J Bioecon

https://doi.org/10.1007/s10818-017-9256-9

Adam Smith, scientist and evolutionist: modelling

other-regarding behavior without social preferences

Vernon L. Smith1

© Springer Science+Business Media, LLC 2017

Abstract In this essay, I want to illustrate the power of Sentiments to bring order to
contemporary experiments where the traditional game-theoretic models failed deci-
sively to predict human action even under the conditions of anonymity. Sentiments
is about sympathy, an undefined primitive human characteristic known and identi-
fied through the work it does in enabling the emergence of the human capacity for
fellow feeling (in: Smith (ed) The theory of moral sentiments, Oxford, Oxford Uni-
versity Press, p. 10, 1759). Fellow feeling provides the experiential foundation for our
rule-following conduct, and constitutes the evolutionary basis for human sociality.
Similarly, gravity in Newtonian physics was a primitive concept known by the work it
does in governing the orderly motion of all bodies in the observable universe, as it was
known in Newton’s time. Both systems sought to explain and understand observations
by means of postulated forces at work in nature, but insensible to human awareness.

Keywords Adam Smith · Experimental economics · Cultural evolution · Economic

psychology

1 Introduction

The Eighteenth Century opened on the last 27 years of the life of Isaac Newton (1643–
1727) who had a profound influence on how people comprehended and thought about
the physical world in which they lived. Perhaps no figure was more significantly
impacted by the Newtonian enlightenment than Adam Smith (1723–1790) who was
intellectually destined to envision and articulate a new world of freedom and prosperity

B Vernon L. Smith
vsmith@chapman.edu

1 Chapman University, Orange, CA, USA

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 V. L. Smith

that would become a great leap into the future for John Locke’s (1632–1704) classical
liberalism.
One of Smith’s most significant early contributions in revealing his intellectual
future was his History of Astronomy. Published posthumously (Smith 1795), this work
testifies to his early admiration for the Newtonian system, and provides a glimpse
into his scientific program and its inspiration. This essay by Smith is about Wonder,
Surprise, and Admiration, sentiments that fire the human imagination and curiosity
to understand and account for the observed order in the physical world. And, the
discovery that that order is accounted for by a system governed by invisible forces
with rules of motion that “recommend it to the imaginations of mankind” (Smith 1795,
p. 103). Newton’s profound accomplishment had been a theory that could account for
the observable motion of all bodies on earth, and in the heavens, ranging from the moon
to the comets based on postulated forces of gravity and inertia that were invisible to
human awareness. Newton saw order in the physical universe, discovered the rules
that governed that order, and thereby modelled the invisible forces of that governance.
Similarly, Adam Smith observed order in human social, political and economic life
as expressed in Roman and Greek history down to the Northern European cultures that
surrounded him. Smith’s program, and that of others in the Scottish Enlightenment
over the span of less than 100 years, was to inspire and launch a methodology for
discovering the forces in human sociality and economy that governed and shaped that
order, but were invisible to human awareness.
Smith published two books in a lifetime of intense scholarship. His first, a work
in social psychology, The Theory of Moral Sentiments (Smith 1759; hereafter Senti-
ments) was well-receive in its time, but failed to attract a following in the nineteenth
century. Psychology and social psychology would not be distinguished from natu-
ral philosophy for over a hundred years later. His second book, An Inquiry into the
Nature and Causes of the Wealth of Nations (Smith 1776; hereafter, Wealth) was a
book for all time, and established the field of economics. When Smith died in 1790,
after completing the extensively revised and expanded sixth edition of Sentiments, he
had already become widely known as the author of Wealth.1 Smith saw Sentiments
as a work that was superior to Wealth.2 I think he was right, in part because his first
book was essential in conveying the full implications and importance of his second
book as a contribution to human understanding. But posterity would judge otherwise;
Wealth was a spectacularly successful book for its time, like few others in history. It
was digested by scholars throughout Europe and America, and by statesman such as
William Pitt the Younger, prime minister of Britain for 17 years.
The evolutionary cultural nature of Smith’s thought is evident in both Sentiments and
Wealth. He had a curiosity-driven fascination for change; in history, in the heavens,
and in the social and economic world; he sought to explain by systematic analysis
disciplined by “experiments”, that is, test cases.

1 As an economics graduate student in 1950, I read Wealth. Nowhere in Wealth does he cite Adam Smith
(1759), leaving the student-consumer without a clue as to its importance as a prolegomenon to understanding
his second work.
2 Ross (1995, p. 177).

