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Affluent Investor | July 29, 2017

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Adam Smith Was Right About ‘Fairness’

lady justice PUBLIC DOMAIN

If Adam Smith’s Theory of Moral Sentiment was not about Max-Utility (one’s own), was it about Max-U (one’s own, other’s), where a social preference function includes outcomes for both yourself and other(s)? One modern interpretation is that people are concerned with the ‘fairness” (e.g., equality) of outcomes, or the avoidance of inequality of outcome. This approach rescues the neo-classical paradigm by the simple device of changing the function that is maximized to be consistent with choices. It is not, however, sufficient to complete the rescue because experimentalists in their efforts to explore why Max-U (one’s own) failed have also shown that “intentions” and context matter, and not only outcomes.

For Smith this is too mechanical and piecemeal; and fails to capture the essence of human sociality as rule-following conduct originating in the human capacity for “sympathetic fellow-feeling,” which, when mutual, gives you equilibrium in the sense of harmony, or resonance. When people are following mutually approved rules, you have a convention or norm. Of course such an equilibrium may never be attained if culture and technology keep the system always in flux.

In Theory of Moral Sentiments, Smith uses the word FAIR 23 times—7 cases are fair sex, weather or complexion. In 16 cases he refers to fair means, fair play, fair conduct, fair dealing or justice—the “fair and impartial spectator.” Hence, for Smith “fair” implies no “fouls.” Theory of Moral Sentiments is not about outcomes except in the sense of whether they were within the boundaries of acceptability given the context. Theory of Moral Sentiments is about justice as rules that use punishment to discourage and control acts of injustice. Justice developed that way, according to TMS, because of the strength of our sentiments of resentment to deliberate actions of a hurtful tendency. We will want to return to this theme later in more detail. (TMS, II.ii.1.1-10)

Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School of Business & Economics and the School of Law, and he is part of a team that will create and run the new Economic Science Institute at Chapman.

Dr. Smith has authored or co-authored more than 250 articles and books on capital theory, finance, natural resource economics and experimental economics. He serves or has served on the board of editors of the American Economic Review, The Cato Journal, Journal of Economic Behavior and Organization, the Journal of Risk and Uncertainty, Science, Economic Theory, Economic Design, Games and Economic Behavior, and the Journal of Economic Methodology. He is past president of the Public Choice Society, the Economic Science Association, the Western Economic Association and the Association for Private Enterprise Education. Previous faculty appointments include the University of Arizona, Purdue University, Brown University, the University of Massachusetts, and George Mason University, where he was a Professor of Economics and Law prior to joining the faculty at Chapman University. Dr. Smith has been a Ford Foundation Fellow, Fellow of the Center for Advanced Study in the Behavioral Sciences and a Sherman Fairchild Distinguished Scholar at the California Institute of Technology.

In 1991, the Cambridge University Press published Dr. Smith’s Papers in Experimental Economics, and in 2000, a second collection of more recent papers, Bargaining and Market Behavior. Cambridge published his Rationality in Economics: Constructivist and Ecological Forms in January 2008. Dr. Smith has received an honorary Doctor of Management degree from Purdue University, and is a Fellow of the Econometric Society, the American Association for the Advancement of Science, and the American Academy of Arts and Sciences.

Dr. Smith is a distinguished fellow of the American Economic Association, an Andersen Consulting Professor of the Year, and the 1995 Adam Smith Award recipient conferred by the Association for Private Enterprise Education. He was elected a member of the National Academy of Sciences in 1995, and received CalTech’s distinguished alumni award in 1996. He has served as a consultant on the privatization of electric power in Australia and New Zealand and participated in numerous private and public discussions of energy deregulation in the United States. In 1997 he served as a Blue Ribbon Panel Member, National Electric Reliability Council.

Dr. Smith completed his undergraduate degree in electrical engineering at the California Institute of Technology, his master’s degree in economics at the University of Kansas, and his Ph.D. in economics at Harvard University.

 

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