What Is Self-Interest?
Self-interest refers to actions that elicit personal benefit. Adam Smith, the father of modern economics, explains that the best economic benefit for all can usually be accomplished when individuals act in their self-interest. His explanation of the Invisible Hand reveals that when dozens or even thousands act in their own self-interest, goods and services are created that benefit consumers and producers. Moreover, Smith and other economists have also studied the behaviors of rational self-interest which suggest that most people will act in an economically rational way when faced with behavioral decisions affecting their own personal income and well-being which can also contribute to the positive effects of the Invisible Hand.
Self-interest can be both a psychological and economic term. In general, it refers to individual actions and behaviors that provoke positive personal benefits. Throughout the years, economists have studied self-interest and the behaviors of rational self-interest to help develop theories and assumptions for the economy.
Adam Smith explored the economic effects of self-interest and rational self-interest in his popular book, The Wealth of Nations. Smith found that self-interest and rational self-interest were powerful motivators of economic activity. As such, he based his theory of the Invisible Hand on these key areas.
- Self-interest refers to actions that elicit personal benefit.
- Economist Adam Smith was primarily the first person to study self-interest in economics, leading to his Invisible Hand Theory.
- The Invisible Hand Theory suggests that when entities make economic decisions in a free market economy based on their own self-interest and rational self-interests it manifests unintended, positive benefits for the economy at large.
Adam Smith, Modern Economics, and Self-Interest Considerations
In a market economy, individuals and businesses own most of the resources available (e.g., labor, land, and capital) and use voluntary decisions, made in their own self-interest, to achieve the greatest personal benefit from marketplace activities and transactions. In this type of system, the government plays a small role, and the economy is shaped by two forces: self-interest and competition.
Adam Smith argued that self-interest was of utmost importance as a motivator for economic activity. In his book, The Wealth of Nations, covering the subject, he describes it this way:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Self-interest and competition dominate in capitalist economies where goods and services are exchanged freely. These forces drive the supply and demand for goods and services as well as the value of goods and services. They can also lead to innovation.
Adam Smith was one of the first economists to explain how self-interest and rational self-interest in a free-market economy can lead to overall economic well-being. These concepts are developed in Smith’s theory of the Invisible Hand which purports that a large majority of society benefits when each entity acts in their own best interest because it also overlaps with the best interests of others manifesting unintended but powerful societal benefits at large.
Rational self-interest is also a component of Smith’s Invisible Hand Theory. With rational self-interest, Smith suggested that humans act rationally when making decisions involving their finances or monetary benefits which also have a powerful influence on the economy. This plays out in decisions on price comparisons, substitutes, expense management, and more. Overall, decisions made with rational self-interest are generally made based on financial prudence and economical satisfaction. Thus, rational self-interest can lead to important assumptions for economic projections and analysis.
In terms of a market economic system, the basic assumption is that both producers and consumers act with self-interest as well as rational self-interest to invoke not only the greatest benefits but the most prudently managed financial decisions as well. Therefore, both self-interest and rational self-interest often occur simultaneously.
The Invisible Hand
The concept of the Invisible Hand was introduced by Smith in the 18th century. It refers to the idea that when parties act or interact, making decisions based on self-interest, unintended benefits are produced for society at large. This is the basis for the underlying concept of Smith’s overriding explanation on the importance of self-interest in economics.
Economists believe that the Invisible Hand has been the driver of a number of goods and services created for the benefit of both consumers and producers. As parties interact in a market economy, voluntary exchanges occur. These voluntary exchanges are based largely on actions made in self-interest. These actions manifest societal benefits at large because actions of individual self-interest often overlap with the best interests of others creating unintended benefits for large scale economic gains.