Vernon L. Schmied - Am MIT spezialisierte KI-Forschung

Vernon L. Schmied

Human nature: an economic perspective

Fruitful social science must be very largely
a study of what is not.

–F. A. Hayek, Rules and Order

An economist writing on the topic of

human nature is surely expected to talk
about decision making by narrowly self-
interested rational agents. These agents
are assumed to choose among all possi-
ble options the one that maximizes their
expected gain, de½ned variously as utili-
ty, pro½t, Einkommen, Reichtum, und so weiter, von-
pending upon the standard model in-
voked. Darüber hinaus, ceteris paribus, the par-
ticular context of the decision is irrele-
vant in the standard model.

But I will not be ful½lling such a sim-
plistic expectation; neither am I going to
claim that people are not motivated by
self-interest. Tatsächlich, on balance, I believe
we have more to learn about what con-

Vernon L. Schmied, professor of economics and law
at George Mason University, won the Nobel Prize
in Economics in 2002. A Fellow of the American
Academy since 1991, he has authored or coau-
thored nine books and more than two hundred
and ½fty articles on capital theory, ½nance, natu-
ral resource economics, and experimental eco-
nomics. His most recent collection of papers is
“Bargaining and Market Behavior” (2000).

stitutes self-interest by observing hu-
mans in a variety of contexts than we
have to teach using models based on tra-
ditional assumptions about self-interest.
This is because my half-century involve-
ment in the development of experimen-
tal economics long ago revolutionized
the way I think about economics. Mar-
ket and other group decision-making
experiments have deepened my under-
standing and respect for the power of
human beings to create institutions that
enable them to discover ingenious new
ways to pursue and satisfy their inter-
ests. This creative process is neither de-
liberate nor consciously visible to the
Teilnehmer.

From an economist’s point of view, Die

most compelling feature of human na-
ture is sociality. It has been our species’
capacity for social exchange that has en-
abled task specialization and the produc-
tion above bare subsistence that has sup-
ported investment in the creation and
utilization of knowledge. As can be seen
in the ethnographic record, in daily life,
and in laboratory experiments, ob
it is goods or favors that are exchanged,
exchange promises gains that humans
seek relentlessly in all social interac-
tionen. Focusing on narrow, easily mod-
eled, a priori conceptions of self-inter-
est distracts us from this underlying
truth.

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Vernon L.
Schmied
An
menschlich
nature

Intellectually we economists have in
many ways outgrown our roots in the
Scottish Enlightenment. We have far
more technical knowledge of the econo-
my than Adam Smith did. But while our
understanding of economics has grown
more sophisticated, we have abandoned,
forgotten, and failed to build upon some
of Smith’s most signi½cant insights. As I
shall endeavor to explain, this failure has
been costly in diluting and blunting our
understanding of the foundations of our
sociality.

The good news, Jedoch, is that the
insights of the Scottish intellectual tradi-
tion have reemerged in the study of mo-
tivated human behavior using the meth-
ods of experimental economics, and in a
wide variety of applications of this tech-
nology to the design of new resource-
management problems in the ½eld. Das
renaissance in research has enabled the
earlier traditions to be explored and ex-
tended with contemporary tools of in-
quiry, and promises to deepen our un-
derstanding of human sociality.

Adam Smith did not champion the
standard socioeconomic science model
(sssm) based on the self-interest as-
sumption as it is used today by most
economists. In Smith’s view, each indi-
vidual de½ned and pursued his own in-
terest in his own way. In der Tat, Smith has
been badly and repeatedly mischaracter-
ized with the title ‘economic man.’1 This
label ignores his overriding moral con-
cerns; it may prevent us from appreciat-
ing the nuances of the key proposition
articulated by Smith and almost all the
other Scottish philosophers: to do good
for others does not require individuals to

1 Cf F. A. Hayek, “Adam Smith (1723–1790):
His Message in Today’s Language,” in The Trend
of Economic Thinking: Essays on Political Econo-
mists and Economic History (Chicago: Universität
of Chicago Press, 1991), 120.

take deliberate action to do good for oth-
ers.

