Greed, Self-Interest, and the Extended Order of Voluntary Transactions

by Don Boudreaux on November 12, 2012

in Competition, Complexity & Emergence

Sebastian, a friend from Poland, wrote to ask – I think for a newspaper or magazine essay that he is writing – my opinion on these questions:

- Is greed good?
- Does the self-interest really leades to common good?
- Bernard Mandeville claimed that human vices are the motor of progress. If everyone was honest, economic growth wouldn’t be possible?
- Is the “invisible hand” only a metaphor or is it a valid notion?
For what it’s worth, I paste below (after correcting for typos) my reply to Sebastian:
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Greed should be distinguished from self-interest.  Greed is not good.  Greed is grasping for more than you deserve.  Self-interest is simply the reality of humanity.  By this I mean that each of us cares more about ourselves, our loved ones, and our friends, than we care about strangers.  Asking if this reality is good is like asking if gravity is good.  It just is.
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One virtue of a private-property free market is that it channels our self-interests so that we serve our self-interests best by serving the self-interests of others.  I can get a beer from you, a brewer, only by giving you something that you value more than the beer in return.  We both gain.

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Government, in contrast, unleashes greed.  By enabling the politically powerful to grab more than they can get through voluntary exchange, government encourages people with political power and influence to act on their greed – to grab more than they deserve.

I am no Mandeville scholar.  It was useful for him (and, later, Adam Smith and other economists) to point out that (in words that I believe I’ve pilfered from David Henderson) “intentions are not results.”  The fact that each of us pursues only our own self-interest does not necessarily mean that some greater good – a greater good unintended by anyone – will not emerge.  What F.A. Hayek called the extended market order is one such greater good that has emerged as the unintended by-product of what are mostly self-interested actions by individuals within free, private-property markets.

But it is certainly not true that honesty and other virtues prevent or even slow economic growth.  (Note that one can be simultaneously both honest and self-interested.)  Economic growth springs from entrepreneurial innovation and consumer freedom to spend their money as they wish.  The resulting competition among businesses fuels creativity and economic progress.  It is not necessary that rich people consume lots of expensive goods (although such consumption is also not necessarily harmful).  The key is freedom – free entry into, and exit from, markets; freedom of prices to adjust to supply and demand conditions; freedom of consumers to spend their money as they judge best; and freedom from excessively burdensome regulations and taxation, as well as from threats to the security of private property rights.

The invisible hand is both a valuable metaphor and a valid notion.  There is, of course, no real see-through hand guiding human actions.  But the idea that each of us is led, as we pursue our own self-interests within free private-property markets (and, more generally, through a rich assortment of voluntary arrangements), unintentionally to promote a larger and beneficial end, is unquestionably correct.

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