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Adam Smith, scientist and evolutionist: modelling other-regarding...

Sentiments is about sympathy, an undefined primitive human characteristic known

and identified through the work it does in enabling the emergence of the human capacity
for fellow feeling (Smith 1759, p. 10). Fellow feeling provides the experiential founda-
tion for our rule-following conduct, and constitutes the evolutionary basis for human
sociality. Similarly, gravity in Newtonian physics was a primitive concept known by the
work it does in governing the orderly motion of all bodies in the observable universe,
as it was known in Newton’s time. Both systems sought to explain and understand
observations by means of postulated forces at work in nature, but insensible to human
awareness.

2 Axioms of conduct

Smith’s fundamental axiom underlying human conduct is self-love; technically, in

modern language, we are explicitly said to be “self-interested” and non-satiated. More
money (or more of a good or resource with monetary equivalent) is better, less is
worse.3 In modern economics this axiom directly motivates and determines individual
action. But in Sentiments man’s inherently self-loving (or “self-interested”) nature
does not imply that people fail to nurture an empathetic other regarding attitude and
conduct toward others in their community of family, neighbors and friends. By “other
regarding”, I mean that the individual’s specific actions are sensitive to their consequent
beneficial or hurtful effect on others, and not only to his own gain or loss. For a person’s
conduct to be other-regarding, however, it is necessary to know how others benefit or
are hurt in the specific context of the individual’s action, where the context (situation,
circumstances) allows people to see what alternative action(s) could have been taken,
but were not. In Sentiments, common knowledge that all are self-interested and non-
satiated serves as a sufficient condition for enabling people to judge the potentially
beneficial or hurtful effects of their context-specific actions on others in our social
groups. In the absence of knowledge of who is hurt and who benefits from an action
taken, an actor cannot mediate her choice to achieve and maintain harmony with her
associates. In Sentiments this axiom is an essential input to a socializing process in
which action is governed by rules that are appropriately other regarding.
These considerations lead to a second axiom in Smith’s model of the social matu-
ration process in which from birth we learn to “humble the arrogance of our self-love
and bring it down to what others will go along with” (Smith 1759, p. 83). We each
experience the benefits or hurts that are a direct consequence of the actions of oth-
ers; and, together with context, we make judgements as to their intentionality. Others
always mark their approval or disapproval of our actions in response to the benefits or
hurts they feel. In this conjunction with others we each gradually come to see ourselves
as others see us. Hence, the mature “impartial spectator” within us learns to exercise
“self-command”, better enabling us to choose actions of a beneficent nature toward

3 In Sentiments, proper attention to self is a virtue to be respected: “We are not ready to suspect any person
of being defective in selfishness…Carelessness and want of oeconomy are universally disapproved of, not,
however, as proceeding from a want of benevolence, but from a want of the proper attention to the objects
of self-interest” (S, p. 304).

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 V. L. Smith

others, and to avoid the self-loving temptations of the moment that may be hurtful
toward others.
Sentiments is about articulating a process whereby we become socially effective in
our relations with others, all the while being strictly self-loving.
A third axiom states that human sentiment is characterized by a fundamental asym-
metry between our joy and our sorrow. Between our natural normal state,
“...and the highest pitch of human prosperity, the interval is but a trifle; between it
and the lowest depth of misery the distance is immense and prodigious. Adversity,
on this account, necessarily depresses the mind of the sufferer much more below
its natural state, than prosperity can elevate him above it.” (Smith 1795, p. 45)

3 Principles of conduct

In using the word CONDUCT Smith’s model of sociality is concerned not with iso-
lated decision, but with manners, or the patterns of action we take as individuals in our
relations with others. Each action is richly sensitive to its particular contextual circum-
stances, and these patterns establish a person’s character. Our rule-following behavior,
however, need not be a deliberate self-aware process. Rules result from invisible forces
that are outwardly manifest in the observable social order.
Certain principles govern Smith’s modelling of conduct.
First, human motivation arises as an integral part of our sociality. There is no such
thing as an individual who is separate and distinct from her social origins and experi-
ence. Motivation as desire derives from the asymmetry between our inner experience
of joy and sorrow, and is manifest outwardly by a fundamental asymmetry between
gains and losses,4 each composed of two parts: A. The desire for praise and praise-
worthiness in gain space; and B. The desire to avoid blame and blame-worthiness in
loss space. “Praise and blame express what actually are; praise-worthiness and blame-
worthiness, what naturally ought to be the sentiments of other people with regard to
our character and conduct” (Smith 1759, p. 126).
Consequently,
“We suffer more...when we fall from a better to a worse situation, than we ever
enjoy when we rise from a worse to a better. Security, therefore, is the first and
the principal object of prudence. It is averse to expose our health, our fortune, our
rank, or reputation, to any sort of hazard. It is rather cautious than enterprising,
and more anxious to preserve the advantages which we already possess, than