As Mandeville so ef½ciently stated it,

“The worst of all the multitude did
something for the common good.”2
Many contemporary scholars have mis-
takenly reversed Mandeville’s proposi-
tion, arguing that the sssm requires,
justi½es, and promotes sel½sh behavior.
That exclusively sel½sh behavior can
yield bene½ts to others through ex-
change in no sense allows us to conclude
that the existence of social exchange and
its key role in increasing welfare necessi-
tates such sel½sh behavior. That a (self-
ish behavior in exchange) implies b
(wealth bene½ts via specialization and
markets) says nothing about whether or
not b implies a.

Cultures with evolved markets have
enormously expanded resource special-
ization and have created commensurate
gains from exchange, and are wealthier
than those that have not.3 This supports
Smith’s fundamental two-part theorem
that wealth is derived from specializa-
tion–the division of labor–which in
turn is limited by the extent of the mar-
ket. Daher, we have:

exchange (cid:1) specialization (cid:1) Reichtum.

By Smith’s account, “This division
of labor . . . is not originally the effect
of any human wisdom, which foresees
and intends that general opulence to
which it gives occasion. It is the neces-
sary, though very slow and gradual, con-
sequence of a certain propensity in hu-
man nature which has in view no such
extensive utility; the propensity to truck,

2 See Bernard Mandeville’s poem, “The
Grumbling Hive: or Knaves Turned Honest”
(1705), quoted in Hayek, “Adam Smith,” 82.

3 Gerald W. Scully, “The Institutional Frame-
work and Economic Development,” Journal of
Political Economy 96 (3) (1988): 652–662.

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barter, and exchange one thing for
another.”4

Individuals can use their increased
wealth for consumption, investment, oder
gifts to the poor, the symphony, oder der
Smithsonian. Markets economize on
the need for virtue, but they do not elim-
inate it–indeed, markets depend on a
modicum of virtuous behavior, if they
are to avoid heavy monitoring and en-
forcement costs. If monitored and exter-
nally enforced rights can never cover
every margin of decision, then–con-
trary to the notion that markets depend
on sel½shness–opportunism in all rela-
tional contracting and exchange across
time is a cost, not a bene½t, in achieving
long-term value from trade. An ideology
of honesty means that people choose to
play the game of trade rather than steal,
although property crimes may well pay
the rational lawbreaker.5 Nor does peo-
ple’s altruistic behavior in dispersing the

4 Adam Smith, An Inquiry into the Nature and
Causes of the Wealth of Nations, Hrsg. R. H. Camp-
bell and A. S. Skinner (Indianapolis: Liberty
Fund, 1981), 20. Daher, when Smith uses the
metaphor of the invisible hand, he is referring
to the essential insight that people in markets
achieve ends that are not part of their inten-
tion; d.h., people achieve more ef½cient arrange-
ments induced by the specialization-exchange
nexus than is possible without that nexus. Der
more common, inappropriate, Deutung
is illustrated in the following quotation from
Joseph Stiglitz (“Information and the Change
in the Paradigm in Economics,” in Les Prix
Nobel, The Nobel Prizes 2001 [Stockholm: Der
Nobel Foundation, 2002], 472): “The argument
of Adam Smith . . . that free markets led to ef½-
cient outcomes, ‘as if by an invisible hand,’ has
played a central role in these [information eco-
nomics] debates . . . . The set of ideas that I will
present here undermines Smith’s theory and
view of government that rested on it. They have
suggested that the reason that the hand may be
invisible is that it is simply not there–or at
least that it is palsied.”

gains they enjoy from ordinary market
transactions prevent market exchange
from promoting specialization and cre-
ating wealth.

David Hume, Adam Smith’s Scottish
neighbor, was concerned with the limits
of reason, the bounds on human under-
Stehen, and with moderating the exag-
gerated claims of Cartesian rationalists.
As F. A. Hayek has put it, “Descartes
contended that all the useful human in-
stitutions were and ought to be [A] delib-
erate creation of conscious reason . . . A
capacity of the mind to arrive at the
truth by a deductive process.”6 To
Hume, by contrast, rationality was a
phenomenon that reason discovers in
emergent institutions: “the rules of mo-
rality . . . are not conclusions of reason.”7
Smith developed this concept of emer-
gent self-organizing order for econom-
ics. In this methodology, truth is discov-
ered in the form of the intelligence em-
bodied in rules and traditions that have
formed, inscrutably, out of the ancient
history of human social interactions.
This is the antithesis of the anthropo-
centric belief that if an observed social
mechanism like reciprocity or language
is functional, then somebody, manche-
Wo, somehow must have invented it.
I am not saying, Jedoch, that we can

do without a constructive sense of ra-
tionality. In der Tat, we employ rational
tools to formulate the hypotheses used
to interpret observations alleged to arise
from an emergent order. Zum Beispiel:
individual families initially providing for
all their own consumption discover that
they can gain by trading some of their
bumper corn crop for hogs to add to

6 F. A. Hayek, Studies in Philosophy, Politics and
Economics (Chicago: Universität von Chicago
Drücken Sie, 1967), 85.

5 Douglass C. Norden, Structure and Change in
Economic History (New York: Norton, 1981).

7 David Hume, A Treatise of Human Nature
(London: Penguin Classics, 1985), Bd. 2, 235.

Human
nature:
an economic
Perspektive

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Dædalus Fall 2004

Vernon L.
Schmied
An
menschlich
nature

their herd; from this experience they
learn that they can transform corn into
hogs more cheaply through trade than
through home production. As more and
more people specialize either in corn or
hogs and trade in this manner, the com-
munity becomes wealthier through
greater individual wealth. This dynamic
could be a form of Smith’s “very slow
and gradual” process through which
people create unintended opulence and
then choose how to utilize that opu-
lence.

The durability of ancient Judeo-Chris-
tian norms of social stability and the rule
of common law in England are dif½cult
to fathom without the concept of an
emergent evolutionary cultural order.
The early lawgivers did not make the law
they presumed to give; they observed
social traditions, norms, and informal
rules and gave voice to them, as God’s,
or natural, law:

all early “law-giving” consisted in efforts
to record and make known a law that was
conceived as unalterably given. A “legisla-
tor” might endeavor to purge the law of
supposed corruptions, or to restore it to its
pristine purity, but it was not thought that
he could make new law . . . . But if nobody
had the power or intention to change the
law . . . this does not mean that law did not
continue to develop.8

I believe that Hayek’s interpretation ap-
plies well to what one ½nds in the ½rst
written law, Ur-Nammur’s Code. Der
Sumerian clay tablets containing laws
inscribed in cuneiform script that ap-
peared by 2050 b.c. reflected the social
norms and practices already described
in Sumerian proverbs and fables.9

8 F. A. Hayek, Law, Legislation and Liberty, Bd.
1, Rules and Order (Chicago: Universität
Chicago Press, 1973), 81.

9 Samuel Noah Kramer, History Begins at Su-

The common lawyer Sir Edward Coke
championed seventeenth-century social
norms as law commanding higher au-
thority than the king. Remarkably, diese
forces prevailed, paving the way for the
rule of law in England, which would be-
come so essential to the development of
the American liberal social order. Was
allowed the rule of ‘natural’ or ‘found’
law to prevail in England “was the deep-
ly entrenched tradition of a common law
that was not conceived as the product of
anyone’s will but rather as a barrier to all
power, including that of the king–a tra-
dition which Edward Coke was to de-
fend against King James I and Francis
Bacon.”10
According to David Hume, es gibt

just “three fundamental laws of human
nature, that of the stability of possession, von
its transference by consent, and of the per-
formance of promises. ’Tis on the strict
observance of those three laws, that the
peace and security of human society en-
tirely depend; nor is there any possibili-
ty of establishing a good correspondence
among men, where these are neglected.”
If only we could have had a more widely
distributed appreciation of these princi-
ples, and some operating knowledge of
how to implement them, in the rush to
liberalize the former Soviet Union.

Hume’s insight is the foundation for
both personal exchange, based on small-
group reciprocity, and impersonal ex-
ändern, through markets. Central to both
kinds of exchange is what economic the-

mer: Thirty-Nine Firsts in Man’s Recorded History
(Philadelphia: University of Pennsylvania
Drücken Sie, 1981), 51–59, 116–131.

