Rational Self Interest and Ethical Egoism
The disparity between the pursuit of individual self-interest and collectively good outcomes. Calling into question that idea that unmitigated greed is the sole driver of welfare for a society.
Individuals acting only in their own self-interest are likely to ignore the negative effects of their actions. The world is more than just individuals trading with one another. People acting in their own self-interest can murder, rape, steal, and simply be as seemingly benignly annoying as not holding doors or ignoring someone else’s wish to have the TV turned down. We typically think to correct these greviences by changing the incentives. Egregious offenders of social moors such as murderers are put in jail, certainly an incentive or huge “tax” on the behavior. But it’s interesting to note, that if an ethical theory is to hold true as a fundamental way to live, it cannot be true without assuming into existence some agency to keep it from devolving into anarchy and bedlam. “By the way, this only works if you have laws for it.” Doesn’t seem very compelling as an ethical theory.
One of the most important concepts in macroeconomics is the notion of the fallacy of composition: what might be true for individuals is probably not true for society as a whole. The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part.)
The assumption is that advantageous transaction at the micro level must necessarily transmute to a collectively good outcome for the aggregate. Why do we accept this assumption without evidence? We have no reason to suppose that because parts of something have a quality, the thing that it creates is imbued with this quality. Ask why.
A first order defense for Ethical Egoism, and the theory of the Invisible Hand, and Randist selfishness. All families of argument of the propositions that assert that behaving selfishly, in ones own self interest outside of any concern of collective interests will cause us to produce good for everyone is rebutted here. We had many way of going about it. But as usual, logic and Philosophy provide a tool we had missed. You can provide examples of how acting in ones own self interest can in many times be very harmful to society, rape, murder, theft, fraud. But it is a good start to simply say it is an error in reasoning to assert that what is good of a component necessarily extrudes to the set containing all in that set. The fallacy of composition. You might also point out a classic Reductio ad absurdum. If it is the case that a world where individuals only act in their own self interests leads to collectively good outcomes, then anyone in the world could simply do whatever they wanted, and we would all have the best world possible. Anarchy or a world where you were just set loose to do anything would lead to maximum efficiency. Wars, famines, all crimes and all examples of ills brought on from a person’s own desires for wealth and power would have to be considered good, which leads to a contradiction. The final death of this weak argument comes from their own rope. Millions of people acting in their own desire, call for a government – which according to the typical Randist, is a necessary contradiction to freedom. Therefor the Randist is now faced with a board set up to destroy them – people behaving in their own selfish interest create a government to give them things they want, which is supposed to destroy their freedom. They must reject one of the conclusions. Finally you can bring up the arms race, the stadium, tragedy of the commons, evolution, and bidding wars, and the entire book “The Darwin Economy.” The argument cannot survive.
In fact, behavior that is rational for individuals at the microeconomic level can lead to unexpected results when everyone in a group acts that way. Imagine you’re in a stadium among a big crowd watching a concert. You want a better view of the antics onstage, so you stand up. Then some others stand up for a better view, and eventually everyone is standing up. Everyone acted rationally from a microeconomic, individual point of view, but the end, macroeconomic result was that no one saw any better than they did before. (But now they are all standing for the entirety of the game, and thus less comfortable).
Antelope growing larger horns to win fights against rivals, collectively putting pressure on the entire species to do so to the point where they cannot move through the woods effectively anymore – and get hunted and killed do to their inability to move away fast enough.
Bidding up the prices in an area of housing. You don’t get anymore house, but now the frame as just shifted and everyone pays more.
Game Theory and the Prisoners Dilemma
The lack of coordination, that is, pursuing your own interest, and how it creates collective action problems. One may of course argue that by people pursuing their own interest, it will naturally impel them to seek collective solutions with needed. “I’m cooperating with you because it helps me.” But this gets into a circle of what is antecedent to what, working together to promote everyone’s being, or everyone individually wanting to be better so they decide to cooperate. It is unclear which bears out as the more important idea.
In game theory, the dilemma that Prince faced is called the prisoner’s dilemma, and it illustrates how perfectly rational behavior on the part of competing individuals can result in bad collective outcomes. When the results of our actions depend on the behavior of others, the theory of the invisible hand doesn’t provide much guidance about the likely outcome. How Markets Fail: The Logic of Economic Calamities (p. 12).
Excellent introduction to one of the fundamental objections against the idea that the individual pursuit of self-interest always results in collectively good outcomes. Game Theory provides an excellent tool for understanding how one person’s decision doesn’t produce a result in a vacuum. It only produces a result in combination with another’s decision, and by both agents pursuing goals that individually make perfect sense, together the results can be disastrous. Rational Irrationality thus provides one of the most glaring and profound examples of market failure, one with no possible logical rebuttal in and of itself.
The Great Recession of 2008 and risk
Most of “How Markets Fail” and how banks took excessive risk, which was in their own interest, but ultimately resulted in a collectively disastrous outcome. It is also in the interest of each bank to horde money in such a scenario. When this happens credit dries up, and the cycle repeats and feeds on itself.
Externalities – The enjoyment of the advantage while others bear the cost
Countless examples here addressed in their own page, and could be their own book.
