When he tried to do anything for the good of everybody, for humanity, for Russia, for the whole village, he had noticed that the thoughts of it were agreeable, but the activity itself was always unsatisfactory; there was no full assurance that the work was really necessary. . . . But now since his marriage, when he began to confine himself more and more to living for himself, though he no longer felt any joy at the thought of his activity, he felt confident that his work was necessary, that it progressed far better than formerly, and that it was always growing more and more.
-LEO TOLSTOY, Anna Karenina
Self-interest is vital to our prosperity. As Adam Smith famously explained, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens."
So very true. Private property and free markets harness self-interest, enlighten it, and inspire each of us to better our own condition by bettering the conditions of others.
This justification of self-interest is consistent with the belief that, while self-interest might be channeled into productive avenues, the world would be an even better place, and the economy would be even more productive, if people weren't self-interested.
I dissent from this oft-expressed belief. It isn't so much that a flourishing, highly productive economy such as ours is possible despite self-interest; rather, such an economy requires self-interest. This is so because there are two aspects of reality that every economy must deal with, but that altruism does nothing to alter: scarcity and ignorance.
Because resources are scarce, prosperity requires that what relatively few resources we have be used as wisely as possible. In a world without scarcity, for example, it would be sensible for me to keep my fireplace lit by tossing dining-room chairs into the blaze. Why shouldn't I do so? Chairs are superabundant and, hence, valueless.
Of course, in reality, while the wood that my dining-room chairs are made of would produce an excellent fire to warm my living room on a cold winter's evening, I clearly would reduce my family's prosperity if I used our furniture so foolishly.
But how do I know this fact? I know it because chairs-like all goods, services, and resources-have market prices. These market prices tell me the relative values of goods, services, and resources. It's because I must pay a few hundred dollars for a dining-room chair, compared to a few cents for a chopped log, that I burn chopped logs rather than furniture in my fireplace. Self-interest directs me to use relatively abundant materials (logs) in place of scarcer materials (furniture) as fuel for my household fires. As a result, my family is wealthier than we would be if I didn't know to make fires from logs rather than furniture.
Likewise for the economy writ large. Motor fuel is today made from petroleum. …