1. How to learn sociality : Mandeville and Hayek Marina Bianchi University of Cassino marina.bianchi@unicas.it Storep Seminars Cassino 4 March 2016

2. Mainstream economic theory has encouraged us to take institutions as given and to think in terms of preordered outcomes, such as market-clearing prices. The process of coordinating different interests remains unexplained in this tradition. The question of how cooperative norms emerge among uncooperative individuals has a long history, however, and a growing recent literature on institutions stresses the importance of explaining them as the endogenous and unplanned result of the separate pursuit of individual interests. The idea o f institutions as spontaneous, unintended order may be traced to Bernard de Mandeville, and the idea of economic coordination as a complex process of acquiring knowledge through trial and error belongs to Friedrich Hayek. More recently analysts have tried to formalize these insights in a game-theoretic approach.

3. Mandeville published The Fable of the Bees, or Private Vices, Publick Benefits in 1714. It was a real revolution in political and economic thought. The main idea is expressed in the form of a paradox. Private vices enable societies to live in splendour, while virtues bring them to poverty. As the final verses of The Fable say: “Fraud, Luxury and Pride must live, While we the Benefits receive”. How could this be? Mandeville’s view of unsocial sociableness

4. Through the fable of the bees that live in luxury and ease in the fruitful hive, Mandeville compares two different images of society. One is the image of a small, pacific and frugal society, closed to external exchanges, with low consumption and no money. The other is the image of a large, commercial and military society, based on mutual exchange of goods and services.

5. the social links among its members can be based on their direct and voluntary agreement and cooperation. Private moral principles such as benevolence, altruism, frugality and temperance may become the conditions for public benefits and constitute the social amalgam of a compact community. At the same time, for Mandeville, this golden age society, small and virtuous, is closed to development and prosperity, as well as to sciences and political supremacy. In Mandeville’s view only in the limited and easily controllable society

6. In the second kind of society, the large and commercial one, the social links are not based on a moral sense of community among its members but exclusively on their private drives and self-interested behavior. In this society the social coordination of the different individual desires does not depend upon the control of any one of its members. Here there is is no direct connection between private virtues and social benefits

7. But how can a self-interested, unsocial collection of individuals become a “society”? What is the process through which harmful inclinations and desires become the original drives of social cohesion? “It is the Work of Ages to find out the true Use of Passions, and to raise a Politician, that can make every Frailty of the Members add Strength to the whole Body, and by dextrous Management turn private Vices into publick Benefits” (Sixth Dialogue, 2:3 19).

8. Mandeville’s solution to the problem of social coordination among self-motivated individuals relies on the discovery of the role of the institutional complex represented by the market, extensive division of labor and competition, guaranteed by a system of laws, in “utilizing” for social ends private and uncoordinated drives. Between social institutions and individual desires a kind of feedback loop is established by Mandeville. Institutions, while shaping and channeling human passions, stimulate and enlarge them into a cohesive community. Individual passions, for their part, are the inner motor that induces and (unwittingly) promotes those social orderly rules. The evolution of language

9. In this unplanned, spontaneous mechanism of evolving rules men learn “to play the Passion against itself” and to exchange the natural symptoms of the passions for “other Symptoms, equally evident with the first, but less offensive, and more beneficial to others” (Third Dialogue, 2: 125-26). Thus pride is turned into honor and fear of shame (125; Remark [C], 1:63-64), and force and violence are turned into politeness and good manners (Sixth Dialogue 2:291,295). This spontaneous process of social learning is never irreversible, Mandeville always warns. He stresses how social and moral codes, not being founded upon any real principle of virtue or religion but being the result of art and education, can easily be turned into vices again: “The same Fear of Shame, that makes Men sometimes appear so highly virtuous, may at others oblige them to commit the most heinous Crimes” (Third Dialogue, 2:124; “A Search,” 1:343). In this case, the conditions for stabilizing the cooperative strategy must be articulated and codified in a system of laws, contracts, or mutual agreement

10. Mandeville views this process of social learning as the result of two things: the presence of obstacles and human ingenuity. The nature of obstacles is either natural, such as the original danger from beasts, or social, such as the threats which men pose to each other (see the steps toward society as narrated in Dialogues 2:230-31 and 266-67). Human ingenuity, the ability innovatively to overcome obstacles, is rooted in and nursed by private passions (vices). Mandeville’s solution implies that rules evolve and are created because individual drives remain in a sense unsocial; that is, they are not bound to obey a predesigned plan but are able to create differentiation and novelty. This is what gives substance to Mandeville’s view of unsocial sociableness: society arises not despite but because of individual conflicting interests