Positional vs. Relative Advantages
Merely bidding the price of some things up, so that everyone has a nominal higher value, but relatively no one has gotten anywhere. The frame of reference is merely shifted, but no one is “better off.”
Imagine watching a game in at a stadium. You can’t see well, so you stand up, in order to give yourself a better view. Pursuing your own self-interest, you chose the best and most logical course of action. You have given yourself a comparative or absolute advantage over everyone else. Now someone else can’t see behind you, so they stand up pursuing their own self-interest. Soon, everyone in the stadium stands up. Now, everyone has an absolute advantage over their previous position, but no one has a positional , or relative advantage over anyone else. Now, everyone is standing up and actually less comfortable before, while gaining no real advantage. They merely shifted the frame of what an advantage was, but everyone else did it too, so no relative or collective advantage was gained. An example where everyone pursing their own self interest leads to collectively bad outcomes.
One person driving faster on the interstate to get home will get home faster. Everyone else doing this too will just result in more volatile and unsafe conditions, and more wrecks.
The Elks in the woods. Their ever larger evolving antlers give them a positional advantage in a fight, but collectively they have more trouble moving away from predators in the woods.
These examples, and countless others in this world underline the idea that while everyone is trying to maximize their utility, this maximization is not always making place through trade that is making everyone else better off. This are things we say exist outside of market norms, and are the most common cases of the failure of ethical egoism.
There is more to life than Markets
The pursuit of self-interest as an unfailing and ever reliable aggregator of common good is predicated upon a very hidden, but very important premise which fails altogether to explain more than a marginal part of people’s everyday lives. Trade. Presumably we trade because we make each other better off, and a worldwide nexus of these trades supposedly just makes everyone better and better off. Why does this seem so difficult to believe but hard to articulate? Because most of the time in our life, we aren’t trading. As Robert Lane notes “Only a modest element of our daily consciousness is focused directly on market-related things. A much larger portion is occupied by work(which is quite different from a labor market), family, friendship, uncomercialized leisure, education, worship, musing,…” Many of these activities have market aspects, but to see them merely as markets misses their essence. (Everything for Sale. Pg 48)
People often complain about others not holding the door, or taking too long when you have to do something, or or being late, or normal things we do every day in life. What if it was beneficial to me to be late? Doing so is rude and robs you of your time. Not holding the door hurts another, but helps me maximize my utility. That argument that selfishness breeds collectively good outcomes reduces to absurdity when we take one crucial part out of the equation. We are not always trading.
Opportunistic profit seekers taking advantage of unsophisticated consumers
While we are tirelessly told such agents will be brought to verdict by market forces, it does nothing to address the damage already done. Credit Card Companies, Housing, and cooperate mergers leading to mass layoff and great human cost are all examples where in the pursuit of profit for one’s own gain, one may be providing value for another (someone reaps the benefits of a corporate merger or all those credit card fees) but does so at great human cost to many others. Do you think it’s the rich that get hit with layoffs and credit card fees? Also, a perfect example of where the wealthy get wealthy at the expense of the poor. The market worshippers tell us the wealthy provide jobs and innovate so that we’re all better off, and this is largely true. But it ignores the dark side of the coin. It’s hard to imagine how a person getting by on barely sustainable levels is made better off by being laid off credit card fees.
There are two sides of the coin, in regards to benefits between the wealthy and the poor. Opportunistic profit seekers often gain money through deceptive practices, fees, mergers resulting in mass layoff and plundered assets, even bloated health care bills that few people can choose to avoid. It sounds great when you filter everything through Friedman’s off the shelf wealth creation arguments. It’s definitely another when the damage done is outside of the usual buying and selling of commodities and a result of more complex issues like systemic banking crisis, opportunistic fees and fines, consolidations, stock selloffs, layoffs, and mergers, and countless other examples. In the wealthy’s tireless pursuit of money, a debris field of human suffering can be found. Wealth at the expense of the poor.
The natural response is that “it’s their own fault” for not having perfect information in every situation. But the issue isn’t who is at fault. It’s a clear-cut example of how the wealthy do sometimes get wealthy off of the backs of the poor. That is the sense in which people mean.
The Tragedy of the Commons
The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone’s long-term interest for this to happen. This dilemma was described in an influential article titled “The Tragedy of the Commons”, written by ecologist Garrett Hardin and first published in the journal Science in 1968
The metaphor illustrates the argument that free access and unrestricted demand for a finite resource ultimately reduces the resource through over-exploitation, temporarily or permanently. This occurs because the benefits of exploitation accrue to individuals or groups, each of whom is motivated to maximize use of the resource to the point in which they become reliant on it, while the costs of the exploitation are borne by all those to whom the resource is available (which may be a wider class of individuals than those who are exploiting it). This, in turn, causes demand for the resource to increase, which causes the problem to snowball to the point that the resource is depleted (even if it retains a capacity to recover). The rate at which depletion of the resource is realized depends primarily on three factors: the number of users wanting to consume the common in question, the consumptiveness of their uses, and the relative robustness of the common.
