Philip Pilkington has written a piece about the problem with individualism and myths, a topic I have written on also. While I agree with the bulk of what he has to say, and I offer some of my own comments (these are taken from a paper in review, a copy is available on request) in what follows, I feel he misses the true culprits in criticising Adam Smith.
Central to Pilkington's argument is this text from Smith
Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation.
I am not convinced the problem originates in Smith, who was, I believe, embedded within Aristotelian ideas of reciprocity and justice, immediately before the section Pilkington quotes, Smith writes:
All the members of human 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. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices.Society MAY subsist without the basis of reciprocity, but its not going to be the best type of society. I believe Pilkington makes this point, but still seems to hold Smith responsible for us ending up as we have.
I believe the issue arises out of Romanticism, which placed greater emphasis on individuality and created the environment for both neo-classical economics and Marxism. The issue that economics, before the 1920s, Marxism and Graeber share is that they ignore uncertainty. If the world is uncertain, I argue that we need reciprocity love, gratitude, friendship, while if there is a 'certain' scarcity, individualism triumphs. I suggest that when faced with scarcity, society responds by fragmenting into elements that compete for scarce resources. Alternatively, when society is challenged by uncertainty it turns to communality, seeking to diversify risks. On this basis, the rise of expected utility maximisation as dealing with scarcity in a Romantic context of the individual genius struggling against nature and within a framework of stable chances, can be explained. I contend that since the ‘Nixon shock’ society has been more focused on uncertainty than scarcity and is struggling to shift the economic paradigm in response to this change in the economic environment.
Arjun Appadurai captures this in arguing that the leading agents in modern finance
believe in their capacity to channel the workings of chance to win in the games dominated by cultures of control …[they] are not those who wish to “tame chance” but those who wish to use chance to animate the otherwise deterministic play of risk [quantifiable uncertainty]”. [Appadurai, 2011, p 533-534]
These observations conform to the definition of a ‘speculator’ offered by Reuven and Gabrielle Brenner: a speculator makes a bet on a mis-pricing. They point out that this definition explains why speculators are regarded as socially questionable: they have opinions that are explicitly at odds with the consensus ([Brenner and Brenner, 1990, p 91], see also [Beunza and Stark, 2012, p 394]). In comparison, gamblers will bet on an outcome: an ace will be drawn; such-and-such a horse will win against this field in these conditions; or Company Z will outperform Company Y over the next year. Investors do not speculate or gamble, they defer income, ‘saving for a rainy day’, wishing to minimise uncertainty at the cost of potential profits.
Speculation in modern finance, as Daniel Beunza and David Stark observe, is about understanding the relationship between different assets and “to be opportunistic you must you must be principled, i.e. you must commit to an evaluative metric” [Beunza and Stark, 2004, p 372]. This explains why modern finance relies on mathematics, “Mathematicians do not study objects, but the relations between objects” [Poincaré, 1902 (2001), p 22].
The speculator has been a feature of the modern markets ever since they were established in the seventeenth century. In 1719 Daniel Defoe described stock-jobbing in The Anatomy of ExchangeAlley as
a trade founded in fraud, born of deceit, and nourished by trick, cheat, wheedle, forgeries, falsehoods, and all sorts of delusions; coining false news, this way good, this way bad; whispering imaginary terrors, frights hopes, expectations, and then preying upon the weakness of those whose imaginations they have wrought upon [Poitras, 2000, p 290 quoting Defoe]
The process described is speculation because the stock-jobbers are not betting on outcomes, rather they are attempting to change the expectations of others, create a mis-pricing that they can then exploit.
The philosophical antecedents of the modern hedge fund manager, betting against determinism, could be even further back, in the medieval Franciscans such as Pierre Jean Olivi and John DunsScotus. While the Dominican, empirical rationalist, Aquinas argued that knowledge rested on reason and revelation, Scotus argued that reason could not always be relied upon: there was no true knowledge of anything apart from theology founded on faith. While Aquinas argued that God could be understood by rational examination of nature, Scotus believed this placed unjustifiable restrictions on God, who could interfere with nature at will: God, and nature, could be capricious [Luscombe, 1997, p 127].
