Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide


  1. 1. When most people think of finance, ideas such as stock exchanges, banks, and corporations often come to mind. Yet as a social science, business is linked to the decisions and behaviors of its players. The Principle of Self-Interest suggests that all things being equal, people act in their own financial self-interest. For some, the Principle of Self-Interest may seem cold and unfeeling because there are other aspects to life other than attaining money. The principle does not presuppose that money is the most important aspect in anyone’s life. Financial transactions often take place without parties meeting face-to-face. Buying and selling stocks, for example, are transacted by a telephone call to a broker or a click of a mouse online. Often, the two parties are unaware of the people with whom they are doing business. Therefore, they buy and sell securities based on what is good for them even if it means a loss of value for the other party.
  2. 2. Generally, the Principle of Self-Interested Behavior explains human behavior well and captures much of its variability in competitive financial markets. Advantages of Self Interest: It is seldom disputed that people have a natural tendency to act out of self interest, although the extent and definition of self interest have not found consensus. Debate ensues on the topic of whether this tendency is a paragon of morality, a vice to be conquered with altruism, or somewhere in the continuum between the two extremes. In Atlas Shrugged, Ayn Rand professes a view of morality where the only moral actions are those that follow the rational inclinations of man. The view of Joseph Butler, espoused in his sermon Upon the Love of Our Neighbor, is that man should harbor a benevolence and love for his fellow neighbor and engage in those actions that best serve both himself and his neighbor. In reality, these views are equivalent in their results and applications. Despite different views of motivation, the theories ultimately prescribe similar actions. The precept of strategic self-interest advocated by Rand is moral not merely because it embraces rationality, but also, it will be demonstrated, because it fosters a flourishing in one's neighbor. To act rationally and with strategic self-interest is to think locally and act globally. In adopting a set of rules that benefits only the individual, reality dictates concessions and compromises that dispute Rand's fundamental disposition to helping others but stem from her idea of self interest and collaterally benefit everyone.Ayn Rand summarized her philosophy as "the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute." While Rand does not spell out a definition of self interest, this approximates it. Rand felt that self interest is the long-term promotion of one's own intellectual and productive capabilities and happiness. Rand critiqued conventional altruistic moral codes as being immoral because they dismissed pleasure and rational self interest. She felt that the "mind is only judge of truth" and that "the extent to which a man is rational, life is the premise directing his actions. To the extent to which he is irrational, the premise directing his actions is death. Disadvantages of Self Interest:
  3. 3. Marked Economy vs. Command Economy:- MarketEconomy: In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre- determination of prices for different commodities, and the amount of regulation controlling different industrial sectors. Command Economy:
  4. 4. A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. There are two polar opposite approaches to an economy's operation. The command economy is the top-down, centrally-planned economy of socialism. The market economy is the decentralized economy of the free market. The most fundamental distinction between the two is the existence of private property in the free market and the absence of private property in the command economy. The alleged virtue of the command economy is that it is planned in contrast to the unplanned market economy. The error in this view is that the market economy is actually very rationally planned by means of consumer demand through the price system. Additionally, for four reasons the command economy will be deficient. First, an attempt to plan an entire economy by a central committee is bound to be inefficient just because the task is so large. There is no way that a committee of say, 300 planners can know the needs, conditions of resource availability, and localized knowledge spread throughout an economy. Second, the command economy ultimately rests on coercion as its means of motivation. Socialists will typically claim that the resort to coercion (the Berlin Wall, Russian gulags, etc.) is not part of their system, but only an unfortunate bad choice in political leaders and those socialism only attempts to control the economy, not people's individual liberties. But, of course the main element in an economic system is in fact people; therefore controlling an economy is first and foremost control of people--the Berlin Wall was no peculiar misfortune. Suffice it to say further that human motivation is diminished when coerced. Third, the command economy is a collectivized system. All work for the benefit of their quotal share of total production. Individual incentives are absent. As an example, with 100 workers in an economy each will receive 1/100 of total production. If one worker shirks, his loss is only 1/100 of the production he otherwise would have generated. (Imagine the incentives when this system is broadened to a nation of 200 million!) Each ends up attempting to live at the expense of others and total production plummets. And fourth, the incentive of production is to please the political authorities who have life and death control over the workers. In contrast to the market,
  5. 5. where production is predicated on consumer demand, the consumer is the forgotten being in a command economy. Self Interest Self-interest simply means doing what is in the best interests of one’s self. As such, such behavior is instinctive and inherent in the universe, both as to humans and other life forms. From a business and economic standpoint, it is only when each of us acts in our own self-interests that the collective “society” can elevate. Paternalism in business is of little or no value in achieving that goal and does not help the party being patronized. (Read “Capitalism”). It’s the old “give a man a fish and he eats for one day but teach a man to fish and he eats forever” story. By acting in one’s self-interest and thus teaching the other party in a transaction to do so as well, the actor is helping that other party achieve independence from dependence. To cater to the other party’s dependence on that paternalism only makes you co-dependent. That neither helps you nor the other party. There is absolutely nothing wrong and there is absolutely everything right in advancing one’s self-interest. It is a sign of self-respect. Starting out with the “own everything” mantra is a mindset that then enables you to negotiate from that standpoint. (Read “Private Laws”) Clearly since rights are often a zero sum game, by seeking to own everything, you then are in a position to negotiate for participation in everything even if the other party actually owns it. But if you start out being willing to not own everything, to give it away in the name of “fair” or otherwise, you are already starting out below ground level. Contract provisions are there, in the open, for all parties to read. If a party does not know what the provisions mean or their full potential implication, they should seek the advice of someone who does. If you sign an agreement without knowing what you need to know, you have only yourself to blame.
