of course, raises the immediate question about the way in which the social sector of the economy is being funded. But before we say something about this, we should also consider another issue which may not come under category B of economic interactions but which may nevertheless require collective action and, hence, funding. We are referring here to the problems associated with the ability of individuals to access national income. In modern economics, if all individuals owned sufficient number of assets that generate a regular flow of income and if this income were sufficient to sustain a socially constructed standard (that which we called social subsistence), then there would not have been a problem with the ability of individuals to access national income and to fend for themselves without the intervention from the collective. But we saw (in Chap. 3) that the reality is that most people have no access to such income and they rely almost exclusively on their labour as a means to access national income. When people depend on their labour for their ability to fend for themselves, there are two major implications for the social function of the economy. The first is the problem that people become, to an extent, enslaved by labour. They must work at any cost and, therefore, they must take whatever opportunity the market offers them. In terms of their sovereignty, these people are in no position to ever refuse to play the game and they are likely to spend most of their lives stuck in work they do not like (see a discussion in Chap. 4). The second problem is that society must make sure that there are, at all times, enough places of work to go around. As we discussed in Chap. 3, there is some evidence—though somewhat speculative—that with the rise of automation and digitisation the technological need for labour is receding while output continues to rise rapidly. This means that both the amount of work available may be diminishing and the ability to choose that which one would like to spend their lives doing may become considerably reduced. In addition to this, if society wishes to allow corporations to operate, it has to be in a position

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to care for those who are affected by the fact that corporations will hire and fire workers at will. This means that society must be prepared for a world in which work ceases to be the main mechanism through which people access national income and, which is more important, that work ceases to be an effective tool for generating, artificially, the purpose of life. What we mean by this is that the problem of the future of work is not just a question of income distribution, it is a far more serious question in terms of the meaning of people’s lives. Can people who are never employed have a meaningful life? Or, is work the tool which pours contents into people’s lives? In modern economics where education and culture have a functional meaning, people receive the former in as much as it services the world of work and the latter in as much as it alleviates the harshness of this world. But if education were the end in itself and if all people in society were given the opportunity to connect to the intellectual and cultural heritage of their society, the Aristotelian idea of the good life may be resurrected. We must not forget that when Weber discussed the rise of capitalism from Protestant Ethics, which made work a religious duty, the spiritual contents of these people’s lives was not work itself but the religion which made them do it. The modern world seemed to have kept the work and removed the spiritual—or, rather, intellectual—contents from individuals’ lives. For the lucky ones, work itself became the end rather than the means for the good life; for the less lucky, work became a means to a life devoid of any intellect or cultural depth. So, in the non-functional society we are trying to describe here, education and culture have already been taken out of the market domain and placed firmly in category B of economic activities. This means that all members of society will have access to their intellectual and cultural heritage, which would allow all of them to seek for the meaning of life in other ways than work. Instead of talking about people who are self-­ employed, we should start thinking about people who are self-engaged. Such people will be those who will pursue their interests in a non-commercial way and through voluntary operations within their community and across communities in their society. Naturally, all those people who will not be able to find work—but will nevertheless find a purpose

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in life due to the public provision of education and culture—will have to be able to subsist and will require financial support from the public. The question that immediately arises is what form should this support take and where would the money come from (in addition to the funds needed for maintaining the services provided under category B of socially significant economic goods). In recent years there have been a considerable amount of discussion of the question of a universal basic income. Accordingly, all members of society should receive regular income from the government whether or not they have other sources of income and that this income should be enough to allow people to opt out of the game and direct their lives towards other goals than finding a work that will fulfil them. While I have sympathy with this idea, there are three problems.22 The first is that it is not evident that with the current nature of education and intergenerational cultural transmission many would be able to find a meaningful ­alternative to work in their search for the purpose in life. Secondly, there is an element of waste in it. Why should someone who has access to national income through either assets or income or both also receive the additional income from society? In the end, society will be made up of individuals who may be net-financial givers and net-financial receivers. Needless to say, there is no immediate correspondence between being a net-financial giver and being an overall donor to society. Nor would being a net-financial receiver mean being an overall receiver. The third problem is the important task facing future theory that would have to deal with the emergence of the division between those who become net-­financial donors and those who are net-financial receivers.

 There is something about universal income which is orthogonal to the principle of proportional remuneration that we discussed in Chap. 4. Naturally, our desire is not to abandon the principle but just to create a safety net that would allow everyone in society to fulfil their purpose in life. In the contemporary treatment of the economy and society, all things are measured in terms of material wellbeing and, therefore, proportionality of reward is always measured in those terms. However, in a society where some of the activities go through area B in the previous analysis, return cannot always be measured simply in pecuniary terms. Therefore, the notion of proportional remuneration in a society with more complex notion of what its agents produce, will also be complex. Universal basic income is only part of the return which people will get from society in return of their contribution. 22

