How Vernon Smith has helped us understand Adam Smith better…


Maria Pia Paganelli of Yeshiva University has this nice paper on the topic.

She says most economics bases itself on self-interest. However, this is not always the case as we see humans valuing cooperation and fairness as well. Adam Smith’s The Theory of Moral Sentiments was based on these ideas. AS said humans value other things as well- sympathy, and innate desire to be both praised and praiseworthy.

Vernonm Smith extended Adam Smith’s ideas and showed via experiments that indeed people valued cooperation and fairplay and were sympathetic to others. This led to people monitoring and giving punishment for non-cooperative behaviors or by following internalized rules of conduct that promote fair and cooperative behaviors.

In experimental results in industrialized countries, cooperation and fairness are routinely observed. Cooperation and fairness may vary with the degree of anonymity, because subjects do respond to incentives. Nevertheless, even with complete  anonymity, a relevant amount of cooperation and fairness is observed. For example, using undergraduate subjects from the University of Arizona, even with double blind procedures, 29% of second movers choose $25 for self and $15 for other, over $40 for self and $0 for other, after the first movers have forgone $10 for self and $10 for other (Cox and Deck 2005). Additionally, cooperation and fairness are also observable in many foraging societies across the globe, although in different forms from the ones observed in industrialized countries.

Fairness seems to be universally present among humans, even if it varies with different incentives and across cultures (Henrich et al. 2004). Interestingly, similar experiments done with non-human primates also show some level of cooperation and “fairness.” Non-human primates help each other in getting food and reciprocate the help received. They get upset if one gets an “unfair” share: if one primate undeservedly gets a larger portion or tastier food, the other primate screams in protest (de Waal 1996 and 2003 de Waal and Berger 2000, de Waal and Luttrell 1988, Brosnan and de Waal 2003, Jansen, Hare, Call and Tomasello 2006).

The paper looks at this linkage of Adam Smith thoughts to Vernos Smith’s experiments:

This paper develops as follows. The first section describes some of the hypotheses used to explain cooperative behaviors in the existing literature. It is followed by the explanation of how Adam Smith may help us understand the mechanism through which  we may be able to move from personal to impersonal exchange, namely the internalization of rules of cooperation achieved through sympathy, reducing the transaction costs present in complex anonymous societies. The Smithian explanation is  subdivided in three sections: the generation and internalization of cooperation at the individual level, at the social level, the institutionalization of the rules of cooperation which may be seen as a feedback mechanism  caused by and causing increasing cooperation. The final section of the paper briefly  examines some limitations for developing cooperation.

Superb paper. How economists are interested in so many aspects….

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