The following transcript has been lightly edited.
Thibault Schrepel
Welcome, everyone. I am delighted to be joined today by Vernon Smith, who is a Professor appointed to the School of Business and Economics, and the School of Law at Chapman University. Vernon was awarded the 2002 Nobel Prize in Economic Sciences for his work in experimental economics. Vernon has written nearly 400 articles and books on a wide range of topics from 1957 to the present. I have prepared some questions in the hope of giving an overview of his work and also showing the relevance of Vernon’s work to many of the most complex and modern issues. Throughout the conversation, we will be talking about Adam Smith, complexity theory, Web3, public choice theory, economics as a field, and I will not resist asking some more personal questions at the end.
Vernon, I couldn’t be happier to have you on. So thank you very much for making the time. And without further ado, I suggest we get started. The first question is the following: I want to conduct this interview under the auspice of Adam Smith. So, let me start with the obvious. You have said once that ‘The Theory of the Moral Sentiments’ is Smith’s most important book. Please explain why.
Vernon Smith
Well, it is interesting that Adam Smith thought it was his most important book. His biographers all report that fact, and I think he’s right. ‘The Theory of Moral Sentiments’ is really a book about society. Adam Smith was very much aware of the existence of order everywhere. There’s order in the universe; there’s order in our neighborhoods and our community. He basically models that. In an important passage, he asked us to imagine that a member of our species is brought up without any contact with another member of the species. He uses the metaphor of a mirror. He says, give this person a mirror, and that person now is able to know what it means for the face to be deformed, what it means for a mind to be deformed. All of this comes from his interaction with others. In Smith’s view, that begins in earnest about the time we first have playfellows. Our playfellows are not as indulgent of our actions as our parents and close family. He calls that our first entry in great school of self-command.
A key concept in Adam Smith is this notion of self-command that we learn to control and moderate our own behavior in the light of how we come off to others. That sort of disciplines our actions. In Smith, actions are of two kinds: there’s the good things we do for each other in our communities, and then there’s the bad things we do to each other, and this has to be controlled. Our instincts are to punish. We resent deliberately hurtful actions, and that resentment leads to the urge to punish, to sort of retaliate, that’s our automatic response. The whole notion of justice is as follows: beneficence is about the good thing, justice is about the control and elimination of the bad things we do to each other. The concept of property comes from that.
What are the really bad things? It’s murder, theft, robbery, violation of contract, those are kind of the main four categories. If murder is rapid, it means we have no property on our bodies. Theft and robbery: unless those are controlled, we do not have property in the products of our body and mind. And if contracts are readily violated then we don’t have property in the promises that we make to each other. Those are kind of the basic ideas behind justice in Adam Smith. Out of this comes the theory of society. As between beneficence and justice, justice is much the more important because if people are at all times ready to hurt each other, then you can’t really have a society. So that is the more important of the two.
Modern notions of justice include distributional justice. In Smith, that’s about beneficence. That’s not about justice. There’s this clean distinction between rules that govern the good things that we do for each other, and rules that control and limit the bad things we do to each other. That’s sort of a long-winded summary. That’s the essence, to me, of ‘The Theory of Moral Sentiments’. It’s very fundamental. Once he understood the origins of society and where society comes from, then he could talk about economy. Then his second book was ‘The Wealth of Nations’. But I think the first is much the more important and basic. And I think it’s a book, unfortunately, that economists have not read. Philosophers have, there’s a literature in philosophy that recognizes the importance of ‘The Theory of Moral Sentiments’. But economists have not read it. And moreover, when they have read it, and written about it, it’s clear to me they didn’t understand it. A good example is Jacob Viner, arguably one of the great historians of economic thought. He has an essay on Adam Smith, and he discusses ‘The Theory of Moral Sentiments’, which he says it’s not a significant book. The great book is ‘The Wealth of Nations’. And so economists have either not read it, or if they have read it, have dealt with it in a superficial way.