  6. 6. Resolved Question Show me another» What is the difference between market and command economy?  3 years ago Report Abuse M.A.W. Best Answer - Chosen by Asker An economy may be defined as the state of a country or region in terms of the production and consumption of goods and services, and the supply of money. A market economy (also called a free market economy, free enterprise economy) is an economic system in which the production and distribution of goods and services takes place through the mechanism of free markets guided by a free price system . On the other hand, a command economy (also known as planned economy) is an economic system in which the state or government controls the factors of production and makes all decisions about their use and about the distribution of income . There is another type of economy, known as Mixed economy. Mixed Economy is combination of free market and command economy. However, this essay will analyze the main key difference between command and free market. A command system is one in which decision making is centralized. In a command economy, the government controls the factors of production and makes all decisions about their use and about the consumption of output. The central planning unit takes the inputs of the economy and directs them into outputs in a socially desirable manner. This requires a careful balancing between output goals and available resources. Resources is allocated through a planning process. At its most extreme, this means that the state will direct labor into jobs as well as directing consumers what to consume, although it is more likely that they will direct producers what to produce, thus determining the choice of goods available to consumers. What is more, price is controlled by government, they decide minimum and maximum price of goods according to their importance. For instance, one the one hand, government sets the minimum price for wheat to encourage farmers to produce more. On the other hand, government sets the maximum price on rents so every one can easily afford that. In a command economy, the state plans the allocation of resources between current consumption and investment for future, the output of each industry and firm, methods of production and the resources allocated to each industry and firm. Moreover, in a command economy, all factors of production apart from labor are owned by the state. The classic examples of command economies were the USSR under Stalin and the People's Republic of China during Mao's Great Leap Forward. In contrast, in a free market economy, all economic decisions are taken by individuals and firms, which are assumed to act in their own self-interest. Firms decide what goods shall we produce? They can produce what ever they want to acquire their maximum profit. They can produce necessity goods such as foods, clothes, tables and chairs. Moreover, they decide the prices of goods as guided by the laws of demand and supply. For instance, one firm produces Flat TVs, if Flat TVs are highly demanded, Prices increase dramatically. However, demand of black and white TVs decrease, consequently prices decrease. In addition, in a free market economy, the output is determined by the quantity demand, the techniques of production by the firms themselves keeping in mind efficiency and productivity and land is free to buy for everyone (firms, business invertors and etc). The free market idea of land ownership can
  7. 7. have some good and some disastrous effects. On the one hand, land ownership is good because this gives the opportunity to business person to plan for long term with out having any problems such as, rent or charges on the land will increase after few years. On the other hand, land prices will increase dramatically which will affect the whole country. For instance, residential land values in Japan grew seven times faster than wages between 1950 and 1988 . This wrecked Japan's economy and it has taken 16 years to recover. The common examples of free market are USA, China and Canada. To sum up, world has scarce resources. The economic systems of countries are designed to allocate those resources, through a production system, to provide output for their citizens. The fundamental questions that these systems answer are: what to produce, how and for whom? Market economies leave the answers to these questions to the determination of the forces of supply and demand while command economies use a central planning agency to direct the activities of the economy. Both have their own strengths and weaknesses. But in really world, all economies are actually mixed economies, incorporating some facts of both market and command economies. The relative importance of the particular economic system in the country is the determinant of the type of economic system that it is generally considered to be.