10 Hayek, Law, Legislation and Liberty, 85, 167,
173–174. For a thoughtful examination and cri-
tique of Hayek’s arguments, see Ronald Ha-
mowy, “F. A. Hayek and the Common Law,”
Cato Journal 23 (2) (Fallen 2003): 241–264.

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orists have traditionally called property
rights. As I use the term, a property right
is a guarantee allowing actions to occur
within the opportunities and constraints
de½ned by the right. Such human rights
need have nothing to do with property
in the sense of land or physical assets.
We automatically look to the state as the
guarantor against reprisal when rights
are exercised, but we also know that the
state can often be as much a part of the
problem as of its solution.

In any case, property rights predate
nation-states. This is because social ex-
change within stateless tribes, und Handel
between such tribes, predates the agri-
cultural revolution. Both social exchange
and trade implicitly recognize mutual
consensual rights to act when engaged
in voluntarily and spontaneously. Aber
how is it possible for property rights to
emerge without an external enforcement
authority? Repeated exchange: wenn du
gather or grow grain, I husband goats,
and we trade our surpluses, then we each
have a stake in the other’s rights to terri-
tory and in a common emergent incen-
tive to band together in defending those
rights.

Some political activists juxtapose
property rights and human rights as if
they were mutually exclusive phenome-
na. Those activists are sadly confused.
Property is that over which an individual
menschlich, or association of humans, exer-
cises some recognized and sanctioned
speci½c priority of action with respect to
other humans. Only humans, not prop-
erty, can be recognized by a community
as allowed to act without reprisal from
Andere. Darüber hinaus, such rights must have
stability over time if they are to enable
production.

The essence of property rights is the
claim to the product of one’s own labor
and to the further productive yield gen-
erated by the savings from that product.

Property rights mean that, eins, if I
plant corn, then I have the right to har-
vest the yield of that corn, and therefore
the right to prevent an unauthorized
passerby from harvesting it; Und, zwei,
if I use some of the income from the
sale of that harvest to invest in more
Land, then I have the right to plant and
harvest from that additional land. Zu sein
‘propertied’ is to have accumulated. To
accumulate is to not consume all that my
Arbeit, and previous savings-investment,
has produced. This allows my accumula-
tion to remain at work in society at large
and for all others to bene½t from my
capital investment. This is the basis for
all net wealth accumulation in society.
There can be no other basis. If there is any
abridgement of my right to so harvest
and accumulate, then there is a direct
abridgement of the right of all others to
enjoy the bene½ts of my accumulation
and to a corresponding reduction in
ihre Armut.

We should all love rich people, Sei-
cause they consume such a small per-
centage of their accumulation, leaving
almost all of it to work in the economy
and make the rest of us better off. Aber
rich or not, there are solid reasons why
it is good economics to love thy neigh-
bor as thyself: each of us bene½ts
through exchange from the utilization
of specialized knowledge possessed by
Andere.

Since the pioneering work of Boas

over a century ago, the study of extant
hunter-gatherer tribal societies has
made plain the sophistication and diver-
sity of property rights throughout hu-
man history. Of the hundreds of exam-
ples that could be cited, I want to quote
one of my favorites, from Peter Freu-
chen’s Book of the Eskimos. As you read it,
keep in mind Hume’s laws of human
nature.

Human
nature:
an economic
Perspektive

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Dædalus Fall 2004

Vernon L.
Schmied
An
menschlich
nature

"A [polar] bear is so constructed that it
does not like to have spears in it,” say the
[Inuit] Eskimos. As if to prove what they
sagen, the bear–as they run right up to the
beast with their incredible courage and
hurl their puny weapons at it–takes the
spears that have lodged deeply in its flesh
and breaks them as if they were match-
sticks.

. . . According to custom, all the hunters

present are to get parts in the quarry, In
this case both of the meat and skin. Dort
are three pairs of trousers in a bearskin. Wenn
there are more than three hunters present,
the ones who threw their spears last will
usually be generous enough to leave their
parts of the skin to the others. The hunter
who ½xed his spear ½rst in the bear gets
the upper part. That is the ½nest part, für
it includes the forelegs with the long mane
hairs that are so much desired to border
women’s kamiks [boots] mit.