Appadurai was motivated to study finance by Marcel Mauss’ essay Le Don (‘The Gift’), exploring the moral force behind reciprocity in primitive and archaic societies. Appadurai notes that the speculator, as well as the gambler and investor, is “betting on the obligation of return” [Appadurai, 2011, p 535]. The role of this balanced reciprocity in finance can be seen as an axiom in that it lays the foundation for subsequent analysis, it can also be seen as a simplifying assumption: if the future is uncertain what mechanism ensures that agreements will be honoured. David Graeber also recognises the fundamental position reciprocity has in finance [Graeber, 2011], but where as Appadurai recognises the importance of reciprocity in the presence of uncertainty, Graeber essentially ignores the problem of in-determinism in his analysis that ends with the conclusion that “we don’t ‘all’ have to pay our debts” [Graeber, 2011, p 391].
Aristotle’s Nicomachean Ethics is concerned with how an individual can live as part of a community and he saw reciprocity in exchange as being important in binding society together ([Kaye, 1998, p 51], [Aristotle, 1925, V.5.1132b31-34]). According to Joel Kaye, this means that Aristotle took a very different view of the purpose of economic exchange, it is performed to correct for inequalities in endowment and to establish a social equilibrium and not in order to generate a profit. This view is at odds with that taken by mainstream modern economists, or even anthropologists such as Graeber, who seem to be committed to a nineteenth century ideal of determinism and so can ignore the centrality of reciprocity in markets. I argue that in the presence of uncertainty, society needs reciprocity in order to function.
Reciprocity and fairness are linked, and the importance of fairness in human societies is demonstrated in the so–called ‘Ultimatum Game’, an important anomaly for neo-classical economics [Thaler, 1988]. The game involves two participants and a sum of money. The first player proposes how to share the money with the second participant. The division is made only if the second participant accepts the split, if the first player’s proposal is rejected, neither participant receives anything. The key result is that if the money is not split ‘fairly’ (approximately equally) then the second player rejects the offer. This contradicts the assumption that people are rational utility maximising agents, since if they were the second player would accept any positive payment. Research has shown that chimpanzees are rational maximisers while the willingness of the second player to accept an offer is dependent on age and culture. Older people from societies where exchange plays a significant role are more likely to demand a fairer split of the pot than young children or adults from isolated communities ([Murnighan and Saxon, 1998], [Henrich et al., 2006], [Jensen et al., 2007]). Fair exchange appears to be learnt behaviour developed in a social context and is fundamental to human society.
The relevance of the Ultimatum Game to the argument presented here is that separates the Classical themes of fairness and reciprocity from the Romantic theme of Darwinian ‘survivial of the fittest’. In An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Adam Smith, working in the Classical framework, argues that humans are distinctive from other animals in the degree to which they are co-operative
Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. [Smith, 1776 (2012), Book 1, Chapter 2]
Humans , on the other hand, exhibit
the propensity to truck, barter, and exchange one thing for another. [Smith, 1776 (2012), Book 1, Chapter 2]
Markets are not simply a technical tool to facilitate life, but they capture a key distinction between humans and other animals. This is observation is very different to Darwin, who wrote in The Descentof Man in 1871,
My object in this chapter is to shew that there is no fundamental difference between man and the higher mammals in their mental faculties. [Darwin, 1871, p 36]
Darwin would go on to note that
the weak members of civilised societies propagate their kind. No one …will doubt that this must be highly injurious to the race of man [Darwin, 1871, p 168]
and to argue that society should control this process within the ethic of Consequentialism. Darwin did acknowledge that ‘survival of the fittest’ did not explain the ‘nobler’ aspects of civilisation [Darwin, 1871, p 161–167], but his arguments are integral to the ‘social Darwinism’ of Spencer and Galton that explained how the ‘best’ became the ruling. Darwinian metaphors are still a powerful feature of the paradigm centred on neo-classical economics and Consequentialist Ethics and the Ultimatum Game, and the concept of fairness, is an anomaly for the whole of this paradigm.
I conject that balanced reciprocity should be an axiom of exchange, possibly in preference to the axiom that the aggregate demand price is equal to the aggregate supply price [Keynes, 1936, Ch 2, VII], or that a price is the cost of labour and a risk premium (e.g. Duns Scotus [Kaye, 1998, p 140], Smith, Marx). Reciprocity is anterior to the concept of justice, in particular the argument for justice and fairness as being essential components in commerce follow Aristotle’s arguments for how people, in a state based on egalitarianism, can live together in an urban society.
