On the social nature of rationality in Adam Smith and John Stuart Mill

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On the social nature of rationality in Adam Smith and John Stuart Mill par Michel S. ZOUBOULAKIS | Éditions L’Harmattan | Cahiers d’économie politique 2005/2 - n° 49 ISSN 0154-8344 | ISBN 2747590690 | pages 51 à 63

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ON THE SOCIAL NATURE OF RATIONALITY IN ADAM SMITH AND JOHN STUART MILL Michel S. ZOUBOULAKIS1

Résumé L'objectif de cet article est d'établir la nature sociale de la notion de rationalité dans l'œuvre de Adam Smith et de John Stuart Mill. Une lecture attentive de leurs textes révèle que ces auteurs pensaient que les actions individuelles dépendent du contexte social, culturel et moral dans lequel elles ont lieu. A la lumière de cette relecture des textes classiques, les avancements théoriques récents en matière de rationalité économique méritent à être reconsidérés. Abstract The main purpose of this article is to stress the social nature of economic rationality in the works of Adam Smith and John Stuart Mill. As it will be suggested through some textual evidence, both thinkers believed that individuals and their actions depend on the social, cultural and moral frame inside which they operate. In the light of this, it is proposed to evaluate the potential impact of their ideas in the latest theoretical developments of economic rationality. Classification JEL: B12, B40

1. Introduction2 The concept of formal economic rationality commonly describes any behaviour appropriate to the achievement of given goals (namely, maximum utility for the consumers and maximum profit for the producers) within the limits imposed by the economic conditions and constraints (such as consumer's budget and producer's technology). This concept, also known as homo oeconomicus, has too often been associated with the 'fathers' of Political Economy, even suggesting that this is the founding characteristic of the science of economic phenomena. But, it was Jevons 1. University of Thessaly, Department of Economics, Argonauts Str., 38221 Volos, Greece. Tel. 0030 24210 74882, Fax 0030 24210 74772, e-mail: [email protected] 2. This work was presented at the 7th ESHET Conference in Paris in Feb 2003. I would like to thank my discussant Peter Rosner and the participants of that session, especially Eyup Ozveren, for their useful remarks and suggestions. Vassilis Argyroulis has helped me improving the English text.

Cahiers d'économie politique, n° 49, L'Harmattan, 2005

Michel S. Zouboulakis

and Walras who established the concept of constrained maximization in economic theory. In the pre-marginalist era, economic behaviour meant the usual conduct of economic actors belonging to a particular socio-economic context. The main purpose here is to stress the social nature of economic rationality in the works of the two most influential Classical Political Economists, namely Adam Smith and John Stuart Mill. Both thinkers believed that economic actions are context- dependent, i.e. they take place inside a well-defined social context. As it will be suggested through some textual evidence in the first section bellow, Smith and Mill, both recognized that individuals and their actions are influenced by the social, cultural and moral frame inside which they operate. In the light of this, it will be easier to evaluate in the last section the potential impact of their ideas in the latest developments of economic theory. 2. Classical Economic Man In Classical Political Economy, the principle of economic behaviour -namely that in economic activities every person seeks for his own interest and desires for "bettering its own conditions"- was held as an empirical generalization established either by introspection and common observation (Smith) or by the experimental science of Psychology (Mill). 'Classical Economic Man' referred to a person belonging to a specific geographical and historical context and that during his real economic activities he/she "endeavours to produce the greatest possible value" (Smith, 1776, I, 477). As explained in more detail bellow, only in that particular context, "every individual…intends only his own gain" according to Smith and he/she will therefore prefer "a greater portion of wealth to a smaller in all cases" as indicated by Mill. 2.1 Smith's social individuals Smith explicitly condemned the atomistic view of the individual action. There are two major points supporting this judgment: the existence of many antagonistic motives governing human nature, and the human faculty of "sympathy". Other antagonistic motives act concurrently upon individuals themselves, while "sympathy" connects individuals to one another. In his Theory of Moral Sentiments, Smith recognized that individuals are undeniably self-interested: "Every man is, no doubt, by nature first and principally recommended to his own care; and he is fitter to care of himself than of every other person…" (1759, 82). Had he limited his analysis there, he would open the road to Utilitarian calculativeness. But Smith insisted that although "self-love" is a natural impulse, it is not alone in governing human action. There are many psychological motives that counteract the instinct of "self-love", such as the "desire for social es-