4 Kahneman (2002) was cited by the Nobel committee for his contributions “concerning human judge-
ment and decision making under uncertainty.” The asymmetry between gains and losses, particularly as
it is manifest in decision under uncertainty, is perhaps one of the most persistent and well-documented
regularities established since the 1970s in the decision and judgement literature by experimental psychol-
ogists, behavioral, and experimental economists. It is significant that none of this literature was influenced
by Smith (1759), whose contribution was not so much lost to modern thinking and research, as never found.
It is equally significant that the subsequent literature independently discovered many of the principal ele-
ments that Smith articulated, reproducing, if less comprehensively, important aspects of his analysis and its
implications 200 odd years later.

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forward to prompt us to the acquisition of still greater advantages.”5 (Smith

1759, p. 213)
What is at stake is much more than our wealth; we can also lose our health and esteem
in the form of rank and reputation; i.e., our social standing in the beliefs and thoughts
of others, and thence, mirror-like, how we feel about ourselves.
In discussing justice, Smith uses this asymmetry between gains and losses as a
principle to explain why there is a difference between how society treats violation of
property and violation of contract: “To be deprived of that which we are possessed of,
is a greater evil than to be disappointed of what we have only the expectation. Breach
of property, therefore, theft and robbery, which take from us what we are possessed
of, are greater crimes than breach of contract, which only disappoints us of what we
expected.”6 (Smith 1759, p. 84)
A second principle derives from the axioms of self-love and social maturation.
The actions we choose are socially mediated and constitute signals shaped by their
propriety (approval or disapproval) in the given situation, circumstances or context in
which the action is to be taken.7 Thus,

“As we have no immediate experience of what other men feel, we can form
no idea of the manner in which they are affected, but by conceiving what we
ourselves should feel in the like situation.” And “Sympathy...does not arise so
much from the view of the passion, as from that of the situation which excites
it.” (Smith 1759, pp. 9, 12)

Smith’s vision of the social world is one of constant change, learning and adaptation.
The impropriety of a hurtful action may readily invoke a rebuke or punishment leading
us to avoid or modify the action under similar conditions in the future. The propriety
of a beneficial action will likely bring reward and encourage repetition in the future. If
an equilibrium exists in the modern sense it lives in rule space, and is under constant
testing and reexamination that shapes its cultural fitness.

4 The nexus of context, motivation and self-interest in human sociality

We summarize how the above axioms and principles come together to determine how
praise-praiseworthiness relates to judgements of propriety in determining action. The

5 This passage explains why innovation is relatively rare; why so few penetrate the boundaries of tradition
to risk failure.
6 Although this property of law clearly reflects Smith’s proposition on the asymmetry between gains and
losses, he does not explicitly make that cross reference. Elsewhere, for example in the quotation on page
213, Smith cross references page 45 where he first develops the idea of gain-loss asymmetry. I do not see
that omission as significant in terms of his understanding.
7 As we will see below in applying Smith’s framework to a two-person extensive form game, circumstances–
the set of moves and resulting payoffs–all matter because intentions are conveyed not just in the action taken
but in the available action that could have been taken at each decision node. The situation as read by others
help form the rules-as-conventions or cultural norms that we follow.

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 V. L. Smith

form is particularly useful for application to two-person games like the trust game
discussed below, and in the cited literature.8
Let an action, ai , by individual i depend on i’s judgment of its propriety, given the
action’s contextual circumstances, based on the first principle discussed above:

ai (Pr opriet y|C) = αi (C) · P R + βi (C) · P R · P W + γi (C) · P W + δi (C) , (1)

where P R and P W are dichotomous9 (0, 1) indicator variables, respectively, reflecting

