The two faces of Adam Smith.

• Author: Smith, Vernon L.
• Position: Economist

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest . . . 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 necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Adam Smith Wealth of Nations, 1776; 1909, pp. 19, 20

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

Adam Smith The Theory of Moral Sentiments, 1759; 1976, p. 9

1. Introduction

   The juxtaposition of these two statements lays bare what would appear to be directly contradictory views of human nature held by Adam Smith. This has long been noted and perhaps helps to account for the greater notoriety of the Wealth of Nations in both popular and academic discourse. Thus, as observed by Jacob Viner, "Many writers, including the present author at an early stage of his study of Smith, have found these two works in some measure basically inconsistent" (Viner 1991, p. 250).

   These two views are not inconsistent, however, if we recognize that a universal propensity for social exchange is a fundamental distinguishing feature of the hominid line, and that it finds expression in both personal exchange in small-group social transactions and in impersonal trade through large-group markets. Thus, Smith had but one behavioral axiom, "the propensity to truck, barter, and exchange one thing for another," where the objects of trade I will interpret to include not only goods, but also gifts, assistance, and favors out of sympathy, that is, "generosity, humanity, kindness, compassion, mutual friendship and esteem" (Smith 1759; 1976, p. 38). As can be seen in both the ethnographic record and the laboratory experiments, whether it is goods or favors that are exchanged, they bestow gains from trade that humans seek relentlessly in all social transactions. Thus, Adam Smith's single axiom, broadly interpreted to include the social exchange of goods and favors across time, as well as the simultaneous trade of goods for money or other goods, is sufficient to characterize a major portion of the human social and cultural enterprise. It explains why human nature appears to be simultaneously self-regarding and other-regarding. It may also provide an understanding of the origin and ultimate foundation of property rights.

   A property right is a guarantee allowing actions to occur within the guidelines defined by the right. We automatically look to the state as the guarantor against reprisal when rights are exercised by rights holders. But property rights predate nation states. This is because social exchange within stateless tribes and trade between such tribes predate the agricultural revolution a mere 10,000 years ago - little more than an eye blink in the time scale for the emergence of humanity. Both social exchange and trade implicitly recognize mutual rights to act, which are conveyed in what we commonly refer to as "property rights." In what sense are such rights "natural"? The answer, I think, is to be found in the universality, spontaneity, and evolutionary fitness value of reciprocity behavior. Reciprocity in human nature (and prominently in our closest primate relative, the chimpanzee) is the foundation of our uniqueness as creatures of social exchange, which we extended to include trade with nonkin and nontribal members long, long before we adopted herder and farmer life styles.

2. The Origins of Trade: Reciprocity, Hunter-Gatherer Sharing, and the Market Economy

   Reciprocity in Chimpanzee Communities

   Humans and modern chimpanzees - biologically, our closest cousin - are believed to have branched off from a common ancestor about five to six million years ago (Diamond 1992, pp. 15-31). Our chimp relative, more than any other nonhuman primate, shares with us a remarkable sophistication in social organization (de Waal 1989, 1996), but I want particularly to emphasize the chimp capacity to engage in acts of reciprocity, both positive and negative (McCabe, Rassenti, and Smith 1996). By positive reciprocity, I mean individual A responds, nonsimultaneously, with like acts, when individual B has transferred goods or favors to A. Such behavior is common among the chimps studied by de Waal at the Yerkes Regional Primate Research Center and at the Arnheim Zoo. Thus, the number of food transfers in each direction was positively related to those in the opposite direction: "If A shared a lot with B, B generally shared a lot with A, and if A shared little with C, C also shared little with A." Also, "grooming affected subsequent sharing: A's chances for getting food from B improved if A had groomed B earlier that day" (de Waal 1996, p. 153, pp. 245-6).

   Negative reciprocity occurs when individuals are punished for "cheating" on a social exchange, that is, failing to return positive reciprocity to those who have provided it to them. Negative reciprocity is the endogenous policeman in social exchange that defines natural property rights systems. Positive reciprocity, or "reciprocal altruism" (Trivers 1971), is subject to invasion by selfish free riders. Hence, the importance of negative reciprocity to punish free riders, as an implicit transaction or enforcement cost of positive reciprocity.

   Negative reciprocity is also observed in ape communities. Group expression of negative reciprocity was particularly intense, as well as prominently delayed, overnight, in the following incident reported by de Waal:

   One balmy evening, when the keeper called the chimpanzees inside, two adolescent females refused to enter the building. The rule at Arnheim Zoo being that none of the apes receive food until all of them have moved from the island into their sleeping quarters, the chimpanzees actively assist with the rule's enforcement: latecomers meet with a great deal of hostility from the hungry colony.

   When the obstinate teenagers finally entered, more than two hours late, they were given a separate bedroom so as to prevent reprisals. This protected them only temporarily, however. The next morning, out on the island, the entire colony vented its frustration about the delayed meal by a mass pursuit ending in a physical beating of the culprits. Needless to say, they were the first to come in that evening. (de Waal 1996, p. 89)

   Apes also appear to understand exchange, or at least have no difficulty interpreting intent when something is offered by a human in return for retrieving an object. For example, someone leaves an item, such as a screwdriver, behind in the ape enclosure. "One of its inhabitants will quickly grasp what we mean when we hold up a tidbit while pointing or nodding at the item. She will fetch the tool and trade it for the food" (de Waal 1996, p. 147).

   Reciprocity and the Origins of Human Trade

   For at least 2.5 million years (Klein 1989, p. 163; also see Semaw et al. 1997), our hominid ancestors lived as tool making hunter-gatherers in small extended families and tribes. Some of our brethren still live as hunter-gatherers, whose life styles have been intensively studied by ethnologists for exactly one century (Boas 1897), providing clues as to what life in the Paleolithic period might have been like. It is only in roughly the last 10,000 years that most of our ancestors abandoned this traditional life style beginning in the Near East, first by domesticating sheep about 10,500 years ago, then about 9500 years ago, by growing various grains that had been gathered by foraging technologies developed much earlier. Similar independent changes occurred in North America and the Far East. Although this agricultural revolution accelerated a previous tendency to a more sedentary life and greater dependence on trade through specialization, the origins of trade are far older, going back at least 100,000 years, and perhaps much earlier.

   The key to understanding our long "propensity to truck, barter, and exchange" is to be found, I think, in our evolved capacity for reciprocity, which formed the foundation for social exchange long before there was trade in the conventional economic sense. All humans, in all cultures, engage in the trading of favors. Although the cultural forms of reciprocity are endlessly variable, functionally, reciprocity is universal. We do beneficial things for our friends, and implicitly we expect beneficial acts in kind from them. In fact, this condition essentially defines the difference between friends and foes. We avoid close relationships with those who do not reciprocate. You invite me to dinner and two months later I invite you to dinner. I lend you my car when yours is in the shop and on another occasion you offer me your basketball tickets when you are out of town. Close friends need not be conscious of "keeping accounts," and the fact that we are in a trading relationship is as natural as it is subconscious and taken for granted. Once either of two friends become conscious of asymmetry in reciprocation, the friendship may become threatened. People who persistently have trouble forming and maintaining friendships are subclinical sociopaths who fail to possess a subconscious capacity and intuition for reciprocity. Prisons contain a disproportionate share of a population's sociopaths (Mealy 1995).

   Girl Exchange with the Eskimo

   That trade can be hypothesized to have grown directly out of social or gift exchange is illustrated by the individual's negotiating stance in many extant hunter-gatherer tribes. Consider the trading procedures that accompanied an exchange by the Greenland Eskimo at the turn of this century. Peter...