Imagine being stranded alone on a deserted island. You’ve developed basic survival skills such as fishing and foraging, although you are better at the latter than the former. You built a functional shelter and have enough food to survive. But life could be better.
One day after gathering coconuts, you suddenly see another human on the beach. That individual, who is carrying a basketful of fish, spots you as well. You both pause, staring at one another in surprise.
This “Robinson Crusoe” scenario is a common in many Economics 101 courses to advance the discussion of market exchange. If you’ve ever taken this course, you know what happens next. Both individuals instantaneously realize it is in their mutual interest to exchange goods, agree to specialize, and construct a chart summarizing their comparative advantages. You, being better at climbing trees, become the coconut collector, whereas your new trading partner becomes the expert fisherman. Your quality of life improves with the increased efficiency arising from specialization and trade.
This logic arises directly from Adam Smith and David Ricardo. In The Wealth of Nations, Smith argues that the division of labor improves productivity by allowing individuals to enhance dexterity and avoid “sauntering” between activities. But if one devotes more attention to one task, it is necessary to rely upon others to supply those things you no longer produce for yourself. Fortunately, humans are natural-born truckers, barterers, and exchangers. An expanded market that promotes exchange with an increasing number of individuals thus allows for more specialization, productivity, and wealth. Even if some individuals are better at all tasks, division of labor still works if people specialize in the things they are relatively best at. This is the concept of comparative advantage articulated by David Ricardo in The Principles of Political Economy and Taxation.
Thus, on our formerly-deserted island, two people leveraging comparative advantage increases both individuals’ welfare. Cooperation improves living standards.
Not So Fast: Relations Before Transactions
But is this really what would happen if two strangers met for the first time on what was believed to be a deserted island? Confronted with this situation, would you automatically draw a comparative advantage chart? And would you honestly expect the stranger you just encountered to agree without question that specialization and exchange are the obvious solutions to a fruitful (and fish-filled) standard of living? Is it obvious that cooperation would spontaneously emerge?
I propose that the answer to these questions is emphatically “No!” Rather, the first reaction of each individual is more likely to be confusion, distrust, and fear. Granted, both castaways may be excited to meet someone else; companionship is often a desired good. But what if the stranger is hostile, plans to attack, and steals all your hard-earned coconuts? And what if the other person is part of a larger tribe that views intruders with suspicion? With little knowledge of the “other,” it may be prudent to expect conflict, and not cooperation, as a possible outcome. Uncertainty about the intentions of strangers clouds the possibility of cooperation.
The initial moment of contact between two strangers creates a fundamental choice. Even before mutually advantageous exchange can occur, each party must decide whether to attempt friendly interaction or run away in fear. Choosing the latter option would leave you “alone” on the “deserted” island without any gains from trade to improve your living standards. Things wouldn’t be the same as before, however. Now, you face trepidation that the “other” might sneak into your camp, pilfer your goods, and possibly cause you harm. What a horrible, Hobbesian world this would be – solitary, poor, nasty, brutish, and (alas) probably short!
You might surmise that mutually advantageous exchange and cooperation are the better choice in this scenario, but how does one convince the other party of your peaceful and productive intentions? You probably aren’t the only one thinking this; the other person is likely engaged in the same thought process. As such, something else must happen before we create a comparative advantage chart. Cooperative relations don’t spontaneously occur. Uncertainty must be alleviated. Trust must be built. Relations must precede transactions. But how?
Fellow-Feeling Builds Trusting Relations
While Smith is best known for explaining how specialization and market exchange lead to prosperity, he also gave us the recipe for solving the initial problem of uncertain intentions in his other magnum opus, The Theory of Moral Sentiments (TMS). Indeed, he lays it out clearly in the first sentence of the work: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” Smith calls this “fellow-feeling.” From here, Smith builds a theory of morality based upon prudent and propitious decisions under conditions of uncertainty.
Smith accomplishes this task by positing the mechanism of the impartial spectator. When making important decisions affecting others, we step outside of ourselves and consider how others would react to such choices. One should choose the option that best improves the well-being of all individuals affected, and one that is socially propitious – that is, in keeping with accepted norms and values. Choices are not merely about satisfying our immediate material preferences, as simplified neoclassical economic models assume; such decisions include considerations about how society views our choices. Our social reputation matters. We want not only to be loved, but to be lovely; not only to be praised, but to be praiseworthy. This takes human choice beyond immediate and direct gratification, embedding it within a context of long-term reputations and relationships, the things that are crucial for extending markets. Before markets, we must forge trusting relationships. Fellow-feeling becomes the foundation of the wealth of nations.
The Gift of Sacrifice
Let us return to our “deserted island.” When we last left our two castaways, they were both staring at one another, wondering furiously whether the person across from them was friend or foe. The answer to that question will determine whether there will be any bartering, exchanging, specialization, and increased prosperity. What to do now?
Cooperative exchange first requires a desire for peaceful relations. Achieving this likely necessitates a sacrificial offering – a gift – to signal one’s intentions are not hostile. If you offer up several coconuts by laying them on the ground and motioning with your hands that they are for the stranger to take, you have shown a willingness to give up valuable resources to forge an ongoing relationship. Michael Thomas and I have argued that sacrificial gift-giving is historically common as a means of building trust among strangers and alleviating uncertainty surrounding contractual exchange.
Gifts also encourage reciprocity, a needed ingredient in economic exchange. Even a simple “thank you” signals a gracious desire for a relationship. This seed of reciprocal obligation underlies all commercial relations.
Island Earth: Ritualistic Gifting, Civility, and Prosperity
The “deserted island” example is instructive, but is it realistic? Very few people are stranded on desolate atolls; we are born into societies populated by millions of individuals. We encounter dozens of people daily, some of whom we’ve never known before. Now consider that each time you meet a stranger in a commercial environment, you are essentially in the same scenario as our hypothesized island. Without some level of certainty whether a potential trade partner is honest and reliable, we are unlikely to exchange. Without generalized trust, the extent of the market shrinks drastically, and we are the poorer for it.
Unfortunately offering coconuts to every stranger we meet is cost-prohibitive. So how could society recreate the fellow-feeling and beneficial sacrificial behavior witnessed on our island? The answer is public ritual.
To overcome the difficulties of giving gifts to every stranger we encounter, societies invest in ritualistic forms of gift giving. Christmas, Hanukkah, Valentine’s Day, and even Halloween are infused with gifting practices, reinforcing the values of sacrifice and reciprocity. These ritualistic gifting practices are celebrated publicly. People visibly adorn their residences and businesses with decorations and dress in fancy attire during holidays. Such frivolous expenditures indicate willingness to sacrifice resources to be seen as lovely and praiseworthy. We celebrate businesses and households that decorate for the enjoyment of others.
To put it another way, public gifting rituals help build key components of civility — sacrifice, graciousness, and reciprocity. This is the basis for the Golden Rule, a simple yet effective decision-making heuristic that allows two strangers on a desolate island realize gains from trade and benefit from specialization. Adam Smith would approve!
Relations before transactions. Trust before trade. Our moral sentiments before the wealth of nations.
The lesson extends beyond the classroom. We should all remember that the simple act of freely giving a coconut can initiate and enhance the power of voluntary exchange and comparative advantage to create common prosperity.
