The following is an interview conducted by Archbridge chief economist and Profectus co-editor Justin Callais with Nobel Prize-winning economist Vernon Smith and his colleague Bart Wilson, co-authors of the book, Humanomics: Moral Sentiments and Wealth of Nations for the Twenty-First Century. We discuss insights from “Humanomics” and how it relates to the economics of human flourishing.
Justin Callais: Can you explain what you mean by “Humanomics?” What do you think is missing in the economics profession that motivated you to write this book?
Vernon Smith: Economics concerns the study of human action as choice in markets for goods, services, labor, and capital assets acquired through saving/investment. The publication of Adam Smith’s Wealth of Nations (1776) was a milestone in founding economics as a study separate from philosophy. In the next two centuries, economic theory developed into a rigorous treatment of the consequences of choice governed almost exclusively by agents modeled as strictly self-interested individuals, although this was not the broad message in Wealth of Nations, in which individuals pursued their “own interest” in their “own way.”
Smith also wrote The Theory of Moral Sentiments (1759), which in our view was a theory of how order in society emerges from the bottom-up: rules humans create and follow to get along with each other in their ordinary interactions. We think the book title Humanomics better conveys this holistic perspective.
Bart Wilson: Unlike Adam Smith, the current study of economics does not model human relationships. It does not study flesh-and-blood human beings who gravitate toward each other with fellow feeling, who are excited by moral sentiments that prompt them to act, and who judge each other’s conduct with a sense of propriety. Fellow feeling, moral sentiments, and a sense of propriety, however, explain why we do what we do. Economics seems to have lost sight of the fact that our sociality, along with the general rules of conduct we follow, is integral to economics. Humanomics, by contrast, studies how human beings simultaneously navigate the personal social world of our families, friends, and neighbors, as well as the impersonal economic world of market exchanges.
Justin: What are your main critiques of the “maximize utility” paradigm economists have worked under for the past two centuries?
Vernon: Utility theory models of human action have associated utility or disutility with the consequences of an action, and in this have not plainly distinguished origins from consequences. Adam Smith made this distinction, leading him to articulate propositions in which human actions found their origins in the emotions of gratitude for good-hearted, beneficent acts and of resentment for deliberately hurtful acts. Thus, utility models cannot account for the unexpectedly high frequency of cooperative choices in two-person anonymous single-play trust games; whereas a central proposition in The Theory of Moral Sentiment predicts action in contexts such as is represented in this game. In Humanomics, we focus on the predictive and explanatory power of thinking in terms of actions that are rule-governed and rooted in human relationships that involve what Smith called “fellow-feeling.”
Bart: Utility maximization assumes that actions map into outcomes if and only if people have preferences for those outcomes. This bidirectional logic, however, does not explain why people act the way that they do. It describes behavior without offering an explanation. While this logic works well for helping us understand, for example, income and substitution effects in markets when relative prices change, it merely organizes consumer behavior in markets. It does not explain why people choose the bundles of products given a set of prices and a budget constraint. In personal social interactions, we are precisely concerned about why people reward beneficent actions and punish unjust ones. As Adam Smith articulates in The Theory of Moral Sentiments, fellow feeling, moral sentiments, and a sense of propriety explain why people do such things.
Justin: How can we combine the insights of both of Adam Smith’s books to better understand the world—as you attempt to do in this new approach?
Vernon: The same principles govern action in both books. Thus, in both books people are motivated to get along with their neighbor. Although all are strictly self-interested, this does not mean they will act in their self-interest. The alternative to any action “A” is action “not A,” or failing to act beneficially.
Bart: The Theory of Moral Sentiments provides a foundation for understanding why people do what they do in their personal social lives, and The Wealth of Nations explains why people prosper in the larger, impersonal world of markets. In The Theory of Moral Sentiments, Smith identifies two key pillars for society: beneficence as its ornament and justice as its foundation.
For society to flourish, beneficence must be abundant. Communities thrive when we do good for one another and reward those who are good to us. Beneficence, however, is less crucial than justice in the sense that if injustice runs rampant, society risks collapse. If we readily hurt and injure each other, the bonds that hold us together will disintegrate under mutual resentment and animosity, leading us to seek retribution in a vicious downward circle. As Adam Smith recognizes, justice is “the main pillar that upholds the whole edifice” of society, including especially market exchange.
Justin: What, in your opinion, is missing from two popular approaches to economics: neoclassical (price theory) economics and behavioral economics? What can they learn from each other?
Vernon: Both neoclassical price theory and behavioral economics suffer from failing to distinguish the origins of human action from the consequences of human action; also, the failure to distinguish the state of being self-interested from actions taken in your self-interest. These failures find their origins in individualist utility theory—a theory with no predictive content.
Bart: When neoclassical price theory expounds upon prices, equilibrium processes, and resource allocation, it functions as intended. The equi-marginal principle is indispensable for cost-benefit analysis in economics. However, when utility maximization is separated from the equi-marginal principle, as it generally is in behavioral economic modeling, the logic derails.
Look carefully at social preference models of “other regarding” preferences and norm following. There are no ratios of marginal rates of substitution being set equal to ratios of prices because there are no prices at all in social preference models of utility maximization. In behavioral economics, there is simply behavior “B” if and only if there are preferences for “B.” Social preference models cannot explain why people choose to “B.”
Justin: If we take this approach seriously, how should the field of economics change? What would you like to see in terms of research motivated by this book?
Vernon: We need non-utilitarian and not only utilitarian models of human action. Adam Smith articulates one such alternative; namely, the human need to get along with their neighbors via the creation and following of rules governing our interactions with others. The theory must lead to propositions that are predictive of human action as a function of rules conditional on circumstances and therefore predict action in advance of observation.
Bart: We hope people will engage with both The Theory of Moral Sentiments and The Wealth of Nations to deepen their understanding of how human beings navigate the world. Adam Smith’s insights have reshaped how we interpret what people do in our economic experiments. His astute observations on human conduct present us with novel propositions to test with new experiments. Central to Adam Smith’s analysis (and synthesis) is a focus on actual human beings, rather than representations of utility maximizing agents.
Justin: What connections do you see between “Humanomics” and broader human flourishing?
Vernon: Human flourishing is about discovery as a process that is adaptive and that anticipates new forms of knowing. It is about learning, but what is learned cannot be known for it is about never knowing what you do not know.
Bart: This just so happens to be the subject of my upcoming book, Meaningful Economics, set for release later this year. The subtitle is Making the Science of Prosperity More Human. While economic science assumes incentives and self-interest are sufficient to explain economic activity, I argue that purposes and human values are necessary to explain human conduct, including three basic principles of economics–trade, specialization, and property. To achieve this, we need to be able to distinguish, as Adam Smith does, the causes of human action from the consequences of human action. Smith provides such a framework for us to explain the roots of human conduct and its economic effects by grounding a science of economics in the moral sentiments that prompt human beings to act.
