today’s experimental economic science. Modern commentators often don’t realize that, though, because they neglect to consider that Wealth of Nations was not Smith’s only book.
When writing Wealth of Nations, Smith assumed (as do all authors) that its readers would have also read his first book: the Theory of Moral Sentiments, published in 1759. So he did not think it necessary to revisit the much different picture of human nature he had previously presented. Read together, Smith’s two books show that he had a kinder and gentler view of human nature than today’s economics textbooks indicate.
This point was made to me by Colin Camerer, whose research is at the forefront of understanding the connections between game theory and human behavior. Camerer’s specialty, “behavioral game theory,” is a subdivision of the field generally described as “behavioral economics.” By the 1980s, when game theory began to infiltrate the economics mainstream, various economists had become disenchanted with the old notion, descended with mutations from Adam Smith, that humans were merely rational actors pursuing profits. Some even hit on the bright idea of testing economic theory by doing experiments, with actual people (and sometimes even real money). Not surprisingly, experiments showed that people often act “irrationally”—that is, their choices do not always maximize their profits. Pursuing such experiments led to some Nobel prizes and some new insights into the mathematics underlying economic activity.
Game theory played a central role in those developments, as it quantified the profit maximization, or “utility,” that people in experiments were supposed to be pursuing. In a complicated experiment, it’s not always obvious what the utility-maximizing strategy really is. Game theory can tell you. In any event, Camerer finds it fascinating that game theory shows, in so many ways, that humans defy traditional economic ideas. But those experimental results, he told me, don’t really defy Adam Smith.
During one of our conversations, at a coffee shop on the Caltech campus, Camerer stressed that Smith never contended that