Evolution of the market economy

First page of The Wealth of Nations (1776) (Wikicommons). Adam Smith mainly wished to understand why the market economy worked in his time, not why it didn't work in earlier times.

In his newly published book, Cognitive Capitalism, Heiner Rindermann argues that the market economy requires a population that thinks and behaves in certain ways. Without these mental and behavioral qualities, the production and exchange of wealth is handicapped. This factor, argues Rindermann, best explains why some countries are poor and others rich ... even when both share the same economic and legal system.

This argument would have seemed self-evident half a century ago. Since then, however, the trend on both the left and the right has been to treat humans as entities who can be freely substituted for each other. 

Yet this was not the view of Adam Smith, the founder of economics. In The Theory of Moral Sentiments, he noted that people do differ mentally and behaviorally, particularly in two key qualities:

The qualities most useful to ourselves are, first of all, superior reason and understanding, by which we are capable of discerning the remote consequences of all our actions, and of foreseeing the advantage or detriment which is likely to result from them: and secondly, self-command, by which we are enabled to abstain from present pleasure or to endure present pain, in order to obtain a greater pleasure or to avoid a greater pain in some future time. In the union of those two qualities consists the virtue of prudence, of all the virtues that which is most useful to the individual. The Theory of Moral Sentiments, Part IV, Chapter I

Today, these two qualities are called "intelligence" and "time preference." A third one, mentioned in The Wealth of Nations (1776), is the willingness to refrain from using violence as a means to gain wealth or status:

In those unfortunate countries, indeed, where men are continually afraid of the violence of their superiors, they frequently bury and conceal a great part of their stock, in order to have it always at hand to carry with them to some place of safety, in case of their being threatened with any of those disasters to which they consider themselves as at all times exposed. This is said to be a common practice in Turkey, in Indostan, and, I believe, in most other governments of Asia. It seems to have been a common practice among our ancestors during the violence of the feudal government. The Wealth of Nations, Book I, Chapter I

When the German and Scythian nations overran the western provinces of the Roman empire, the confusions which followed so great a revolution lasted for several centuries. The rapine and violence which the barbarians exercised against the ancient inhabitants interrupted the commerce between the towns and the country. The towns were deserted, and the country was left uncultivated, and the western provinces of Europe, which had enjoyed a considerable degree of opulence under the Roman empire, sunk into the lowest state of poverty and barbarism. The Wealth of Nations, Book III, Chapter II

This theme runs through The Wealth of Nations, albeit peripherally. The author repeatedly uses the terms "savage" (18 times), "barbarous" (36 times), and "civilized" (58 times). This theme also comes up in his private correspondence when he discusses Western Europe in an earlier and more barbarous age. The threat to life and property had a chilling effect on trade:

Travelling, from the disorders of the Country, must have been extremely dangerous, and consequently very rare. Few people, therefor, could propose to live by entertaining travellers; and consequently there would be few or no inns. Travellers would have be obliged to have recourse to the hospitality of private families: in the same manner as in all other barbarous Countries. The Correspondence of Adam Smith, p. 142

Adam Smith studied the workings of a market economy in its full flowering. Centuries earlier it had been much more rudimentary, and elsewhere it was still nonexistent. He knew this but failed to mention these constraints in his model of a self-generating, self-regulating market. Nor did he explain the long and painful evolution of a peaceful society where people understand the future consequences of their actions and prefer long-term gain even at the price of short-term pain.

Why this oversight? One reason is that he mainly wished to understand why the market economy worked in his time, not why it didn't in earlier times. A second reason was more ideological. He believed that this kind of economy had taken so long to develop in his country and was still nonexistent elsewhere because of ignorance: most people misunderstood how markets work and their benefits. If only they could be made to understand …

In reality, people had understood markets and their benefits since the dawn of history, even to the point of protecting them with walls and armed guards. Nonetheless, these islands of economic activity remained limited in space and time; there were plenty of markets but no market economy. Most economic activity was non-monetized and done within the family or for the local lord. The average person simply didn’t think and behave in a way that would let the market mechanism encompass the production and exchange of all wealth.

Adam Smith understood that certain qualities of mind and behavior had kept the market economy from developing, especially low foresight, high time preference, and high propensity for violence. But he attributed these qualities to lack of education. Like other Enlightenment thinkers, he believed that education would level all differences:

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education. The Wealth of Nations, Book I, Chapter II

Adam Smith lived in a society where the lower classes largely failed to reproduce and were steadily replaced, generation after generation, by the downwardly mobile cast-offs of the middle and upper classes (Clark 2007). The result was a shift toward middle-class values: thrift, foresight, and a rational mindset. By his time, most of the people he met were either middle class or impoverished descendants of the middle class.