whether the action is praise-able by others (1), or not (0), and is praise-worthy (1), or
not (0); and αi , βi , γi and δi are nonnegative functions that weight the motivations P R
and P W in judging and determining the propriety of the action. In the second term,
it is assumed that P W interactively leverages P R, while the third term expresses the
sentiment that P W may yield stand-alone value (honor in self-command), “distinct”
from P R, even where no praise is possible. For example, in double anonymity exper-
iments weight is still given to P W even where no one can know (and feel praise for)
your decision (Cox and Deck 2005).10
In Eq. (1) C (m 1 , m 2 ) represents the circumstances including game structure, choice
alternatives and the vector of all nodal payoffs (m 1 , m 2 ), allowing choice alternatives
to be read as signals. Action is based on conduct that is more or less appropriate
conditional on circumstances, where the action chosen best satisfies or “fits” a socially
mediated criterion. The additive function, δi (C), independent of the social indicator
weights, allows an element of socially unmitigated “self-interest” to be expressed.
Hence, if i cannot infer the intent of other and reward beneficence, then αi (C) =
βi (C) = 0, and δi (C) looms larger than otherwise in determining the action chosen,
but this is still mediated by a positive weight for P W .11
An expression similar to Eq. (1) applies to a hurtful action subject to blame/
blameworthiness, but with different weights to capture the asymmetry between gains
and losses.
Equation (1) defines a rule for i. A rule for an individual is thus a mapping from
C (m 1 , m 2 ) and the self-command weights (judgments) i places on P R and P W,
into an action. The action is a reflection of the individual’s socializing experiences.
Simultaneously, there exists in i’s social world conventions (“customs”) defining what
“people will go along with” for the choice of αi , subject to the same conditionals. If i’s

8 This section was added after my referee justifiably reprimanded me for not recognizing more prominently
that Smith’s model of sociability relates to “the love of what is honorable” (Smith 1759, p. 137) and thus to
our natural desire for praise-praiseworthiness, and to avoid blame-blameworthiness, especially worthiness.
Accordingly, in the text I review our treatment in Smith and Wilson (2017a) wherein the rules we follow
derive directly from these motivations.
9 Obviously P R and P W could be arguments of monotone increasing functions, but treating them as
dichotomous, but weighted in defining the individual’s social state, most clearly represents Smith’s logical
structure.
10 Some such formulation is further indicated by McCabe et al. (2003) who compare voluntary and
involuntary versions of a trust game in which one/third of Player 2s choose to share as if cooperative even
where they cannot infer the intentions of their counterpart Player 1s.
11 “The love of praise-worthiness is by no means derived altogether from the love of praise. Those two
principles, though they resemble one another, though they are connected, and often blended with one
another, are yet, in many respects, distinct and independent of one another.” (Smith 1759, p. 114)

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choice is out of order, as in uncertain and less familiar situations, he or she will receive
corrective feedback (“disapprobation”).12 Hence, Sentiments is primarily about the
adaptation of individuals to what is “fit and proper.” The model is open concerning
the inertial processes whereby the demands of social conventions emerge and change
through time, but there is an implication of evolutionary change and adaptation.

5 Propositions on beneficence and justice

Sentiments is a work in understanding the long evolved pre-civil rules-and-order of

society that became the foundation of the civil order. That core concept is articulated
in four strong propositions: two on Beneficence and two on Justice.
Beneficence Proposition 1 Actions tending to be beneficent toward others, which
are properly (intentionally) motivated, alone merit a reward response because such
actions alone excite the gratitude felt in others (Smith 1759, p. 78).
Beneficence Proposition 2 Because beneficence is always free, and cannot be
extorted, the want of beneficence does no positive evil, invokes no resentment, and
merits no punishment (Smith 1759, p. 78).
Justice Proposition 1 Actions tending to be hurtful toward others that are improperly
(intentionally) motivated, alone merit punishment in response, because such actions
alone excite the resentment felt in others (Smith 1759, p. 78).
Justice Proposition 2 Adherence to the rules of justice (want of injustice) does no
positive good, excites no gratitude, and merits no reward (Smith 1759, pp. 81–82).
The import of these propositions depends on intentions:
“To the intention or affection of the heart, therefore, to the propriety or impro-
priety, to the beneficence or hurtfulness of the design, all praise or blame, all
approbation or disapprobation, of any kind, which can justly be bestowed upon
any action, must ultimately belong.” (Smith 1759, p. 93)