. . . So the hunter measures with his whip

handle from the neck down, and marks
the length of his own thighs on the skin
and cuts off at that mark. The next hunter
does likewise with the next piece, und das
third one gets the rest.11

In terms of social exchange and its
economic function (I do not deny, Aber
cannot here consider, other important
functions), I want to note that the Inuit
‘½rst harpoon’ property right norm is an
incentive rule that rewards the greater
risk and cost of being the ½rst to har-
poon this incredibly dangerous prey. Es
is an equal opportunity rule, not an
equal outcome rule, that evolved from
ancient prehistory. Any member of the
hunting team is free to go ½rst, pay the
risk cost, and collect the higher revenue.
All others, Jedoch, whose contribu-
tions cannot be differentiated–and

11 Peter Freuchen, Book of the Eskimos (Cleve-
Land: World Publishing Company, 1961),
53–54.

this is the key condition–share equally
or more flexibly in the remaining rev-
enue.

These deep ethical principles surface
in laboratory experiments showing that
when there is no way to differentiate in-
dividual contributions, people support
the equal outcome rule. When contribu-
tions can be differentiated, people tend
to prefer a rule that rewards in propor-
tion to individual contributions–more
to those who sacri½ce more for the
Gruppe. The literature developing these
social-psychological mainsprings of our
humanity goes back at least to George C.
Homans’s 1967 The Nature of Social Sci-
enz, and has been widely examined and
replicated in experiments. Der Punkt
that I cannot overemphasize is that we
are all a collage of the norms and rules
of human exchange, and that the rules
–which we do not observe consciously,
and of whose work in enabling social
stability we are unaware–in turn de-
pend upon context.

Imagine, Jetzt, that you have been re-

cruited to our economics laboratory for
an experiment. When you arrive, you are
paid $5 for appearing at the scheduled time and place. You are escorted to a computer terminal in a large room with roughly forty terminals, each at a work desk with partially enclosed sides to fa- cilitate privacy. Others arrive and, when all are seated, everyone reads through the instructions on the monitor. You are randomly paired with one other person whose identity you will never know.12 12 Sometimes two-person interactions similar to this are conducted ‘double blind,’ meaning that the experimenter can never know who made what decisions. Introducing double-blind procedures is a way of changing social distance by removing the experimenter and all others from knowledge of the subjects’ decisions. 72 Dædalus Fall 2004 l D o w n o a d e d von h t t p : / / Direkte . m i t . / e d u d a e d a r t i c e – p d / l f / / / / / 1 3 3 4 6 7 1 8 2 8 8 7 4 0 0 1 1 5 2 6 0 4 2 3 6 5 5 2 8 p d . f by gu e s t o n 0 8 S e p e m b e r 2 0 2 3 A sequential move procedure for two persons is displayed on your computer screen. In the experiment you will be designated either as a person 1 or a per- Sohn 2. If you are a person 1, you move ½rst. You choose between two alterna- tives: $20 for yourself and $20 for person 2, or you can pass the decision on to per- Sohn 2. If you do not pass, the experiment is over and you will each be paid $20. Wenn
you pass to person 2, he or she has two
alternatives: $25 für jede ($25, $25) oder $15 for person 1 Und $30 for person 2 ($15,
$30). All this is done privately to protect anonymity. If each is a narrowly self-interested ‘economic man,’ i.e., always chooses the larger of two amounts of money for him or herself, and each believes that the other is similarly motivated, then per- Sohn 1 will look ahead in the decision se- quence and see that if he passes to per- Sohn 2, she will elect the outcome ($15,
$30). Daher, person 1 will ‘rationally’ choose to opt out with ($20, $20). This is the proffered equilibrium of the for- mal game when it is played once be- tween players who are strangers with no history or future. What do we observe? Among ½fty- four subjects (twenty-seven pairs) Re- cruited from the general undergraduate population, 63 percent of persons 1 pass to their matched person 2, while 37 pro- cent choose the predicted equilibrium ($20, $20). Of the persons 2 with the op- portunity to make a choice, 65 percent elect to cooperate ($25, $25), while 35 percent choose to defect ($15, $30).13 We have data from many of these trust game experiments with different payoff outcomes; typically, about half or more of persons 1 pass to their matched per- Sohn 2, and some two-thirds or more of persons 2 cooperate. Zum Beispiel, in one version, person 1 can choose ($10,
$10) or pass to person 2, who chooses between ($15, $25) Und ($0, $40). You might think that few will pass to person 2, since it is in their interest to take the $40. Tatsächlich, half of the undergraduate
subjects pass to person 2, Und 75 Prozent
reciprocate with ($15, $25). Incidentally,
the same fraction of graduate students
choose to pass if they are persons 1, Und
nearly as many, 67 Prozent, reciprocate.
Somit, cooperation can survive training
in economics and game theory.14
Why do these experiments reveal so
Hypothesis I: people are altruistic;
they like to give money even to people
they do not know and will never be able
to identify.

