Adam Smith and Web 2.0

History plays tricks on us. The real internet revolution picked up after the internet bubble had burst. And the economist whose framework helps most in thinking about the internet revolution is none other than Adam Smith, who kicked off economics more than 200 years ago.

The internet boom involved firms using the net to broadcast to customers - like ads on the TV - or to automate the sales process; for instance with customers booking their own airline tickets or ordering books. Today Web 2.0, or collaborative web, is enabling armies of volunteers around the globe to build a better world. Some are building and giving away public goods such as open source software like Linux and Firefox and reference resources like Wikipedia. Others provide expert analysis and commentary on blogs, often surpassing professional journalists. Others like Facebook connect people with something in common.

These phenomena can’t be easily explained within economists’ standard framework, in which economic decision makers are reduced to the ideal type known in the trade as homo economicus. Homo economicus is a pure, calculating egoist optimising his profit or “utility” without regard for others’ views or conduct (except where they’re useful to his ends).

Homo economicus might not explain which films we see or whom we socialise with. But a theory’s job is to highlight some aspects of reality - by leaving out others. And when you make investments or haggle for a car or house, you’re probably doing the best homo economicus impression you can.

Even here, however, something’s seriously wrong. We’re socially comparative beings. We care deeply about the conduct, opinions and values of our peers, using comparisons with them to orient our own ideas about what we need or value and how wealthy we want or need to be. And as for the subtler things about our economy, from the motivation of employees in large companies to all those amazing things that Web 2.0 is bringing forth, well homo economicus doesn’t seem to get close to what’s going on.

Enter Adam Smith’s Theory of Moral Sentiments, published 250 years ago last month - a book he intended partly as a theoretical foundation for his later economics. As Smith sees it, we begin our lives as blobs of infantile egoism - infans economicus if you like. But from then on Smith sees the process that we now call socialisation deepening and transforming us.

We learn from our immediate family, upon whom we are utterly dependent, that some things win their approval and admiration, others their disapproval and even disgust. Our craving of approval and dread of disapproval and our ability to understand others by imagining ourselves in their shoes draws us into a life long dialectical social drama.

In modern economics, the attraction of great power, fame or wealth is simply greed for more. Smith’s richer psychology offers a more plausible explanation. “[T]o what purpose is all the toil and bustle of this world?” Smith asks. What human drive lies behind avarice and ambition?

Is it to supply the necessities of nature? The wages of the meanest labourer can supply them … To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure, which interests us.

Smith was an advocate of self-interest in human affairs but in a much richer, more interesting way than is usually thought. In advocating a larger role for self-interest Smith identified the public goods that are pre-requisites for self-interest becoming socially constructive. Within economics the invisible hand only works in a peaceful, lawful society, and with strong, free competition.

Within society more generally, self interest becomes a rich ethical meal, not the morally anorectic egoism of homo economicus. Our natural sociality enriches and educates our self-interest. Craving esteem and imagining ourselves as others see us, we gain some objective appreciation of our own moral worth. And this is ultimately a spur towards virtue as we strive to be worthy of the esteem we crave (although of course as we are mere mortals there is much stumbling on our journey).

Like the opening of a new hemisphere to astronomers, Web 2.0 is scaling up the scope for human sociality and thus opening up whole new vistas for the expression of self-interest. And yet profit seeking is only a small part of how that self-interest is manifesting itself.