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On the social nature of rationality in Adam Smith and John Stuart Mill

teem", "vanity", and the "desire for an easy life".3 First, men living in societies, besides seeking for "bettering their own conditions", also seek for the "approbation" of their fellowmen (1759, 50). Second, while vain men "desire to be praised for what themselves do not think praiseworthy" (1759, 64), when vanity coexists with natural qualities of character, it can promote "many respectable and amiable virtues", such as truth, integrity, sense of honour, cordial friendship, humanity, politeness etc. (1759, 258).4 Third, the natural "interest of every man to live as much as his ease as he can", is excessive when revenue predominates as a source of wealth leading to indolence and idleness, which definitely "corrupts the industry of those who ought to be maintained by the employment of capital" (1776, I, 358). Thus Smith introduced systematically moral elements when he believed them relevant to his economic analysis: "Capitals are increased by parsimony, and diminished by prodigality and misconduct" (idem). Moreover, Smith clearly affirmed in the opening pages of his TMS "how selfish so ever man may be supposed there are evidently some principles in his nature, which interests 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". Smith's genetic concept of "sympathy" is a counter motive to 'self love', since it represents one's interest in the happiness of other people.5 Through 'sympathy' one is imagining him/her in the situation of the other in order to share his/her feelings. In that sense it should not be confused with benevolence or altruism; neither should be treated as being opposed by self-interest.6 It is rather a fundamental principle of human conduct that controls and complements the motive of 'self-love'.7 "Mutual sympathy", guarantees both the morality of human actions, together with social order and cohesion. Without it, no ethical citizenry is possible.8 Therefore, in Smith's sympathy perspective, individuals understand themselves as being always part of a social whole and act consequently with "compassion for their fellowmen". The very idea of 'socialized individuals' is founded, according to Smith, upon this relationship of "mutual sympathy" with other human beings.9 Consequently, human behaviour and action are not to be considered as the result of rationalistic calculations of personal advantages and disadvantages alone. Individuals never act isolated but always within a society, that is in reference to the "moral sentiments" of other people. For that reason it was impossible for Smith to think, like 3. See Sen (1987), Song (1995), Winch (1996) pp.103-8, Evensky (2001). 4. On Smith's idea of 'vanity' midway between Mandeville and Rousseau's, see Winch (1996), p. 73. 5. Peil (1999), p.59. 6. This confusion gave rise in the famous "Adam Smith problem" in 19th century literature and beyond. For a clear-cut exposition of this 'problem' see Skinner (1987), Beraud (1992), pp.310-3, Dupuy (1992), pp. 147 ff., Winch (1996), p.105, Peil (1999) p. 58 ff. 7. Maitre (2000), p.59. 8. Evensky (2001), p.515. 9. Elsner (1989), p. 197, Peil (1999), p. 86.

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the Marginalists did a century after him, that Political Economy is a fully autonomous and autarchic field founded solely on the principle of economic rationality. The "desire of wealth", which explains why human beings are producing means of subsistence is the fundamental motive in business. But it never works alone. As it was rightly argued "the idea of 'mutual sympathy' implies that an individual's personal identity, ambition and needs are not antecedent to the exchange, but are produced in the continuous processes of exchange in which the individual is engaged".10 When someone exchanges, he/she is trying to get the best advantage of it without loosing his/her predisposition to mutual sympathy. He/she remains always committed to the prevailing social rules and values and continues to "desire, not only to be loved, but to be lovely" (1759, 113). "Mutual sympathy" is the human faculty responsible for social morality. The pattern of behaviour founded upon it is formed out of a specific social context. Smith explained repeatedly and extensively in his Wealth of Nations how social institutions, norms and values shape individual plans and behaviour. Whether this is sufficient to qualify Smith as an Institutionalist is a question lengthily debated elsewhere.11 What is significant from our point of view here is that on account of the concept of 'sympathy', individual behaviour is rooted in the concrete social conditions of every particular society. Four ideas suggesting social embeddedness can be mentioned from the Wealth of Nations: 1) The idea that the quality of political institutions greatly affects economic behaviour and consequently the state of development of a country. The comparison of the two most important British colonies, the constitutionally governed North American Colony, and "that of the mercantile company which oppresses and domineers in the East Indies" illustrate this (vol. I, 82). 2) The idea that "trust reposed in the workmen" is an essential quality of labour that should be taken into account when it comes to estimate its remuneration (vol. I, 55). Smith even believed that trust was one out of five significant exceptions to his general rule of equality of wages between different employments (vol. I, 117). 3) The idea that different systems of morality co-exist "in every civilized society", namely "the strict or austere [and] the liberal or …the loose system" (vol. II, 315-6). Each system adopted by distinct social groups, leads to divergent patterns of behaviour as far as consumption, saving and investment are concerned. In that sense, "in mercantile and manufacturing towns, where the inferior ranks of people are chiefly maintained by the employ10. Peil (1999) p. 92, makes a convincing comparison with the Walrasian understanding of individual behavior. 11. Cf. Elsner (1989), Song (1995), Peil (1999), pp. 89 ff., Evensky (2001), p.504. Song offers further bibliographical evidence.

