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Moral markets: A marginalistic interpretation of Adam Smith

Abstract

The article is built upon James Otteson's analogy between the structure of moral and economic rules. In Otteson's interpretation of Adam Smith's works both of them develop from an exchange of information of interacting agents. We develop that concept about Adam Smith's Theory of Moral Sentiments, analyzing those exchanges, and considering them Moral Market processes, in the Austrian Tradition of markets as processes. We think that Smith's emphasis on graduality and his metaphor of the Impartial Spectator allows us to propose a marginalistic approach to those markets stating how, in some of them which we call moral exchanges of justice, and through a great number of exchanges, moral rules of justice emerge. Finally, we present the problems that arise when legislation tries to change the results of these exchanges, in what we called a price control in the moral market.

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Notes

  1. This is because we will deal mainly with the social process through which, in our opinion, moral rules spontaneously emerge, not with the way in which a particular individual behaves to benefit from coexistence with his peers. We particularly thank Guido PIncione for his comment on this point.

  2. We will not consider the long standing debate about the meaning of Smith’s use of sympathy. Basically we will consider a zone of sympathy a subset of the modern concept of empathy and a zone of pure empathy. By that, we mean empathy that is no longer connected with affections, as sympathy is, but only with cognitive issues.

  3. Smith and Hume disagree about the foundations of morality: “Hume believed that utility was the ‘foundation of the chief part of morals’. Smith, on the other hand, while utility may contribute an additional beauty to virtue, it is never the source of their virtue and rarely the source of moral approbation” (Martin 1990:107)

  4. Answering two anonymous referees’ points we must say that as markets grow and there are more transactions between more distant agents, these two conditions involve more universal approvals about the properness of a certain behavior. This means that more general rules of justice are discovered (agreed on) which are rationally founded and therefore more impartial. That is why we affirm that they tend ro remove conflicts because factions are gradually dilluted to reach an agreement between increasingly distant partners. Steve Pinker has proposed a similar tendency. (Pinker 2011)

  5. In this sense, Dupuy states, “Smith’s agent is radically incomplete. Far from having all the qualities that would let him obtain, by deduction, the moral and social order, he desperately needs his fellows to make an identity for himself” (Dupuy 1992:98). For Ezequiel Gallo, “These two features of human nature combine themselves in the Scottish Thought with a permanent external circumstance. This man, with limited generosity and imperfect knowledge, faces nature which is mean in the provision of resources for the satisfaction of his needs. For Hume this dreadful combination is so crucial that explains, alone, the need of justice” (Gallo 2008:39).

  6. See Menger (1871):87ss). About these goods that he called “non-economic”, he wrote, “It is, then, clear, that in regard to these goods in which the available stock is larger than the needs, economic activity is excluded in the same natural and necessary way in which appears when the goods are in the opposite quantitative relation.”

  7. Similarly, Urquhart states that morality needs a standard sympathetic capacity that is neither total nor inexistent. “Fully sympathetic beings would inhabit an entirely different moral world; and beings wholly lacking the capacity for sympathy, could neither be moral no individuals. Morality then requires both that I have a strong sense of myself as an individual, and that I divide myself, displacing myself, looking at myself, as I only can look at you-from outside” (Urquhart 2010:185 emphasis in the original). In the same sense, according to Hume, “If men were provided of everything with the same abundance and if everyone would have for the others the same affection that they have for themselves, justice and injustice would be unknown to this world” (Hume 1739,:494/5 quoted by Gallo 2008:39).

  8. “When order is achieved between human beings letting them act on their own initiative- restricted only by laws uniformally applied to everyone- we have a spontaneous order in society. We can say then, that the efforts of those individuals are coordinated by the exercise of their own individual initiative and this self-organization justifies liberty in the political field” (Polanyi 1951:159,quoted by Hayek 1960:213).