11. This view of the emergence and role of social institutions is surely new. It is deeply different from the traditional answers to the problem of the constitution of societal rules. The theory of “social contract,” in which the wise statesman directly creates the rules of rational government, leaves unexplained how the complex process which coordinates separate individuals can be discovered and reproduced. On the other hand, the “utilitarian” solution in which private interests translate in an orderly way into social welfare simply assumes away any possible discrepancy between individual and social needs and drives.

12. Both these solutions refer to the large society and its social rules as if they had the features of the small and controllable group, as if the rules and goals which belong to one belong to the other as well. In Contractarianism, the social authority can combine the dispersed and differentiated individuals of the large society as if the rules of coordination were as easily knowable as in small groups. Utilitarianism, on its part. attributes to individuals a homogeneity and uniformity of interests, as if they belonged to that small society that had shaped and formed their interests and goals in sameness and cohesion.

13. Friedrich Hayek’s spontaneous order: The correct vs the corrigible society

14. Hayek was the first to utilize Mandeville’s idea that sociality is based on individual drives and opposes it to the classical equilibrium solution of economic theory Hayek emphasizes the spontaneous and unplanned order of social institutions but gives this more precise form as a process of social learning and discovery (Hayek 1968, 253, 260; Hayek 1978, 269). The process that in Mandeville transforms private vices and inclinations into socially beneficial outcomes is, in Hayek, specified as a process of acquiring and transmitting knowledge through trial and error.

15. DESIGNED VERSUS SPONTANEOUS ORDER In comparing different rules of social order Hayek draws a first fundamental distinction which remains the dominant theme of all his reflections. The distinction is between Norms that result from conscious design and planned action and Norms that are a spontaneous creation, the gradual result and accumulated experience of many generations. The first set of rules belongs to the internal behaviour of organizations, the second describes the external interdependencies among organizations The main source of error in describing how institutions emerge consists, for Hayek, in collapsing these two different explanations of social structures into one. Such collapsing occurs when we consider all rules of social interaction to be the result of a planning mind and when we assimilate all social rules to the rules of organizations.

16. This is the ‘artificer bias’ kind of explanation (Ullmann-Margalit 1978): since social structures show orderly, patterned rules, they are (must be) planned. This view, which attributes the origin of all social institutions to invention or design, is sharply contrasted by Hayek to that order of society that is due to a process of experimentation and trials, which requires the efforts and accumulated ‘hard-earned’ experience of many generations (Hayek 1960: 60). This pre-Darwinian evolutionary view is, for Hayek, the great contribution of that tradition of thought initiated by Mandeville and David Hume and continued by the Scottish moral philosophers of the eighteenth century, such as Adam Smith and Adam Ferguson in the field of economics, and Edmund Burke in the field of political thought (Hayek 1948: 8–9; 1973: 22). The visible hand

17. The answer is based on what Hayek describes as the use of knowledge in society, the way knowledge is acquired and transmitted through social interaction. The problem: In the complex order of modern society knowledge exists only in ‘the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess’ (Hayek 1945:77). The solution must rely on a mechanism that is able to utilize individual knowledge without any individual really needing to know the overall outcome, a system that, though based on the decentralized contribution of every one of its members, does not rely, for its existence, on any of them (Hayek 1946: 12). But what makes this view of evolutionary, spontaneous order a better analytical tool than the view of planned order?

18. Evolved codes of law, languages, family organizations, moral rules as well as rules of conduct, are the result of this process, which gradually and tentatively selected better-fit and socially more beneficial institutions (see, for example, Hayek 1978:253). The market with its system of property rights and legally enforceable rules, represents the best example of this evolved set of institutions. The problem that the market has to solve is in fact how the particular knowledge embedded in every individual plan can be diffused and made general. How, for example, can the minimum cost of production be discovered? how can the desires and attitudes of unknown customers become known ? (Hayek 1946:100–1); which goods are scarce goods and just how scarce are they ? (Hayek 1978:181). These are all problems that measure the efficiency of the communication system of the market.

