Self-interest and Capitalism Are Not Synonymous
“I am in favor of self-interest and thus of capitalism. It follows that I may legitimately judge any public policy according to whether or not it furthers my personal interest.” This is a paraphrase of what an intelligent Twitter correspondent of mine seems to believe. Although he does know something about business and economics, he is completely wrong on that point.
It is not because one favors self-interest that one must support capitalism. (I take capitalism in the sense of free markets or economic freedom.) Socialism and its extreme of communism are also based on self-interest, both in the sense that many or most who support such systems believe it is in their self-interest to do so, and in the sense that individuals living under those regimes continue to act mainly out of self-interest. Any observation of socialism in the real world should make this obvious. My correspondent could as well favor communism—and, smart as he is, if communism came to be established in America, he could probably become a successful apparatchik.
Whether there exist other motivations than self-interest or whether all motivations can be subsumed under it (Mother Teresa claimed that her abnegation made her perfectly happy) is a valid question. But even one thinks that altruism cannot be reduced to self-interest, this is not a reason to believe that more benevolence, abnegation, or charity exist under socialism or communism than in a free-market society. If anything, observation strongly suggests the contrary.
The superiority of free markets is that they efficiently reconcile the personal interests of the different individuals in society. Efficiency means that free markets lead each individual to serve his fellow humans while pursuing his own self-interest, and this in a way that promotes general prosperity. In a socialist or crony-capitalist context, economic interactions become a zero-sum game.
Under a communist regime, the plumber defrauds you on repairs because he knows that the baker cheats him on the weight of bread. There is little competition to push cheaters out of the market, and thus no incentive to offer good prices and quality. If your windshield wipers are stolen from your car, which was apparently so common in communist Russia that people removed them at night, you will try to replace them by stealing some yourself. Self-interest, but not economic freedom. Nina and Jean Kehayan, two French communists who lived in Soviet Russia with their children for about two years, came back rather disillusioned and recalled their experience in their 1978 book Rue du Prolétaire Rouge (“Red-Proletarian Street”).
Evaluating public policy in a classical liberal or libertarian perspective amounts to asking not whether it furthers my interests or yours instead, but to which extent it allows free markets and their supporting institutions to work; to which extent it allows people to trade according to their own reciprocal interests; or, in certain cases, to which extent such policy emulates the workings of free markets.
Aug 22 2019 at 10:38am
Your wise blogpost prompts a few observations:
1. The concept of a society of altruists is incoherent. Altruism lacks a target unless at least some people are motivated at least partly by interest or by other motivations. Altruism is a concern to serve the objective interests or subjective motivations of another person or group.
2. Discussions about interest and altruism often proceed as if these are the only motivations. In reality, many motivations operate. For example:
* Interests (self-interest, group-interest, altruistic concern for another’s interests).
• Passions (love, righteous indignation, jealousy, hatred, anger, spite, envy, etc.)
• Impartiality (justice, principle, aggregate well-being, etc.)
Note that many of the passions are negative motivations towards others. Self-interest seems almost admirable compared to negative passions! Aren’t politics more likely than free markets to give rein to negative passions?
3. Re: “In a socialist or crony-capitalist context, most economic interactions become a zero-sum game.”
Bryan Caplan and Tyler Cowen argue that crony capitalism has its merits in a positive-sum perspective. For example, over at EconTalk this week, Tyler Cowen states:
Aug 22 2019 at 10:58am
Thanks for your comments. Two points:
Interestingly, just before I saw your post, I had doubts about my sentence “In a socialist or crony-capitalist context, most economic interactions become a zero-sum game,” and I removed the “most,” leaving the proportion of zero-sum-game interactions indeterminate.
This being said, I don’t think I agree with what you report from Tyler’s interview (I’ll listen to it later). Crony capitalism might be good to get permissions to do what you and I think is good, but, besides allowing what is not good, it also legitimizes and strengthens the whole permission system. As Benjamin Constant said (I paraphrase from memory), “when rights have disappeared privileges are a useful refuge,” but the goal must be to abolish the privilege system.
Aug 22 2019 at 12:30pm
For as Lao Tzu taught in the Tao Te Ching (6th – 3d Cent. BCE), 38. On the Law [Religion]:
For when Tao is lost, there is love;
When love is lost, there is kindness;
When kindness is lost, there is justice [duty];
When justice [duty] is lost, there is the law [religion];
When the law is lost, privileges are a useful refuge. Also, tax havens.
Aug 23 2019 at 11:27am
Interesting. The sentence from Benjamin Constant reads: « Là où les droits ont disparu, les privilèges sont un asile et une défense. »
Aug 23 2019 at 4:26pm
Forgive me–I added that last line to Lao Tzu’s work as a joke ‘cuz it seemed similar in cadence. Please don’t attribute that to Lao Tzu!