  9. We use “equalize” in the sense of the process by which two agents who are involved in the same event attempt to eliminate their differences in perception to put each in concord with the other. As Smith wrote, “The person principally concerned is sensible of this, and at the same time passionately desires a more complete sympathy. He longs for that belief that nothing can afford him but the entire concord of the spectators with his own. To see the emotions of their hearts, en every respect, beat time with his own, in the violent and disagreeable passions, constitutes his sole consolation. But he can only hope to obtain this by lowering his passion to that pitch in which the spectators are capable of going along with him. He must flatten, if I may be allowed to say so, the sharpness of its natural tone, in order to reduce it to harmony and concord with the emotions of those who are about him. What they feel will, indeed, in some respects, different from what he feels, and compassion can never be exactly the same with original sorrow; because the secret consciousness of the change of situation, from which the sympathetic sentiment arises, is but imaginary, not only lowers it in degree but, in some measure, varies it in kind, and gives it a quite different modification. These two sentiments, however, may, it is evident, have such a correspondence with one another, as is sufficient for the harmony of society. Though they may never be unisons, they may be concords, and this is all that is wanted or required” (Smith 1776:70/71).

  10. The discovery of mirror neurons and their functions will probably affect in the near future the way we think about “sympathy”. Kiesling (2012) describes three main coincidences between Smith’s concept and mirror neurons research.

  11. As Otteson notes, “Our ability to imagine how others feel depends on two main factors. The first is our knowledge of the agent’s situation. (…) The other variable in the process is the spectator’s own sensibility (2002:44). Accordingly, for Griswold, “Smith is right to emphasize that what he is calling ‘sympathy’ requires conception, that is cognition, as well as imagination” (Griswold 2010:71/72).

  12. According to Forman-Barzilai (2010:139), Smith takes from Hume the idea that sympathy seems to dilute when the object is away from the agent. Paganelli (2010) finds in the role given by Smith to distance, typical of a commercial society, the most fertile ground for moral development because it places individuals “neither too close, nor too far away from each other” (Paganelli 2010:426)

  13. In our opinion, Adam Smith’s “sympathy”, as used in TMS, is, in the modern sense, a subset of “empathy”, at least in Spanish. Considering the English term, for Forman-barzilai (2010):12), “sympathy” is not “empathy”. Fitzgibbons (1995:62/3) states that it has that meaning. Otteson (2002:17) divides the concept of the term into three parts: “Smith, three meanings of sympathy in order, are: natural fellow feeling for others, pity for others and correspondence of sentiments between two or more people” (Otteson 2002:17). We maintain our previously stated position that sympathy is a subset of empathy.

  14. An anonymous referee has remind us of Michael Sandel’s position about acts of for example civil spirit, originating or replicating into new similar acts. We agree with Sandel’s position that civic spirit, solidarity and altruism tend to growth with their use, particularly thorough examples, they are, in a certain way, a structure of social capital. But this must not be confussed with the decreasing slope we posit. Besides the social capital Sandel postulates is more frequently found in small than in larger groups. But it would be perfectly possible a larger society as Sandel proposes, and we still think it does not contradicts our point.

  15. Occam’s razor, or the principle of parsimony or economy, makes simplicity a theoretic virtue. See Baker (2010) for further reading on this point.

  16. Here, we follow the Austrian Tradition of the derivation of supply’s law, which is inferred from the principle of diminishing marginal utility.

  17. Carrasco (2006:131) states, “From our natural tendency to sympathy, that is innate to human nature, and through some learning process, we come to experience and to seek (and to be motivated to) the pleasure of properness. Then the “moral sympathy”, although natural (meaning not artificial nor imposed) in man, is not an innate tendency, but a structure of second order that is based on our psychological construction and that includes in itself some deliberation, assimilation and comprehension. It is a cognitive sentiment” (emphasis in the original). On this subject, Nuzzo (2010:46/7) states that sympathy is an intellectual disposition more than an original sentiment.

  18. Carrasco refers here to moral judgments as we prefer to call them, following Maliandi (2004).

  19. Otteson (2002, 124) states that the motivating wish of moral markets is the pleasure for the mutual sympathy of sentiments.

  20. These are isolated exchanges and, therefore, do not form market prices. Its determination is in a specific combination of space and time, without the possibility of repetition and so without the possibility of establishing a moral rule.

