Is Self-Interest Sufficient to Organize a Free Economy?

The quick answer is, “No.” And few of the better-known theoreticians of the free-market have ever thought that self-interest was, or even could be, sufficient to organize, or long maintain, a free economy. Among those theoreticians, Adam Smith is often regarded as having been the primary philosopher of self-interest. In a book written to correct a number of misunderstandings of Smith's teachings, we find the following summaries of Smith's view about self-interest:

Far from being an individualist, Smith believed it is the influence of society that transforms people into moral beings. He thought that people often misjudge their own self-interest.

Even more directly to the point:

[Adam Smith] regarded the attempt to explain all human behavior on the basis of self-interest as analytically misguided and morally pernicious. [1]

As Adam Smith certainly realized, self-interest will be one of the principal forces organizing economic activities in any society, but that is as true of the most repressive or brutal society as it is of a relatively free and open society. Most of us will not like the results of self-interest untempered by a respect for other creatures. As a recent example, in running their country to the disadvantage of most Soviet citizens, the leaders of the Communist Party and of the Soviet military and intelligence services were advancing their own self-interests, at least as they understood or misunderstood those interests.

The advantages enjoyed by Americans over citizens of the Soviet countries, and the advantages we still enjoy over the nominally free citizens of Russia and other eastern European countries, are those of a society organized to allow a high percentage of Americans to act in such a way as to serve both their self-interest and some substantial stock of moral principles. Not only our habits and customs, but also our positive laws—such as those of copyright—enter into that organization of our society, for good or bad, but not in a morally neutral manner.

Self-interest is not necessarily evil, though it can lead people to act in morally reprehensible ways. The love of self, and the consequent development of self-interest, is one aspect of a creature who is also a social, and hence moral, being. Self-interest itself can serve moral interests in a free society so long as that society has the proper foundations. The elements of those foundations include not only a populace sharing a substantial body of moral beliefs and habits but also the formal political structures, positive laws, and accepted court decisions capable of supporting both social order and personal freedom. Once those are in place, and once they have been internalized by the bulk of the citizens, then self-interest will provide a fuel of sorts to keep an economy functioning effectively without leading to immoral results on the whole. The question is always: Is our society organized properly, in its positive laws and in the habits we teach our children and reinforce in ourselves, so that self-interest and moral principles do not generally come into conflict?

Those people aware of modern mathematics or of programming techniques should appreciate the recursive, and inherently unstable, interactions between individual morality and social structure. To oversimplify in a useful manner: People with substantial moral beliefs organize societies along those beliefs and those societies then begin to form the habits and beliefs of children, immigrants, etc. according to those same beliefs. Always, it is a messy historical process which can be destroyed or rerouted into less desirable paths. There is inevitably a question as to whether we are straying from a proper path and also a question as to how robust the society is, i.e., how much of a disturbance it would take to destroy much of what is good about that society.

Sometimes, good people will decide that something has gone wrong and it is time to fight for a moral principle even if it becomes necessary to sacrifice, or at least qualify, their own self-interest. In the words of Thomas Sowell, a free-market theorist of our time:

There are, of course, noneconomic values. Indeed, there are only noneconomic values. Economics is not a value itself but merely a method of trading off one value against another. If statements about “noneconomic values” (or, more specifically, “social values” or “human values”) are meant to deny the inherent reality of trade-offs, or to exempt some particular value from the trade-off process, then such selfless ideals can be no more effectively demonstrated than by trading off financial gains in the interest of such ideals. This is an economic trade-off. [2]

In context, Professor Sowell was not arguing against those imputing some sort of moral power to self-interest; he was instead arguing against those who think there should be an easy path to the reform of a society which may have a particular moral defect. Those are two sides to the same coin—serving self-interest may put a person in conflict with moral values and the attempt to serve moral values may lead to some sacrifice of one's self-interest.

Self-interest can be a powerful fuel for a society, at least when the citizens of that society are well-formed individuals, but there is no mystical or magical aspect to self-interest that guarantees moral results. Self-interest will lead to generally moral results to the extent that moral constraints, external but mostly internal, guide the actions of the self-interested parties. A society with the proper constraints does not come into existence by some act of magic, but rather by the acts of people who are aiming at a higher purpose, whether the preservation of liberty in the society as a whole or the preservation of a cooperative spirit within communities of programmers, or maybe both of those at the same time.


  1. Both quotes are from page 2 of Adam Smith: In His Time and Ours, Jerry Z. Muller, Princeton: Princeton University Press, 1993.
  2. From page 79 of Knowledge & Decisions, Thomas Sowell, New York: Basic Books, 1980.