The formalizing of self-interest as an economic principle was largely the work of Francis Edgeworth. It is sometimes wrongly traced back to the work of Adam Smith. While Smith wrote about self-interest, he actually had a much, much more nuanced view of both when people would behave out of self-interest and when self-interested behavior could be good for society then he is usually given credit for. (He most certainly did not claim either that individuals are always self-interested or that self-interest always leads to optimal outcomes, and cited limits to self-interest in both Theory of Moral Sentiments and Wealth of Nations; see here, here, and here for more on the misinterpretation of Smith.)
Amartya Sen, one of the few economists to also be a good philosopher, starts his critique by reviewing the work of Edgeworth. As it turns out, even though Edgeworth gave us the math for self-interest, he didn’t think it was a very good assumption except in the cases of (1) war and (2) contract. While this is a substantial restriction, it still covers a lot of ground, so it’s worth looking at how Edgeworth came to this conclusion.
Edgeworth gets there by rejecting the utilitarian premise that individuals act to maximize the greatest good for the greatest number. Having rejected that he concludes that individuals act not to maximize overall utility, but instead to maximize only their own utility. Sen notes that the rejection of utility is not sufficient grounds to adopt self-interest,
between the claims of oneself and the claims of all lie the claims of a variety of groups-for example, families, friends, local communities, peer groups, and economic and social classes. The concepts of family responsibility, business ethics, class consciousness, and so on, relate to these intermediate areas of concern, and the dismissal of utilitarianism as a descriptive theory of behavior does not leave us with egoism as the only alternative.
Edgeworth then shows that under assumptions of self-interest and in the absence of externalities, self-interest can lead to an equilibrium that maximizes the satisfaction of individual preferences. This is a position in the ‘core’ area of the economy. Sen’s reply is simple, ‘who cares?’
Being in the core, however, is not as such a momentous achievement from the point of view of social welfare. A person who starts off ill-endowed may stay poor and deprived even after the transactions, and if being in the core is all that competition offers, the property-less person may be forgiven for not regarding this achievement as a “big deal.”
Moving on from Edgeworth, the argument for self-interest and rationality has sometimes been given in the form of revealed preference. The basic idea is to determine one’s preferences, which can’t be directly observed, by asserting that they are the same as one’s behavior, which can be observed. As Sen notes, “Behavior, it appears, is to be “explained in terms of preferences, which are in turn defined only by behavior.” This comes close to simply being a definition that is devoid of any new content, but the idea of revealed preference still rests on the claim that preferences and behavior are consistent over time. This makes it falsifiable. And, in fact, it has been falsified.
Sen notes that revealed preference fails not only by assuming too much in terms of preferences being identical to behavior, but also by assuming too little in terms of other possible sources of information about preferences. As Sen puts it,
…choice may reflect a compromise among a variety of considerations of which personal welfare may be just one. The complex psychological issues underlying choice have recently been forcefully brought out by a number of penetrating studies dealing with consumer decisions and production activities.It is very much an open question as to whether these behavioral characteristics can be at all captured within the formal limits of consistent choice on which the welfare-maximization approach depends.
In my view the question is no longer open. Scholars like Kahnemahn, Ariely, and Thaler have shown that human behavior cannot be captured by the welfare-maximization framework, but Sen was writing in 1977, so it was more of an open question then.
After this critique, Sen then begins to build up his alternative vision. Sen distinguishes between cases of sympathy and cases of commitment. Sympathy involves an individual being linked to others, feeling sad when they are sad and happy when they are happy. In this sense, sympathy does not upset the basic model of preferences too much, it simply adds a new component. I prefer it when the people I care about are happy, and so I might give up some amount of my self-interested happiness in exchange for the happiness I feel when they are happy. (Since Sen’s writing this has been added to some models, particularly of charitable giving, usually under the name ‘warm glow’).
Commitment involves placing an ethical stance ahead of one’s own well-being. In Sen’s words, “One way of defining commitment is in terms of a person choosing an act that he believes will yield a lower level of personal welfare to him than an alternative that is also available to him.”
This may seem insignificant, but it’s important to remember that there are actually a lot of activities that we engage in frequently that don’t yield obvious benefits. Recycling, for instance, is a case of ignoring the economic logic that my individual recycling effort cannot make a difference. In theory, each person should free-ride on the efforts of others to preserve the environment, and yet I recycle, eat less meat, bike to work, etc., not because I believe the marginal benefits to these things outweighs the marginal cost, but rather because it is the right thing to do. Voting, obeying social norms, giving to charity, doing favors for strangers, tipping the server at a restaurant you’ll never return to, and many other cases also follow this same pattern.
Now, it is true that it’s difficult to separate out sympathy from commitment. One could argue that I enjoy doing the right thing, and therefore I’m still maximizing my own well-being. First, this reduces preferences to observed behavior, as mistake already critiqued above. The motive to do the right thing is different than the motive to enjoy oneself, and lumping them together is a categorical mistake. Second, we can think about the use of pre-commitment devices to combat weakness of will. Because preferences vary over time one can commit oneself to a certain course of action, in part because one knows ahead of time that ‘the right thing’ and ‘the preferred thing at the time of the decision might vary.’ As a simple example, by not having a parking pass for work, I encourage myself to bike, even when it’s raining or otherwise unpleasant outside. The use of pre-commitment devices seems to be a pretty clear case of placing a form of commitment ahead of individual well-being. Third, as Sen points out we can actually desire to have preferences different than the ones we currently have (i.e. I wish I liked vegetarian foods more, or I wish I cared more about others). These sorts of meta-preferences mean we can attempt to commit to changing our current preferences and thus bring our individual desires closer to our ethical ideal.
As Sen argues, economic man is significantly worse off because of a failure to recognize these distinctions:
A person thus described may be “rational” in the limited sense of revealing no inconsistencies in his choice behavior, but if he has no use for these distinctions between quite different concepts, he must be a bit of a fool. The purely economic man is indeed close to being a social moron.
All of these considerations have a lot of impact on how we think about setting up a society to that is both just and encourages human flourishing. Sen cautions not to make the same mistake Edgeworth made when rejecting utility and concluding that rejection implied self-interest (egoism). Sen writes, “The rejection of egoism as description of motivation does not, therefore, imply the acceptance of some universalized morality as the basis of actual behavior.” Instead, it means human behavior is, as it always has been, a complex phenomena driven by multiple motivations, including socialization.
Sen wrote in 1977, and while there’s been a lot of interesting behavioral economics that takes Sen’s critique seriously and explores actual human behavior, there’s still a tragic gap between what Sen and empirical observation teaches us, and what is taught in economic classrooms across the United States.