Self-Interest

Bryan Caplan asked for paradoxes of the economic way of thinking for which he would then provide intuitive explanations for the paradoxes. I asked Bryan to provide an intuitive explanation for how self-interested behavior serves the interests of society at-large.

By acting in their own self-interest, individuals without intending to do so, serve the interests of others.  

To which Bryan responded:

With competition, selfish people can't get ahead unless they make their customers happy.  And unless you're lucky, the most competent person who loves you won't do as good a job as the most competent person who wants your business.  After all, billions of people want your business, and you're lucky if ten people alive love you.  

I’m not impressed with this response (though I am with many of his others). And I also don’t find Bryan necessarily correct.  

More beneath the fold.

Economists have not done a good job of explaining the meaning and concept of self-interest as it applies to the spontaneous emergence of order and to wealth creation. Even I’ve defaulted in the past to lecturing that Mother Theresa was as self-interested as Bill Gates. But that undermines the importance of Adam Smith’s concept of self-interest; it doesn’t explain it.  

People from all walks of life act rationally based on all sorts of motives, from pure altruism and selflessness to pure egoism and selfishness, and everything in between. Soldiers jump on grenades tossed into their foxholes to save the lives of their fellow infantrymen. And many politicians entrusted to serve the public that elected them line their own pockets through graft and corruption.

We all act at different times based on different motives. Smith espoused this idea. My wife and I do not bargain over our respective marital and family responsibilities and we don’t outsource our parenting responsibilities. We don’t “truck and barter” (and certainly not for money) between ourselves to decide who washes the dishes, who mows the lawn, who does the laundry, or who drives the kids to school. For the most part we employ a command and control system of centralized authority (my wife) or volunteerism to decide who does these things and more. The same is true with how we raise our kids.    

In the case of my immediate family, reciprocating altruism and other selfless acts work because my wife and I have interdependent utility functions. This means that my happiness is tied to hers, and vice versa. I therefore act in ways that promotes her welfare and happiness even at some cost to me. (Sometimes considerable cost, like when she wants me to go dancing). I am willing to do these things for her without any concern for direct reciprocation because it is in my self-interest to do so – when she is happy I am happy (obviously net of the cost of making her happy). She does the same for me, and the same applies to my kids.

It’s also true, though to a lesser extent, that this applies to friends and extended family. (I believe Bryan correct when he estimates this nexus to be no more than ten people.)  

Bryan argues that only through luck is “the most competent person who loves me [likely to] do as good a job [serving my wants] as the most competent person who wants my business.” I disagree; it depends on what’s being delivered. I indeed cannot prepare for my family a meal that is superior to what a professional chef vying for my dollars can prepare for my family. On the other hand, I can provide better care for my children than even the most competent professional daycare provider. Certain things are not best provided through market exchanges: massages yes; love, compassion, empathy and understanding no.  

So my wife, son and daughter are all part of my utility function in the form of emotional bonds. This causes us to act selflessly towards one another and to serve each other without expectation of direct reciprocation. (Well, maybe the kids some times.) I am willing to incur disutility to promote their interests due to the emotional bonds between us, and they too do the same for me. All of this is without planning and without expectation that each or any act will be reciprocated directly. One who doesn’t reciprocate later, however, may eventually be shunned from the nexus. (i.e., “You’re using me.” “You’re not carrying your own weight.” etc.)  

The students I teach are also part of my utility function, but in a totally different context. I am willing to incur disutility by serving their interests, but only because I know that I will be directly reciprocated for my actions. It is my love and concern for my self and my family that causes me to incur this disutility and serve the interests of my students - I know I will be compensated for my efforts. And I expect this compensation to increase with the success of my efforts, which means the more I serve their immediate and future interests the greater my reward.

I may at times perform acts of charity for a student or students, or go above and beyond what my employment contract requires of me to serve the interests of a student or small group of students. But this is not the primary basis of our relationship and could never be so. My acts toward students is directly related to my expected direct reciprocation. In fact, had we not entered into our original business relationship I probably never would have encountered them in order to perform acts of charity toward them.  

Adam Smith did not profess that human beings are greedy and selfish and should therefore act accordingly for society to function. He argued that we are driven by many emotions, including altruism and selflessness, when dealing with others, including strangers, but that social cooperation based on altruism and selfless acts does not scale. The further removed someone is from my interpersonal emotional network, which as Bryan argues is probably about ten people, the less we can rely on altruism and selflessness to meet our own wants and serve each others interests.  

We therefore rely on institutions that enable individuals to act in their own self-interest, with the unintended consequence that their behavior serves the interests of others. It is my concern for my own well-being and that of my family that causes me to serve the interests of others and creates a widespread system of social cooperation. I better the lives of others, including strangers, without ever intending to directly care for them.

To those for whom the notion of behavior based on self-interest sounds so selfish and lacking in morals and against the idea of community, I ask them how many kidneys they currently have. I have yet to have anyone say just one, and so I follow up with why they have not taken the selfless act of donating a kidney. If they really believed that individuals should always act selflessly, there is relatively little cost in donating a kidney and your act can save one of the many people who die each year waiting for a kidney. And it certainly saves them from the painful experience of thrice weekly dialysis treatments. Their behavior is understandable; their disdain for logic is not.