Aug 22 2019 at 1:03pm
1. A classical liberal/libertarian perspective seeks rules facilitating reciprocity motivated by individual initiative–yes, including initiatives fueled by self-interest. Yet these rules may not always advance the self-interest of every person (e.g., people holding state-granted monopolies), which illustrates that the pursuit of self-interest differs from the pursuit of classical liberal/libertarian rules.
2. Moreover, people act according to self-interest regardless of their economic systems. We should not imagine that, even if communism/socialism purports to altruistic motives, people living in those systems exhibit an abnormal amount of altruism—nor that people living in capitalism act with any abnormal lack of altruism.
3. Implied: We may have cause to suspect that people living in communism/socialism act with less altruism.
A. These system foster bureaucracy and restrict choice, reducing the consequences people bear for doing a poor job and the rewards for doing a good job. Without these incentives, people’s job performance deteriorates throughout society. People become cynical. And cynicism depresses social cohesion, manifest in a loss of altruism and a rise in crime. In other words, when people feel victimized, they feel less charitable toward others and more willing to victimize others in turn.
B. Also, communism/socialism may depress GDP. Poorer societies have fewer resources with which to act charitably, regardless of their inclinations to do so.
Aug 23 2019 at 12:25pm
I roughly agree. Your first paragraph, though, unduly restricts my argument. A regime of liberty and competition is likely to promote your interest but may not do so in a particular instance. It is in your interest that all your competitors (on the supply side) drop dead.
Aug 22 2019 at 1:12pm
Robert Sugden makes the case that the standard normative contrast between self-interest and altruism misses the mark:
Aug 23 2019 at 11:32am
Sugden is a creative thinker.
Aug 22 2019 at 3:34pm
It seems the crux of the problem is that when it comes to public policy, there is an inevitable coordination problem that can’t be remedied the way it could in a market, and this pursuit of self interest through politics leads to a suboptimal outcome, say, where each person selfishly votes to cause $10 worth of damage to someone else’s property to earn $5 for oneself.
However, I’d argue that your correspondent’s mentality would actually be perfectly consistent with capitalism and with the optimal allocation of resources if only there existent functioning vote markets. If free voting markets existed, and a policy would benefit me by x while causing 2x worth of damage to others, said others could pay me x not to support the policy. In other words, our ability to reach an optimal allocation even as each individual pursues self interest does not necessarily cease to exist once we enter the realm of public policy; rather, limitations on the free exchange of votes (and possibly transaction costs due to issues in setting up such a market) are what make self interest problematic in that context.
Aug 22 2019 at 3:46pm
Quadratic voting mimics logrolling and incorporates individual intensity of preference, whilst preserving political equality.
The original paper by Stephen P. Lalley and E. Glen Weyl (AER 2018) is available online ungated at SSRN:
Aug 23 2019 at 12:17pm
John: Although I admit not being on top of this QV issue (and that is an understatement), how would it prevent the 1% or the 10% from, say, literally enslaving the rest of the voters? In other words, it seems to me, the distribution issue is paramount in QV, as it is in welfare economics in general. I would propose the two following statements (with only a bit of overstatement, especially for principle #1):
In a minimal state, any voting system is acceptable.
In an unlimited state, no voting system (or other collective choice procedure) is acceptable.
Aug 23 2019 at 2:49pm
A clear, non-technical account of quadratic voting (QV) may be found in chapter 2 of Eric A. Posner & E. Glen Weyl, Radical Markets (Princeton U. Press, 2018).
Because QV allocates to each voter equal ‘voice budgets’ overall for a set of polls, it does not produce ‘tyranny of the minority.’ A minority may prevail on a specific issue or poll if (a) the minority cares deeply about the issue and (b) the contrary majority cares little. The minority allocates a disproportionate share of its voice budget to its cherished issue. But the voters who constitute this minority will then have proportionately less voice in the remainder of polls on other issues.
Quadratic voting can be useful also in private governance, wherever there are plural distinct issues and differences among board members (or among shareholders) in intensity of preference.
Aug 23 2019 at 3:38pm
Even a polity that recognizes a great sphere of individual liberties and accordingly limits the sphere of collective decisions should not be indifferent about voting systems.
Arguing, bargaining, and voting will play roles even in a limited sphere of collective decisions. Some procedures for these exercises of voice are more just than others.
Anarcho-capitalism, too, would involve collective decisions about a range of issues, insofar as there are firms, clubs, and other formal organizations. Here, too, some methods for internal collective decision-making are more just than others.
