Vernon Smith and Bart Wilson – Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century
This is on my shortlist of best books of the year. Smith and Wilson combine insights from their experimental economics research with Adam Smith’s Wealth of Nations and especially his 1759 book The Theory of Moral Sentiments. Not only are the two systems compatible, they make each other stronger. Adam Smith’s insights into how empathy drives human behavior turn out to be confirmed by empirical lab experiments. Neither Adam nor Vernon Smith nor Wilson) is much on the fictional hyper-rational Homo economicus who lives in textbook perfect competition models. They are more interested in Homo sapiens, a much more subtle and demanding subject.
This book isn’t the easiest read for a layman. While Smith and Wilson do provide some brief explanations, a working knowledge of the more common game theory games is helpful, especially the Prisoner’s Dilemma and the Ultimatum and Dictator games. What the lab experiments find is that people, as they actually are, tend to be both happier and wealthier when they can make their own plans, rather than when they attempt to fulfill other people’s plans from above.