Russ Roberts has a new book out -- How Can Adam Smith Change Your Life -- and on a recent EconTalk episode he sat down with Vernon Smith to discuss the ideas of Adam Smith. Back in 1997, Vernon Smith delivered a wonderful distinguished lecture to the Southern Economic Association entitled "The Two Faces of Adam Smith", where he discussed in detail our human capacity to "truck, barter and exchange" as well as our ability to cooperate and have a sense of sympathy for others. V. Smith's work is just brilliant on this. And, he has continued to explore this connection between our relentless striving to realize the gains from exchange and productive specialization, on the one hand, and, to realize the gains from peaceful social cooperation on the other. See, e.g., his paper wth Bart Wilson on "The Fair and Impartial Spectator in Experimental Economics."
In reflecting on what he has learned from the 2 Smith's, Russ states the following:
This week's EconTalk episode with Vernon Smith helped me understand something that has been bothering me for a long time.
Economics students are taught that human beings are maximizers--we want more rather than less of the things that give us pleasure. But we are constrained by our income. That means making choices. And that means facing tradeoffs.
Deirdre McCloskey has called this vision of human behavior Max U. Humans are thought to maximize utility subject to the constraint of income. Adam Smith in The Theory of Moral Sentiments seems to take a different approach. He argues that material well-being is nice but not what brings true satisfaction. "Man naturally desires, not only to be loved, but to be lovely." We care about what others think of us and we want the reputation that we earn to be earned honestly.
What does this perspective on humanity have to do with Max U and how does it fit in with Smith's view in The Wealth of Nations? On the surface, they don't conflict at all and it's only a methodological difference. All we have to do is make the utility function richer to include the non-material satisfactions we enjoy. We don't just care about stuff, we also care about our reputation and whether people admire us or respect us or honor us. So someone is willing to lose respect by doing something unethical if the gains in material well-being outweigh the losses from a poorer reputation. One can argue that Gary Becker's whole approach to price theory is an attempt to take the richer Smithian model of human behavior and embed it in utility maximization approach.
Vernon Smith is arguing in this week's episode that that's wrong. You can't just wedge the Smithian concerns about reputation into the Max U framework. Here is how I understand Vernon's point (and I am also drawing here on the last chapter of my Adam Smith book). The Wealth of Nations is about trade among strangers. When I'm on the web buying something or choosing where to shop for groceries or buying a house, it's all about what's in it for me. I'm self-interested and trying to get the best deal possible. That doesn't mean I'll cheat and lie but I'm trying to maximize my net benefit from these kinds of transactions.
Of course I'm self-interested in more intimate settings--my emotional and social interactions with my friends, neighbors, and colleagues. But here, I constrain my self-interest. ...
There is more in Russ's discussion of the lessons he has learned, including Hayek's discussion of the "two worlds at once" thesis about the modern world.