Whatever the scope of collective decisions, quadratic voting is a new mechanism worthy of scrutiny and experimentation.
Aug 22 2019 at 10:22pm
I agree that the logic isn’t quite right, but I also agree with the conclusion of the person on Twitter. You should judge policies on how they affect you; when everyone does that, we get an approximation to the best policies. It’s precisely when people start judging policies on how moral they are or how good they sound that the problems start. Obviously there are the coordination issues; resolving them is what the courts and political system are for.
I agree with Lemieux that personal interests is not the same as self-interest.
Aug 23 2019 at 11:40am
“You should judge policies on how they affect you; when everyone does that, we get an approximation to the best policies.” Therein lies the problem. The statement is ONLY true if political processes aggregate individual preferences in an acceptable way. From Kenneth Arrow to public choice, we know this is not true for any reasonable, individualist definition of “acceptable.”
Aug 23 2019 at 12:54pm
In addition to Pierre’s point, we should also consider means here as well as ends. To the merchant, a policy restricting trade certainly promotes his interests, and thus he may support it. But it does not logically follow that such a policy should be employed. Indeed, that is the focus of much of Enlightenment jurisprudence thought.
Naked self-interest alone does not lead to an “approximation to the best policies.” What the classical liberals stress is this self-interest bound by the most sacred rules of justice.
Aug 23 2019 at 4:03pm
The political system can’t really resolve coordination problems when it has a mandate from voters to impose them, and the courts are typically restricted to settling juristic matters, and coordination problem-afflicted policies may be no more likely to run afoul of a constitution than a policy that isn’t so afflicted.
Aug 27 2019 at 1:44pm
Thank you for those replies.
I have to admit, they’ve left me a little confused. I mean, I know public choice is hard, but what alternative is there? And Jon, “sacred rules”? I simply don’t accept that such things exist – some rules are better than others, but who on earth could determine which rules are sacred?
There are many tweaks and twists in a political system, but just from an information flow kind of perspective, isn’t it far better to rely on voters telling us about their own situation, rather than requiring voters to guess/calculate aggregate outcomes? I see voting as working (to the extent that it does work) very much in the way that markets work: individual choices based on individual situations, adding up to a final outcome. There’s no way around that… is there?
Aug 23 2019 at 3:42pm
For most kinds of transactions, markets reconcile self interest with the public interest. That does not work for externalities to big or too diverse or too international to be handled by tort. Unfortunately, this is not just a footnote; the continued accumulation of CO2 in the atmosphere will cause very large damages and require very costly investments to mitigate.
I cannot understand why Libertarians, who ought to favor the lowest cost, least government intrusive method for addressing this increase at least a much as Liberals, do not support taxation of net CO2 emissions.
Aug 23 2019 at 4:39pm
Well, for one, Dave Henderson’s post yesterday highlights that the carbon tax may not be the lowest cost option. Also, Buchanan and Subblebine point out that the mere presence of an externality does not indicate a welfare-enhancing solution exists (Paper title: “Externality”). Dahlman expands upon that point with a discussion of transaction costs (“The Problem of Externality”). Buchanan & Tullock also point out the various other items of interest that come into play whenever political decisions are made (“Calculus of Consent”). Gordon Tullock discusses the difficulties of establishing and changing policies whenever the need should arise (“The Transitional Gains Trap”). John Nye talks about how often estimates of the taxes do not take into account the pricing already in play in the market (“The Pigou Problem.”) I, building on the work of Dahlman and Buchanan, discuss the difficulties in even determining when a market failure has occurred (“When is a Market Failure Not a Market Failure?”) and that oftentimes the definition of an externality depends on individual preferences (“What Theory Won’t Tell You About Public Goods”). Schelling discusses the difficulties in establishing coalitions (“Micromotives and Macrobehavior,” in particular Chapter 11). Hayek discusses the difficulties in determining the precise level necessary for taxation (“Use of Knowledge in Society”).
Aug 24 2019 at 12:13pm
To what extent is progress inhibited by making the perfect the enemy of the good?
Well, yeah, that’s where we are vis-a-vis emissions, and current policy of status quo.
Aug 24 2019 at 1:11pm
Henderson’s post is not a Nirvana Fallacy; he is not comparing a realistic thing to an unrealistic, idealized version of the thing. He is comparing potential costs and benefits of carbon emissions and methane emissions.
Indeed, which is strong evidence to my point.
Sep 4 2019 at 12:23am
That may be the key to your question on taxing CO2 emissions: quite a few people around have not been convinced by this assertion yet. The problem with the future is that it is rather difficult to predict and since Malthus, the prophets of doom have been proven wrong quite a few times.
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