Are capitalists happier?

L-R: Vernon Smith, Ronald Rotunda, Bart Wilson

As many of the world economies seem to be collapsing simultaneously, it is a good time to step back, take a deep breath and look at the bigger picture. Which kind of economy ultimately works better in the long run -- capitalism or socialism?
We have long known that workers are richer in capitalist countries than in socialist ones. But are they happier? Capitalism sounds much harsher, like Thomas Hobbes' depiction of the state of nature -- the war of all against all. Socialists see capitalism as a system where people unfeelingly compete by trying to drive out their opponents. Capitalists counter that free markets are really about voluntary exchange and trading for mutual benefit.
So who is right? Using virtual economies, we can now literally recreate, in laboratory investigations, the state of nature and are no longer left to philosophical musings of first principles.
In the state of nature, individuals produce what they need --e.g., grain, beef, etc. People can remain self-sufficient, or choose to trade and specialise -- some people may be more efficient than others in certain jobs. For example, some may herd cattle better while others have a green thumb growing crops. Or, they can even steal from each other because, in the state of nature, no legal system protects private property. (That should please the French anarchist Pierre-Joseph Proudhon who proclaimed, “Private property is theft”).
The virtual economy endows each participant with an icon, “home,” where they consume goods, and a “field” where they produce them. For simplicity there are only two goods. They could be meat and potatoes, or ham and eggs. We call them red and blue. The experimenters privately inform each participant of their preferences over these two goods. Half are told that for every 3 reds they need 1 blue to earn 3¢, and the other half earn 2¢ for each red unit consumed with 2 blues.
An experiment consists of 24 independent sessions, each lasting forty 100-second “days.” Afterwards, each participant is paid privately in cold hard cash, just like a real market, providing the same incentive the capitalist system gives each of us. The more they produce, the richer they become.
No player interacts face-to-face with any other, and none can be identified, so we have the anonymity of an impersonal market. However, the players can anonymously communicate with each other in a public chat room.
For everything else over the next hour, they must discover by trial-and-error, including whether making reds or blues is advantageous. They can also discover that they are able to give goods to other people and other people can give goods to them. They can be self-sufficient, or learn to trade with each other, or specialize in red or blue and earn more money. These laboratory experiments consistently demonstrate Adam Smith's assertion, that “it is the power of exchanging which gives occasion to the division of labour, so the extent of this division will always be in proportion to the extent of that power”. Many participants -- but not all -- quickly discover that they can benefit from trade.
There is a serpent in this paradise: participants inevitably, and often quickly, discover that they can simply take goods from one another without paying for them. In the chat room, the players promptly and spontaneously call this activity “stealing”. In this virtual “state of nature” no government protects private property.
Barter only works if the traders can keep the fruits of their labors. In a few cases the group agrees amongst themselves not to steal, even though the only enforcement mechanism is voluntary compliance. As in one person's chat, “it would benefit us all if no one was a thief.” Another agrees, “to make a long term profit teamwork helps a lot”; “trade, not take.” This group gets richer. The potential profits these players can earn by trading are roughly triple their earnings from no-trade self-sufficiency.
Other groups do not barter much, do not respect private property and try to get richer by theft. They trade very little, steal a lot and get poorer. Groups that agreed to respect private property, trade and specialise create large gains, approaching 60 percent of the maximum possible (as high as, or higher than, an identical experimental variation where the computer prevents stealing).
The capitalists indicate greater happiness. We cannot measure this happiness the way we can quantify gains from trade, but the chat room discussions are revealing. In the “villages” (groups of players), the capitalist players engaged in small talk and banter as well as trade. A typical chat: Person 1 tells Person 7 that they can make more money if they specialise like the others, and Person 7 adds, “then trade” and “everyone is uber-happy.” Another player comments, “we are awesome”. “Yup,” says another. Another participant says, “usually there's some idiot who just hordes his own blocks”. To which another responds, “very sad”. When Person 2 explains that stealing is not in anyone's long term benefit, Person 6 responds, “I love you player 2”. The players who agreed to respect private property also seemed more respectful.
In the villages that did not respect private property, the chat room exchanges were very cold and impersonal. Surprisingly, at no point do these players discuss specialisation. They saw that other villages were producing and consuming a lot more and were a lot wealthier, but they never asked how they might acquire such quantities. On the days of “rest”, they seldom chatted in the chat rooms.
A person in a village that respected property noticed the poverty in a village violating private property and lamented, “they must still not have everything ironed out yet. I feel sorry for em”. The anti-capitalists felt sorry for themselves. “I'm tired of this,” says one player. Strong language is not uncommon, “listen, im getting dicked over”.
Capitalism is about voluntary exchange for mutual benefit --risking loss as well as gain. As Person 8 says, “I think the point is to cooperate.” Oddly enough, only those people who agreed to respect private property figured that out.
It is interesting that the polls show that voters are not moving to the left, or favouring a larger role government, even after a market meltdown. Perhaps they sense what the economic experiments demonstrate. And perhaps the rioters in the UK will learn that it is better to find a system that works rather than work against one.

Vernon Smith is a 2002 Nobel Laureate in economics. He and Bart Wilson are professors of economics and law at Chapman University's Argyros School of Business and Economics and School of Law. Ronald Rotunda is a professor of law at Chapman. The opinions expressed are their own.