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But the problem of waste with regard to the idea of universal benefits is that it will, in most likelihood, be based on a tax system. Therefore, those individuals who will be paying tax will then receive it back in the form of basic income. Instead, the idea of basic income should be replaced with guaranteed income. Now, one may ask, in what way will this be different from current forms of means-­tested income support? The answer is that claimant will need to demonstrate that they are self-­engaged23 and will not be asked to take any other available jobs. So where will the funding come from for such an elaborate social sector in the economy? The standard answer would be, of course, through taxation. Recall that in modern economics the aversion to taxes was motivated by the desire not to impede the blessed workings of competitive decentralisation. But as we have tried to establish, there is, in fact, nothing blessed about the workings of competitive decentralisation, so interfering in the working of such system should not be a cause for trepidation. The main cause for the objections to taxation was the efficiency cost of such intervention. In the absence of lump-sum taxes, any tax will cause a loss not only of utility (thus violating allocative efficiency) but much more serious: it would cause a loss of material wellbeing. If one raises the tax from those who work hard and earn a lot (i.e. income tax), then the self-interested instrumentally rational agent would work less (or put less effort in his or her work). When one uses the tax revenues to support those who earn and work little, they too will respond to this income effect by working less. So altogether, society will lose efforts at both ends of the redistribution cycle.24 However, as we showed in Chap. 7, when agents are socially minded—whether expressively or instrumentally— their response to redistribution will be very different indeed. In fact, it is even possible to show that the total effort contribution that will result from such an act of redistribution would lead to greater efficiency in the sense that both donor and recipient would respond to the tax by increasing their effort contributions.  Yet another thing for the new theory to develop where criteria can be found to evaluate the level of one’s self-engagement. Namely, if one finds purpose in life in communal theatrical activities and one is short of the income needed to socially subsist, one should be eligible for support. The evidence for such a person’s self-engagement would be his or her activities in the communal theatre. 24  This issue is a great puzzle as we have here a situation where people who may vote for a government that would wish to redistribute income would then respond to the implementation of their will by withdrawing their own efforts. We discussed some of these issues in Witztum (2008). 23

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Naturally, the tax in our case would come mainly from the economic activities in sector A of the economy which includes both corporations and co-operatives. As in this sector there may be some individuals who are still effectively selfish (in spite of the higher level of sociality of most people), their response may be negative in the sense that society may end up paying for the funding mechanism by losing some material wellbeing. But this is something society which has a dual purpose may wish to do. Moreover, as there will also be enough people in sector A who are socially minded (either expressively or instrumentally), there may not be a negative effect. Nevertheless, there may be a dilemma which society may face. In truth, society should aim its taxation policy towards the profits above the normal which corporations make. But while targeting the corporations would help promote co-operatives, it would also ensure that the response to the tax would be negative (as the corporations represent those who are still effectively selfish). Either way, the main source of funding for the public would be the surplus created above the socially constructed level of costs by the economic activities in sector A. Some may argue, however, that the amount of money needed to support the elaborate sector B of the economy may be so great that the taxes required would lead to a sharp decline in sector A’s activities, which would mean both decimation of material wellbeing and the abolition of the tax base. But this kind of Laffer Curve argument is predicated on individuals being self-interested instrumentally rational. With socially minded individuals who would learn to appreciate the contribution of the collective (what Mill called individual development), the negative response to higher tax rates is not a necessity. Moreover, as so-co-­operatives are also making a surplus, they too will be taxed and their response is unlikely to be similar to that of the corporations. This means that the ability of the collective to raise taxes in a socially minded environment should be much greater than it is assumed to be in the self-interest dominated society. This is particularly true if society chooses to socialise investment and thus, may capture the entire surplus created in area A.  But there is a way in which society may be able to raise some of the needed funds while avoiding some of the presumed negative incentive effects of taxation even in a self-interested environment. It is through taxation of property. Recall that when Walras conducted his analysis of the economy, he distinguished between the search for the essence of

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things (the pure science, in his language) and their application (the art). While he discovered that there exists an order in the sense of a situation where all rational wants coincide and the prices of all goods reflect their essence (utility, or value in use), the manifestation of it in reality was problematic. But in his case, this was less of an issue as he recognised that the art of economics requires government intervention to achieve social objectives and uphold morality (or justice). To facilitate the role of society without interfering in the potential order of the markets which in his case exists in principle, he proposed the same idea which Henry George proposed in the USA: the public ownership of land. Now, the evidence about the share of land in the wealth of a country or in its gross domestic product (GDP) is not easy to gauge and is influenced by many additional factors. But by way of example, there seems to be some evidence to suggest that on average land constitutes around 20% of the wealth of a country.25 This is a considerable amount given the overall share which capital has in a country’s GDP. For instance, in the USA, the share of land in GDP seemed to have been around 8% at the time in which the overall tax revenues of the US government amounted to about 12% of GDP.  It is, of course, true that the US government is not an example of the level of public spending that would be needed to support the part of sector B which involves goods that have intrinsic social dimensions, in a less functional society. However, given that a significant part of tax revenues would come from other sources than payroll tax which would include taxes on the remaining stock of capital, the amount of revenue available to the public from public ownership of land could be a significant help in the management of the society within which socially minded individuals would like to reside. There is, of course, the efficiency issue as those whose work depend on land will have—in a world of incomplete contracts—less incentives to work hard (and, hence, efficiency losses). However, while this may be true in a world of self-interested instrumentally rational agents, it will not be true in a world of socially minded individuals who behave either expressively or instrumentally as socially minded agents do. Moreover, even in standard modern economics we are willing to forgo some  See, for instance, a discussion in Caselli and Feyrer (2007).

