Vernon’s Lessons about Exchange

Vernon Smith, our own Smith, has called our attention to Adam Smith´s jurisprudence emphasizing the origins of property, government, taxes and the emergence of the rules of justice. Relying on fascinating passages from TMS and LJ, Vernon´s loupe illuminates the importance and the complexities of justice. The father of experimental economics underlines the role of resentment and punishment and the social relationship of victims with compensation under Smith´s evolutionary perspective.

We know that “The rules of justice are accurate in the highest degree” (TMS, III.6.10: 175) and that is why those rules “may be compared to the rules of grammar” (TMS, III.6.11: 175). But we also know that this artificial virtue has evolved from the early stages of the “savage nations of hunters and fishers” until we reached “commercial society”. This institutional process is also the unintended consequence of the division of labor and exchange.

The challenges for classical liberals are clear in terms of Smith´s “liberal plan of equality, liberty and justice” (WN, IV.ix.3: 664). And since the eighteenth century, we have improved towards a much better living together. The social edifice of classical liberalism has increasingly rendered more equality, liberty, and justice. But we forget the basic foundations of these three principles.

Vernon Smith begins his reflection saying that “the origins, consequences and understanding of human action” are the foundation of Smith's legacy. And he calls our attention to our propensity to “truck, barter and exchange”. The “origins, consequences and understanding” of exchange are connected to human action, society and justice. Let me focus on the latter with a personal note that has influenced my own understanding of Adam Smith.

Almost six years ago there was a meeting at Liberty Fund about the “Adam Smith Works” project. We explored and discussed different things, but during a memorable lunch we began to exchange ideas about the centrality of Smith´s “truck, barter and exchange”. And Vernon called our attention to the use of the word “fair” and what it really meant. He strongly recommended reading Anna Wierzbicka´s “English: Meaning and Culture” (2006). I did so and we began an unforgettable email exchange on this issue.

Vernon, like Adam Smith, understands competition as unintended “assistance and cooperation”. But they also value “fair-play rules''. If TMS is Smith’s book on ethics, I would like to argue that morality is behind Smith's political economy since the very beginning of WN. For reasons of space, I will only concentrate on chapter 2 of Book I, stressing Vernon ́s call to the “universal propensity to truck, barter and exchange one thing for another” and Adam Smith´s use of the word “fair”.

The second chapter of Book I is, in my view, the most important chapter of WN. This short and rich chapter is about “the principle which gives occasion to the division of labour”. The first paragraph is worth fully reproducing, as it refers to the unintended consequences and the “nature and cause” of the division of labor:

“This division of labour, from which so many advantages are derived, 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.” (WN, I.ii.1: 25)

The propensity to “truck, barter, and exchange” is the cause of the division of labour. The father of Economics was very careful choosing this combination of words.[1] He is covering the three different institutional arrangements for exchange. Smith´s comprehensive choice covers truck, that is changing one thing for another, as in a tribe of hunters or shepherds; barter, changing one thing that can be money for a service, and finally exchange as simply meaning the modern use of money as a means that facilitates trade. But more importantly, the division of labor and the expansion of the market are a “gradual consequence” of the “principle of exchange”. Exchange is the final cause.

Then, with striking pragmatism and realism, Smith refers to the cause or origin of exchange:

“Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire.” (WN, I.ii.2: 25)

Exchange is neither something that we receive from heaven, nor the consequence of any natural law. It seems “more probable” that the propensity to exchange is the necessary consequence of the “faculties of reason and speech.” Immediately, Smith argues that WN is not the place to inquire about the causes of exchange, so he continues explaining our human propensity to trade.

Smith then argues that if language and persuasion are common to all men, these faculties can be found “in no other race of animals” (WN, I.ii.2: 25). And he surprises the reader with this very simple but at the same time deeply insightful argument:

“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him.” (WN, I.ii.2: 26, italics added)

If animals want to obtain something, they need to “gain a favor.” Yet we, human beings, who are social and political animals (Aristotle´s zoon politikon), have language and speech as a “means of persuasion.” Language and speech are necessary for exchanging ideas, that is, for persuading.[2] Trade is about persuasion, so we live in a social field of communication, a kind of marketplace of persuasion. And within this market, language and speech are essential for our economic and political interaction.

The apparently simple sentence “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog” hides a social and moral twist. Six years ago, Vernon Smith called our attention to the unique Anglo-Saxon concept of fairness that has a social and moral sense. Smith’s purposeful, careful and often neglected use of “fair” is not fully assessed. As Wierzbicka has persuasively argued, the word fair is “thoroughly untranslatable” (2006, p. 141). In fact, the meaning of “fair” always relates to others implying “a certain consensus” (ibid., p. 146).

The meaning of fair goes beyond reason and rational deliberation. It appeals to the notion of a fair game, to social rules and not only laws, to what is socially approved but not necessarily enforceable. It relates to justice but also to honesty. If the word “sympathy” does not appear in WN, the sympathetic process is present as moral exchange. In sum, Smith adds a rational and moral basis to trade. And exchange, the first cause for WN, rests upon fairness and persuasion, that is, communicating or trading through “reason and speech.”

Then follows the famous and traditionally misinterpreted sentence: “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” (WN, I.ii.2: 26–7). Smith carefully uses another combination of three words that made much sense to the poor and common people during the 18th century. The “industrious and frugal peasant” (WN, I.i.11: 24) was quite familiar with meat, beer, and bread. They were “necessaries” for the “street porter”, not “conveniences” - like expensive old books - for the philosopher.[3] The main concern of WN was improving the condition of the poor.

Today we know that Smith’s self-interest is different from self-love or selfishness, as it relates to prudence. Regard for our own interest is a realistic account of human nature that has moral foundations in TMS and experimental economics. As Vernon Smith has also taught us, “fair and deliberate” exchange is the basis for a liberal order. Reasons and sentiments interact, even when we think about justice and the market.

Endnotes

[1] Already in the Introduction and Plan of the Work he uses “necessaries and conveniences”, “industrious and frugal”, “skill, dexterity and judgment”, and now, in chapter 2, “truck, barter, and exchange”. The meaning and sense of the words comprehensively complement each other.

[2] As Deirdre McCloskey has argued, to persuade is to exchange ideas “softly” with the other, to convince is the victory of one´s ideas over the other. The latter might lead to Smith´s “man of system” and to the triumph of one over the others.

[3] See the wonderful paragraph that compares the street porter and the philosopher whose vanity, when she or he becomes older, dispels any resemblance (WN, I.ii.4: 28-9).

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