Complexity theory
Thibault Schrepel
You’ve mentioned economists and the way they approach ‘The Theory of Moral Sentiments’. I want to ask you questions about the field of economic theory. But before, you also mentioned human society and the fact that indeed, the economy is made out of human beings, which is not something you can abstract away. On that subject, I want to quote a short paragraph from your Nobel lecture. You said that we have become accustomed to the idea that a natural system, like the human body, regulates itself. To explain regulation, you say, “we look for feedback loops rather than a central planning or directing body. But somehow, our intuitions about self-regulation do not carry over to the artificial systems of human society.” This makes me curious about the following: what is your take on complexity theory, complexity economics, and its tools such as agent-based modeling? To put it differently, how does it compare to or complement experimental economics?
Vernon Smith
We got accustomed to seeing order everywhere. We sort of take it for granted. We don’t know where it comes from. There’s nothing in our education and our training that makes it clear what the origins of order are. We have people everywhere following rules that bring order. But we don’t have the sense of what its origins are. I think that is why it’s so important to read Adam Smith, which is still by far the best on this, of all the moderns. I read Adam Smith for guidelines on what to expect from experiments, because his propositions on beneficence and justice have application directly to neighborhoods and to laboratory experiments. Adam Smith has not yet been used in that way. He is dealing with very complex phenomena, which are solved by people using fairly simple day-to-day rules in their interactions. In a way, it’s kind of the tip-off of what’s most interesting about complexity theory, that organisms can, with strictly local knowledge, relate locally to others. You achieve order and progress through networks.
Much of order has to do with changes and not just static states. One of complexity theory’s most important themes – I’m certainly not an expert all of that, my reading is really very limited in the formal literature on complexity theory – is that complex solutions emerge from quite simple rules. There are wonderful examples of that in colonies of ants and bees, really fairly low levels, and even microorganisms. Adam Smith often spoke of God as the author of nature. He thinks of supreme intelligence behind everything in the universe. He talks about nature and the rules of nature that govern sort of the way in which we discovered things: thou shall not kill, thou shall not steal, thou shall not covet the possessions of thy neighbor. These rules, you see, are of ancient origin. People didn’t know where they came from. It’s natural to think that all must have been given by Moses on a mountaintop. They have a narrative that kind of gives them an exponent. But people have this desire to understand, they’re curious about origins.
In antiquity, these answers were very simple and based upon a sense that there must be a designer behind all of this design. That notion of design implying a designer is kind of the origins of the notions of God. Adam Smith was Christian. He refers to our Savior. He had these much more comprehensive ideas about which design becomes evident in human affairs. So, of course, complexity is in both of Adam Smith’s books. There is a notion that whole economies are driven by bottom-up processes involving the rules that we follow and that free economies of the world require very little explicit enforcement because most people voluntarily follow. They don’t steal, and they don’t inflict harm on others; they generally find it in their interests to do favorable things for others. Those favorable actions toward others lead people to want to reward those actions. We had reciprocity coming out of the beneficence propositions that you find in Adam Smith. So, yes, complexity, very complex systems can be governed by these bottom-up rules. It’s sort of remarkable.
WEB3
Thibault Schrepel
And often, these rules are simple. One of the great sayings in complexity science is that the sum is greater than its parts, which means we need to understand the role of each of the parts or each of the agents. If I quote Adam Smith, human beings have a tendency to seek to be loved, but also to be lovely, which may explain a lot of the emergence that you see. Talking about complexity, and the importance of those very simple interactions, leads me to a potential technological translation of those principles: Web3.
In a Web3 environment, the role of each agent is more important than in a Web2 environment. Let me explain. I’ve heard you describe Uber as a great example of a company that can help spontaneous order emerge through an algorithm. Now, of course, there is a company here, Uber, behind the algorithm so, in a sense, spontaneous order is organized not by a government, but by a powerful company. In response, some people are advocating for Web3, in which the transactions are organized without a centralized entity, and where you will see that users transact directly with each other, using a protocol. Now, you’ve been running a decentralization workshop for years, so your experience can be very useful to the field. Here’s my question: what’s your take on Web3 or in other words, what’s your take on decentralizing the economy? And I guess that leads us to answer whether or not we are too dependent on the big tech companies in 2023.
Vernon Smith
Well, Thibault, I think the Web3 – what a little that I know of it – is really quite exciting. Because as you indicate the first Internet application was read-only. And then we had read–write, and now we have a read–write–own, we have much more, where people are protected. Their privacy is protected through blockchain technology while having complete freedom to interact with others. There’s protocols, but they can actually create routines within that. It’s open to that.