25

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efficiency in return for socially desirable outcomes (second best principles). But as the social welfare function suffers from the same a-social attributes that all self-interested instrumentally rational agents share, the price society is willing to pay is usually fairly low as society is always willing to compromise its values for a handful of material wellbeing. From Walras’s perspective—and this may be a disputed question about which we will not elaborate here—the public ownership of land is a matter of justice. As such, it is a principle which cannot be compromised without losing its status as a principle. Consequently, two things will follow: on the one hand, individuals may be willing to pay a very high price in efficiency terms to have that which they deem to be just; on the other hand, as they see in the public ownership of land a just cause, they are unlikely to withdraw their effort when they do not command the full return on it (i.e. they will behave like socially minded agents do). Public ownership of land is not really an essential part of our argument but in a society based on the intrinsic sociality of its members, the role and significance of property rights—and in particular, non-reproducible ones—must be re-examined. Duguit (1911), for instance, is considered by some, in the legal profession, as one of the first to introduce social considerations to the question of property rights.26 He very much follows Comte and Durkheim (and to a lesser degree, Spencer) in arguing that people depend on each other and that their collective endeavours are based primarily on solidarity. But the social function approach to property rights which Duguit generated presupposes a social arrangement and is therefore aimed at the limitation of the rights which people have over property. It is not addressing the question of whether and why people have a right to own property in the first place which, of course, will have implications for the question of the distribution of these rights. In other words, the question is not whether a person has a right to a property but what do these rights mean in terms of what he or she can do with it. There is not much one can learn from this about the question of allocation or distribution of property rights.  See, for instance, Colin Crawford (2011) and Mirow M C (2010). As was argued in Witztum (1997, 2005b), Adam Smith’s conception of property rights included distributional consideration and was therefore inherently social well before Duguit. 26

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But can property rights which are all about the exclusion of others and the exclusivity of use, have an intrinsic social value? Can the allocation of property rights be a social necessity which is independent of its efficiency? If so, how would such considerations affect the moral and legal rights which people have to property? Within the natural law and liberal traditions, the rights which people have to an asset seem to be based on possession (ius in re). If you acquired something without infringing anyone else’s rights, the mere possession of the thing gives you a right to it and excludes others from using it or claiming it for themselves. But the question is, what are those other rights that must not be infringed? Are they also rights which emanate from possession (i.e. you cannot take without consent a thing which is already owned by another)? Or, could these rights be socially construed? What we mean by rights which could be socially construed is rights which people may have as members of society and which could be as diverse as, for instance, a right to belong, a right to subsist or a right to the fruits of one’s labour. This may mean that neither the right of accession (to property) nor the right of possession can only be dependent on refraining from violating other property rights and they may have nothing to do with the creation of wealth or efficiency. Could it be that some assets should be owned collectively (therefore, no individual can have property rights in them) even though it would have been efficient for these assets to be owned privately? Alternatively, in a world of synergies, could it be that the right of accession should be conditioned on other agents’ ability to make use of their own, separate, assets even though this may not be efficient? This is, of course, a broad question which we will not answer here but must be part of any attempt at understanding society and its institutions. At the moment, the dominant approach to property rights is based on a functional society which is serving a-social individuals. If we accept our interpretation of the sociality of humans, such an approach is inappropriate. As I said earlier, I intend to work on a follow-up book which will deal with the broader (and political) implications of the current book and this, no doubt, will lead to an examination of property rights.

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Some Broader Implications One of the main characteristics of the Dual Social Economy which we propose here is that it relies heavily on the ability of activities in area A to fund the provisions of area B which lie in the public domain. But this becomes a problem in the globalised world in which we live. As the heart of globalisation is the free movement of the means of production which include both capital and labour, the ability of a society to pursue its own social agenda becomes limited. If there is a difference between the sizes of the public sector in area B of two different societies—and there are many reasons why there should be such a difference reflecting the real cultural diversity of the world—it would mean that the tax burden in the two economies will be different. In a globalised world, this may lead to the move away of resources like capital and labour from the high-tax-burden economy to the low-tax-burden economy. If this happens, the tax base of the high-­tax-­burden economy dwindles and the ability of the economy to implement its own social and cultural vision will be undermined. One could, of course, say that this would not happen as the individuals in each economy are part of the social agenda and would not wish to undermine it by avoiding paying the necessary tax. While this is true in principle, it does not allow for the fact that social attitudes are not narrowly distributed around a certain mean. Namely, while the mean level of interest in the others which members of one society have may be higher than another, there is still a distribution of attitudes around that means. Therefore, even in the society with the more demanding social agenda and public-sector spending, there will be enough people whose behaviour is more likely to be similar to the self-interested instrumentally rational utility maximiser. These people, who are still socially minded—and who have benefitted from, as well as share interest in, the social stock—are also more likely to either move their assets away or altogether move themselves, if they feel that the tax burden is sufficiently high to offset their commitment to the social agenda of the society within which they live.27  The question of free movement of labour is complex and contentious. We will not discuss this here but I do hope to deal with this in the intended follow-up volume. We should only point out here that though societies have duties to transfer their intellectual heritage to the next generation, it is a considerable investment on society’s part. Should people be able to take this accumulated 27

