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 truebut it is in fact false Dec 10th 1998 |From the print edition 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 mistakesie, 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 analysedto yield patterns and suggest generalisationswithout 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 wordsand 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 proposesbut 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, selfinterested 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 strangeror, 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 difficulties.

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?

From the print edition: Finance and economics