The first economic experiment in our Humanomics class is based upon my research article with Sean Crockett and Vernon Smith. The idea for the project came from an honors course that Vernon and I have co-taught using experiments to teach the classic primary texts of Hume, Smith, Marx, Jevons, Walras, and Hayek. One initial gap in the course was that we didn’t have an experiment to cover Adam Smith’s fundamental proposition that exchange makes specialization possible. So I set out to design one.
In the traditional market experiment, the experimenters explain to the participants how to trade. For this experiment that seemed more than a little heavy handed if the question is, what is the process by which exchange "gives occasion," as Adam Smith says, to discovering the "division of labour"? OK, we’re supposed to trade. What else is there to do in this experiment? Choose production? Hmmm, I guess I’ll produce the most I can to trade.
Thus the first requirement in building the design was that participants would have to discover specialization and exchange. Since designing experiments is more fun when playing with others, I invited Sean Crockett, a pre-doctoral visitor at the time with expertise in general equilibrium analysis, to brainstorm how we might design an experiment in which the participants would have to discover exchange and specialization and build their own market institutions to create wealth. When we had something, we discussed the platform with Vernon, and it now serves as the foundation for Humanomics and for how I think about Humanomics.
In the experiment the participants are endowed with a house and a field displayed as icons on a computer screen. The participants choose how much of their daily production time they would like to allocate to producing red and blue items in their field. They are then told, deliberately in the passive voice, that "you earn cash based upon the number of red and blue items that have been moved to your house." What they have to discover is that not only can they move items to their own house, but that they can move items to other people’s houses.
There are two types of people in this world, odds and evens. Evens (Person 2, 4, 6, and 8) earn two cents for each two blue units that are consumed with one red unit. Odds (Person 1, 3, 5, and 7) earn three cents for each three red units consumed with one blue unit.
This figure summarizes the environment for one even and one odd person:
Given her ability to produce and her preferences to consume, a self-sufficient odd person can maximize her consumption by producing 30 red and 10 blue. Similarly, a loner even can maximize his profit by producing 13 red and 26 blue. Summed together, this outcome is represented by the point labeled as "autarky" or (43, 36).
Unbeknownst to the participants, evens have an absolute and comparative advantage in producing blue, and odds an absolute and comparative advantage in producing red. If an odd person spends her entire production time producing red, she can produce 130 units, shown as the red dot on the horizontal axis. If an even person spends his entire time production time producing blue, he can produce 110 units, shown as the blue dot on the vertical axis.
Suppose that an odd person produces 130 red units, and an even person 110 blue units. An odd person can then trade 40 red to an even person for 30 blue. An odd person would then consume 90 red and 30 blue, and an even person would consume 40 red and 80 blue. This point is labeled as "competitive equilibrium". The black lines are a frontier for what an odd and an even person together can produce (a production possibilities frontier).
The last details are that the middle of the screen contains a chat room in which the students are free to discuss "any and all aspects of the experiment" anytime during the experiment, though they cannot reveal their name. The research experiments lasted 40 days of 100 seconds, but our classroom economies only lasted 27 days of 90 seconds. For the first 13 days the participants are in pairs. On day 14, the software merges the pairs into two groups of 4, and on day 21, all 8 houses and fields appear on everyone’s screen. Finally, because this world can be frenetic and hence tiring, every 7th day is a day of rest in which there is no production but the chat room is still open.
Now, what do people do? There were two economies of eight people in both sections of the course. Below I present the results for the two extreme groups.
At one extreme, the economy achieves 88% of the possible wealth above self-sufficiency by the last day:
And at the other extreme, only 6% of the possible wealth above autarky is realized:
Why the disparity? (We see the same variance in the research experiments.) All of the students are Chapman freshman undergrads. All have read and discussed the prologue and first two chapters of The Rational Optimist. The geographic, physical, and economic settings are identical. Why is group 4 wallowing in poverty and group 2 more than twice as rich by the end?
Over the first 14 days, group 2 exchanges 533 words and group 4 some 430, but the content of the discussions is rather different. In group 2, Person 8 asks on day 2, "what are we trying to accomplish?\" and Person 4 on day 7, "lets work together to make a profit yall". These students are immediately engaging their counterparts as part of an inclusive "we". The same is not true in group 4. At best any "we" is a question on day 7: "Are we supposed to be sharing information as a team or is this an individual competition?" Over the course of the first 14 days, the word "we" is used 16 times to engage another field owner in group 2. In group 4, there are just 5 instances of "we".
For the students in this Humanomics class, experiencing this world and discussing alternate realizations of it illustrate what Matt Ridley cleverly calls "The Manufacture of Virtue" in trade, albeit with much less on the line: "Taking the first step to proffer the hand of cooperation to a homicidal enemy must have been momentous and almost impossibly difficult, which is perhaps why it is such a rare trick in the animal kingdom" (p. 88). Even with stakes of a grade, this experiment demonstrates that the values of a particular community can accelerate or retard the creation of wealth.
On day 14, Person 7 in group 4 asks, "what is the best way to go about this? there is some trick to obtain a ton of one color and manipulate the other color to increase your profit substantially." The trick is not to manipulate for one’s own gain. The uniquely human trick is to integrate strangers into a "we" for voluntary mutual gain.