Jaan W. Whitehead, "The Forgotten Limits: Reason and Regulation in Economic Theory", ed. Kristen Renwick Monroe, The Economic Approach to Politics: A Critical Reassessment of the Theory of Rational Action, New York, HarperCollins Publishers, 1991.
The problem is that, by extracting the rational actor model from its economic context, the factors in the marginalist model which appeared to support the changes in how individual behavior was viewed - namely the presence of the competitive market system as a harmonizing force and the clear definition of the desirable collective goal of maximizing output - were no longer present. Political life does not have such a clearly defined collective goal or a dependable natural regulatory force. [55]
[Self-regulating dynamic]
[Adam] Smith's concern in all of his work was to examine the relationship between the individual and society. He saw humankind as an emotional being, and he tried to analyze the types and intensities of the various emotions that motivated human behavior. As a result of his analysis, he determined that, left on its own, emotionally driven behavior would result in conflict. From this he concluded that, in order for people to live together in society, their behavior needed to be constrained or regulated. Such constraint could take place through self-regulation, but his study of human beings deemed this an unrealistic basis on which to establish social interaction. Selfish and destructive emotions were too powerful to be reliably tamed by voluntary self-regulation. A second alternative was coercive regulation by government, but, since human beings also make up government and are prone to both mistaken judgment and infringements of personal freedom, this became, for Smith, a last resort if other types of regulation failed.
A third alternative, and the one that Smith favored, was regulation through natural forces that were impersonal but could be relied upon. ... Since self-regulation was undependable and government regulation uncertain and potentially coercive, his analysis of moral, political and economic behavior became a search for such natural regulatory forces which could produce harmony between the individual and society. [56]
[Naturally regulating forces]
We cannot know what further analysis Smith might have made of political life if he had lived or if we had a fuller record of his thought, but it is clear that he believed that a strong regulatory force was necessary in political life. Since he did not identify such a natural regulatory force, he recognized law or government coercion as taking its place. [58]
His central proposition was that people basically want to better their economic condition. In part, this comes from the need to sustain themselves and their dependents. But in larger part it comes from the desire to achieve status and the approval of other people. Although Smith did no necessarily approve of economic achievement as the basis for status, he found it to be an extensive and commanding factor of the society he was investigating. This desire to achieve status produced vigor in economic activity that prudence alone would not produce. [59]
[Strive for status]
By observing how people acted if left free to follow the strong emotions of self-interest, Smith discovered that there was, indeed, a natural mechanism that regulated behavior which was the mechanism of the competitive market. In the market process, although people tried to buy at the lowest price and sell at the highest price in order to maximize their goods and income, the market process, in fact, forced the curtailment of these objectives for each individual through the competition of all individuals. This competition led to the most efficient utilization of resources which maximized total output. Although each individual acted in only a self-interested way, the competitive regulation of self-interested behavior led to public benefit in the form of increased total output. [59]
[Competition creates constraint]
Under the influence of the marginalists... not only did Smith's concern with the emotional bases of behavior and the need to regulate that behavior become obscured but many of the wider political and social concerns of the classical economists became excluded from consideration. [63]
Smith's view of humans as emotional beings in need of regulation was replaced with a view of them as self-contained and rational actors. [65]
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