The Rational Optimist: How Prosperity Evolves. Matt Ridley
a trade buddy
In 2004, a series of volunteer undergraduates sat down at computer screens at George Mason University in Virginia to play games for money. In the game each person found himself in a virtual village with his own house and field in which he could produce and consume red and blue virtual ‘units’ during brief sessions of the game. In each case, he knew that the more he acquired and the closer he got to a certain ratio of blue and red units (e.g., 3:1) the more real money he went home with. But unknown to him, he was either an ‘odd’ player, who was programmed to be faster at making red units, or an ‘even’ player, faster at making blue units. On his screen each player could see what other players (two, four or eight in total) were up to and he could chat with them on-screen during each run and in the 100-second gaps between runs. On one run of the game, in session six, two players had the following exchange:
‘wonder if u can give me objects’
‘oh yeah.’
‘heyyy, i make blues faster, what color do u make faster?’
‘red’
‘lol ok’
‘LOL’
‘so ill make all blues and u make all reds’
‘then drop them to each other’s houses?’
‘yea do it’
‘ok 100% red’
‘100% blue’
The purpose of the experiment, run by Bart Wilson, Vernon Smith and their colleagues, was of course to see if people discovered exchange and specialisation for themselves with no rules or instructions. In the game, specialising is risky because the pay-off for ending up with units of only one colour is zero, but specialisation with exchange allows three times the pay-off of self-sufficiency. Yet there were no clues that trading was even possible. Though some players remained stuck in low-yielding self-sufficiency, most eventually discovered gains from trade. ‘Prior to exchange,’ comment the experimenters, ‘near-autarky prevails, and once the “power of exchanging” is discovered, specialisation gradually evolves.’ Intriguingly, the players began by trading bilaterally and personally – that is, each player developed a trading relationship with another player and only later extended the invitation to others.
That trade began as a bilateral and personal affair seems plausible. In the nineteenth century among the Yir Yoront aborigines, in northern Australia, each man’s family camp had at least one highly valued stone axe. The axes all came from a quarry jealously guarded and systematically worked by the Kalkadoon tribe at Mount Isa, 400 miles to the south, far beyond the Yir Yoront lands, and they passed through the hands of many trading partners to reach the tribe. Each older man had a trading partner to the south whom he met once a year in the dry season at a ceremonial gathering. In exchange for a dozen sting-ray barbs, to be used as spear tips, he received an axe. In turn he had obtained some of the barbs from his other trading partner to the north – to whom he gave an axe in return. Another 150 miles to the south, the exchange rate was different: one axe for one barb. There were arbitrage profits all along the chain.
So perhaps the first steps to trade with strangers began as individual friendships. A woman could trust her daughter who had married into an allied band within the same tribal grouping. Then perhaps the woman’s husband could learn to trust his son-in-law. The alliance between the bands in the face of a common enemy allowed the barrier of suspicion to be breached long enough for one to discover that the other had a surplus of stone for making axes, or of sting-ray barbs for making spear tips. Gradually, step by step, the habit of trade began to grow alongside the habit of xenophobia, complicating the ambitions of men and women.
Most people assume that long-distance trade among strangers and the very concept of the market was a comparatively late development in human history, coming long after agriculture. But, as the Australian aborigines suggest, this is bunk. There is no known human tribe that does not trade. Western explorers, from Christopher Columbus to Captain Cook, ran into many confusions and misunderstandings when they made first contact with isolated peoples. But the principle of trading was not one of them, because the people they met in every case already had a notion of swapping things. Within hours or days of meeting a new tribe, every explorer is bartering. In 1834 in Tierra del Fuego a young naturalist named Charles Darwin came face to face with some hunter-gatherers: ‘Some of the Fuegians plainly showed that they had a fair notion of barter. I gave one man a large nail (a most valuable present) without making any signs for a return; but he immediately picked out two fish, and handed them up on the point of his spear.’ Darwin and his new friend needed no common language to understand the bargain they were agreeing. Likewise, New Guinea highlanders, when first contacted by Michael Leahy and his fellow prospectors in 1933, gave them bananas in exchange for cowrie shells. Pre-contact, the New Guineans had been trading stone axes over large distances for a very long time. In Australia, baler shells and stone axes had been crossing the entire continent by trade for untold generations. The people of the Pacific coast of North America were sending seashells hundreds of miles inland, and importing obsidian from even farther afield. In Europe and Asia in the Old Stone Age, amber, obsidian, flint and seashells were travelling farther than individual people could possibly have carried them. In Africa, obsidian, shells and ochre were being traded long distances by 100,000 years ago. Trade is prehistoric and ubiquitous.
Moreover, some ancient hunter-gatherer societies reached such a pitch of trade and prosperity as to live in dense, sophisticated hierarchical societies with much specialisation. Where the sea produced a rich bounty, it was possible to achieve a density of the kind that normally requires agriculture to support it – complete with chiefs, priests, merchants and conspicuous consumption. The Kwakiutl Americans, living off the salmon runs of the Pacific North West, had family property rights to streams and fishing spots, had enormous buildings richly decorated with sculptures and textiles, and engaged in bizarre rituals of conspicuous consumption such as the giving of rich copper gifts to each other, or the burning of candlefish oil, just for the prestige of being seen to be philanthropic. They also employed slaves. Yet they were strictly speaking hunter-gatherers. The Chumash of the Californian channel islands, well fed on sea food and seal meat, included specialist craftsmen who fashioned beads from abalone shells to use as currency in a sophisticated and long-range canoe trade. Trade with strangers, and the trust that underpins it, was a very early habit of modern human beings.
The trust juice
But is trade made possible by the milk of human kindness, or the acid of human self-interest? There was once a German philosophical conundrum known as Das Adam Smith Problem, which professed to find a contradiction between Adam Smith’s two books. In one he said that people were endowed with instinctive sympathy and goodness; in the other, that people were driven largely by self-interest. ‘How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it,’ he wrote in Theory of Moral Sentiments. ‘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,’ he wrote in The Wealth of Nations.
Smith’s resolution of the conundrum is that benevolence and friendship are necessary but not sufficient for society to function, because man ‘stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons’. In other words, people go beyond friendship and achieve common interest with strangers: they turn strangers into honorary friends, to use Paul Seabright’s term. Smith brilliantly confused the distinction between altruism and selfishness: