Why do we trade with strangers?

April 11, 2010

by Roger Koppl

Bill Butos edited the latest volume of Advances in Austrian Economics, which is devoted to “The Social Science of Hayek’s The Sensory Order.”  It is a terrific volume demonstrating that Hayek’s classic 1952 book in psychology matters for the social sciences, including economics.

Contributors include G. R. Steele, Leslie Marsh, Lorenzo Infantino, Francesco Di Iorio, and Peter Earl.  Bill’s introduction rewards careful reading.

My imagination was captured by Jean-Paul Carvalho and Mark Koyama’s paper “Instincts and institutions: the rise of the market.”  Carvalho and Koyama identify and close an important gap in our understanding of the evolution of trade. Thanks to Greif, Milgrom, North, and others, we have a pretty good idea how medieval institutions promoted trade and enabled the emergence of capitalism. Thanks to Cosmides, Fehr, Bowles and others we have a pretty good idea how our evolved psychology supports the institutional fabric of modern capitalist economies.  What we have not understood, however, is how our evolved psychology could be consistent with the emergence of the medieval institutions that promoted trade early on.  How could we have bootstrapped those early trade-promoting institutions?  Our evolved psychology was meant for life in band-level society.  Thus, it should have thwarted the early expansion of trade beyond relatively small groups.

Thanks to Greif, Milgrom, North, Cosmides, Fehr, Bowles and others, it is no longer such a puzzle that a vast network of trade with strangers can persist.  It remains deeply puzzling, however, that this vast network emerged in the first place.  Carvalho and Koyama show that our evolved psychology actually promoted the emergence of medieval trading institutions.  The really key point comes from de Quervain et al., who show that revenge is sweet: people are willing to pay a price to punish those who betray them.  Thus, when Europeans were largely unaccustomed to trade with strangers, feuding supported trade and set the stage for later developments such as the law merchant.  This is an important and original argument.  It shows just how important the paper of deQuervain et al. is.  And it is a good example of how research in economics is converging with research in once distinct fields such as neuroscience.  I suppose that last remark brands me as a neuro-Hayekian, and you can read about that subject as well (start here) in Bill’s wonderful volume.

7 Responses to “Why do we trade with strangers?”

  1. Troy Camplin Says:

    A recent Science article by Joseph Heinrich et al., “Markets, Religion, Community Size, and the Evolution of Fairness and Punishment,” in Science, 327 (March 19, 2010): 1480-84, also deals with this issue. I would think too that Christianity as the dominant religion also allowed many in the region to think of everyone who was a Christian as being in their tribe. Darwin suggested that we treat more and more people ethically precisely as we include more and more people in our tribe. While I think that’s part of it, the above suggests too that Hayek was on to something with his idea of social evolution as emerging into a spontaneous order — and it suggests too how it was begun.

  2. Lee Kelly Says:

    The intersection of sociobiology, neuroscience, and economics is quite fascinating, like a synthesis of Hayek’s social science with Popper’s evolutionary epistemology. It is an interesting convergence of matters usually divided into different subsets of academia: philosophy and biology, logic and evolution.

  3. koppl Says:

    @Troy,

    Glad you’re into Henrich and his group. I totally love their stuff.

    @Lee,

    The old divisions amongst disciplines are all pretty much gone IMHO. You have economists doing brain scans and fighting of the logic of group selection. Biologists entering the fray with arguments about altruism or religion. And on and on. It’s wide open and lots of fun. It’s much more interesting than it used to be.


  4. Troy makes agood point. But trade occurred between not just stangers, but adversaries: Muslims and Christians. Who conducted that trade? Jewish familes. Grief explains how trust relationships enabled that 3-way trade.

  5. Troy Camplin Says:

    Koppl,

    Increasingly, you are right that the old divisions are dissolving. Not fast enough for some of us, but they are starting to dissolve. An interdisciplinarian may find work one day yet!🙂

    Jerry,

    You’re right, of course, that even seeming adversaries would trade with each other. As Voltaire observed, the Christian, Jew, and Muslim all get along at the London Stock Exchange. Widespread religions no doubt help expand the ingroup considerably, but it’s hardly a sufficient explanation.

  6. Greg Ransom Says:

    Hayekian neuroscience has been advanced most explicitly by UCLA neuroscientist Joaquin Fuster:

    http://www.joaquinfuster.com/

    I recommend his work to anyone interested in the topic.

    Let me also suggest the Gerald Edelman has taken a decisive step beyond the limits of the Hayek-Hebb framework with his account of neuronal group selection.

    Hayek’s _The Constitution of Liberty_ explains how evolving, competitive systems with room for novelty provide the room needed for growth and progress — and Hayek uses Darwinian selection processes as a example of this.

    Edelman’s work shows how this room for novelty and growth is possible at the brain / neuronal group level, solving major problems in Hayek’s work (and that of everyone else).

    Add the work of Kuhn to this, and you have a fairly robust picture of the selection processes that Hayek presumes, but (mostly) fails to provide mechanisms for.

    Edelman also suggests ways to unify brain science with Wittgenstein’s work of language and concepts — work that also ties in directly with Hayek’s account of imitated patterns of behavior (Wittgenstein talks of “going on together” and of “shared natures”).

  7. Troy Camplin Says:

    Thanks for the names. I needed them for an article I’m writing


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