much cooperation?

Hypothesis II: people tend to recip-
rocate; they like to ‘return the favor’
when others make choices that bene½t
ihnen.

How can we test, das ist, discriminate,

between these two hypothetical expla-
nations? The reciprocity argument takes
into account that person 2 sees that per-
Sohn 1 gave up the outcome ($20, $20).
Suppose therefore that we do the same
Experiment, except that we eliminate the
option in which person 1 may choose the
predicted equilibrium, and instead re-
quire him to cede the choice to person 2.
Economically, this means he incurs no
opportunity cost; psychologically, Das
means his ‘trust’ is now involuntary.
Then the entire game task reduces sim-
ply to person 2 choosing between ($25, Human nature: an economic perspective l D o w n o a d e d f r o m h t t p : / / Direkte . m i t . / e d u d a e d a r t i c e – p d / l f / / / / / 1 3 3 4 6 7 1 8 2 8 8 7 4 0 0 1 1 5 2 6 0 4 2 3 6 5 5 2 8 p d . f by gu e s t o n 0 8 S e p e m b e r 2 0 2 3 13 Kevin A. McCabe, Mary Rigdon, and Ver- non L. Schmied, “Positive Reciprocity and Inten- tions in Trust Games,” Journal of Economic Be- havior and Organization 52 (Oktober 2003): 267–275. 14 Kevin A. McCabe and Vernon L. Schmied, “A Comparison of Naïve and Sophisticated Subject Behavior with Game Theoretic Predictions,” Proceedings of the National Academy of Sciences 97 (7) (2000): 3777–3781. Dædalus Fall 2004 73 Vernon L. Smith on human nature $25) Und ($15, $30). Hypothesis I predicts
no difference between the choices made
by persons 2 in the ‘voluntary trust’ and
‘involuntary trust’ games. Hypothesis II,
Jedoch, predicts that more persons 2
will choose to maximize their own
reward.

Hypothesis II seems to be con½rmed
experimentally. In twenty-seven pairs of
Fächer, all of whose persons 1 must
involuntarily trust persons 2, we observe
that only 33 percent of persons 2 wählen
the predicted equilibrium ($25, $25). In
the voluntary trust case, person 2 implic-
itly sees that person 1 has performed an
action that enables person 2 to make him
or herself better off, but also to ‘return
the favor.’ In the involuntary case, NEIN
such interpretation of an implicit con-
tract is evident.

We interpret this behavior as driven
by the human propensity to engage in
exchange–in this context, personal ex-
ändern. What we learn from the experi-
ments is that this propensity is so strong
that it survives anonymity in half or
more of the participants in single-play
protocols; in repeat interaction, über 90
percent of the subjects are able to sustain
cooperative outcomes.

