Reconnecting Modern Economics with Its Classical Origins: Discovering Adam Smith

Abstract

Quite distinct from the two kinds of markets studied in laboratory and field was the large experimental literature on two-person extensive form games, particularly, “trust ” and “ultimatum ” games demonstrating the massive failure of self-interested utility maximizing choice to predict and enable understanding of the highly replicable findings in these experiments. My co-authors and I struggled to explain, understand, and reformulate human choice theory in this new environment. The vast majority of scholars took the “social preference” route in which the maximized utility function included both own and other outcome payoffs. To me that could not be right and was challenged by early test experiments. The reciprocity route we took seemed better but as we discovered, was too circular—flawed at its roots in failing to do anything beyond giving a name to the pattern of observations. The insight came from a fundamental discovery: Adam Smith’s first, largely obscure book, The Theory of Moral Sentiments, elegantly and masterfully modeled human sociability governed and disciplined by rule-following conduct. We get along with our neighbors and friends by developing an acute sensitivity to the gratitude they feel when we intentionally act to do good things for them. They resent our deliberately hurtful actions toward them and feel that we deserve punishment in response. To judge benefit and hurt, however, Smith relied on common knowledge that all were “self-loving.” Crisply stated propositions in this coherent model make plain what accounts for both cooperative and non-cooperative play in these games. A big scientific bonus is that the propositions make possible new experimental designs and predictions .