This reminds me of when I first went to Arizona, that was in 1975. That’s when we first used electronics in experiments. Up to that time, all of the experiments involved passing out paper, instructions, paper forms to be filled out, returned, and then redistributed with a kind of ongoing decision framework. Well, at the University of Arizona, I had a mixed class of undergraduates and graduates. And my kind of standard way of teaching experimental economics was to have the students present papers that they read. The idea was that they would, by the end of the semester, come up with experiments and even kind of could, if not in that class in follow-on classes, actually pursue those experiments and do them. So it was about the second or third week and the students, were through this literature, were finding out what experiments were. And Mike Benoni was a junior engineer, mechanical engineer in my class. He raised his hand, and he said, “Professor Smith, do you know about this Plato computer system over in the library?” I said, “No.” He said, “Well, I think that’s a teaching computer. I think it would be great for doing these kinds of experiments on.” So I said, “Well, let’s go find out.” It was a smaller class, about 10. And so, I made an appointment with the person in charge of that, and we went over to the library, and he gave a demonstration of this Plato computer system.
Interestingly, it was pretty advanced; it had a plasma screen that was touch-sensitive, and a grid on it. So you could communicate not only through the keyboard but through a touch-sensitive screen. And of course, this was before the modern computer monitors that we had. So that ended up being the class project. I said, “Okay, if you guys are interested in this, go for it.” It was very exciting, and I often tell that story, because I get credit for taking the field of experimental economics into this new electronic technology. I didn’t do it; the students did. And although I’ve told that story, people still think of me as the person that did it, whereas I was the learner. And they were as much the teachers as I was. It was one of those very exciting classes, and experimental economics has lent itself very well to that sort of thing because it’s not entirely literature-based. We now have literature that we can draw on, but it’s practice-based.
One of the things that I discovered about and reading in Adam Smith, is that his thought process and propositions have applications to experimental environments. In my book with Bart Wilson on Humanomics, we sort of developed that theme, pointing out that the ultimatum, and particularly the trust games that have been going on now since about 1990, were a puzzle: why were people so cooperative? You’re matched with somebody at random; you’ll never know who it is. You’re going to play this two-person game exactly once. You’re either the first mover or the second mover, a random choice. And what’s remarkable is the extent to which people resist defection in their own interest to take advantage of the other person. That is very hard to explain or understand in terms of the kind of the standard model and economics. But Smith has a proposition. Beneficence proposition one: he says actions of a beneficent tendency alone deserve reward because of the gratitude we feel for this other person’s actions.
Bart and I were using ‘The Theory of Moral Sentiments’ at a law class, we have been assigning it. And we all of a sudden realize, wait a minute, that explains the trust game. Because you’re the second mover, the first mover’s move, pass to you… that person doesn’t have to do that. The stakes were doubled as a result of that person passing because there’s built-in this notion that there’s some synergy between these two individuals. So together, they can do more than each alone. And the process of one passes to two rather than them taking the equilibrium plays out. Then, person two can either cooperate or defect. Well, about two-thirds of the people cooperate only about 1/3 defect, and take most of the money for themselves. That proposition fits it perfectly. And then we began to read the propositions. What does this imply in regard to the design of experiments? And will the outcomes be as Smith predicts? So, we reported a number of experiments in that book that no one would have thought of doing if they hadn’t read ‘The Theory of Moral Sentiments.’ At some point, you begin to realize that, wait a minute, his thinking gets really quite clear and very relevant to issues today, just as much as it was 150 years ago.