12 Here in brief is an example from my personal experience. In the Tucson suburbs, homeless individuals
occupy the center islands of major intersections, and offer newspapers for sale. The same individual regularly
occupies a particular island, suggesting well-defined property rights emerging by mutual voluntary consent.
I occasionally buy a paper from the man who occupies an island near my home, giving him $5 for a $2
newspaper. But I rarely read media newsprint anymore; so approaching the island one day, I see the familiar
man at his station. Approaching the island for a left turn I stop, roll the window down, reaching out with
a $5 bill in my right hand. He reaches for the bill with his left, and extends his right hand to me holding
the newspaper. I say, “That’s ok, you can keep the paper.” He instantly pulled back both hands, replying
matter-of-factly, “I only sell newspapers.” Although startled, I recovered, and say, “I’ll take the newspaper.”
He looked at me and smiled; we had a contract. Notice the detailed circumstances. My intention had been
to be doubly generous, let him sell the paper to somebody else. He corrected my error. He was a business
man. It was entirely acceptable for me to show my gratitude for his service by giving him $5 for a $2
newspaper, but there was no way I could refuse the paper while he accepted the bill without those actions
giving the lie to his work-ethic integrity. He would not allow me to be an instrument of his corruption. I
corrected my error, and in a later encounter saw more evidence of his devotion to his customers. Observe that
neither of us doubted that the other preferred more money to less. The monetary stakes were minor; what
mattered was our conduct in a relationship. After another year his post was empty for a time, but eventually
was taken by another person. There are rules for acquisition and occupation, rules for maintaining orderly
vender-customer relations, and, we can suppose, rules for accession.

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 V. L. Smith

Fig. 1 Invest $10 trust game SPE

$10
1
$10

C
$15
2
$25

SPE: Subgame perfect equilibrium

$0 C: Cooperaon
$40 D: Defecon
D

6 Some implications for game theoretic analysis: applications to a trust

game

In this section we apply Smith’s model and Beneficence Proposition 1 to the analysis
of an early two-person game, intended in its design to constitute a stringent test of
cooperation in a single play extensive form trust game.
The game is illustrated in Fig. 1 (McCabe and Smith 2000). The design was moti-
vated, as a simple special case, by the “investment trust game” of Berg et al. (1995)
one of the most sited articles in experimental economics. If Player 1 moves right,
each player receives $10, and the game ends. If Player 1 moves down, passing play to
Player 2, imagine Player 1’s $10 being tripled because of the existence of synergistic
gains from exchange between the two players, as when an investor provides financial
support to an entrepreneur. But that narrative is not part of the subjects’ instruction
because the idea is to give self-interested play its best shot.13 A right move by Player
2 splits the $30 gain equally between the two players, yielding the cooperative impu-
tation ($15, $25). Alternatively, Player 2 can take all the money by moving down, thus
choosing “defection” on the presumed offer to cooperate by Player 1, and yielding
($0, $40).

13 See Osborn et al. (2015) who imbed a previous extensive form game tree in a narrative which causes a
substantial change in the results.

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Adam Smith, scientist and evolutionist: modelling other-regarding...

By way of contrast with Smith’s model of human interaction, I will first review
the well-known traditional “self-interested” analysis of player action for the game
in Fig. 1:
1. Common knowledge that all Players are strictly self-interested and non-satiated.
2. Only own payoff outcomes matter in choosing action.
3. Apply backward induction to the game tree.
4. Determine each player’s choice in reverse sequence of play.
5. If Player 1 passes to Player 2, the latter is motivated to move down.
6. Player 1’s best strategy is to move right, the (subgame perfect) equilibrium of the
game.
Now consider how the game would be analyzed from the perspective of Sentiments.
The elements in that perspective involve: sensitivity to the rules of conduct mediated by
hurt-benefit patterns; an inference of intentions; each person imagining themselves in
the other’s role; and “self-command.” Notice that a move down by Player 1 unambigu-
ously benefits Player 2, and quite transparently is “properly motivated;” for example,
it is extortion or threat-free. The choice is voluntary; Player 1s vulnerability to loss can
be avoided by not passing to Player 2. The available choices by Player 1, together with
the alternative available responses of Player 2, including all the payoffs, define the
“circumstances” that determine action, and which are read by the actors in applying
Beneficence Proposition 1.
1. Common knowledge that all players are strictly self-interested and non-satiated.
2. Action is self-controlled by enculturated sensitivity to who is hurt or benefits from
an action, and an inference of intent.
3. Intentions are inferred from opportunity cost of the action taken.
4. Intentional Beneficence → Gratitude → Impulse to Reward;
Intentional Hurt → Resentment → Impulse to Punish14 ;
5. Apply backward induction to the game tree to determine who is hurt or benefits
from an action at each node and to judge intent.
6. Each Player’s “impartial spectator” imagines herself in the role of the other in
judging intent and probable responses.
7. Forward play is then a signaling game–a conversation–that conveys intent.
8. If Player 1 would cooperate if in the role of Player 2, will Player 2 see it in the
same way if given the opportunity to act?
9. Will Player 2 cooperate, given the unambiguous signal of Player 1’s beneficent
intention?
The results for 24 randomly and anonymously paired subjects are displayed in Fig. 2.
The results are substantially more consistent with Beneficence Proposition 1, than the
traditional neo-classical model. Thus, knowing for certain the action of their paired
Player 1 counterpart, nine of the twelve Player 2s (75%) choose to cooperate. But
we can say more. The random assignments of subjects to roles implies that the same
proportion of Player 1s would move right, conditional on having been assigned to