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ment of capital, they are in general industrious, sober and thriving" (vol. I, 356). 4) Finally, the idea that the quality of the educational institutions, and culture in general, is the principal cause of the various talents observable between people. As he has thoughtfully remarked, "The difference between the most dissimilar characters, between a philosopher and a common street porter, seems to arise not so much from nature, as from habit, custom and education" (vol. I, 19-20; cf. vol. II, 282 ff.). The last example is very significant since it shows how the human character evolves along with proper social institutions.12 Individuals, grown up in specific social conditions, are able in their turn to transform these conditions in intended and unintended ways.13 As in the case of Mill after him, examined bellow, Smith kept his faith in methodological individualism without adhering to atomistic explanations. 2.2 Mill's historically bounded rationality Mill had a different methodological departure from Adam Smith. His main purpose was to construct Political Economy as a separate, yet not fully independent branch of social science. Mill explained that though social phenomena are complex and are produced by an "intermixture of causes", every class of human affairs depends on its own specific causes. To support his argument he compared every "kind of cause", such as psychological, cultural or economic, with the components that are forming the resultant of forces. The social consensus is only decomposable by means of abstraction because "different species of social facts are in the main depended immediately and in first resort on different kinds of causes" (1843, 900). Political Economy is therefore concerned solely with that class of social phenomena, "in which the immediately determining causes are principally those which act through the desire of wealth; and in which the psychological law mainly concerned is the familiar one, that a greater gain is preferred to a smaller" (1843, 901). From Mill's point of view, economists are isolating by means of abstraction one specific range of social phenomena relative to the production and distribution of wealth, leaving aside all non economic motives, like those emanating from the sentiment of approval and respect of the fellowmen;14 they also eliminate every secondary economic "disturbing cause" that might influence the "desire of wealth". Two such disturbing causes were detected by Mill himself: the "aversion to labour", and the "desire of the present enjoyment of costly indulgences" (1836, 321). Having stated that, Mill was not claiming that people really act this way, but only in "rele12. Cf. Evensky (2001), p. 504. 13. Cf. Arrow (1994), Evensky (2001). 14. Cf. Duncan (1978), p.255.

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vant circumstances", that is when they are seeking more wealth. Accordingly, because in real life the economic motive operates concurrently with a number of other non-economic motives and the two "disturbing causes", Political Economy explains what people tend to do during their economic activities.15 Mill's principle of economic behaviour, i.e. that every person desires to get as much wealth as possible "with the smallest quantity of labour and physical self denial", was supposed to be the result of a "long and accurate observation", an empirical generalization established by the experimental science of Psychology. The same judgment applies to the rule of conduct he introduced, namely that everyone "is capable of judging of the comparative efficacy of means for obtaining that end" (1836, 321). In the Book VI of his System of Logic, Mill definitely affirmed that the psychological premises of Political Economy are established by Psychology and furthermore grounded on statistical or historical evidence (1843, 907).16 The function of the principle of economic behaviour was, according to Mill, to serve as one of the fundamental premises of the deductive reasoning of Political Economy, together with the principle of population, the principle of diminishing returns and the principle of non-decreasing productivity of capital and labour.17 In Mill's view, Political Economy, together with Politics and History, forms a separate branch of Social Science, the deductive science that deals with "the action of collective masses of mankind, and the various phenomena which constitute social life" (1843, 875). He had conceived a hierarchical structure of three levels in a way that higher-level laws result from the combination of lower-level laws, that is to say from the bottom "laws of the nature of individual man", to the midway laws of human character formation, which constitutes the subject matter of Ethology, and finally to the more complex laws of Social Science on the top. In this way, economic phenomena appear as "the result of a composition of the laws of psychological and ethological phenomena" (1843, 896).18 It was accurately said that "Mill's central theoretical and empirical project was to use economic man, with his rudimentary but manageable psychology, to prove that institutions did matter".19 His concept of economic rationality aimed to describe how a person, belonging to a particular geographical and historical context, tends to behave during his economic activities under the influence of only one motive -the "desire of wealth". The scientific study of economic phenomena grounded on this 15. On laws as tendencies see Hausman (1981), p.375; (1992), p. 124 and Cartwright (1994), p.179. 16. For more evidence about Mill's idea of grounding hypotheses on direct observation see Hausman (1981), p.377; Hollander & Peart (1999), p. 381 and Zouboulakis (1997), (2001). 17. The meaning of these principles is analyzed in Zouboulakis (1993), pp. 91-102. 18. On Mill's three level scheme see Hollander (1985), p.135, Persky (1995), p.226, Redman (1997), pp.332-3. 19. Persky (1995), p. 224.