Of course, this year, we’re celebrating the three-hundred-year anniversary of Adam Smith’s birth. He was born in 1723. Now Newton didn’t die until 1727. So you see, you have Isaac Newton living passed Adam Smith’s birth. David Hume would have been about age 17 or 18, I think, when Isaac Newton died. The shadow, the figure of Isaac Newton was very strong in 18th-century Scotland. That was a very exciting period then, with David Hume working out some of the philosophical and methodological consequences of the idea and Newton that observations could be explained by hidden forces. This whole notion that there are things that we don’t see, that are hidden from us, but those forces can be modeled, and account for what we see… that’s the kind of visionary thinking that Isaac Newton brought to physics and astronomy. And I see the Scottish Enlightenment as a working out of that idea in human, political, legal, social, and economic systems. I think that’s what makes about 45 years in Edinburgh and other parts of Scotland so exciting, because there are not only very smart people that are picking up on that idea, but they’re also very close observers. You know, Adam Smith was a very close observer of circumstances around him, of what businessmen were doing, and a close follower of a lot of practice going on in legal, social, and business systems around him. He saw order and all of that. So this is right at the heart of modern complexity theory. Smith was dealing with it without any, of course, of the tools of experiment, the computer tools, all of the tools that we have now. But his thinking and methodological devices all apply very much in today’s world.
Adam Smith distinguished being self-interested from acting in a self-interested way. We don’t do that today. We think that actions are motivated by the consequences of those actions. Whereas in Smith, these were distinct enterprises, origins, and consequences. And, of course, he’s able to see that the origins of economy are in the trades we make with each other. That has the unintended consequence of producing prices that enable people to specialize. They specialize across markets and are guided simply by their own interests to decide what to do and how to do it. That sort of defines classical liberalism.
He saw that as the great source of wealth creation. His methodological views, and distinctions that he made, distinguish origins and consequences on the one hand and one way of thinking and also distinguish being self-interested and acting self-interested on the other. His whole model of society is not based on altruism at all. He says we are all strictly self-interested. But he says you can’t look your neighbor in the face and avow that all your decisions and actions are self-interested because they won’t like it and you won’t be able to get along with your neighbor. Right there is the heart of his approach to why it is that we follow orderly bottom-up rules that produce order in society. So, everyone is self-interested in ‘The Theory of Moral Sentiments’, but that doesn’t keep them from taking actions that are sensitive to the feelings of others.
And when it comes to write ‘The Wealth of Nations’, he’s just carrying forward this notion that each person basically defines his own interests in his own way. Of course, if people read only ‘The Wealth of Nations’, they get all kinds of ideas that are just not correct. For example, Smith says that every man, so long as he does not violate the rules of justice, should be perfectly free to pursue his own interest in his own way. People have tended to read that and say, “well, we’re all self-interested and greedy, Smith’s whole model is based upon, you know, the pursuit of self-interest and greed.” That’s not what it says at all. Because he’s very careful to say that, right up front, that we’re free so long as we don’t violate the rules of justice. And then we pursue our own interests in our own way. Well, he’s leaving lots of room for people at ground level to decide what their interest is and how to pursue it.
If you read ‘The Theory of Moral Sentiments’, before you read ‘The Wealth of Nations’, you’re sort of prepared for that, and for some of that language that, in ‘The Wealth of Nations’, reflects his propositional thinking about the origins of society. I’ve come to see the two works as being very complementary to each other. In Web3 complexity, I think these books are directly relevant to what’s happening there, technologically. And this Web3, I’m telling you, it’s going to have a life of its own. I’m sure we’re going to be astonished at what people do with that, just as when we first went electronic in our experiments. What did we think we were doing? We thought we were going to make it easier to do experiments on the computer; we could also have the data recorded accurately and run longer and more ambitious experiments. What we didn’t realize was that this tool was going to change the way we thought about experiments. Because now we could do things that we didn’t think were feasible. People are gonna follow their curiosity, and they’re gonna use these opportunities made available in Web3 in ways that will be very difficult to predict or anticipate. That’s why I find it pretty exciting.
Public choice & institutions
Thibault Schrepel
It seems to me that ‘The Theory of Moral Sentiments’ can indeed explain how agents behave in an economic system. So in a sense, it can inform complexity economics, and going back to Web3, you will see emergent behaviors that will indeed come as a surprise to those who have argued that without a centralized entity, there is no chance of getting to a sustainable organization of market and that people will indeed just pursue their self-interest to the death of the ecosystem. This is not what Adam Smith is showing. So, indeed, I will recommend to anyone in the space to have a look at ‘The Theory of the Moral Sentiments’. Now, I want to switch from the more technological translation of Adam Smith to potentially what it means in terms of institutions. You are, among other things, a professor of law and economics, as I said in the introduction of this conversation, which brings me naturally to your work on institutions and experimental public choice.