14 For trust game tests of Justice Proposition 1 and Beneficence Proposition 2 see Smith and Wilson (2014,
2017a).

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 V. L. Smith

Fig. 2 Sentiments versus N F

“social preference” models of SPE
invest $10 trust game: frequency 0.50 $10
of play 24 1
$10

0.50

C
0.75 $15
12 2
$25

0.25

SPE: Subgame perfect equilibrium

3 $0 C: Cooperaon
$40 D: Defecon
D
N: Number of subject pairs by node
F: Frequency of pairs moving right
or down

position 2. Hence, the estimated proportion of Player 1s deterred from choosing to

move down by the uncertainty that Player 2 is a person like themselves is 0.75 − 0.50
= 0.25.

7 Other-regarding behavior

It is not an exaggeration to say that experimental and behavioral economists coalesced

on a wide consensus as to how to resolve the prediction failure of traditional theory in
games like that above: re-specify the utility function to accommodate the anomalous
observations.15 By assuming that some Player 2s prefer actions yielding money for
both themselves and their matched Player 1, the contradiction with the data is narrowly
resolved. Why was this the professional response?
The Max U (own) model of action failed in being unable to predict the substan-
tial extent to which many people’s actions were sensitive to how others benefit or
are hurt by the action taken. Hence, the chosen actions show other-regarding and not
only own-regarding considerations. Consequently, it seemed natural for economists
to simply change the utility function to include both own and other payoffs; alterna-
tive non-utilitarian modelling frameworks, such as in Sentiments, were not part of the
predominant current literature or thinking. Long before, the neo-classical revolution
had displaced the process models and thinking in classical economics with models of
equilibrium in outcome space. Context and circumstances did not matter; only out-

15 Influential contributions pursuing this line of research include Fehr and Fischbacher (2002). For an
excellent recent report, see Cox et al. (2016).

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comes based on maximization mattered. The logical error in simply re-specifying the
utility function was to suppose that other-regarding behavior implies other-regarding
preferences. In truth it’s the other way around: if preferences are other-regarding then
behavior will be other-regarding, but it does not follow that other-regarding behavior
implies other-regarding utility. Social preferences are sufficient, but not necessary, as
a condition for the observation of other-regarding behavior.
The experimental research design process and agendas were subsequently influ-
enced by this resolution, and by this belief error: “A substantial number of people
exhibit social preferences, which means they are not solely motivated by material
self-interest but also care positively or negatively for the material payoffs of relevant
reference agents” (Fehr and Fischbacher 2002, p. C1). The statement is incorrect,
because what people exhibit is other-regarding choice behavior,16 which does not
imply other-regarding utility. The counterfactual to Max U (own) as determining deci-
sion is either a just-so Max U (own, other), or an alternative model of human sociality.
The “just-so” nature of such presumed preferences has, from the first studies, been
required, because the behavior shows sensitivity to intentions and the descriptive cir-
cumstances in which the game is embedded. Because choice behavior reflected these
considerations, the re-specified utility function was required to contain as parameters
all of the elements that were found to effect decision.
Smith had provided a precise model involving these elements, but one that implicitly
assumed common knowledge of self-interested agents, an axiom sufficient17 to allow
the process of social maturation based on sentiments to enable agents to learn to
follow rules that favor actions that benefit, or actions that avoid, hurting others. The
learning-to-be-social process involves rewarding beneficent actions and punishing
hurtful actions based on inferring intentions, albeit subject to error, from the decision
context. The tests reported in Fehr and Fischbacher (2002) are tests of Max U (own)
against social preferences, Max (own, other); the neo-classical utility model is not
tested against an alternative model of human social behavior that also predicts other-
regarding action; nor are the alternatives tested against each other.18
The key features of the model in Sentiments are also involved in parameterizing
social preference functions, and in the behavior of experimental subjects: intentions;
sensitivity to context; kindness and its reward; hurtfulness and its punishment. This