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Therefore, to protect the potential cultural diversity of the world in terms of the conception of human sociality, there may be a need for societies to ensure that they have a tax base which can s­ ustain their agenda of choice. This means that societies may need to restrict the mobility of capital and, to some extent, that of labour too, to make sure that it can fulfil its social functions and its obligations towards the individuals whose sociality it reflects. This is not a call for a halt on the ability of individuals to move around but it is a call for such mobility to be based more on other principles than simply on the search for material wellbeing. Given that different societies will have different expressions of sociality, it stands to reason that people should have a right to move to the environment which is most consistent with their own sense of sociality. But again, this is a major  and complex issue which we are not investigating here but which, too, will be the subject of our intended further examination of social structures. Put differently, the organisational conclusions implied by this work are indeed far reaching and in the current climate of globalisation (in terms of factors mobility) it may be impossible to implement them and allow the real diversity of world cultures to emerge or be protected. One may therefore wish to consider the practical implications in stages. In the first stage, globalisation in the sense of the mobility of factors should be restricted while free trade should be allowed to continue. This will allow societies to regain their sovereignty and pursue the agenda which reflects their own culture and history rather than allow the culture and history of economically successful nations (in terms of material wellbeing) to take over. At the same time, the preservation of free trade between societies will ensure the continuous dialogue across societies which will genuinely enrich each one of them without threatening a cognitive takeover. human capital—broadly conceived—and simply transfer it to another society without a recompense to the society which provided this capital? It is true that it is a social duty to transfer its heritage and therefore, an individual right, but rights and duties are more complex notions in the social setting than in a highly individualistic one where society is purely functional. In fact, the whole concept of property rights should be re-examined in the social setting and this is another thing I hope to be able to do so in the intended follow-up volume.

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Taking Stock: A Summary of the Book Having explored our afterthoughts with regard to theoretical developments and more immediate organisational implications, it is time to move to the second part of the epilogue: the summary of the book. We have travelled a long and winding road and it will be useful if we could take stock of what were the main tenets of the argument which has been developed in the book. It has been, of course, an exceptionally difficult task to rise against something which in the eyes of many is both natural and successful. The affluence of those societies that embraced competitive practices—conceived as a natural order—seems to recommend them to all. The conveniences of life, the increased pace of technological innovations with its exceptional wide reach, and the spectacular skylines of financial and business centres in big cities seem all the signs of phenomenal success. And here we are trying to say that in spite of all this, there is something profoundly wrong, if not rotten, with that very thing which seemed to have brought all this about: the natural order of competitive decentralisation. But it would be good to remind the reader of the beginning of our journey, of that point where we began to believe in the power of selfregulation, and where we thought that the harmony of matter, so beautifully and convincingly explored by physics, can easily be extended to the harmony of humans or humanity. At that junction, we noted the warning from Mandeville and his Fable of the Bees, which is, perhaps, more relevant today than ever before. Recall that Mandeville promised the exact same thing: a world of affluence and prosperity which would come about through the free rein of human interactions. However, that which is given free rein in his account, is nothing else than greed, lust, fraud and vanity, which are all a-social or even anti-­social behavioural traits. Adam Smith offered a relief from this terrifying dilemma by arguing that material wellbeing can emerge naturally when people are, as he thought them to be, socially minded but when there is a tension between that which they socially desire and that which natural liberty delivers. Instead of being impressed with those expressions of material success to which we are constantly exposed, Adam Smith warns against the awe

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with which we gaze at the beauty of materially successful commercial societies. We have a tendency, he thought, to confuse the sense of harmony we feel when contemplating the beauty of a well-­ contrived machine—which is exactly what a wealth-producing system of natural order is—with the harmony we would feel if we followed through our natural inclinations (our conscience) and made a real effort to try to feel as others would, had we been in their place. We, therefore, may end up believing that those human attributes which produce the plenty and are so well rewarded in the natural process must also be morally good. This could have meant that Mandeville’s paradox would be resolved by making greed and vanity morally good but, to Smith the observer, this was clearly a corrupt morality and the result of nature’s deception; it was a triumph of the nature of things over the nature of humanity and, as such, not a sustainable order (i.e. there is no diachronic order). So, while Mandeville saw in natural liberty a force for the good as it transformed private vice into public good (economic success), Smith’s position was more ambivalent. While natural liberty would not be economically successful without good morality,28 it has the capacity to appear successful by generating its own corrupt sense of morality. In other words, economic success cannot be separated from social, or moral, success. Modern economics, on the other hand, reflects neither paradoxes nor any ambivalence. Natural order, if undisturbed, is unambiguously both economically and socially successful. And it is this view which we set out to reject because the only thing we really see in the blinding glitter of affluent societies is what Smith has noticed as nature’s deception, the corruption of moral sentiments and the free rein of all those qualities which Mandeville deemed as necessary and Smith’s own morality would condemn. There is, perhaps, no greater manifestation of this than the importance of growth in current public and academic discourse about economics. The natural liberty of competitive decentralisation together with the protection of the property rights of those, we are being told, who pull society,  In the sense that all members of society refrain from using material wellbeing as a means for social approbation which would lead the economy to an equilibrium at what Smith called natural rates where growth is maximised (see the discussion in Chap. 8). 28