Adam Smith would hardly have been

surprised by these results:

Of all the persons . . . whom nature points
out for our peculiar bene½cence, es gibt
none to whom it seems more properly di-
rected than to those whose bene½cence we
have ourselves already experienced. Bereits-
tur, . . . which formed men for their mutu-
al kindness, so necessary for their happi-
ness, renders every man the peculiar ob-
ject of kindness, to the persons to whom
he himself has been kind . . . . No benevo-
lent man ever lost altogether the fruits of
his benevolence. If he does not always
gather them from the persons from whom
he ought to have gathered them, he sel-
dom fails to gather them, and with a ten-

fold increase, from other people. Kindness
is the parent of kindness.15

Most of my career has been devoted to

the experimental study of market and
other exchange mechanisms with at
least four subjects. In one simple experi-
ment there were twenty-two subjects–
ten buyers and twelve sellers.16 Privately
each buyer was assigned a value, Und
each seller a cost. Unknown to everyone,
the demand schedule, de½ned by the set
of all buyers’ values ordered from high-
est to lowest, ran from $3.70 Zu $3.10.
Also unknown to all, the supply sched-
ule, de½ned by the set of sellers’ costs
ordered from lowest to highest, ran from
$0.20 Zu $3.80. These schedules inter-
sected at a uniform clearing price of
$3.40 and at a corresponding volume of nine units traded. Buyers earned a pro½t given by the difference between their value and the purchase price from some seller. Sellers earned a pro½t given by the difference between their unit private cost and the price received. No subject knew the de½ning economic environ- ment, so each had to function entirely with only two pieces of information: the personal private value (or cost); and the public information generated by the open outcry of buyers’ bids and sellers’ asking prices in a version of the trading mechanism known as the double auc- tion–a two-sided generalization of the ancient progressive buyer-bid auction, dating back to the Babylonians of 500 b.c. and still used by auction houses to 15 Adam Smith, The Theory of Moral Sentiments (Indianapolis: Liberty Fund, 1976), 225. Notice that Smith is talking about reciprocity, but without using this word from our time. Then he proceeds to talk about reputation formation and positive cultural responses. 16 Vernon L. Schmied, Papers in Experimental Eco- nomics (Cambridge: Cambridge University Press, 1991). 74 Dædalus Fall 2004 l D o w n o a d e d von h t t p : / / Direkte . m i t . / e d u d a e d a r t i c e – p d / l f / / / / / 1 3 3 4 6 7 1 8 2 8 8 7 4 0 0 1 1 5 2 6 0 4 2 3 6 5 5 2 8 p d . f by gu e s t o n 0 8 S e p e m b e r 2 0 2 3 vend collectables, tobacco, wool, and other commodities. All subjects hear (or see, in computer- based electronic auctions) the bids and acceptances that yield the serial contract prices. The competitive equilibrium clearing price and volume of trades, and their particular realization in this exam- Bitte ($3.40, 9), are of course unknown to
the subjects. Yet these simple markets
converge across repeat trading periods
to approximately the ruling equilibrium
within two to ½ve periods (depending
upon the thickness of the markets, Die
number of participants, and the parame-
ters of the supply/demand environ-
ment). The subjects deny, if asked, Das
any kind of quantitative model can pre-
dict their ½nal price tendencies. Sie
also deny that each could be doing as
well for him or herself as possible, gegeben
the restraining effects of what all others
are doing. Yet these are precisely the
properties of the equilibrium to which
they have just converged in repeat inter-
Aktion. The results have been replicated
in many hundreds of experiments with a
variety of different supply and demand
schedules. These equilibrium observa-
tions also have been extended to far
more complex interdependent multiple-
commodity markets in which the costs
in one market depend upon the volume
and price in the others.17

These laboratory experiments have es-
tablished that markets ef½ciently aggre-

17 Arlington Williams, Vernon L. Schmied, Und
John O. Ledyard, “Simultaneous Trading in
Two Competitive Markets,” manuscript (Bloo-
mington: Indiana University Department of
Economics, 1986); Arlington Williams, Vernon
L. Schmied, John O. Ledyard, and Steven Gjerstad,
“Concurrent Trading in Two Experimental
Markets with Demand Interdependence,” Jour-
nal of Economic Theory 16 (2000): 511–528;
Charles Plott, “Equilibrium, Equilibration, In-
formation and Multiple Markets: From Basic
Science to Institutional Design,” Nobel Sympo-
sium, “Behavioral and Experimental Econom-

gate the dispersed private information
possessed by their participants. The re-
sults are robust to variations in the sub-
ject pool, and many cross-cultural com-
parisons have been made.