Central to Hardin’s article is an example (first sketched in an 1833 pamphlet by William Forster Lloyd) involving medieval land tenure in Europe, of herders sharing a common parcel of land, on which they are each entitled to let their cows graze. In Hardin’s example, it is in each herder’s interest to put the next (and succeeding) cows he acquires onto the land, even if the quality of the common is damaged for all as a result, through overgrazing. The herder receives all of the benefits from an additional cow, while the damage to the common is shared by the entire group. If all herders make this individually rational economic decision, the common will be depleted or even destroyed, to the detriment of all. Hardin also cites modern examples, including the overfishing of the world’s oceans and ranchers who graze their cattle on government lands in the American West.
It would certainly be in the interest of an individual to utilize a particular resource to his advantage, as he would bear the full benefit of the resource. But in effect, the costs of using this resource is being externalized, that is, the cost is being spread to other people in the form
The rebuttal that this idea is actually an advocating idea for the privatization of everything and that Coase’s theorem of mutually befitting negotiation would solve everything can be answered by two main rebuttals:
Exploitation of the poor, and that were everything privatized a person of low monetary means, as necessarily must exist in Capitalism, would have effectively no substantive freedom whatsoever. (Libertarianism, for and against, and Development as Freedom)
Some things are non-consumable and non-excludable, like military protection, and cannot be subject to privatization. As Galbraith said, some things must be provided to everyone and paid for by everyone, if they are to be provided for anyone.
Some things are unable to be privatized, and must always be treated as a public good, like climate and clean air. Whether or not they allow government intervention into this rebuttle is irrelevant; the debate would not be a debate about government at this point, but about ethical egoism, whether or not individual self-interest always promotes collectively good outcomes, where we would know the answer to this would be, “no.”
More general examples (some alluded to by Hardin) of potential and actual tragedies include:
- Planet Earth ecology
- Uncontrolled human population growth leading to overpopulation.
- Air, whether ambient air polluted by industrial emissions and cars among other sources of air pollution, or indoor air.
- Water – Water pollution, Water crisis of over-extraction of groundwater and wasting water due to over irrigation
- Forests – Frontier logging of old growth forest and slash and burn
- Energy resources and climate – Burning of fossil fuels and consequential global warming
- Animals – Habitat destruction and poaching leading to the Holocene mass extinction
- Oceans – Overfishing
- Publicly shared resources
- Radio frequencies – Unlicensed frequencies used for wireless communications, especially 802.11 a/b/g in the U.S., detailed under Part 15 (FCC rules) would be vulnerable to the overuse of high power transmitters, especially overdriven transmitters with dirty signal profiles, and especially when combined with omnidirectional antennas had the FCC not mandated maximum transmission power for each class of device and limitations on their spectral profile.
- Spam email degrades the usefulness of the email system and increases the cost for all users of the Internet while providing a benefit to only a tiny number of individuals.
- Vandalism and littering in public spaces such as Public restrooms, parks and recreation areas.
- Knowledge commons encompass immaterial and collectively owned goods in the information age.
- Freeways experience heavy traffic due to overuse
Sometimes people will probably say people only cooperate because it helps them to achieve what they want. So in that sense, “Ethical Egoism” or even everyone pursuing their own self-interest always leads to good outcomes in that sense. No one cooperates unless it helps them. In this case, we would say “No shit.” Saying everything everyone does is for themselves is a very different thing than saying individual self-interest leads to collectively good outcomes. The rapists, murders, fraudsters, thieves, and liars need not apply to your theory. Saying everyone wants what they want is tautologically uninformative. They want to say selfishness makes everyone productive and helps everyone. No it doesn’t. Some forms of selfishness need to be kept in check. Some forms lead to systemic crashes and several other divergent problems. People can organize to get what they want, sure. But everyone doing what they want because they want it is a null statement. It tells us absolutely nothing.
The Paradox of Thrift
If no one spends no one earns income, and a recession follows along with terrible consequences. It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Such a situation is harmful for everybody as investments give lower returns than normal.
The Paradox of Deleveraging
Race to the Bottom
Races to the bottom can be described in game theory by the prisoner’s dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but it is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate.
An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits. However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the “defector” (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and, therefore, collects less revenue overall. Assuming the foundational premise is correct, the optimal option for all governments would be an agreement to maintain tax harmonization. However, it has been countered that the government who provides the most efficient services, including regulatory structure and welfare spending, will win through competition, and that race-to-the-bottom is not the norm, but applies only to special situations such as extradition and atmospheric pollution.
A race to the bottom can occur in deregulated private industries as well. One such example would be the subprime mortgage crisis. Banks assume credit risk when they issue mortgages, but can charge higher fees by originating mortgages to the less credit-worthy. Novel financial products, coupled with securitization of mortgages and credit default swaps led to a race to the bottom of lending standards and risk management.  Counter-arguments show that subprime lending was heavily influenced by government-backed loans, which were intended to help the needy who also tend to be less credit-worthy. It is difficult to ascertain whether race-to-the-bottom applies to a given situation or not.
“Greed is good”
Higher social class predicts increased unethical behavior
Research finds that people who are categorized as poor and working class are more likely to act in pro-social ways because of their greater commitment to egalitarian values and greater levels of compassion.