19. The price system is the communication system here. Prices are the informational device which enables individuals to acquire the information necessary constantly to change and readjust their choices. ‘ Prices direct their attention to what is worth finding out about market offers for various things and services’. Prices detect potential and unused opportunities and transform them into effective ones. Simply by letting themselves be guided by these common indicators (Hayek 1978: 60), people have learnt to substitute abstract rules for ‘the needs of known fellows’ and for coercive, imposed ends (ibid.: 61). Through this system an entire new set of opportunities to be exploited has been opened up. Market prices, therefore, do not simply constitute a matching-of-expectations device. Beyond this, they signal where new opportunities are present, where as yet unexplored needs can be satisfied, and how completely unknown people can be reached., In this way they activate a process of discovery

20. Communication Failures Rules of order are viewed by Hayek mainly as a solution to a problem of co-ordination, as the gradual discovery of that system of general rules of communication that enables people to make the best use of their specific knowledge, without any recourse to ‘conscious social control’ (Hayek 1944: 36). From the legal system to the rules of language, we constantly observe a progressive displacement of the concrete by the abstract. (Hayek 1952 and 1967). But not all institutions are expressions of communication failures.

21. Cooperation failures There is another set of rules which we may expect to emerge as a solution to a different class of problems – those related to failures to co-operate. Cooperation failures arise in those strategic situations in which the players, by pursuing their private interests obtain an equilibrium outcome that is worse than the outcome that they would have obtained had they played more co-operatively. These game situations are, as is widely understood, situations of a Prisoner’s Dilemma (PD) type. Is Hayek’s model of the emergence of co-ordination rules still usable in these other cases?

22. 2 1 R R 2 L L 0 1 2 1 D D C C Coordination failures Common interests Cooperation failures Discordant interests Rules of traffic Game Prisoner Dilemma game 3 0

23. It is clear that the reason for co-operation failures does not depend uniquely on the existence of dispersed knowledge. A player’s choice of defection is made irrespective of other player’s choices. Even perfect intelligibility of one’s opponent’s willingness to adhere to a co- operative rule does not change the dominant strategic choice to defect. The origin of a failure to co-operate is due to the contrast of interests that arises from the gains associated with the possibility of outcompeting the rival. Unless the rules of the game are changed, and a new incentive structure is provided so that the reasons for contrast disappear, the mutual losses that accompany this symmetric competitive behaviour are the unique solution in PD situations.

24. The market system and competition are not only the place only for arbitrage gains but also of the searchfor new forms of gain. And a developed system of laws In cooperation games On the one hand, a complex system of moral codes, rules of fairness, as well as an articulated system of punishments for the violators, has to be continuously discovered and adjusted. On the other hand, the search for competitive gains must always find new channels.

25. Mandeville, we have seen, has a powerful expression which applies to this form of competitive behaviour: In the market process players learn to play the passion against itself. Vices are not replaced by virtues; they remain vices, only they become more sociable in their effects. Nothing guarantees that this form of socialization proceeds steadily and irreversibly. But the learning procedure that is implied in the process will provide the flexibility for adjustments and corrections. The meaning of‘order’ changes it is not a state of affairs, but a process; it is not not a correct state, but a corrigible one.

26. Hayek, F.A. (1937) ‘Economics and Knowledge’, Economica, 4: 33–54, repr. in Hayek 1948, pp. 33–56. —— (1944) The Road to Serfdom, Chicago: University of Chicago Press. —— (1945) ‘The Use of Knowledge in Society’, American Economic Review 4: 519– 30, repr. in Hayek 1948, pp. 77–91. —— (1946) ‘The Meaning of Competition’, in Hayek 1948, pp. 92–106. —— (1948) Individualism and Economic Order, Chicago: University of Chicago Press. —— (1952) The Sensory Order, Chicago: University of Chicago Press. —— (1960) The Constitution of Liberty, Chicago: University of Chicago Press. —— (1968) ‘Competition as a Discovery Procedure’, in Hayek 1978, pp. 179–90. —— (1967) Studies in Philosophy, Politics and Economics, Chicago: University of Chicago Press. —— (1973) Law, Legislation and Liberty, Chicago: University of Chicago Press, vol. 1. —— (1978) New Studies in Philosophy, Politics, Economics and the History of Ideas, Chicago: University of Chicago Press. —— (1988) The Fatal Conceit: The Errors of Socialism, London: Routledge.