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principle offered only a partial and provisional view of what was actually occurring in industrial societies of mid 19th century. If political economists wanted to extend their studies beyond these geographical and historical limits, they had to consider the "actual economic behaviour in all its local and temporal varieties".20 As a consequence of its method, Political Economy was considered to be a partial and approximate science, limited in its scope, the deductions of which needed to be corrected by the results of the other social sciences (1843, 903). Mill's methodological practice emphasises that Political Economy is historically bounded, because its assumptions are pertinent only to specific social conditions. When these conditions change, economists need to modify their conclusions by means of verification, to take account of "circumstances almost peculiar to the particular case or era" (1836, 333).21 We can mention some significant examples of this methodological practice in his Political Economy: 1) The extension of his distribution model beyond the classical three-class social system of landlords, capitalists and workers, to account theoretically for existing contemporary social structures in continental Europe. Where producers are at the same time also landowners or when they cultivate their own fields themselves, the motives to work and to accumulate differ from the standard capitalist mode of production. In the latter case of the peasantproprietorship system the small scale of the production is beneficial to productivity. On the contrary, in the former case, the French 'metayers' and the Irish cottiers proved themselves to be far less industrious since their labour were too divided from ownership (1848, Book II, Chaps. VI to IX). 2) His famous discussion on the influence of custom upon competition. For Mill, the competitive case was the theoretical model working under the ceteris paribus condition, just like Galileo's law of fall is valid in a frictionless world (1836, 330). When it comes to explain "the actual affairs of life [one should] consider not only what will happen supposing the maximum of competition, but how far the result will be affected if competition falls short of the maximum" (1848, 248).22 This was particularly valid for distribution issues since they were a matter of human institution; they were dependent greatly upon customs, laws and other standards subject to change at society's discretion.23

20. Schumpeter (1954), p. 452. 21. Cf. Hollander (1985), p.126, DeMarchi (1986), p.94. Hollander & Peart (1999) offered a conclusive analysis of Mill's methodological practice of modifying economic theory by the means of verification. 22. About Mill's real meaning, see Hollander (1985), p. 960, Redman (1997), pp. 340-2. Cf. Jensen (1996), p. 21, who is reading Mill as a forerunner of Ayres' Institutionalism. 23. See a propos Duncan (1978), p. 244; Jensen (2001), p. 497.

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3) His treatment of social norms and values as an advantage of economic efficiency. Besides the traditional factors of "productiveness", such as natural advantages and technical skill and knowledge, Mill includes also many qualitative factors. He mentions intellectual qualities like "practical good sense", "quickness of perception", or "natural comprehension" which improve significantly labour productivity (1848, 108-9). But there are also what Mill describes as "the moral qualities of the labourers", insisting particularly on "trustworthiness" as a fundamental element of efficiency of the work of the "hired labourers", eschewing thus any supplementary cost for monitoring (1848, 111). 4) His analysis on the national character as a determinant of capitalist behaviour. Mill criticized openly those political economists who considered existing human nature as universal: "the principal error of narrowness with which they are frequently chargeable, is that of regarding not any economical doctrine, but their present experience of mankind, as of universal validity; mistaking temporary or local phases of human character for human nature itself".24 Hence, he emphasized "the culture bound nature of Ricardian Economics"25 by recognizing the limits of application of the AngloSaxon behavioural model: "Yet, those who know the habits of the Continent of Europe are aware of how apparently small a motive often outweighs the desire of money-getting, even in the operations which have money-getting as their direct object" (1843, 906). As in Smith's case above, Mill also recognized that individuals are both constructive within and constructed through social institutions. So, on the one hand, because he was eager to establish the causal laws of human behaviour, he denied the idea of individuals acting inconsistently at their 'free will'. But on the other hand, as a consequent individualist, he could never adhere fully to the 'doctrine of necessity', as if human character was only a by-product of the social context.26 His idea to build the science of Ethology or, "the science of human character formation" (1843, 868), aimed precisely to explore how human character affects social circumstances. That was the basis for his entire reformist program of "the elevation of mankind", by stimulating "the progress of the mass of the people in mental cultivation" through national education (1848, 758). Still, by admitting that human character evolves together with social institutions being "moulded" by them, Mill definitely broke away from the Utilitarian universalistic Psychology of pain and pleasure. To conclude this section, in Smith's and Mill's perspective, Political Economy provides only a partial view of what was really going on in early industrial 24. In Auguste Comte and Positivism (1865), quoted in Duncan (1978), p. 236. 25. Jensen (1996), p. 19. 26. On Mill's Institutional Individualism see Zouboulakis (2002).