You once said that “experimental economics destroyed whatever was left in me in the notion that somehow you could do better than to find institutions that organize decentralized information.” I want to talk about that. When I look at antitrust agencies, I don’t think that they simply “organize decentralized information.” They would do so by protecting the emergence of different business models, such as Web3. But instead, what you see is that they show teeth by regulating existing business models. We have lots of examples of that. Recent examples include the Digital Markets Acts in Europe and other regulations in the US. Now, the question is, why do they do that? I would think that agencies have a better incentive to regulate what exists already because it’s politically more rewarding. So here’s my question. As the former president of the ‘Public Choice Society’, I’d love to hear from you on what it would take to limit what agencies can do, to put them on track to indeed simply organize decentralized information. Which kind of mechanisms do we need? Where should we start?
Vernon Smith
If you read chapter seven of ‘The Wealth of Nations’, Smith is describing the haggling and bargaining process but among buyers and sellers in a market. Out of that, early forms of bargaining, bilateral and multilateral bargaining described things like the oral outcry, double auction, and its electronic forms. My first experiment implemented the oral outcry, two-sided open. One of our first projects when we went electronic, in 1975, at the University of Arizona, I had a student, Tim Williams, who programmed the first electronic double auction trading system. We know it’s the first, because he started in the fall of ’75 and finished in the spring of 1976.
I remember the Toronto Stock Exchange announcing, I think, around July, that following summer, that they were implementing the first electronic trading system on the Toronto Stock Exchange. Interestingly, their idea was to use that for the thinly traded stocks, none of the dealers wanted to give up the heavily traded. They created an institution that aid them up. They thought that they could create this institution and control it, but no, it became part of people’s way of thinking. Other business models started to do variations on it, and pretty soon you had all the personalized trading posts gradually giving away to purely electronic trading. I’ve seen that happen in my lifetime. I’ve heard brokers and dealers saying at the time that this would never happen because no one would want to give up their control of the trading to machines. But once that institution was created, then it had a life of its own, and it ended up doing away with post-trading at the New York Stock Exchange. It did away with the commodity pits, in Chicago, the futures commodity pits, all very physical layouts, the resolution of the trades to make sure the total amount bought was the total was equal to what was sold… That has to be done in a tip before people left.
All that now is done, of course, electronically. You see, it’s just completely taken over that. And there is a many different forms, of course, and supplements to it. Before the New York Stock Exchange opens, you had electronic futures market on the open. So now markets are virtually continuous, you can trade any time or case, any of the listed securities or commodities. These institutions are just really collections of algorithms, ways of implementing the detailed means by which people interact with each other and make trades. I think something alike, comparable of that, you’ll see happening on Web3 because it’s an open platform. Basically, what you need to do is to facilitate on Web3 the beneficent actions that people can take, but also what you need regulation or some sort of control, it is to limit the bad things that people can do to each other.
Adam Smith was very much aware of the asymmetry between gains and losses. That’s a very modern theme in psychology, will Adam Smith [..] The amount by which we can rise from any given state, he says, is small relative to the amount by which we can fall. He gets this from the asymmetry between our joy and our sorrow. He drives the notion of an asymmetry between gains and losses, and uses it to account, for example, as to why that punishment is greater for theft and robbery than for violation of contract. He says, “Violation of contract merely frustrates our expectation of gain. Theft and robbery take from us what we have already possessed”. I mean, what an incredible insight. He takes simple propositions and gets big-picture views of how society is organized out of them. Modern psychology didn’t do that.
They’ve been pursuing an asymmetry between gains and losses as an empirical thing for quite some time. But, they had no theory that was predictive of that. In other words, they were discovering things empirically. Smith had a prediction model of these things and it’s why he’s so powerful. The creation of institutions, in the form basically, of rules and algorithms that will govern how we interact, is an essential aspect of the form that human curiosity takes that creates groups. It produces groups; it produces sort of the elements that explain collections. Collections that are themselves orderly and at a higher level than just the order that comes from individuals interacting with others and that’s been going on a long time in the human enterprise. Web3 is going to be a wonderful example where we’re going to observe that playing out. Scholars need to study, people who think like Adam Smith need to study this new institution and what comes out of it.