16 “Other-regarding behavior” was a term introduced in Hoffman et al. (1994) in their study of ultimatum
and dictator games, to guard against the presumption that the behavior was necessarily explained by and due
to other regarding preferences, specifically “fairness” in the sense of outcomes, as distinct from fair-play
rules which are modelled in Sentiments. But that cautionary language failed to prevent the leap captured in
the above quotation, which reflects a common mis-perception.
17 The axiom is sufficient, and does not rule out social preference functions. But each agent’s social
preference must be compatible with the other. You and I have a potential conflict if we each prefer to
transfer money to the other. Smith handles this problem elegantly by assuming strictly self-interested
individuals who learn to control its expression because they are in a relationship with others. Modelling
relationships–what it means to be social–becomes the challenge to socio-economic theory, not refitting
utility functions to new observations.
18 Cox et al. (2016) ingeniously examine various motives for Player 2s to be trustworthy in a variation on
the original Berg et al. (1995) game. The most important motive empirically is what they call vulnerability-
responsiveness in which Player 2 avoids any action that would hurt Player 1. But this is explained by Smith’s
model as a weak form of Beneficence Proposition 1: not to hurt is for Player 2 not to play down.

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 V. L. Smith

leads to several distinct utilitarian social preference functions–one associated with

each behavioral trait. Most of these cases have corresponding social psychological
features in Smith’s model of sociality, indicated below in parentheses:
• Positive reciprocity (intentionally beneficent action invokes gratitude and a reward
response)
• Negative reciprocity (intentionally hurtful action invokes resentment and a pun-
ishment response)
• Inequity aversion (actions/outcomes that are inappropriate or unmerited in a given
context may cause resentment and deserve punishment).
• Pure altruism or unconditional kindness [the nearest similarity in Sentiments
appears to be “natural (kin) affection”,19 or “universal benevolence” Smith (1759,
pp. 219 and 235)
• Envy [may reduce sympathy for the joy, or greatness, felt for the achievements of
others; Smith (1759, pp. 41–42, 44)
My argument is that “social preference theory”, as a response to the prediction fail-
ures of standard neo-classical utility theory in extensive form games, constitutes an
anecdotal “fix” that fails to address their origin and development, why they are con-
text sensitive, and their link with broader themes in economics and society. Smith’s
program was to model the socialization process, not only the endpoint outcome, and
to derive features of the emergent rules that account for human conduct. The latter
had broad implications for the structure of rules that govern a decentralized society.
This never-found alternative offers several advantages over narrowly construed social
preference patches for post-hoc rationalization of behavior in two-person games like
the trust game:
1. Sentiments provides a model of human conduct that seamlessly connects action in
social groupings with that in markets. Rejected is the concept of two-selves–selfish
here in a market, unselfish there with a friend.
2. Sentiments offers propositions like those stated above that predict action in trust and
ultimatum20 games that failed the standard self-interested maximization models
in the 1990s.
3. Sentiments offers propositions that suggest and predict action in unique new exper-
iment designs.
4. Sentiments connects human conduct to broad socio-economic themes of benefi-
cence, justice, property, and wealth creation in stable societies.

19 My referee points out, however, that Smith himself disclaims any special biological role for natural
affection. “What is called affection, is in reality nothing but habitual sympathy... The general rule is estab-
lished, that persons related to one another in a certain degree, ought always to be affected towards one
another in a certain manner... A parent without parental tenderness, a child devoid of all filial reverence,
appear monsters, the objects, not of hatred only, but of horror” (Smith 1759, p. 220).
20 In the Ultimatum game people are randomized into Proposers who are offered a split of say $10 ($100)
and Responders who accept or reject the offer, giving zero to each. Many Responders refuse offers of $3
($30) or less. Yet $1 ($10) is better than nothing and is predicted not be rejected in one’s self-interest. In
the standard ultimatum game, play is not optional, is thereby coercive (extortionist), and by Proposition
2 the outcomes cannot be analyzed in terms of utilitarian benefits. Smith and Wilson (2017b) report new
“voluntary” versions of the ultimatum game recording the highest frequency of support for equilibrium that
have been recorded in the literature.

