Tihs is such a great interview on Econ Talk: Vernon Smith on Adam Smith and the Human Enterprise
Russ: So, what do you mean by ‘the rules’ part? In what sense is–explain that. Guest: Well, I think, the rules come from–for example one sort of rule comes from this first proposition, where actions of a beneficent tendency to proceed from proper motives alone require reward. Well, the rule that people generally follow is to reciprocate kindness. Okay? So, that’s a kind of rule that you get from Adam Smith. And also, he has another proposition, which is the reverse of the beneficent. And this has to do with the hurtful action. He says,
Actions of a hurtful tendency which proceed from improper motives seem alone to deserve punishment.
In other words, what does it mean to be improper? Well, you intended to be hurtful. If it was just an accident, um, Smith says, you know, if it was just an accident, that’s different. But if it’s intended, then this is hurtful. And people feel resentment to that. Just as they feel gratitude toward actions that intended to be beneficent, so they feel resentment when you deliberately make a choice, take an action that is hurtful to me. And that excites resentment, Smith tells us; and I am motivated–if I have an opportunity, I will punish you for that. And that, by the way–that proposition is the basis of property rights in The Theory of Moral Sentiments. The Theory of Moral Sentiments develops beautifully a theory of property rights, and it comes from that second proposition. And it’s because we have these rules in our small group to respond in a resentful way toward deliberately hurtful actions, he says, When it comes time for civil government we just move those rules over and they become the law. You see. The law originates long before, in cultural groups, long before we have the civil law of government. And he develops that, very, very nicely. He says it’s kind of a–it’s not only a motivation to punish from resentment, but it’s sort of a proportional punishment, you see, depending upon the severity of the resentment. And he says this is why, under the civil order of government, that murder has the greatest punishment. Because what could be more serious than murder? And he also points out that, in that development, that theft and robbery carry a greater punishment than a violation of promises. In other words, contracts. And he says, Why? He says, because robbery and theft take from us what we have already acquired. Violation of contract merely frustrates our expectation of gain. Okay? And he says that’s different. And indeed, theft and robbery are criminal offenses. Violation of contract are only civil offenses. You can get redress, of course, but they are considered less serious. And he gets that from another fundamental proposition in Adam Smith, and that’s the asymmetry between gains and losses. Russ: It’s incredible. Guest: He says, we suffer, and I can tell you this one almost verbatim: He says, ‘We suffer more when we fall from a better to a worse state than we ever gain when we arise from a worse to a better.’ And he goes on, explains this, that it’s loss of fortune, of reputation, of esteem. I mean, it isn’t just money and fortune. He mentions, as I recall, three other things, but they have to do with our rank, our status–
The threat of loss can be a greater motivator than the potential of a gain.
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