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as a whole, forward through their entrepreneurial behaviour and innovation (sometime referred to as ‘non-extracting institutions’) is the essence of economic and social success. Though we pay a lip service to the questions of distribution while glorifying the power of trickle-down theories, for everyone’s benefits we must let the capable, strong and powerful (maybe also greedy and vain) have their way; any attempt to curb their freedom—through debilitating redistributional policies—is the conspiracy of the weak. As the sophist Callicles tells Socrates in Plato’s Gorgias (p. 483, b–c): I believe that the people who institute our laws are the weak and the many. So they institute laws and assign praise and blame with themselves and their own advantage in mind. As a way of frightening the more powerful among men, the ones who are capable of having a greater share, out of getting a greater share than they, they say that getting more than one’s share is ‘shameful’ and ‘unjust’, and that doing what’s unjust is nothing but trying to get more than one’s share. I think they like getting an equal share, since they are inferior. These are the reasons why trying to get a greater share than most is said to be unjust and shameful by law and why they call it doing what’s unjust. But I believe that nature itself reveals that it’s a just thing for the better man and the more capable man to have a greater share than the worse man and the less capable man. Nature shows that this is so in many places; both among the other animals and in whole cities and races of men, it shows that this is what justice has been decided to be: that the superior rule the inferior and have a greater share than they. I think they like getting an equal share since they are inferior.

And thus, paraphrasing on this sophist view, by allowing those who are good in generating material goods to have their way and by allowing them to hold on to that which they produce and command by law (nonextracting institutions), we have the real meaning of natural liberty which will inevitably produce the most of material wellbeing. Therefore, all the material wonders created by commercial societies could well be a sign of the success of competitive decentralisation but can equally be nothing more than the sophistry of growth. Economic success—in terms of the affluence to which we referred to earlier—is no more an affirmation of modern economics’ conception of natural liberty than it is a confirmation

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of Mandeville’s audacity of vice, or the Smithian idea of the corruption of morality. If anything, the growth narrative is a proof of the failure of the modern economic project. The idea of competitive decentralisation, or markets, has nothing to do with what is really good for the individuals who make up society unless that good is encapsulated in the idea of maximising a notion of collective material wellbeing. However, the deception which nevertheless emanates from modern economics is the claim that the support we should extend for competitive decentralisation is not due to growth as such; sensible economists would not defend markets solely for their ability to enrich us. It therefore has nothing to do with either the sophistry of growth or Mandeville’s paradox. Instead, the reason why we should all pursue competitive practices is because they lead to a co-ordinated outcome of individuals’ interests which is consistent with universal social objectives and is morally neutral. It is the fact that all rational agents can solve their economic problem and that allocations are such that there is no waste in either material good or wellbeing which is the appeal of competitive decentralisation. It is not the continuous increase of wellbeing (growth) which should be the secret of its universal success. But this is exactly where modern economics failed to understand the message of the true liberal classical economics. Markets may co-ordinate economic activities but they will fail to co-ordinate the social drive behind them and it is for this reason that we set out, in this book, to show that the message behind modern economics is fundamentally wrong. This failure, however, is not due to the fact that individuals are morally evil but, rather, it is due to the inability of people, even if they were purely self-­interested (or perceive society in a purely functional manner) and fundamentally competitive, to co-­ordinate their behaviour through markets. And this is so not because markets do not function well but rather because they do. This is even more so when people do not perceive society in such a functional way. One may hasten to ask whether markets may work better if people were less self-interested (as is suggested by those who use evolutionary games to solve the riddle of the prisoners’ dilemma), but the problem with posing this question is that it does not take into account the possibility that such individuals may not behave competitively. If they do not, markets—which are predicated on

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competitive interactions—cannot be conceived as the building block of such a system. We have thus tried to establish the following main claims: 1. That competitive decentralisation will never produce an outcome which can be considered as a solution to the economic problem (as defined by modern economics itself ) and be ethically neutral. But this is not just because there are some inherent market failures; it is so even when markets work well; it is, in other words, the failures of markets rather than market failures. 2. That the implications of this for broader social issues is the fact that individuals cannot really fend for themselves which raises question marks with regard to the relevance or usefulness of the modern liberal ideal of a limited civic society. 3. That the recognition of the allocative failure of competitive decentralisation gave rise to a cover up in the form of a shift of agenda towards growth and that such an agenda contravenes the methodological foundations of economic analysis as it deals with aggregates in a theory which is based on methodological individualism. 4. That a shift towards growth removes the ethical neutrality (as the desire of material wellbeing is not a neutral social objective) and opens the door for a Mandevillian interpretation and the sophistry of growth. 5. That one cannot defend markets on the grounds that they protect freedom and conform with justice. 6. That the conception of the individual in modern economics is based on a false sociality. 7. That individuals are intrinsically social and, therefore, social organisation cannot be entirely functional, which means that the sphere of economics cannot be easily separated from the social domain. 8. That the lesson from liberal classical economics is that the correct conception of human sociality means that economics is subservient to social and moral objectives. 9. That the rationality of agents is more akin to what Weber called ‘expressive rationality’ than the modern conception of the instrumentally rational utility maximiser.

