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Monetary calculation and the extension of social cooperation into anonymity.

Article Excerpt
Abstract

Both economists and evolutionary psychologists have addressed recently the question of how humans come to trust anonymous others. However, the idea of monetary calculation, as articulated by Ludwig von Mises and other Austrian school economists, is missing from their accounts. Game theory and evolutionary psychology might tell us why we trade at all with anonymous others, but monetary calculation is needed to explain how we decide which trades to make. When actors can know which trades are more likely to be mutually beneficial, anonymous trade is more likely to occur and is better able to extend social cooperation.

I. Introduction

Though written almost two hundred years apart, Adam Smith's The Wealth of Nations (1976 [1776]) and Ludwig von Mises' Human Action (1966 [1949]) are arguably two of the most important works in economics. Both address very similar themes. Aside from their roles in the forwarding of classical liberalism, they also represent major steps forward in our theoretical understanding of the operation of the market. One common theme that pervades both books is their emphasis on the role markets play in fostering what we might call "social cooperation." At its most basic level, Adam Smith's discussion of the invisible hand, and the ways in which self-interest generates beneficial unintended consequences, demonstrates how market interactions allow us to cooperate with one another in mutually beneficial ways, even if that cooperation is, as noted, unintended. This same idea is developed much further by Mises, particularly in his discussion of what he calls "Ricardo's Law of Association." The key difference between the two is that Mises' analysis is informed by two other ideas: the development of marginalist thinking by Menger and others, and Mises' own work on the centrality of monetary calculation and entrepreneurship.

The concept of monetary calculation helps to explain a puzzle that is raised by the burgeoning discipline of evolutionary psychology when it turns to explain the modern world. Evolutionary psychology tries to explain human behavior by reference to the ways in which the human brain evolved in prehistoric times. (1) That is, much of how we behave today has to be understood in terms of our making use of a brain that evolved under very different social circumstances. Of specific interest to this paper is the question of how it is possible that we can thrive in a world that requires cooperation and coordination in anonymity when our brains were formed in a world where virtually all interaction with others was face-to-face. The social orders of the modern world are largely anonymous, in that we interact with and depend on millions of other people who are known to us only in terms of what they do, not who they are.

Vernon Smith (1998) raised this issue in the context of "Das Adam Smith Problem" of reconciling the other-regarding humans of The Theory of Moral Sentiments with the self-regarding humans of The Wealth of Nations. Vernon Smith argued that we are "hardwired" to be reciprocal toward those we know personally, but self-interested toward those who we do not know. The result is that people are other-regarding in personal exchange, but self-regarding in the anonymity of the market. Leeson (2005) offers an alternative explanation for the same observed phenomena by focusing on the ways in which rational actors can overcome their short-run interest to defect in trust games by realizing the long-run benefits of social cooperation; he explicitly mentions Mises's discussion of Ricardo's "Law of Association" in this context. Rational and enlightened self-interest explains our willingness to trust others in both situations.

This question has also been treated at length in Paul Seabright's 2004 book The Company of Strangers. Seabright (2004, p.8) usefully summarizes this puzzle by asking what makes us "willing to treat strangers as honorary friends?" Seabright (2004. p.27) suggests that two factors are key to answering this question: our "capacity for rational calculation of the costs and benefits of cooperation, and a tendency for what has been called reciprocity." Seabright's answer parallels that of Vernon Smith and Leeson.

However, Seabright, Vernon Smith, and Leeson (and evolutionary psychology more generally) do not provide any real discussion of the ways in which the use of money and the...

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