The economic field
Thibault Schrepel
Talking about scholars, and this will be the last substantial question before I ask you some more personal ones, but talking about scholars and this will be the last time I quote you, you once said that “the major problem in economic theory is a preoccupation with modeling for its own sake, and not asking the fundamental questions.” You went on to say that “these fundamental questions have to do with dynamics and property rights.” If we talk about dynamics for a minute, you are, of course well known for having introduced experimental economics, which, by definition deals with dynamics.
Now, I wonder if you would share the same views as George Akerlof, who recently published a short article entitled ‘The sins of missions’ in which the conclusion is that economics as a discipline, ignores important topics and problems because it insists too much on static ways, meaning here algebra and quantitative methods, as opposed to more qualitative methods that are so dear to Adam Smith, and a few others like Joseph Schumpeter. Would you share the same view that we have neglected dynamics for too long? And if so, how can we change that? Which kind of incentive do we need to change the economic field and push towards more dynamic studies?
Vernon Smith
Well, I think what’s important is that our focus should be on the actors. And a system we’re modeling. The focus should be on the actors and on the actions they take, from their perspective. That’s not what we tend to do. We don’t model the buyers and sellers. In a market, we model our representations of buyers and sellers as maximizing agents. That maximization should come out of the interaction of the participants in the market. I think Akerlof he’s emphasizing the limitation of mathematics. Well, that’s correct, but the limitation is in the thinking first and not in the mathematics.
In fact, Sabiou M. Inoua and I, in our recent book on the Economics of Markets, mathematize chapter seven of the “Wealth of Nations,” because that’s about price discovery. Smith says that when sellers bring too little to the market, all more buyers want to buy at the seller’s costs, then all can be satisfied until buyers bid up the price. That’s a dynamic statement. It’s a statement that when prices start too low, there’s excess demand and buyers act to raise prices. And then if prices start too high, is the reverse; sellers tend to compete by lowering their asking prices. In other words, when there are low prices, buyers are aggressive, price rises. When there’s too much, sellers are aggressive in lowering prices. You can see that happening in the double auction and experiments by just seeing what the buyers and sellers do, the actions they take. We have complete records of that, all playing out of the kind of principles that Smith is narrating a verbal description of what’s going on in that market. So, you have mathematics, but under that is very precise and careful thought process.
Adam Smith saw markets are very much always in motion, adapting and changing or adapting to change. I first learned that though Hayek his really tremendous 1945 AER article on having to do with the pricing system as an information system. Actually, all of that is in the Wealth of Nations. But the language is different because Smith didn’t have the sort of language of information theory that we have now. But it’s clearly about information. It’s about finding prices and those prices becoming public. What was hidden before in a buyer’s private willingness to pay a seller’s private willingness to accept that hidden information, you’ll see a close approximation come to that information is made public. That price is between your maximum willingness to pay and my willingness to accept. That becomes public information. If all of that was private, it would very much limit our dynamic decisions as to what it is that we want, what direction to take, how to orient our skills, direction of learning… All of that is influenced by these prices that characterize all output and input markets. I think what we’re going to see in Web3 will be playing out of both of this human capacity to invent new things.
I just think it’s so important in modeling to focus on the principles that are involved in any social or market or group situation, what are the focus on principles, and the actions they take, and try to take their perspectives and learn by observation. This is what Adam Smith did, he had huge datasets available to him that we don’t think up; he had all of the literature, he had stage plays, Roman and Greek literature, and these all captured a lot of the history and protocols of the time. Smith was thoroughly familiar with it; it became kind of cases or examples that helped to discipline his theory. He would start to go through the examples and then look to see if there are contrary cases. He then tried to explain why these contrary cases did not really violate the general principle. You see this sort of thought process going on in Adam Smith. You have to read him over and over again because it’s hard. It’s hard because some of the 18th-century language is unfamiliar to us. We have words that he used that we don’t use anymore like approbation. They had this all sort of collective consent or property; he was everywhere describing the rules we follow, not because just you and I all find those rules productive, but because all third-party observers agreed. These principles are going to be operating in a Web3.
