McCloskey Points the Way to Modern Smithianism

Deirdre McCloskey, Distinguished Professor of Economic, History, English, and Communication, University of Illinois at Chicago has continued developing her remarkable new work in significant aspects of economics practically single-handed that never cease to amaze me.   She delivered a paper, “Language and Interest in the Economy: A White Paper on 'Humanomics'” at the January meeting of the American Economic Association at the San Diego conference of the ASSA on 6 January 2013 (an electronic copy is available HERE [Corrected 24 March] 

Quite frankly, metaphorically, I jumped for joy.   At last some evidence that someone really understands the Adam Smithian project way ahead of anybody else that I know of.  Here is the abstract:

“Economics ignores persuasion in the economy. The economics of asymmetric “information” or common “knowledge” over the past 40 years reduces to costs and benefits but bypasses persuasion, “sweet talk.” Sweet talk accounts for a quarter of national income, and so is not mere “cheap talk.” The research would direct economics and the numerous other social sciences influenced by economics back towards human meaning in speech - meaning which has even in the most rigorously behaviorist experiments been shown to matter greatly to the outcome. Sweet talk is deeply unpredictable, which connects it to the troubled economics of entrepreneurship, discovery, and innovation. The massive innovation leading to the Great Fact of modern economic growth since 1800 is an important case in point. Some economic historians are beginning to find that material causes of the Great Fact do not work, and that changes in rhetoric such as the Enlightenment or the Bourgeois Revaluation do. A new economic history emerges, using all the evidence for the scientific task: books as much as bonds, entrepreneurial courage and hope as much as managerial prudence and temperance.”

She also quotes from Adam Smith’s Lectures On Jurisprudence (for Wednesday, 30 March 1763, vi.56: 352):

“If we should enquire into the principle in the human mind on which this disposition of trucking is founded, it is clearly the naturall inclination every one has to persuade. The offering of a shilling, which to us appears to have so plain and simple a meaning, is in reality offering an argument to persuade one to do so and so as it is for his interest. Men always endeavour to persuade others to be of their opinion even when the matter is of no consequence to them. If one advances any thing concerning China or the more distant moon which contradicts what you imagine to be true, you

immediately try to persuade him to alter his opinion. And in this manner every one is practising oratory on others thro the whole of his life.—You are uneasy whenever one differs from you, and you endeavour to persuade to be of your mind; or if you do not it is a certain degree of self command, and to this every one is breeding thro their whole lives. In this manner they acquire a certain dexterity and adress in managing their affairs, or in other words in managing of men; and this is altogether the practise of every man in the most ordinary affairs.—This being the constant

employment or trade of every man, in the same manner as the artizans invent simple methods of doing their work, so will each one here endeavour to do this work in the simplest manner. That is bartering, by which they adress themselves to the self interest of the person and seldom fail immediately to gain their end. The brutes have no notion of this; the dogs, as I mentiond, by having the same object in their view sometimes unite their labours, but never from contract.”

This is the missing dimension in the ideas of modern economists (and psychologists sociologists, anthropologists and above all mathematicians – not to forget our friend, Karl Polanyi) when analysing the bargaining problem.

This became evident to me from a search through the literature from the 1930s onwards when writingresearching my MSc (1972, Strathclyde University) on ‘Productivity Bargaining: a case study in an Oil Refinery’ (Shell),  and afterwards, when putting together a “Workshop Negotiations” course at Brunel University in 1975.   There was virtually nothing at all in the literature that showed evidence of economists actually observing substantial negotiations in UK industry.  The USA was somewhat different in the pioneering work of Walton and McKersie, but US economists had less, even nothing, to say about bargaining outside their conflict-based pure mathematical models. My external examiner asked why there was no “good old marginal analysis” in my thesis.  I replied, living dangerously: “because it is not relevant in real world negotiation processes I observed.”

People, writes McCloskey, “talk” or “converse” and “in conversing they open each other to modifications of the price” and “they establish, as we say, the ‘going’ price” and this is “how the paradoxes of continuous traders and so forth in Arrow-Debreu formulations are solved in practice , and why experimental markets work so amazingly well despite not satisfying the Arrow-Debreu conditions even approximately”. … “in this manner everyone is practicing oratory on other through the whole of his life”.

In my research and observation for many years later in negotiation consultancy, I estimated that over 80 per cent of the contact time spent by negotiation partners is spent in argument/debate that sets the tone for the proposing and bargaining phases  of negotiation that determines the quality of the agreed deal, if one is reached.  If an agreement is not reached then that 80 per cent approaches 100 per cent of the contact time and, of course, no deal results, and possibly a great deal of expense in strikes or in changing suppliers.

McCloskey agues that persuasion has economic significance – without it gracing the attention of ‘MAXU’ theorists. 

She writes of “sweet talk” as “honest persuasion” and reports estimates of sweet talk at “one quarter of society’s income”.  The utility maximisers cannot explain sweet talk, opening the way for theories that everybody is a cynical selfish smart guy. For economists the causes of the rapid growth in per capita incomes from within the innovating market economies is an empty set.  Nothing they include the that set explain enough of the forces for change (See McCloskey’s brilliant  “Bourgeois Dignity”, 2010, from Chicago UP, that tests every pure economic notion that have been proposed for why some countries in North-West Europe began the process of developing markets economies, while most others didn’t, and many still haven’t. Her forthcoming book looks closer at what initiated that long process).

I suspect that many neo-classical economists, and the remaining socialists, including a few of Karl Polanyi’s fans, along with the new ecologists, will call for the same old ‘solutions’ and ideologies, and dismiss McCloskey’s thesis.   I think she is worth reading whatever your preconceived notions.