Chapter 62: Self-interest
Johan J. Graafland Introduction Self-interest is an extraordinarily powerful assumption in economics. The reasons for its dominance have been partly positive and partly normative. On positive grounds, the assumption is defended because it leads to reasonable empirical predictions. Economists tend to believe that societal processes can be explained and predicted by assuming that people act out of self-interest. Members of the so-called public choice school, such as Gary Becker, believe that self-interest can explain all behaviour. In their view, individuals will not allot resources to public goods, will free-ride whenever they can get away with it and will lie, cheat and violate other moral precepts and laws when the penalty is smaller than the gain. Self-interest, however, is not only a descriptive assumption in economics. It is also defended on moral grounds. In his famous Wealth of Nations Adam Smith (1776) argues that self-interested behaviour facilitates efficient operation of the economy. This view remains more or less intact in modern economic theory. As K.J. Arrow and F.H. Hahn state: There is by now a long and fairly imposing line of economists from Adam Smith to the present who have sought to show that a decentralized economy motivated by self-interest and guided by price signals would be compatible with a coherent disposition of economic resources that could be regarded, in a well-defined sense, as superior to a large class of possible alternative dispositions. (1971, p. vi, cited in Sen 1977, p. 321) Whereas we might expect chaos in a situation where...
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