Robert Shiller on Human Traits Essential to Capitalism

You’ve started off with Adam Smith’s Theory of Moral Sentiments (which, incidentally, was also one of Karl Rove’s top five, when he did an interview with us earlier this year).

It’s interesting that we have similar tastes – in that respect anyway.

Tell me why you chose it.

This is a remarkable book, because although in some cases it’s outdated, he has an interest in exposing human traits that are relevant to thinking about our daily lives, and he has, to me, a surprisingly insightful ability to do that. He doesn’t have any of the research methods of the modern social sciences; it’s all casual observation, and reading, I suppose, of other people and literature. But there are observations and conclusions in there that I never had before. They’re focused on a purpose, which is understanding how our society works and how people get a sense of mission, of purpose, that somehow makes things work as well as they do.

Can you give a particular example of a trait where you thought, ‘Wow! I hadn’t thought of that before, but he’s so right’?

Well, if you put it that way, it’s going to be disappointing – because your readers will say, "Yes I had thought of that before!" It’s a personal thing. But the thing he starts the book off with is sympathy. He uses the word sympathy – and he’s really focused on selfishness versus social consciousness. He sees that sometimes people are completely selfish, and that’s the problem for any economic theory – how to make a society work when people are completely, unremittingly selfish.

But he also notes something else: He doesn’t use the word empathy, because empathy hadn’t been defined yet. But it’s a very important observation about human behaviour, which is that we are wired to feel each other’s emotions and to have a theory of other people’s minds (not that he would have used the words wired or theory of mind either). The English word empathy was coined around 1900, in a translation of the German word Einfühlung from a German book by psychologist Theodor Lipps. What it means is that it’s not that I feel bad because I observe that you are suffering, it means I actually feel your feelings. So people may often be selfish, but they also have empathy.

Smith also talks about a selfish passion, which is a desire for praise. He argues that people instinctively desire praise, but that, as they mature, this feeling develops into a desire for praiseworthiness. This is a little bit different, and I haven’t seen it written about anywhere else. He points out that, suppose you were praised for something that you knew you didn’t do: It was a mistake, people thought you did something, so they’re praising you, but in fact you didn’t do it. It wouldn’t be such a good feeling – even if you could keep the lie going, and continue to receive the praise. He uses that to show that what people really want is to be deservedly praised. And that turn of mind, which develops as people mature, is what makes us into people with integrity.

I think this underlies how the economy works. We start out with selfish feelings, which are intermixed with feelings of empathy for others, and then we develop this mature desire to be praiseworthy. I think it is central to our civilisation that people do that. Adam Smith uses the example of mathematicians. Mathematicians seem to be, in his observation, totally unconcerned with popular praise. That’s because they know they’re doing good work in their mathematics, but also that the public will never appreciate them for what they do. They live in relative poverty, and they don’t seem to care about praise, except from their fellow mathematicians. And yet they’re doing all of this work which benefits humanity. This is something that happens in our society, and it makes the system work. He doesn’t go on, in this book, to explain how this develops into something that works. But this does mark the beginning of the thought process leading to his later book, The Wealth of Nations, in 1776.

Doesn’t The Wealth of Nations focus more on the negative aspects of human nature – the self-interest as opposed to the sympathy?

I didn’t see a contradiction between the two books. The Wealth of Nations is realistic about human behaviour and argues that a reasonably free enterprise system works well because it combines the different, sometimes conflicting passions of man, into something that is well-directed.

Isn’t Theory of Moral Sentiments also the book where Adam Smith first uses the term ‘invisible hand’?

I once did a search for the "invisible hand", and it was actually used before Adam Smith, but not in an economic context. I think Adam Smith was just using an expression of his time. I wouldn’t attach a whole lot of importance to it. My recent book with George Akerlof is Animal Spirits, and we say Keynes used that term. But he used it in a totally offhand manner. Everyone was using it; any literary person knew that expression.

Your next book is The Passions and The Interests: Political Arguments for Capitalism Before its Triumph, by the great Albert O Hirschman.

This is a great book. It traces the history of an idea – an idea that is central to our whole civilisation today. The idea is that human nature is basically unruly and destructive, or has the potential to become so, but that we’ve designed a society that sets a space for this kind of impulse, where it’s acted out in a civilised manner – and that’s capitalism. So when we reflect on some of the horrors of capitalism, we have to consider that things could have been much worse if we didn’t have this system. Our fights would have been on real battlefields, rather than economic battlefields. That’s a theory, that’s an idea that really led to the adoption of capitalism, or the free enterprise system, around the world.

Capitalism had quite a tough path toward acceptability, I think. Traditionally, making money was viewed as unseemly, and avarice considered a deadly sin.

In medieval times, the dominant intellectual tradition was one of sin and the avoidance of sinful behaviour. Lust for power or wealth were unambiguously bad things. Even in a feudal society, such passions were acknowledged by society as, in some sense, legitimate, but the view didn’t have any authority. In the Renaissance, the authority of these self-denial concepts began to recede. Hirschman talks about Machiavelli representing a different ideal (of sorts) that was emerging. But it wasn’t until the early 1700s that we saw clear thinking about really having a system that becomes stable in a military sense, because you develop a business class that has an interest in the political stability of the system, as they fight it out for their economic interests. He emphasises the philosophy of the French writer Montesquieu and the Scottish writer James Steuart. They both wrote in the mid-1700s about the ideal of a merchant society that would be orderly and looking out for the material interests of people.

Was communism a big setback to this very positive view of capitalism?

Hirschman doesn’t emphasise communism, though he does emphasise that all along, during this course of history, there were critics of capitalism. Montesquieu and Steuart didn’t have the final answer. Marx was obviously among these critics, but the kind of criticism that Hirschman emphasises is a kind of criticism which may be in Marx but is not a major theme. The criticism is that capitalist society is so good at reducing our passions to passions about business, that we become a kind of vulgar, low-brow society – it doesn’t serve the spiritual interests of people.