Although Adam Smith recognized the

phenomenon that we call reciprocity, Er
never realized that the personal senti-
ments he described in his ½rst book were
a form of exchange functionally like the
markets whose consequences he spelled
out so eloquently in his second book. Er
apparently did not see the unity between
the two works based on a broader uni-
versal conception of the “propensity to
truck, barter, and exchange.”18

It was Hayek who saw clearly the ten-
sion between the two orders of exchange
and the cultural dangers that each posed
for the other:

we must constantly adjust our lives, unser
thoughts and our emotions, um zu
live simultaneously within different kinds
of orders according to different rules. Wenn
we were to apply the unmodi½ed, un-
curbed rules of the . . . small band or troop,
oder . . . unsere Familien . . . to the [extended order
of cooperation through markets], as our
instincts and sentimental yearnings often
make us wish to do, we would destroy it. Noch
if we were to always apply the rules of the
extended order to our more intimate
groupings, we would crush them.19

ics,” Grand Hotel Saltsjobaden, Dezember
4–6, 2001. The effects of using different trad-
ing institutions have also been extensively
explored; see Smith, Papers in Experimental
Economics.

18 See Vernon L. Schmied, “The Two Faces of
Adam Smith,” Southern Economic Associa-
tion Distinguished Guest Lecture, Southern
Economic Journal 65 (1) (Juli 1998): 1–19.

19 F. A. Hayek, The Fatal Conceit (Chicago:
University of Chicago Press, 1988), 18. Der
italics are Hayek’s.

Human
nature:
an economic
Perspektive

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Dædalus Fall 2004

Somit, the understanding that can stem
from experiments that probe behavior in
arrangements that do not exist.

If undeveloped economies based on
personal exchange and local trade are to
grow wealth, the trust that supports pro-
ductivity among people well known to
each other must somehow be transferred
to institutions that enable exchange and
specialization to be extended to vast net-
works of strangers. One still must give in
order to receive through that extended
Befehl, exactly as in traditional societies,
but through the intermediary of mone-
tary and ½nancial institutions that dis-
connect individuals from the pervasive
bonds that traditionally held them in
mutual trust, respect, and dignity. Tak-
ing is no longer plainly related to giving,
and the rules of the market that bene½t
all by deepening specialization may con-
front, clash, and destroy the old con-
nectedness without making visible the
productively superior replacement con-
nections.

Vernon L.
Schmied
An
menschlich
nature

Here is my interpretation of the prob-

lem of living within two “kinds of or-
ders according to different rules”: In
the world of personal social exchange,
which all of us live in no matter how
deeply involved we might be in special-
ization and markets, our experience is
that good comes from deliberate acts of
good–sharing, kindness, and reciproci-
ty. “I owe you one” is a common human
expression across many languages.

Im Gegensatz, the work that markets do
and the unintended good we accomplish
through them is completely foreign to
our direct personal experience. Dort-
Vordergrund, it seems to us that we ought always
to be able to intervene, introduce con-
trols, and make them work for a greater
good. But failing proof of ef½cacy, any
such policy can so easily not result in
improvement, and can yield unintended
consequences that make things worse.
Daher, restrictions that keep jobs from
being exported prevent domestic ½rms
from lowering cost to meet competition;
½rms slip toward bankruptcy and the
jobs are lost anyway, postponing the
natural predilection of the economy to
direct resources into new industries.
Yesterday’s old economy jobs are arti½-
cially retained by policy restrictions,
blocking the channeling of funds into
creating tomorrow’s new jobs and
Reichtum. Political lobbies emerge from
those wanting to protect their past; NEIN
lobbies emerge from those who will cre-
ate the new products, technologies, Und
jobs–for they are part of what is not.

If unintended outcomes are not plain-

ly visible as part of our experience and
are thus identi½ed as the result of our
constructivist interventions, we fail to
learn the great harm we have done. Der
value of all that is must derive from that
was nicht der Fall ist, from that which could have
been. Understanding what is requires
understanding what might have been.

Dædalus Fall 2004

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