  21. The graphs are merely illustrative for didactic use. They do not intend to have the rigor of a formal model.

  22. Smith (1997:2) writes, “A universal propensity for social exchange is a fundamental distinguishing feature of the hominid line, and that it founds expression, both in personal exchange in small-groups social transactions and in impersonal trade through large-group markets”.

  23. As Dupuy states, “Far from being transcendent, the figure of the Spectator appears then as a kind of mathematical media that emerges from the experiences that everybody has in his own life in society”.

  24. As in economics, in the short run, the fixed factor is the scarcity of an agent’s affection toward the other members of society. In the long run, this scarcity is reduced or made more flexible.

  25. As Smith puts it “The natural price, therefore, is, as it were the central price, to which the prices of all commodities are continuingly gravitating. Different accidents, may sometimes keep them suspended a good deal above it, and sometimes forcer them down even somewhat below them. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it” (Smith 1776:100). Leonidas Montes sustains that for Smith, the natural price is different from the market (or real) one. “The idea of all prices, the use of the word gravitating and the idea of a center or repose appear as additional evidence of Newton’s influence” (Montes 2006,256) (emphasis in the original). For Montes, “If Smith’s depiction of the price mechanism were actually Newtonian, all prices should gravitate towards one another, implying that the natural price should also gravitate to the prices of all commodities” (op.cit,257). Furthermore, Montes concludes, “Newton’s equilibrium applied to economics would rather become a kind of disequilibrium” (op.cit.263).

  26. Carrasco (2010:140) gives examples of these rules: “Positive harm may be we related to culture, as Fleischacker says, but there may also be other kind of harm, not directly to culture, but to humanity as such. To kill another without any justifies cause (i.e. out of improper motives), to harm children for fun, to break promises (which imply voluntarily obligation) and some kind of slavery may be examples of these cross-culture injustices; in other words these will be object of resentment for any cultural impartial bystander”.

  27. An anonymous referee has pointed us towards Fabrizio Simon’s work, especially Simon (2013). We think Simon’s article considers rationality in a teleological sense, in the context of his criticism of the law and economics analysis. Our work instead, considers rationality in a practical sense, which we think is closer to Smith’s use or it as Carrasco (2006) and Carrasco (2010) describe. As Bréban (2017) explains it is the “force of conception” the bridge Smith builds between rationality and sentiments, between the cognitive and the emotional realm. As the distance between the agent increases, the intensity of the imaginative effort to put oneself in the others’ shoes increases. This cognitive effort diminishes the emotional charge and increases and, at the same time, demands more speculations, better foundations and clearer explanations. That is why the impartial spectator is the most distant one and the least emotionally related with the agent.

  28. This is as in the Austrian concept of the market process. For further reading on this point, see Sarjanovic (1989).

  29. Otteson (2002:63) defends the idea that the impartial spectator alludes to an idealized concept of infinite spectators depending on circumstances and experiences. “There is one idealized concept of what an Impartial Spectator would be –a person who is disinterested in but informed about the matter at hand- and hence a true impartial spectator consulted in any particular situation will fit this mold. On the other hand, the exact parameters within which the Impartial Spectator would employ the Impartial Spectator procedure are determined by the facts of the case in question”.

  30. We owe to James Otteson this particular point.

  31. Jorge Streb has call to our attention this.

  32. In a similar way, Otteson (2002:220) writes about the process of the impartial spectator.

  33. Otteson (2002:200) considers the existence of a moral price reflected in the sentiments of the impartial spectator: “The sentiments of the Impartial Spectator are thus analogous to the natural price of a commodity that Smith describes in WN”.

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Correspondence to Rafael E. Beltramino.

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Castro, W.G., Beltramino, R.E. Moral markets: A marginalistic interpretation of Adam Smith. Rev Austrian Econ 31, 419–437 (2018). https://doi.org/10.1007/s11138-017-0394-z

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Keywords

  • Adam Smith
  • Moral sentiments
  • Marginalistic approach
  • James Otteson
  • Rational reconstruction