Does Self-Interest and Incentives benefit society?

Self-interest and its Effects on Culture

Self-interest has a major effect not only on people’s attitudes but also on culture as a whole. Generally, self-interested behavior is viewed with skepticism, and they reject self-interested behavior. As a result, agreed behaviors in society are altruistic in essence, rather than being altruistic. Agents who behave in an altruistic way are thought to be of considerable value to humanity as opposed to agents who act to satisfy their own interests.

The Economic Environment and Self-Interest

However, the economic environment, especially for supporters, adopts a different mindset toward self-interest. Self-interest is promoted from an economic standpoint. Proponents of self-interest economic behaviors indeed encourage the self-serving behavior of their capacity to contribute to the overall health of the market. To the advocates of selfish behavior in the economy, the action is seen as the invincible hand that maintains the viability of a market economy (Fox & Sklar, 2009).). The basis of their argument originates from the fact that individuals predominantly control a market economy. They own most of the resources in a market economy with the government having power over a small portion of the economy. Hence self-serving decisions made by individuals in that market ultimately contribute to the preservation of the economy. Therefore, self-interest in a market economy serves to ensure the benefit of the entire society.

An Example of Self-Interest in the Market Economy

An example of how self-interest serves the market economy is the decision to go to work. An individual makes a choice to attend work because of the incentives and benefits the individual stands to gain from attending work. If these incentives and benefits were not present, the individual would find it exponentially difficult to attend to work chores. While the decision is made from a purely selfish perspective, it benefits the entire society economically. By going to work, the individual contributes to the economy by providing human capital, hence the whole society benefits from the resulting in the growth of the economy.

Critiques of Self-Interest in the Economy

The above example is just one of the ways self-interest serves the greater good of the society. There are however instances that detractors of the self-interest paradigm point out in their opposition to the perceived benefits derived from self-interest. Cassidy (2009), an economist, and author of “How Markets Fails: The Logic of Economic Calamities” provides succinct examples of how self-interest behavior in the economy can hurt the society. The author illustrates the point by giving referring to the events following a new footbridge opening over the River Thames.

The Danger of Speculative Bubbles

When people used the bridge for the first time, the bridge swayed dangerously, forcing the authorities to close the bridge. At the time they could not identify the reason behind the swaying and only learned of it years later. It was revealed that when the bridge swayed, everyone using it at the time started to step in sync with each other to avoid falling over, an action which magnified the swaying of the bridge.

The decision to step in sync can be transposed on economic actions. When people in a market economy decide to act out of their own interest, they can create a speculative bubble that can lead to a market crisis. For instance, if a substantial number of investors deem a particular investment instrument to be of no value for them, out of self-interest, they will stop investing in the instrument, which consequently devalues the instrument. The value drop may cause the economy to collapse as evidenced in the global mortgage financial crisis. The example above proves to be fairly potent in the discrediting of the value of self-interest in a market economy.

References

Cassidy, J. (2009). How markets fail: The logic of economic calamities. Macmillan.

Fox, J., & Sklar, A. (2009). The myth of the rational market: A history of risk, reward, and delusion on Wall Street (pp. xi-xii). New York: Harper Business.