Thibault Schrepel
I want to conclude by talking about you. I have four short questions. I’m sure this will be of interest to everyone watching or listening to us. First: you were awarded the Nobel Prize 21 years ago. More than two decades after receiving the price, what have been the greatest benefits coming out of it?
Vernon Smith
I guess the benefit to me has been the sense of approval that came from that, that has an objective existence beyond your immediate friends and associates. The Nobel Prize has been particularly important in that respect, and one of the reasons why it has become considered so prestigious. I think the Nobel committees in the past have done their homework really quite well, and have sometimes recognized controversial figures. Hayek was controversial because he was seen politically as a conservative, which I think he wasn’t. Everybody needs to read his essay on ‘Why I’m not a conservative’. It was important to write at the time of the Nobel because we have these popular simplified ways of categorizing people. They divert attention away from what’s really important. So, I think it was important from that point of view, and for a while, it kind of in a way diverted me from my work and continuing it because I did a lot of speaking and traveling. But I basically used those opportunities to talk about what I was doing.
I didn’t range out into popular themes, although I sometimes commented on them if I could relate them to kind of my own experimental work. I tried to convey some of the content and thinking and motivation in laboratory experiments and why these were important in economics. Someone has said that economics is what economists do. Well, it wasn’t economics because others weren’t doing. That changed the course, and to me, it was very exciting because for the first time, I had a way of testing what I thought I knew. I hadn’t been brought up with that way of thinking in my formal education. The first experiment falsified everything I’ve been taught, thought, and believed. We believed that, for a competitive market to prevail, you had to have a large number of buyers and sellers, they have to have complete information, everybody had to be small relative to total… all of that. None of that was true! You could give me two or three people and their supply and demand graphs help to characterize what it is they do. My thinking was totally changed by that, and that’s why I sort of got caught up and brought on into that.
So, I think the lesson here for students is to think in terms of the agents that are out there, trying to understand more about business, business as business persons, government regulation and rules as persons doing this, and how they think about the task. Understand why it is that regulation tends to bring together the regulators and the regulated and they begin to look at things in this in similar ways. Often, you’re thinking about business and regulating business, and you’re not thinking about the consumer. Well, that’s what it’s all for, supposedly. I think what’s important for young economists to do that are studying economics is not to be afraid to learn a lot about what economy agents actually do, think about how you would model them, and then see if what they’re doing well, once you get models, is that efficient. It probably is. But the point is, that’s not why they do it. And all that was Adam Smith’s critique of David Hume. He thought the reason why we follow these rules of property was because of the inconvenience of not doing it.
A typical day
Thibault Schrepel
In ‘Why I’m not a conservative’ Hayek explains that he doesn’t want to just resist change but wants to offer a new path, which is certainly what you’ve done as well in your work. Now, to everyone out there, there is another one that I will recommend, by another Nobel laureate, that’s James Buchanan, who published the book saying entitled, “Why I, too, I’m not a conservative,” also quite good. Coming back to you, what’s a typical day for Vernon Smith? Do you have any routines, things you do to get in the mood? Or is every day its own discovery?
Vernon Smith
I have my routine when I wake up, which is usually put somewhere between 5:30 and 6:00. I get up and I turn on the coffee. My wife has prepared the coffee the night before, I just go out and turn it on. I unlock the house with the electronic booking system, and I come back to bed, and I do my correspondence then, using an iPad. I read my correspondence and do a fair amount of them; I can’t do it all because I may need to send documents or something like that, so I do that when I get into my home office which is right across the living room from the bedroom. I’m in my home office then all by about 7:30, something like that. I have, from time to time interruptions, in the day. I usually go downstairs where I’ve got a machine, and so I do some exercise, also some weights. I try to stay in reasonably good physical condition. I go to a Pilates therapist, twice a week, and do Pilates exercises focused on balance and followed by a massage. You know, I have a deteriorating balance. I try to maintain an exercise regime that involves focusing on muscles that will help balance so if I do go down, I’m able to protect myself better. This is the sort of thing you do when you’re 96 years old and want to remain active.