Before the nineteenth century, scholarship would be conducted in the context of medieval Virtue Ethics: the four ‘Pagan’ or ‘Cardinal’ virtues; Courage (Fortitudo); Justice (Iustitia); Temperance (Temperantia); and Prudence(Prudentia), which originated in Nicomachean Ethics, and three ‘Christian’ virtues; Hope (Spes); Faith (Fides); and Charity (Caritas). Medieval scholars approached morality using the same framework that they used to study physics or medicine by blending four elements, or humours, in the right manner. For example, Charity and Faith yield loyalty, Temperance and Courage give humility and Justice, Courage and Faith result in honesty [McCloskey, 2007, p 361]. An ethical life was one that exhibited all, not just some, of the virtues, and a merchant, by demonstrating them, could be seen as being as virtuous as a prince or a priest. This was not just a Latin Christian view, the first century Mahayana Buddhist Vimalakirti Sutra tells the story of how a virtuous merchant teaches kings and monks.
Following the analysis of Nicomachean Ethics medieval scholars, like Aquinas and Olivi, placed the virtue of Justice at the centre of commerce. Prudence is the common sense to decide between different courses of action, it is at the root of reason and rationality and can be seen as the motivation for all science. This virtue is the one most closely associated, in the modern mind at least, with effective merchants. Temperance, a word that comes into English with Grosseteste’s translation of Ethics, is the virtue least associated with modern bankers. However, the modern understanding of temperance as denial or abstinence is not only how a medieval friar would have understood the virtue. The word is related to ‘temper’ and is concerned with getting the right balance between the virtues. A good merchant would exhibit the virtue by mixing Courage, to take a risk, and Prudence, allowing for the unforeseen, and diversifying.
Faith is the ability to believe without seeing, and was central to Olivi’s whole philosophy. The Latin root is fides captures the concept of trust, the very essence of finance exhibited by the “promise to pay”. While Faith is backward looking, you build trust, Hope is its forward-looking complement. Charity, along with Temperance, is the virtue least likely to be associated with merchants. While we now think of charity in terms of giving to others, in the past it was associated with a love, or care, for others. Shakespeare’s play The Merchant of Venice is about ‘Antonio, a merchant of Venice’ who characterises Charity, or agape, though his sacrifices for his young friend Bassanio. The view that Antonio and Bassanio were physical lovers is a modern interpretation that does not distinguish storge (familial love, the deficit Jessica/Shylock), philia(friendship, Portia/Nerissa, Lorenzo/Bassanio), eros (physical love, Portia/Bassanio, Lorenzo/Jessica) and agape (spiritual love, Antonio/Bassanio, Shylock’s deficit), clear themes running through the play. We would suggest that the problem Graeber should be tackling in his discussion of debt is not the presence of reciprocity but rather the absence of Charity.
References
D. Beunza and D. Stark. Tools of the trade: the socio-technology of arbitrage in a Wall Street trading room. Industrial & Corporate Change, 13(2):369–400, 2004.
D. Beunza and D. Stark. From dissonance to resonance: cognitive interdependence in quantitative finance. Economy and Society, 41(3):383–417, 2012.
R. Brenner and G. A. Brenner. Gambling and Speculation: A theory, a history and a future of some human decisions. Cambridge University Press, 1990.
C. Darwin. The descent of man, and selection in relation to sex. John Murray, 1871. darwin-online. org. uk/contents. html.
K. Jensen, J. Call, and M. Tomasello. Chimpanzees are rational maximizers in an ultimatum game. Science, 318:107–108, 2007.
D. N. McCloskey. The Bourgeois Virtues: Ethics for an Age of Commerce. University of Chicago Press, 2007.
J. K. Murnighan and M. S. Saxon. Ultimatum bargaining by children and adults. Journal of Economic Psychology, 19:415–445, 1998.
H. Poincaré. Science and hypothesis. In S. J. Gould, editor, The Value of Science: Essential Writing of Henri Poincaré. Modern Library, 1902 (2001).
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