Systems Matter Part 7: Self-Interest

There are really only two ways of trying to coordinate the activities of the people of this world into systems of culture and economics. First you must sell those people on a delusion and false promise that they will become better off from their buying into your offer to collectively take care of them . . . if they will fully agree to submit to your centralized system of control, even if it includes coercion; or second, by the voluntary cooperation of individuals based on the pursuit of their own self-interest.

One of Adam Smith’s keenest observations reported in his book, An Inquiry into the Nature and Causes of Wealth of Nations, is that each nation found by Smith to be wealthy was promoting an economic system that allowed for individuals to have the freedom to make choices that served their self-interests. Interestingly enough, all attempts by those individuals to enhance their own interests were, at the same time, furthering the interests of others.

Smith interpreted this to mean that individual pursuit of self-interest will unintentionally produce collective good for the general society. A system could be successful by combining the freedom of individuals to pursue their own objectives with the intense collaboration and cooperation of others in producing our food, clothing, housing, or any other conceivable need.

Smith’s insight was that both parties agreeing to an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange will take place unless both parties benefit from the deal . . . everybody has to end up better off! No coercion, no outside force, interference, or violation of freedom should impede the free cooperation of individuals, all of whom can benefit from the transaction. That is why, as Smith put it, an individual entering into a deal with another individual may intend only his own gain, but, at the same time, like an invisible hand, promote an end that was no part of his intention. That end is the simple fact that the other individual in the transaction also ends up better off. As Adam Smith would say it:

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. (1)

I discovered, in my own business dealings in our Jackson Brothers Investments enterprise years ago, that to pursue and conclude a successful business deal it was more advantageous to not address myself to the other person’s humanity or talk to him about my needs or necessities, but to the advantages he would experience should our proposed deal be put together. The deal must be good for both parties or it will not successfully go together and stay together.

If, by some stroke of good fortune, a person could ever discover the depth of this one cultural and economic principle, the fatal flaw of collective, centralized socialism would be exposed and understood. For example, the cultural economic model Marx and Lenin were unwisely espousing was a model of contraction and not one of growth, production, and expansion. It was doomed to fail from the start. Wealth is built on production. Socialistic redistribution is built on contraction.

The redistribution system keeps taking away from the corpus itself, as well as the incentive to replace it and develop new growth. At some point the redistributive model will go bankrupt. Never has it worked over the long haul. If there are human institutions, including revolutions, that can induce individuals to extend themselves for the glory goal first and their self-interest second, such earthly institutions have not yet been found.

In a communal setting, individuals will continue to put effort into the scheme only as long as the hippy endeavor is capable of giving them what they were looking for when they signed up. Individuals continue to make precise calculations of what they feel their physical and mental capital is worth in trade. They cannot be persuaded to make a bad trade over the long haul by promises of some distant reward. They may waste a few years of their life chasing the illusion, but, eventually, they will walk away from the painted hippy bus.

The collective state could not fool the shoe factory workers in Armenia into extending themselves, even though their comrade overseers fed them the deceptive hope that if they kept working with all their might, things would get better. The workers indicated to me that the most common greeting to one another as they arrived for work at the big warehouse each morning was, “As long as the comrades pretend they are paying us a decent wage, we will pretend that we are working a decent shift.”

After a certain point, workers do not intend to work harder in order that everyone else will obtain a little bit more; because that usually means that they have to give up things like leisure. That reticence is especially true where a significant part of the whole group has no intention of working harder, but still expects to receive more.

In a model based on growth and production the worker can pursue that self-interest goal by discovering and choosing an innovative way to work less but more efficiently. Suddenly some new invention or method is hatched and the same effort is put forth, but the level of production is increased. There is no such option available in the contraction or redistribution model of Marx and Lenin. People under such a system have no incentive to work harder or be more innovative because they cannot keep the fruits of their labors for themselves. Productivity inevitably falls.

In a very real sense, what my new friends in Armenia had found out was that they were being offered less for working more. It came as no surprise that continually less was being produced for the system as a whole. And even if the army boots were produced and shipped nobody could wear them. The goods did not satisfactorily meet the demand of the redistributive system. Therefore, the economic system continued to contract and did not grow. The wealth of the nation decreased.

When designing a nation’s economic and cultural system that does not allow for individuals to pursue self- interest, the leaders always eventually come to the same conclusion as did Marx, The class struggle necessarily leads to the dictatorship of the proletariat. In common language that means that more rules are imposed. More individual freedom is taken away. At the end of every violated rule is ultimately a gun.

Eventually, all the promises of the revolution run dry, the people realize that the redistributive system has gone bankrupt, and there is no such thing as free. When that happens, and there are no material rewards as incentives to expand output, the leaders must always resort to coercion, force, and punishment. The workers must then make uneconomic trades of their labors.

In the old Soviet Union, for example, the most severe penalties were reserved foreconomic crimes. Those crimes could even be as simple as bartering with your neighbor some eggs you saved out of your chicken project in exchange for a bit of coal he had not yet burned that winter. Those infractions were deemed as draining the productive effort from the official economy.

In 1961 the death penalty was reinstated for economic crimes, and even in 1966 it was reported that one fourth of all crimes in the Soviet Union involved misappropriations of state property. (2) It was state property because everything was state property. Those trades for the workers’ labors did not conform to the imposed ideology.

There is a positive correlation between economic freedom and prosperity. The genius of the free market concept is that it does not try to coerce or compel the individuals to work. Instead, leaves the individuals free to choose to work and it rewards their work by letting those individuals keep the fruits of their labor. Back in 1776, Adam Smith reported it this way:

That security which the laws in Great Britain give to every man that he shall enjoy the fruits of his own labour, is alone sufficient to make any country flourish . . . The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance . . . capable of carrying on the society to wealth and prosperity.(3)

Indeed, systems matter!

Next Week: Self-Interest vs. Selfishness

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

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