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10. That such agents are less likely to be competitive and, hence, will not particularly benefit from competitive structures. 11. That social distance may suggest different expressions of socially based rationality and this would lead to a more complex view of the socio-­economic structure. 12. That a natural order is most likely to produce outcomes which are inconsistent with social objectives and with morality. In a nutshell, this is a call for a change of mind-set. Instead of thinking of perfectly competitive markets as an ideal of economic and social organisation, they have to be viewed as the problem rather than the solution. Instead of trying to correct outcomes which are perceived to be the results of markets’ failure, we should worry about the outcomes of markets’ successes. Instead of correcting distributional effects while constantly worrying about the need not to offend the markets, we should accept that markets offend all distributions (see out discussion in Chap. 4). Instead of subjugating all public provisions to the scrutiny of markets, we should subjugate markets to the scrutiny of socially constructed criteria. However, the implications of accepting that there is no natural order which is socially desirable for the question of social organisation are enormous. Apart from requiring a re-examination of the purpose of society and the role of economics in it, the absence of a beneficial natural order means that we should revisit the role of the collective in social and economic life. If people cannot really fulfil what they perceive to be their purpose in life through markets, there has to be a non-market mechanism which helps them achieve it. Moreover, we must also allow for the fact that collective expressions of human sociality may not be the same across societies and that this may mean that different societies may wish to organise their social and economic activities in different manners. We began our journey by referring to the colossal battle between ideas of social and economic organisation in the twentieth century and marked the victory of the idea of spontaneous, or natural, order, over alternative forms of organisation which were c­ ollectively determined. But this victory, in great part, was the result of the painful experience which collective ideas inflicted on the world. Nevertheless, the fact that we had such a bad experience with some collective ideas does not mean that (a) all

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collectives ideas are bound to produce such misery and (b) the collective ideas which did inflict the pain were either the correct, or only, collective ideas. Moreover, we must not forget that what typified the expression of collective ideas in the twentieth century was their close association with political tyranny. Clearly, there is no inherent connection between collective ideas and tyranny—democracy too is a mechanism of formulating collective will—but there is, alas, a connection between tyranny and pain. It is therefore incumbent upon us not to avoid that which seems an essential aspect of human sociality because of the experience we had. It means that we must be cautious when we pull away from the idea of natural or spontaneous order but we must surely not accept the fear from the collective as a reason to affirm the legitimacy of another form of unnoticed oppression: the tyranny of markets.

Some Final Words When one thinks of modern society and economics, one cannot but be amazed at the relevance of past thinkers like Adam Smith and J. S. Mill for modern life. Adam Smith, for instance, whom we explored in Chap. 8, looks at a society of socially minded individuals who are desperately seeking to be social approved. He notes that the way for them to achieve it would have been through the adoption of good character and by behaving morally. However, as social distance increases, their ability to gain such an approval through the direct attention of the other diminishes and they begin to seek it through the accumulation of material wellbeing (and flaunting it around). They do so not because of a deception by nature which makes them think that if one is remunerated in the natural order, one must also be good. Nevertheless, in spite of the rising social distance, their sense of sociality is still intact (in the sense that they still seek social approbation) and their behaviour, therefore, is based on general rules which they derive from what is considered to be the good of society (expressive rationality based on the idea of the impartial spectator). In a globalised society, the social distance increases further and the sense of the collective becomes less clear. This means that while we still seek social approbation through the accumulation of material wellbeing,

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we no longer have any rules of behaviour that are derived from anything social as the concept of society became blurred. Instead, the only rules we adopt are those of functional society which basically means excessive individualism and no sociality. These rules are there to facilitate the working of competitive decentralisation. However, while markets help some people to acquire their social approbation, most people fail to do so. As Smith aptly puts it, no one notices the poor. So, if the production of material wellbeing had a social function—as is the conclusion of the Smithian analysis—the idea of markets failed to achieve it. The foundation of modern thinking about economics (and society) is that it is a functional arrangement in which people can by themselves fulfil all their rational human desires. Through markets they can subsist economically and find social and cultural associations. Society, thus, is nothing but a framework. But the truth which classical economists realised and has been absent from modern thinking is that none of this is true. People’s ability to fend for themselves economically is limited and the idea that their cultural and social needs can all be fulfilled through market interactions reflects a conception of these things which can only be true of people who are entirely self-interested and of a society which is entirely functional. As the evidence suggest that this is not the case, one must concede that modern economics is an inferior theory to liberal classical economics where the conception of the individual is more in line with the evidence. Naturally, classical economics only offered us a framework of how to think about individuals, economics and society but they wrote at a time when the intellectual debate was limited both by experience and by the number of people involved in the discourse. There is now, as we said at the beginning of this epilogue, a need to fill this with details. For the sake of all societies, let this work begin.

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Index1

A

B

Abstract cognition, 377, 404, 419, 541n80, 590n7 Abstract language, 368, 370, 370n41, 371, 375, 401n15, 402, 407, 419 Alienation, 410, 414, 416, 417, 420, 545n86 Altruism, 347, 349, 351, 355, 356, 363, 389 Anthropology, 655n62 Aristotle, 603n26, 652, 653, 684 Assets, 461n29, 547, 652, 702, 721, 723, 728, 729 Asymmetric information, 334 Asymmetric powers, 334

Behavioural economics, 542n83 C

Capabilities approach, 585n4 Categorical imperative, 439n11, 529, 658 Civic society, 393–395, 394n9, 397, 400, 419, 421, 541n80, 584, 585n4, 586, 687, 699, 735 Classical economics, 735, 738 Coase Theorem, 471n38 Collusion, 349, 522 Comparative advantage, 469–470, 471n39, 474, 481n48, 487, 489, 490, 495, 550n92

