This article was originally published at ValuesandCapitalism.com on February 7, 2013.
Economists are confusing. They often disagree about the most basic of ideas. But one thing no serious economist rejects is the important role of self-interest in promoting economic growth.
In fact, this idea has been a mainstay of economic theory for centuries. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” wrote Adam Smith in 1776, “but from their regard for their own interest.”
Today, the importance of self-interest is all but taken for granted. Schools use grades to encourage students to learn. Employers offer bonuses for high-performing employees. Governments offer tax credit for environmentally friendly choices. Today, doubting self-interest’s role as a catalyst for economic growth is almost unheard of.
But unfortunately, pursuing self-interest can go too far.
In the introduction to his book “Economics as Religion,” Robert H. Nelson defines two types of self-interest. “Legitimate” self-interest, he says, is expressed through market processes: as people seek their own benefit, they produce and exchange in conjunction with others in order to build wealth. This is the same kind of self-interest Adam Smith described.
“Illegitimate” self-interest, on the other hand, is expressed in the form of deceit, coercion and violence—seeking their own benefit, people enrich themselves at the expense of those around them. This type of self-interest is usually condemned, and often illegal.
But while illegitimate self-interest may be rare in the United States on a large scale, this is not the case in many parts of the world. Political violence is common in east Africa. Government transparency is deficient in communist China. Police corruption is rampant in places like Sudan, Mexico and Afghanistan.
Americans often analyze these disadvantaged nations and blame certain public figures or features of regional economies like the presence of oil, drugs or famines. But what we often forget is that the same drive for success that fuels our own economic success creates economic disaster when unaccompanied by strong moral values.
This is because self-interest is the most powerful force in the world. It fuels profit-making and charitable enterprises alike. It drives technological progress and entrepreneurial innovation. Yet without strong social pressure to restrain self-interest, economic mayhem results—regardless of financial conditions. As Nelson shows, the nation of Zambia was for years one of the largest recipients of foreign aid in Africa, yet the Zambian economy actually worsened during this same period. Much of this aid, he argues, went straight into the hands of oppressive political rulers who used it to serve their own ends without regard for the rights of their countrymen.
What Zambia lacked was a social system that upheld the values required for economic growth—values that encourage self-interest in the market yet condemn it as a way to harm others. Until these values exist, no amount of investment or aid will do any good. Self-interest will rule, as it always does, but only through the violence of those whose self-interest overcomes their respect for the rights of those around them.
Self-interest is the fount of economic growth. It is the catalyst for innovation and production. But it can also be the prime mover behind violence and corruption. Needless to say, values and capitalism go hand in hand. If either is left without the other, the economic blessings of self-interest will never be known.