Freud argues that personality develops in three parts - the id, ego, and superego. The id operates on the pleasure principle, seeking instant gratification of needs. The superego incorporates social and moral standards learned from parents and society. The ego acts as a mediator between the id and superego, satisfying needs in a way that considers reality and social norms. Freud believes these three parts are often in conflict as the id's desires do not always align with the superego's rules.