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s) 2019 A. Witztum, The Betrayal of Liberal Economics, https://doi.org/10.1007/978-3-030-10671-3

761

762 Index

Darwin, Charles Robert, 352, 408n20 Diachronic order, 335, 336, 451n18, 564, 611, 690, 691, 732 Dual Social Economy, 729 Duguit, Leon, 727, 727n26 Durkheim, E., 340, 341n9, 341n10, 343n13, 344, 344n16, 344n17, 347, 351, 351n21, 378, 439n11, 468n34, 727

538, 540–542, 551–554, 562, 564, 566, 569, 650, 663, 699, 704, 706, 707, 709, 710, 712, 721 Economic problem, 335, 336, 339, 428, 437, 438, 453, 462, 463, 466–470, 474–476, 480, 481, 488–491, 500, 504, 548n90, 580, 581, 584, 597–599, 604, 621, 686, 687, 694, 717, 718n18, 719, 734, 735 Education, 346, 392, 405n17, 568, 568n103, 591, 592, 592n10, 600n21, 614n37, 708, 710, 719–723 Efficiency allocative efficiency, 719n19, 724 productive efficient, 336n1, 597, 707, 719n19 Enlightenment, 408n20 Epistemological, 393n7, 582n1 Ethical neutrality, 428, 735 Ethics, 344, 480, 528, 557, 565, 585, 589, 623, 650, 675, 684, 687 Eudemonia, 383 Evolutionary biology, 339n7, 339n8, 354, 355, 357, 364n32, 375, 429, 688, 689 Experimental economics, 337, 338, 429, 517, 520, 537

E

F

Economic interactions, 388, 427, 430n3, 437, 478n43, 518, 518n64, 519, 520n66, 521,

Fable of the Bees, 731 Fellow-feelings, 518n65, 528, 590, 634, 636, 643, 663, 684

Comparative neurology, 370, 387, 447, 639, 688 Competitive decentralisation, 338, 698–701, 705, 707, 710, 712, 724, 731–735, 738 Cooperation, 341n10, 344n15, 347, 349, 351, 355, 356, 358, 373n47, 389, 478n42, 517, 518–519n65, 519, 520, 522–529, 523n70, 525n72, 527n74, 542n83, 585, 585n6 egoistic cooperation, 340, 345n18, 347, 350, 354, 378 Corruption of moral sentiments, 609, 634, 646, 647, 692, 693, 732 Culture, 341, 342, 373n45, 392, 422, 564, 653, 708–710, 719, 720, 722, 723, 730 D

 Index 

Freedom, 335, 357n27, 392n6, 466, 568, 580, 584, 585, 585n4, 649, 650, 705, 733, 735 Free-will, 557 Functional society, 394n9, 395, 397, 409, 410, 418–421, 586, 699, 704, 705, 709, 719, 720, 726, 728, 738 G

Game theory, 389n2, 429, 478n43, 503, 518, 518n64, 519, 522, 525n71, 526n73, 537, 542n83, 702n2 General equilibrium, 483, 520, 544, 545n87, 582, 588, 594, 618n39, 693, 705, 707 Globalisation, 341, 341n11, 729, 730 Growth, 346, 580, 587, 599–624, 674, 691, 694, 708, 716–718, 718n18, 732–735, 732n28 H

Hamilton, W.D., 347n19, 355, 357, 360, 362, 397n13, 406, 407n19 Hobbes, T., 344n15, 349, 350, 378, 468n34 Homo economicus, 346, 430, 485, 539n77, 543, 548, 562, 563, 571 Human cognition, 373n45, 594, 689, 690, 698, 704, 706n5 Human sociality, 334–380, 387–421, 427, 438, 441, 446,

763

450, 500, 518, 539, 541, 569, 580, 581, 586, 587, 589, 600, 647, 687, 698–701, 710, 711, 730, 735–737 I

Impartial spectator, 512n61, 570, 590, 592, 614, 627, 634, 635, 637, 638, 649, 651, 652, 654–670, 655n62, 657n66, 659n67, 662n69, 672–676, 684, 685, 690, 737 Inclusive fitness, 355, 357, 357n27, 358, 358n28, 360–363, 362n30, 368, 374, 375, 379, 397n13, 406, 428n1, 429, 452n20, 467, 512, 527n74, 586 Incomplete contracts, 726 Individual fitness, 352–357, 358n28, 361, 362n30, 379, 428n1, 467, 586 Inequality, 484, 495, 510, 550n92, 552, 608, 619, 623, 663, 692 Intrinsic sociality, 341, 359, 387–421, 571, 581, 703, 727 J

Justice, 335, 350, 410, 432, 438–440, 439n11, 440n14, 468, 504, 546, 557, 565, 567n102, 594n12, 610, 613, 622n41, 624, 629–631, 649, 650, 652, 653, 662n68, 662n69, 684, 685, 710, 726, 727, 733, 735

764 Index K

N

Keynesian, 622, 700, 716

Natural liberty, 528, 571, 580, 581, 588–590, 593, 594–595n12, 596n16, 612, 619–629, 646, 648–652, 660, 668, 684, 685, 691, 693, 694, 731–733 Natural monopolies, 719n19 Neoclassical economics, 338n6, 346, 350, 378, 542n84, 583 Non-co-operative game, 517, 528, 702n2 Non-extracting institutions, 718, 718n17, 733