But most of my time is sitting right here where I am now, at my desk. Three years ago, I finished a book, “Humanomics,” with Bart Wilson, and this last year, a book on economics and markets. That’s basically about classical versus neoclassical models of markets. We finished that last year. I’m now working on a manuscript. I think the title will be “The Wisdom of Adam Smith, Day by Day.” There’ll be 366 entries that are quotations from Adam Smith, mostly from ‘The Theory of Moral Sentiments’, but also the lectures on jurisprudence, and some from the ‘Wealth of Nations’. I try to give people an easy way, a step-by-step way, of getting into reading Adam Smith because the big books are hard to get people to commit and to even appreciate the relevance of that reading to their world today. And so my idea is to do it in daily reading.
I got this idea from a book on C.S. Lewis that involves daily readings. He was an extremely prolific writer, publisher of many books. The number in Smith is very small, but they’re also very compact and have a lot in them. So that’s what I’m working on now. It’s pretty challenging, actually, to find a short title that really captures the idea. It’s been great, very beneficial to me. I got to appreciate his pattern of thinking and some of his methodological principles; I’ve come to find very them easy to use and apply and think with. I’m a latecomer to ‘The Theory of Moral Sentiments’. I assigned it the first time in the early 1990s. When I go back and read that, I realize how little I understood at the time about the ‘Theory of Moral Sentiments’. It isn’t that what I said was wrong. It’s just there wasn’t very deep. So it’s been great. And it nicely ties up with experimental methods.
Adam Smith would have loved laboratory experimental methods, because he was an experimental thinker. He used the word experiment… both he and David Hume use the word experiment. By that, they mean cases, examples that are potentially a challenge to theoretical models. In fact, David Hume refers to it as the experimental way of thinking, or kind of experimental theorizing. Anyway, these are important ways that young scholars can self-develop and develop sort of kind of a methodology for developing themselves. Every paper in economics tends to begin with another paper. That’s why it’s so path dependent. But it’s important to think outside of that. Young scholars should ask: “why am I doing this? I need to publish, but why do I need to publish these particular kinds of thinking, or kinds of papers?” Think about what you’re doing and why you’re doing it, and the big issues in economics and society.
Thibault Schrepel
So besides drinking coffee around 5:30 am, which by the way I am incapable of doing, what’s your secret to staying active on the professional level, and staying so relevant at, indeed, 96 years old? What’s the secret? We want to know.
Vernon Smith
Well, I often say that I chose my ancestors very carefully. Three of my four grandparents lived into the 90s. My father and his brother didn’t, but they were smokers. So the first rule is: don’t smoke. And I never have. My father had good inheritance, but he sort of blew it by becoming a lifetime smoker. He did quit in his early 50s, and he lived about another 10 years, but I think the damage was done then. I want to live because there’s so much to do. Adam Smith died at age 67. If he had lived my age, he lived 30 years longer. His great work on a theory of jurisprudence would have been completed.
That was a lifelong ambition to bring it all together into a theory of jurisprudence, because he saw jurisprudence, the rules that we follow, as central to the whole understanding the human enterprise. The nearest that we have to his ideas there are in his lectures on jurisprudence, which, fortunately, he lectured not only to students but gave a set of lectures that involved both students and people from the town of Glasgow. Those ideas were made available to curious merchants. A really good set of handwritten notes on his lectures were sold as there was a market for those in the town of Glasgow.
In 1895, a first set of these notes came on the market from an estate sale. And then another set in the early 30s. And these were all the lectures he had given on jurisprudence at the time. That gives us some insight into his articulation of the principles of jurisprudence. These notes, I think, are very good in terms of giving you an idea of jurisprudence. Almost all personal law is based on slavery, women, and children. Those three things; slavery, women, and children, are the source of a lot of huge amount of personal law, and we don’t think of it that way now, so reading Adam Smith is really very formative.
Thibault Schrepel
So, I gather that reading Adam Smith might be your secret to staying active and so relevant at age 96. I also want to point out your biography. There’s a short version that you wrote for the Nobel Committee. I found it to be fascinating. On that note, Vernon, having this discussion with you has been a real treat. Thank you so very much for taking the time and for all the insights you shared. On that, to everyone out there, take care of yourself and if you can, someone else, too. Bye bye.
Recorded on February 23, 2023
