Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century

Cambridge Studies in Economics, Choice, and Society

by Vernon L. Smith, Bart J. Wilson

While neoclassical analysis works well for studying impersonal exchange in markets, it fails to explain why people conduct themselves the way they do in their personal relationships with family, neighbors, and friends. In Humanomics, Nobel Prize-winning economist Vernon L. Smith and his long-time co-author Bart J. Wilson bring their study of economics full circle by returning to the founder of modern economics, Adam Smith. Sometime in the last 250 years, economists lost sight of the full range of human feeling, thinking, and knowing in everyday life. Smith and Wilson show how Adam Smith's model of sociality can re-humanize twenty-first century economics by undergirding it with sentiments, fellow feeling, and a sense of propriety - the stuff of which human relationships are built. Integrating insights from The Theory of Moral Sentiments and the Wealth of Nations into contemporary empirical analysis, this book shapes economic betterment as a science of human beings.

Genres: Economics, Philosophy, Nonfiction

234 pages, Hardcover

Published January 24, 2019

Reviews

[José Antonio Lopez · Rating 4 out of 5]

Vernon Smith, Nobel prize winner 2002, and Bart Wilson are renowned experimental economists. They faced an apparent contradiction when neoclassical utility maximization or Max-U model, that explained perfectly well supply-and-demand market experiments, failed in two-person games. Behavioral and experimental economists explained the differences ex-post as "social preferences".

Humanomics is a neologism in reference to the study of the human problem as both personal social and impersonal economic.

Morality is an emergent order based on the will of the people to seek praise and praiseworthiness and avoid blame and blameworthiness. "In Adam Smith's model of human social conduct, actions are governed by context-dependent rules based on experience and human capacity for mutual sympathetic fellow-feeling". In other words, humans have the capacity to extract the accepted rules by observing and feeling others around.

None of the authors, including Adam Smith, are experts on play but it is striking how they recognize and fit the role of play in children to understand the moral rule set.

"The child naturally wishes to gain their favour, and to avoid their hatred or contempt... and it soon finds that it can do so in no other way than by moderating, not only its anger, but all its other passions, to the degree which its play-fellows and companions are likely to be pleased with."

The capacity to understand the moral rules is context free but the rules in themselves are context relevant. Societies flourish when that mutual support is provided in the reciprocity of gratitud and friendship bound together in good offices of affection and esteem". Societies thrive when their rules promote cooperation, exchange and mutual respect.

One key takeaway from Humanomics is that human behavior follows some general rules on how rules are set, yet the specific rules are different based on time and context. Therefore, we can't use the same rule set to evaluate two different results. But we can identify some common denominators in functional system vs dysfunctional ones.

"When dealing with human beings, we must get comfortable with the imprecision of our humanity"

Smith and Wilson coded Adam Smith's ideas in a series of Axioms and Principles, summarized by Leonel Morales , "One aim in restating Smith's propositions as we do is to spell out the simplicity and universality with which he can be read".

Smith and Wilson proceed to analyze some classical games and see how these axioms and principles can explain the results, opposite to the failure of Max-U and behavioral economics. Finally they use Adam Smith's theory to predict the outcome of a new set of games.

For the authors Adam Smith Theory of Moral Sentiments is a better model to explain how people interact. The analysis also closes the apparent gap between the The Theory of Moral Sentiments and the An Inquiry into the Nature and Causes of the Wealth of Nations.

"His project in Sentiments is to address how moral conduct emerges out of human interactive experience to form a system of general rules that wisely order society. In Wealth he extends that system to markets and national economy to enable a better understanding of the sources and evolution of the economic order."

[Martin Lábaj · Rating 5 out of 5]

Highly recommended. A must read for experimental and behavioral economists. But no less important for other economists and social scientists. Very polite, humble, but solid and sharp, decomposition of Max-U principle applied to everything. Anyone analyzing the fairness, equity or justice through the so called social preferences so far, should deeply reconsider his way of conceptualizing these phenomena.

[Ronald J. · Rating 4 out of 5]

The authors write in the Preface: “We economists have lost sight of an elementary understanding of the social and economic range of human action…of the sentiments that excite human beings to act and by which human beings judge their own and one another’s conduct. Humans live in two worlds governed by distinct rule systems: close-knit social groups, families, neighbors and friends, and the market, where we cannot possibly know the circumstances of strangers. For the latter we rely on voluntary cooperation, freedom of choice, and competition. They correct the record that Smith argued people are motivated by self-interest, noting he speaks of one’s “own interest.” Smith had two invisible hands: one of the marketplace, and one of the impartial spectator each of has in our breast—an internalization of what is approved or not approved by others. It would be 125 years for psychology to be founded separate from philosophy (and Smith was a moral philosopher).

The book shows how the Maximum Utility hypothesis gets human action wrong. Smith didn’t make this mistake because his modeling perspective is first that of the actor (the Austrians did the same thing a century later, especially Mises, see his Human Action). The authors discuss the origin of the language Smith used, very precisely, which is helpful in understanding the context and meaning of what he wrote (such words as altruism, beneficence, benevolence, passion, sympathy, propriety, sentiments, affections, conduct vs. behavior, among others). Sentiments are things of the heart and the mind, contrasted with emotions/passions, which are of the heart only. Sentiments are about thinking and feeling. Modern behavioral economics is an attempt to reintegrate feeling into economic models. With his book Sentiments Smith connects thinking to feeling, and knowing to feeling, which his observations of morality rest upon. Positivists mistrust the fuzzy feelings in our body, as too touchy-feely, but Smith merged feeling-thinking-knowing to understand human conduct. The authors point out that 80 years before behavioral economics, Frank Knight pondered the limitations of the scientific treatment of human data. The authors discuss various experiments, and their own have incorporated Smith’s ideas. Smith’s theory of morality is not right and wrong, but rather propriety and impropriety, since right and wrong are not universal human concepts but English words without equivalents in other European languages.

It’s a fascinating—and very wonkish in places—read. I think their conclusion that Smith’s Sentiments is a model of humanomics is compelling, and how Smith figured out Loss Aversion is amazing—Smith points out that punishment is greater for loss of property than for violation of contract. Sentiments articulates a rigorous model of human action, rich in narrative. There’s some sophisticated math in the book, but overall, it gave me a deeper appreciation of Smith’s work and his model of human action. Between this and Mises’s Human Action, it will change how you think about economics.