L

Laffer Curve, 725 Laissez-faire, 392n7, 394, 543n85, 568, 626 Liberal economics, 580, 581, 690 Liberalism, 392, 581, 586, 589, 699, 700 Locke, J., 344n16, 351, 378, 468n34 M

Mandeville, B., 430, 456, 541, 590n8, 595n13, 624, 627, 629, 690n79, 731, 732, 734 Market failures/failures of the markets, 589, 700, 719, 735 Marx, K., 582, 582n1 Mercantilism, 589, 612, 622, 623, 648, 688 Methodenstreit, 430n3, 543n85 Methodological individualism, 339, 428, 735 Mill, John Stuart, 346, 351, 430, 431, 455n23, 478n42, 518n65, 542n84, 543, 543n85, 544, 562–569, 564n96, 565n97, 566n101, 567n102, 568n103, 582, 582n1, 587, 589–592, 604n28, 622n40, 688, 712n8, 718, 725, 737 Missing markets, 619, 700, 708

O

Opportunism, 512n60, 514–516, 526, 529, 538 Organisation, 335, 346, 387–421, 470, 472, 591, 603n26, 622n40, 623, 698, 707, 708, 712, 712n7, 712n8, 714–717, 714n13, 720, 720n21, 736 economic organisation, 335, 339, 436, 494, 500, 542, 569, 582, 588, 622n40, 681, 687, 698, 700, 707, 710, 736 P

Paradigmatic core, 334–336, 338, 339, 345, 419, 428, 451, 455n23, 467, 469, 470, 478, 479, 485, 486, 504, 533, 542n83, 557, 569, 584, 589 Physiocrats, 582, 595 Plato, 603n26, 733

 Index 

Political economy, 364n32, 541n79, 564, 612, 613, 625 Politics, 387n1, 662n69 Price equilibrium price, 494, 612, 615, 616, 691, 705, 707 market price, 466, 492, 597n19, 612, 615, 618, 621, 623, 646, 691 natural price, 614, 614n37, 615, 618, 674 Prisoners’ dilemma, 734 Property rights, 584, 650, 652, 663, 727, 727n26, 728, 730n27, 732 Public ownership, 719n19, 726, 727 R

Rationality expressive rationality, 351n22, 431, 432, 435, 437, 438, 440, 445, 446, 451, 452, 479, 483, 486, 487, 500, 501, 503, 517, 526, 529, 536, 557, 569, 642, 703, 706, 710, 714, 735, 737 instrumental rationality, 431, 436, 437, 440, 444, 445, 448, 451, 452, 476, 478, 479n44, 482, 483n49, 484n51, 496, 499–501, 503, 504, 511, 517, 569, 571, 636, 714, 717n15 Rational utility maximiser, 335–338, 338n5, 339n7, 345, 345n18, 346, 350, 353, 359–362, 376, 378, 387, 387n1, 388, 389n2, 390, 428, 429, 431, 440, 445, 449, 453, 454, 456, 457,

765

461–500, 502, 504, 508–512, 512n60, 512n62, 515–517, 519, 520, 520n66, 520n67, 521n68, 526–528, 526n73, 530, 531, 533–535, 538–541, 539n77, 559–563, 569–571, 593, 642, 647, 675, 690, 706, 707, 729, 735 Ricardo, David, 582 Rousseau, J.-J., 607n34 S

Second best/second-best, 556, 619, 621, 686, 700, 727 Self-interest, 337, 387–421, 698 Smith, Adam, 338, 430, 705 Social costs, 466, 712–714, 714n12, 716, 717 Social distance, 395–402, 404–406, 405n17, 406n18, 408–420, 427, 428, 438, 447–449, 447n16, 468, 500, 501, 541, 541n80, 569, 587, 605, 605n31, 608, 639–642, 647, 675, 676, 687, 689, 698, 704–706, 708, 710, 712, 712n7, 736, 737 Socially minded individuals, 410, 421, 437, 453, 469, 479, 510, 511, 515–517, 521n68, 526, 528, 529, 534–539, 550n91, 701, 706, 713, 725, 726, 737 Social organisation, 337, 338n5, 339, 344n15, 345n18, 351, 357, 378, 387–421, 500, 512n62, 538, 540n78, 568,

766 Index

589, 627, 680, 688, 693, 700, 735, 736 Social welfare, 727 Sociology, 339n8, 340, 387n1, 539n77 Spencer, H., 340, 341n10, 344, 344n15, 345n18, 350, 373n47, 378, 468n34, 727 Sphere economic sphere, 449, 542, 566, 588, 705, 719 social sphere, 392, 393, 411, 539, 552, 585, 627 Spontaneous order, 737 Stability, 614n37 St Augustine, 335 Strategic interaction, 518n64

Sympathy, 443, 528, 542n83, 548n89, 565–568, 566n100, 590, 595, 595n12, 602, 608–610, 614, 625, 626, 627n46, 628n47, 629, 635, 636, 638, 640–644, 644n50, 644n51, 646, 647, 657, 660, 674–676, 689, 723 Synchronic order, 335, 542n83 W

Walras, L., 345n18, 431, 725, 727 Weber, M., 351n22, 431–433, 431n6, 432n8, 437, 438, 440, 441, 444, 445, 569, 722, 735