The benevolence of self-interest
Critics of economics often accuse
the discipline of viewing people as mere
optimising machines, as ethical nonentities. The charge would be serious if it
were true—but it is in fact false
HOW can economists expect to be taken
seriously, non-economists are given to
complain, when their model of man is so patently inadequate? Mainstream economics
assumes that people are driven by the rational pursuit of self-interest. But, as
everybody knows, people are not rational and they often act selflessly. Where in this
view of man as desiccated calculating-machine is there recognition of the centrality of
love, duty and self-sacrifice in human conduct? What use is a purported science of
social behaviour that is blind to the necessary conditions for social behaviour?
These questions would be telling if “rational”
and “self-interest” meant what these
critics take them to mean. But they do not. In mainstream economics, to say that
people are rational is not to assume that they never make mistakes, as critics usually
suppose. It is merely to say that they do not make systematic mistakes—ie, that they
do not keep making the same mistake over and over again. And when economists talk
of self-interest, they are referring not just to satisfaction of material wants, but to a
broader idea of “preferences” that can easily encompass, among other things, the
welfare of others.
Even when the terms are properly understood,
“rational pursuit of self-interest” is a
simplifying assumption. But the right question is whether this simplification is fruitful, or
so gross that it hides what needs to be examined. Human behaviour is far too
complicated to be analysed—to yield patterns and suggest generalisations—without
employing some such simplification. And in nearly every branch of economics,
rationality has proved a useful one.
There are some exceptions: much effort
has recently gone into examining non-rational
or nearly rational behaviour in special contexts, often with interesting results. It is right
to be open-minded about such things. But critics of economics, if they believe that any
kind of social analysis is possible, had better say what other simplifying assumption
they would rather use. Unsurprisingly, there is no plausible candidate: on the whole,
people do learn from their mistakes.
Turning from means to ends, what about
self-interest? Here the issues are subtler. If
economics supposed, at one extreme, that people seek only to maximise their material
consumption, then it would be plain wrong, and that would be that. If, at the other
extreme, it assumed that people seek to satisfy their preferences (or some such
formula), then it would be true merely by virtue of the meaning of the words—and it
would not tell you anything. The assumption built into mainstream economics is much
closer to the second of these than the first. Anti-economists who find it absurd would
be nearer the mark if they called it a statement of the obvious.
However, the assumption of self-interest
is not entirely tautological. Many kinds of
apparently selfless behaviour may in fact be self-interested in the way economics
proposes—but not all.
Into the first category, selfless behaviour
that is not, fall acts that invite or assume
reciprocity. These are the everyday transactions (if you will forgive the term) of living in
society. People show consideration for others in the hope or expectation that the
favour will be returned. Behaviour that establishes a reputation for honesty, or that
signals a willingness to enter into commitments, is also, as a rule, self-interested in this
sense. That makes it no less conducive to a flourishing society, no less to be praised
and encouraged. Fortunately, it is self-interest, not love, that holds society together.
Into the second category, the realm of
the purely selfless, fall acts such as sacrificing
your life for a stranger—or, less dramatically, leaving a big tip at a restaurant you will
not be visiting again. If acts that were both costly and purely selfless were common,
outside the family or other close relationships, economics would be in trouble.
Analysing a labour market in which workers demanded more work for lower wages,
or employers wanted to lose as much money as possible, would present some
Sad to report, society at large might
be in trouble too: universal altruism would, it
seems, upset the basis for social co-operation. (“I’ll do you a great favour, but I insist
that you don’t do me one in return.” “Sorry, no. I’ll do you a great favour, but only if
you don’t return the compliment.”) In any event, acts of heroism are rare. Like
rationality, self-interest (even when broadly defined) fails to capture some aspects of
social behaviour, but not so many as to render models based on the notion useless.
Again one must ask what other simplifying assumption would serve better. Again, none
has been suggested.
The unrepentant anti-economist might
retort: better no analysis than so gloomy a
science. This is doubtless a matter of taste and temperament. But is it really so
gloomy? When Adam Smith pointed out that, if people want dinner, they look not to
the benevolence of the butcher, brewer or baker, but to their regard for their own
interest, his aim was not to portray social interaction as mean and narrow. Rather it
was to draw attention to the extraordinary and improbable power of self-interest: this
stunted, inward-looking trait is transformed, through spontaneous social co-operation,
into a force for the common good.
Smith regarded this as almost miraculous.
So it is. The main task of economics has
been to understand this astonishing process. And by and large, thanks to its simplifying
assumptions, it has succeeded. That’s not so dismal, is it?