This demographic shift may have caused the Enlightenment itself, which was not so much a time of new ideas as one of existing ideas being understood and appreciated by more people, as if the "smart fraction" of society had increased. Such an increase is possible even with a modest increase in mean IQ because the relationship between the two is nonlinear: "constant increments in mean IQ will not produce constant increments in the smart fraction" (La Griffe du Lion 2002). If mean IQ increases, the smart fraction will initially increase at a faster pace. If the level defining the smart fraction remains the same, this trend will reverse once mean IQ reaches a certain level. The same increase in mean IQ will then produce a smaller increase in the smart fraction.

The most intelligent members of society have a disproportionate impact on its development. Rindermann and Thompson (2011) summarize the literature on this subject, including their own research. Patent rates, GDP, and average annual GDP growth correlate much more with the smart fraction of a population than with the mean IQ of a population. "In concrete numbers, an increase of 1 IQ point in the intellectual class raises the average GDP by $468 U.S., whereas an increase of 1 IQ point in the cognitive ability of the mean raises average GDP by $229 U.S."

The Enlightenment may thus have been the most visible sign of a less dramatic change in the general population. Using soft data and Jean Piaget's theory of cognitive development, Rindermann (2018) argues that mean IQ was steadily rising in Western Europe throughout late medieval and post-medieval times. Previously, the average person had never developed beyond the preoperational mental stage, i.e., good ability to learn language and norms but limited ability to reason because of cognitive egocentrism, anthropomorphism, finalism, and animism (Rindermann 2018, p. 49). From the sixteenth century onward, more and more people reached the stage of operational thinking, i.e., the average person was better able to understand probability, cause and effect, and the perspective of another person, whether real or hypothetical (Rindermann 2018, pp. 86-87).

This cognitive shift seems to have been driven by the nascent middle class, essentially artisans who produced for a growing and increasingly dynamic market. A similar but stronger trend may also explain the rise in Ashkenazi intelligence during the same period (Frost 2007)

Conclusion

Adam Smith lived in a society where most people, whatever their station in life, had more or less the same genetic potential because they shared the same origins of ethnicity and class. He could be forgiven for thinking that a philosopher and a common street porter had the same inborn talents. But what's our excuse?

Heiner Rindermann has picked up where Adam Smith left off by seeking to describe the market economy as more than a mathematical model. It is in fact a radically new way of organizing society that has largely replaced the older one of family, kinfolk, and community. Going from one to the other required profound changes to mind and behavior:

Wealth in modern times is the result of cognitive capitalism. Cognitive capitalism refers to the idea that the cognitive ability of society as a whole, and of its cognitive elite in particular, is the prerequisite for the development of technological progress, for the historic development of modern society with its increasing cognitive demands and complexity, and for the wealth-furthering norms and institutions that form the core of the capitalist system (economic freedom, free markets, rule of law, property rights). (Rindermann and Thompson 2011)

References

Clark, G. (2007). A Farewell to Alms. A Brief Economic History of the World, Princeton University Press, Princeton and Oxford.

Frost, P. (2007). Natural selection in proto-industrial Europe. Evo and Proud, November 16

http://evoandproud.blogspot.com/2007/11/natural-selection-in-proto-industrial.html

La Griffe du Lion. (2002). The Smart Fraction Theory of IQ and the Wealth of Nations, March, 4(1)

http://www.lagriffedulion.f2s.com/sft.htm  

Rindermann, H. (2018). Cognitive Capitalism. Human Capital and the Wellbeing of Nations. Cambridge University Press.

Rindermann, H. and J. Thompson. (2011). Cognitive Capitalism: The Effect of Cognitive Ability on Wealth, as Mediated Through Scientific Achievement and Economic Freedom, Psychological Science 22(6) 754 -763.

http://alphanmanas.com/wp-content/uploads/alphanmanas_post_1863_754.full.pdf

Smith, A. (1759). The Theory of Moral Sentiments.

https://en.wikisource.org/wiki/The_Theory_of_Moral_Sentiments 

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.

https://en.wikipedia.org/wiki/The_Theory_of_Moral_Sentiments

Smith, A. (1987). The Correspondence of Adam Smith, edited by E.C. Mossner and I.S. Ross, Oxford: Clarendon Press

https://books.google.ca/books?id=NFoubpls2NIC&dq=adam+smith+critics&lr=&source=gbs_navlinks_s