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societies. To get full explanations of social phenomena, both an analysis of individual action and institutional analysis are required. Smith does not limit his investigation to the functional rationality of wealth production and distribution, and considers economic processes as an aspect of society as a whole. Mill goes a step further and proposes a method of "correction" of the deductions of Political Economy with the results of other social sciences. Both the Wealth of Nations and the Principles of Political Economy contain an analysis of human action that avoids atomization. Economic actors do not behave as atoms in social vacuum conditions. Economic activities are instead, as some sociologists pointed out lately, "embedded in concrete, ongoing systems of social relations".27 In the same way, their analysis is both general and historically specific: it is general because it uses some general concepts and leads to conclusions exceeding the narrow limits of the observation; it is historically specific since it is bounded in particular socio-economic systems, in time and space.28 3. Rediscovering the significance of classical economic man In the last decade or so, there are a growing number of publications insisting on the necessity to exceed the boundaries of formal neoclassical rationality in many divergent ways. Economists like Williamson (1985, 1993), in their effort to expand the logic of rational choice into other social disciplines, are studying the notion of trust as a means to reduce trading hazard. Others, such as Casson (1993) and Aoki (2000) underlie the institutional diversity of the various capitalist economies and suggest a comparative institutional analysis to overcome the meaningless universality of the "Anglo-American model" of rationality. In addition, sociologists like Swedberg (2000) and Granovetter (2000) are willing to illustrate through empirical studies that the undersocialized neoclassical model of rational action is no longer able to explain crucial economic phenomena, such as the creation of firms, in different institutional settings. Finally, Economic Anthropologists like Landa (1997) have also revealed the influence of cultural values relative to specific ethnic groups in promoting exchange. Still, none of these social scientists recognizes the legacy of Classical Political Economy, when they are not pointing to them as the forerunners of the atomisticutilitarian tradition.29 But the very idea that economic rationality is embedded in specific social context and has, therefore, very different meaning outside this context was already present in the texts of Smith and Mill as seen above. This position does not refute Polanyi's old argument (1944) about the break of social embeddedness and the consequent autonomisation of economic activities in capitalist societies. On the contrary, Smith and Mill's analyses show how to deal 27. Granovetter (1985), p.487. Cf. Ingham (1996), Steiner (1999), p.39. 28 On the problem of historical specificity, consult Hodgson (2001). 29. Cf. Granovetter (1985, 482), Arrow (1987, 27).

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with economic phenomena once capitalist societies have emerged. Smith proposed, through his concept of "sympathy", a means to limit morally economic actions and guarantee social order. As for Mill, he suggested a methodological device of a partial and provisional Political Economy that should be treated "as fragment of a greater whole; a branch of Social Philosophy, so interlinked with all the other branches, that its conclusions, even in its own peculiar province, are only true conditionally, subject to interference and counteraction from causes not directly within its scope" (1873, 178-9). What has been suggested here is that the classical concept of economic rationality has not yet exhausted its explanatory potential. The idea that individuals act inside an institutional structure and are influenced, consciously or not, by social rules and norms30, although acting rationally for their own sake, was definitely elaborated in the work of Adam Smith and John Stuart Mill. Reading again that work under this spirit, will provide some further arguments to all those who hold textbook type formal economic rationality as responsible for disorienting social science to "false paths for 200 years"31.

30. See Hodgson (1986, 1997). 31. Wallerstein (1996).

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