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Further tests of the four propositions in Sentiments in the context of trust and ultima-
tum games–item three above–have been offered elsewhere and will not be reexamined
here (Smith and Wilson 2014, 2017a)
I wish instead to address item four by discussing the societal themes defining the
modern world that are developed in Smith’s work.

8 Beneficence is the ornament; justice is the foundation

A corollary of the four propositions on beneficence and justice speaks to their order
of importance for a stable society. Smith leaves us with no doubt about his view that
justice ranks far above beneficence:
“Beneficence...is less essential to the existence of society than justice. Society
may subsist, though not in the most comfortable state, without beneficence;
but the prevalence of injustice must utterly destroy it. Though Nature, there-
fore, exhorts mankind to acts of beneficence, by the pleasing consciousness of
deserved reward, she has not thought it necessary to guard and enforce the prac-
tice of it...(Beneficence) is the ornament which embellishes, not the foundation
which supports the building...Justice, on the contrary, is the main pillar that
upholds the whole edifice.” (Smith 1759, p. 86)

9 Sentiments and wealth

In Wealth Smith begins with the key observation that “the division of labor”, or spe-
cialization, is the immediate cause of the “improvement in the productive powers of
labor.” (Smith 1776, p. 13) Specialization in turn is a consequence of “the propensity
to truck, barter and exchange”, the origin of which he chooses not to enquire further
into. (Smith 1776, p. 25) Exchange being unexplained, yet “common to all men”,
Smith in effect adopts it as an axiom.21 There follows Smith’s powerful Proposition:
“The division of labour is limited by the extent of the market” (Smith 1776, p. 31).
The substance of Smith’s invention of economics is writ in the form of his grand
investigation of the full consequences and implications of this proposition for it drives
“the nature and causes of the wealth of nations.”
Against the backdrop of Sentiments, however, exchange can be seen as a natural
extension of human sociality. Smith notes that at maturity most animals are entirely
independent.
“But man has almost constant occasion for the help of his brethren, and it is in
vain for him to expect it from their benevolence only. He will be more likely to
prevail if he can interest their self-love in his favour, and shew them that it is for
their own advantage to do for him what he requires of them. Whoever offers to
another a bargain of any kind, proposes to do this. Give me that which I want, and
you shall have this which you want, is the meaning of every such offer; and it is

21 The quotation from page 25 has far deeper meaning and implications than I can explore here. For
example see Schliesser (2011).

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in this manner that we obtain from one another the far greater part of those good
offices which we stand in need of. It is not from the benevolence of the butcher,
the brewer, or the baker, that we expect our dinner, but from their regard to their
own interest” (Smith 1776, pp. 26–27). Think of an exchange as a simultaneous
bilateral, as distinct from a sequential, application of Beneficence Proposition
1 wherein the benefit which alone merits reward is supplied by what is offered,
and the reward by what is simultaneously given in return. The obligation of each
to the other is reciprocally discharged, as are the proper intentions and self-love
of each.
The immediate consequence of exchange is that both parties gain privately, but the
external benefit is that others learn of prices. Prices facilitate comparisons, allowing
others to learn that they can gain by producing wool instead of milk, corn instead
of hogs, do old things in a different way, and new things that better satisfy wants.
Specialization is a learning process facilitated by prices, and expands as new mar-
kets develop. Markets are not about aggregating existing dispersed information, but
discovering alternatives, choosing, becoming, and innovating.
Sentiments describes the origin of property rights in human resentments and the
impulse to punish actions of a hurtful tendency. Justice is about what is left over after
limiting, discouraging and constraining such actions. Hence, justice is the infinite
residue of imaginable actions not prohibited as unjust. Society seeks the good, by
limiting the bad. Think of the social knowledge of that which is hurtful as backward
looking, evolving out of experience, and its commonality commands wide assent.
But knowledge of conjectured good is forward looking, untested, to be explored, and
subject to unintended consequences. Society is a playing field with foul boundaries
defined by consent and that cannot be violated without penalty. Property rights define
the rules of morality, not to be breached. Otherwise you are free to take action and
move as you like in that field of action.
This is how I see Smith’s conception of liberty in Sentiments, and why the justice
conditional appears before the verb in Wealth when he says that22 :
“Every man, as long as he does not violate the laws of justice, is left perfectly
free to pursue his own interest his own way, and to bring both his industry and
capital into competition with those of any other man, or order of men” (Smith
1776, p. 687).

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22 Smith used language with precision. Every word counts. For example he says “free to pursue his own
interest his own way.” Most today would read, even misquote this as, “pursue his self-interest”.

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