What is Self-Interest
Self-interest refers to actions that elicit the most 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 own 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.
BREAKING DOWN Self-Interest
In a market economy, individuals own most of the resources available (e.g., labor, land and capital) and use voluntary decisions, made in self-interest, to control the marketplace. In this type of system, the government plays a small role, and the economy is shaped by two forces: self-interest and competition. Self-interest is arguably the single largest motivator of economic activity. In his book covering the subject, “The Wealth of Nations,” Adam Smith described 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.”
Adam Smith, Modern Economics, and Self-Interest
Smith is most widely known today for his explanation of rational self-interest in a free-market economy and how this can lead to an overall economic well-being for those that sell goods and services and those that purchase them.
Smith’s basic position and teaching posits that though it is not commonly thought in such terms, humans act rationally and thus typically act in their own self-interest. Decisions are generally made based on financial prudence and intrinsic satisfaction. These assumptions are key to economic analysis and commercial success.
In terms of a market economic system, otherwise known as capitalism, goods and services are exchanged freely, and the value for goods and services offered is determined by market interaction. The basic assumption is that both producers and consumers act rationally and in their own self-interest. As these parties interact in a market economy, voluntary exchanges occur. These are voluntary exchanges that are based largely on actions made in self-interest that, in turn, manage to benefit all parties involved. The concept of "rational" self-interest is the term that explains the actions producers and consumers take, making exchanges that leave both parties better off than before the exchange; both sides benefit, either intrinsically, financially, or both.
The Invisible Hand
This concept, introduced by Smith in the 18th century, refers to the idea that when parties act or interact, based on self-interest, unintended benefits are produced. This is the basis or the underlying concept of Smith’s overriding explanation for the importance of self-interest in economics.