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Constructivist and Ecological Economic Rationalities, Part II

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Only after a lifelong career in experimental economics did Smith come to “better appreciate the great depth of the Hayek program and that of his Scottish predecessors , which somehow had been mislaid along the mainstream technical way” (Smith, p. xvi.)  In marked difference with neoclassical economic theory, “Both Hume and [Adam] Smith argued that the order in life and society follows from emergent norms and learning born of experience far more than the constructivist designs of reason” (Smith, p. 37.)

In what is known as “Das Adam Smith problem,” some have argued that Adam Smith’s two main works, the Theory of Moral Sentiments and the Wealth of Nations, are in inherent contradiction with each other.  Smith argued that the problem is artificial; in his view, “the propensity to truck, barter, and exchange one thing for another” (WN, I.2.1) applies to both works, not merely the latter in which it is stated.  In the former it applies to what Smith called “personal exchange” in society, while in the latter it applies to impersonal exchange in markets (p. 7.)  In other words, while what is exchanged, and the form in which it is exchanged, differs between society and markets, they are fundamentally related; the former reflects an ecological rationalism within organic, evolved social institutions, and the latter reflects a more constructivist approach within rationally defined market institutions.

Smith’s argument holds clear implications for economic theory.  The displacement of the exclusive monopoly of constructivist theory opens a space for moral thought in economics that could not otherwise obtain when constructivism took all the oxygen in the room.  Where constructivist economics models can posit a priori satisfaction conditions in rational actors and well defined rules maximizing self interest, ecological economics cannot be so modeled; agent-specific preferences and situational reciprocity are far too complex and unknowable in advance.  Smith’s re-constructionist view can become quite useful in analyzing observed behavior in controlled conditions, seeking then to discover and model the decision processes that emerge from the behavior.

The central theme of Bruni’s book The Wound and the Blessing: Economics, Relationships, and Happiness is gratuitousness, or the willingness to take the risk of trusting the other, even in the market; one may at times find oneself betrayed and harmed, but the payoff can be a more relationally rewarding life.  Bruni, a philosopher of economics, documented experiments that demonstrate the differences between constructivist and ecological rationalities that Smith described.  In a brief section on reciprocity and game theory, Bruni described that early anomalies arose in games in which the theory predicted opportunism, but the results showed cooperation.  Further studies have shown that beliefs about others’ intentions are crucial to agents’ responses.  How an agent responds may—not necessarily—depend on how she believes that the other’s actions were, or were not, kind, fair, or just: the perception of voluntary trust, beneficence, or kindness makes it much more likely that the response will be in kind.   Bruni summarized that “Trust, which is risky and costly, impels the recipient to behave in a worthy manner, greatly reduces opportunism, and markedly encourages growth” (p. 22.)

There are many types of games in which behavior is analyzed; one which Bruni considered is the “ultimatum game.”  Agent A receives a sum of money, say, $10, and agent B knows it; A must return all the money unless A manages to persuade B to take some portion of it.  The standard theory might predict that A would offer B the smallest unit possible, say, $1; that maximizes A’s result, and B will accept the offer on the grounds that he gains $1 that he did not previously have.  To the contrary, the results often show that B rejects the $1 if he thinks it unfair.  The outcomes vary across cultures, but the primary point is that B may well give up gain—even a substantial amount—in order to punish A for what B understands as a lack of fairness.

This is exactly what Vernon Smith saw as the ecological rationality of markets.  The rational evaluation of gain per se is not agents’ sole criterion; it may matter more to the general well-being of a market that one punish another, even to one’s own harm, if accepting an offer perceived as unfair would encourage other such actions.

In other words, agents may perceive moral value in what theory would explain as non-moral rational self-interest.  I find the role of the virtues (fairness, kindness, trust, and so forth) particularly interesting in these interactions, as these are the sorts of things Adam Smith considered in his Theory of Moral Sentiments.  I believe Vernon Smith was right; Adam Smith’s two works are closely related, and economic exchange is but one part of a much larger human propensity to truck, barter and exchange things.  Markets are integral to society, and markets outcomes directly influence the societies in which they operate.

In conclusion, I cite a passage by Bruni that I find particularly forceful in this regard: “I am convinced that a society without markets and contracts cannot be civil; yet a society that seeks to regulate human regulate human relations only through markets and contracts is even less so. … The market, a ‘free zone’ in which we can encounter each other without sacrifice in a mediated and mutually advantageous manner, is a triumph and a tool of civilization; at times it can even ally itself with gratuitousness, becoming a means for promoting a more free and fraternal human coexistence. … the market can be a place where the other can truly be encountered, a place of blessing, as long as we open ourselves to gratuitousness and do not flee from being wounded by the other” (p. xxii-xxiii.)

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