1) In the 17th-18th centuries, philosophers hypothesized that pursuing rational self-interest through economic means like making money could constrain humanity's destructive passions and help end war, as avarice might promote civil society and peace. 2) Adam Smith argued that self-interest is what drives market systems, and that a legal system ensuring individual security along with civic ethics prevents chaos from individuals solely pursuing self-interest. However, acquiring wealth does not necessarily lead to happiness. 3) While early economic theory viewed humans as rational actors purely motivated by self-interest, later research found humans also display behaviors like cooperation, fairness, and loyalty not fully explained by rational self-interest alone.

1. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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The History and Development of Self-Interest as the Basis for
Economic Beliefs and Behaviors
A Partial Origin of Economic Theory
By the 17th and 18th century, a number of thinkers had become overwhelmed by the
seemingly endless civil strife in Europe and England. They believed that Man’s
passions had fuelled constant wars in Europe, particularly by (i) religious
differences and exuberances, (ii) inspired military expeditions, and (iii) aristocratic
adventurism. The violent passions of mankind stoked what seemed to be endless
cycles of civil butchery. A number of philosophers found themselves desperate to
find a way out of a state of perpetual war.
Philosophers hypothesized that reasoned love-of-self could constrain Man’s
destructive forces and passions. Making money, the mildest of the passions, was
seen as an innocuous alternative to war and civil conflict—even though it was
considered by many to be uncouth, bourgeois, and ignoble. Capitalism became a
message of salvation. Avarice might actually raise the level of positive social
interaction among men, promote a civil state of affairs, and secure the peace among
men.
In truth, Hobbes, Hume, and Smith had no great regard for the Man’s inherent moral
foundations or intentions. They believed that men were brutes driven by the self-
destructive forces of their passions and innate urges.
Hobbes in particular was oriented to a cultural transformation in Man’s ethical
make-up. He thought that if men could become less interested in religious and
nationalistic passions and care more for “the necessary things” in life, they would
possess the core characteristics of responsible political subjects for the formation
and maintenance of any civil state. Passionate people, he thought on the other hand,
cannot pursue their own self-interests or their best interests in a coherent fashion,
especially when their passions were ungoverned by reason. What would help Man
would be to learn how to serve his own best interests rationally so that he could
become a moral being.
A rational pursuit of utility (true self-interest) would be a rare moral achievement.
Serving one’s own true self-interest could become an ethical and cultural
counterweight to the religious ideals of conscience (which led to many wars) and
aristocratic ideals of glory. Indeed, Hume saw Christianity as an intolerable moral
provocation, and socially undesirable. If Man could employ a calculating mindset—
that is, act rationally and focus on material goals rather than spiritual goals—he
would serve himself and society morally. Mature self-love would be, in a sense,
prudence.

2. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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This notion of true self-interest by Hume, Hobbes, and Smith was a concept of self-
love that was not narrowly defined. Self-love in these philosophers’ eyes was a stoic
view of being, requiring a command of one’s faculties and control of one’s impulses.
True self-interest is not selfishness. Wise people would, for example, take interest
in their good health and choose to live in that way—not as an end but because it is
quite simply the reasonable thing to do. Such a stoic view would be indifferent to
any outcome morally; ill health or good health would be viewed with equanimity.
This kind of freedom insists on the ultimate moral indifference to worldly outcomes.
Stoic freedom is not acquired by satisfying oneself with what one desires—but by
destroying one’s desires. The work that one performs in life turns one into a moral
subject capable of shaping his or her own very nature. True self-interest, then,
comes only from strenuous self-discipline.
This describes the economic, rational, self-serving Man Adam Smith had in mind
when he wrote his two books: The Theory of Moral Sentiments (1759), and later, The
Wealth of Nations (1776). Smith came to capitalism and his economic theories
through ethics.
Adam Smith’s Ethics and Economic Theory
Smith argued that self-love, especially calculated self-interest, is what drives market
systems. Utility-maximizing self-interest is the foundation of Smith’s economic
theory.
Smith was most concerned about two problems. One, what mechanism would
prevent the unfettered freedom to pursue one’s self-interest from leading to a
Hobbesian war against all? Two, what leads to the wealth of nations? Smith’s
primary answer in both cases was a legal system that insures individual security.
Smith saw three factors working with one another solving his two concerns.
Smith’s first and most important factor was a system of positive law, which included
(i) external constraint by a civil police force and (ii) a refined division of labor (i.e., a
system of courts, an army, and enough leisure for philosophical reflection). Both the
external constraints and the division of labor were funded by a surplus of resources
that came from a given society’s material progress. Hence, Smith’s second factor: a
liberal, free-market system, which was materially productive. Smith’s third factor
was a broad sense of civic ethics in society—caring about the fortunes of others.
Smith’s three factors lead to the wealth of a nation and prevent outright chaos of
individuals seeking to serve their own self-interests against all others’ interests.
Ironically, the productivity of markets is driven by a fundamental deception, said
Smith. Although pain (from lack or loss of goods) might be more powerful than
pleasure, the belief that acquiring wealth, possessions, and status would make
people happy is greatly over-estimated and temporary, wrote Smith. Neither pain

3. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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from the lack of goods nor pleasure from the possession of goods was enough to
ensure the formation and maintenance of a moral and civil society. Indeed, Smith
expressed considerable skepticism about the pleasure that comes from possessions
or status. Smith thought that most possessions of men were little more than
“trinkets of frivolous utility,” which did not serve real needs. Smith wrote that the
rich pursued ends (goods, status) that invariably failed to make them happy or bring
them little lasting pleasure. But, as the rich bought things, they inadvertently
promoted the good of the poor through a kind of trickle-down process (“the
invisible hand of the market”).
Many contemporary empirical research studies support Smith’s intuitions. Health
problems, incarceration, poverty, and wealth have shown to provide little long-
lasting impact on people’s subjective well-being. Paraplegics and lottery winners
tend to revert to the same baseline measures of subjective well-being not long after
the good or bad events have occurred. A meta-analysis of over two hundred
empirical research studies in consumer marketing research across the globe
indicates a slightly inverse correlational relationship between subjective well-being
of people and their wealth.
Smith’s ideas were likely based upon Christian values. Smith thought there were
invidious passions (hatred, resentment, etc.) and beneficial social passions
(generosity, humanity, kindness, compassion, mutual friendship, beneficence rather
than material wealth).
Recent Updates on the Concept of Self-Interest
Smith’s theories argued that rational, calculated self-interest promotes more good
than anyone who could promote it. Darwin 80 years later said that evolution selects
the fittest, which in turn survives by out-reproducing other specie. Economically,
this has been taken to mean that those who look after themselves prosper.
Sociologist and economist Thorsten Veblen railed against this view of Man as an all-
rational calculator of pleasure and pain. Veblen argued that man pursued
conspicuous leisure, which becomes conspicuous consumption, all to no great end.
One significant problem with the idea of an all-rational, calculating self-interest (ala,
a cost-benefit analysis) was that initially such theories could not explain what
appeared to be natural and commonplace human behaviors, like pity. Subjective
expected utility functions could not model things like love, loyalty, outrage, a sense
of fairness, etc. which some thought most characterize human beings and human
behaviors.
In the 1950s and 1960s, behavioral economists began to conceptualize how such
human characteristics might be modeled using expected utility-maximizing
functions. Education became human capital, love became an exchange relationship,
children became durable goods, and addiction, terrorism, arms control, the pace of
scientific discovery all came to be explained by cost-benefit calculations. Only a few

4. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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economists argued against the notion of perfect rationality, while psychologists
began to complain that economic theory became a kind of economic imperialism,
able to explain all things human.
One interesting line of research in this regard is game theory. In experimentally-run
games with iteration, prisoners’ dilemmas produced a tit-for-tat cooperation model
as the best strategy rather than outright, dog-eat-dog competition where players
stiffed each other at every turn. The strategy of tit-for-tat has been purportedly
proven to be the best strategy dealing with conflict under all but a few
circumstances. Tit-for-tat strategy dictates players should cooperate on the 1st
move and in every move thereafter (unless an opposing player defects)—until the
end is in sight (and then defect no matter what).
Cooperation (tit-for-tat) has been found to be operative and the best strategy
available in studies of war, biology, business, child custody, breaches of contract,
superpower negotiations, international trade, and so forth. Game theory research is
firmly rooted in the principle of serving self-interest, but only when self-interest is
considered narrowly (i.e., following one’s desires). For example, it says that
cheating is rational, as long as one is not expecting to get caught.
A second line of work with regards to narrow self-interest or selfishness regards the
emotional signals people give one another unconsciously. It’s argued that
observable emotions short-circuit narrow self-interested behavior because honest
and helpful people are those who others most want as partners (not angry people,
for example). Emotions solve a commitment problem when rational actors behave
in ways that are contrary to their best (broadly cast notion of) self-interest—when
rational actors would break the rules if others were not looking.
Emotional predispositions must be observable: actors must be able to observe one
another’s breathing, postures, pitch and timbre of voice, facial muscle tone,
expression, eye movement and contact, etc. These observable signals are critical in
the communication of information about character. Nature may provide the hard
wiring between body and brain, but culture provides the moral spin and sentiments.
According to these theories, emotions are secular substitutes for religion: they are
the glue that binds people into compacts for mutual benefit and civility. Hence,
integrity and fellow feelings are effective forms of individual fitness (ala,
Darwinism).
People may replenish and exercise their understanding of moral values and
practices through the arts (TV, movies, talk shows, novels, biographies, forums, case
studies, etc.).
The Social Construction Of Economic Realities

5. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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John Maynard Keynes once quipped that the theories of social sciences--right or
wrong--become true by modifying the reality they purport to explain. This happens
through the institutional designs (systems, structures, metrics, processes) that
transform image into reality. Social norming creates accepted truths, and people are
hesitant to violate powerful prescriptive expectations (like, narrow self-interest).
Language, too, affects what people notice and ignore.
In sum, social science theories often become self-fulfilling theories. Social science
theories may not attain their lofty status because they are true, but because they are
interesting and engage the attention of experts and practitioners.
Today, markets are assumed to be the most efficient way of organizing exchanges,
and the core idea of economics is that every agent is actuated by a narrow definition
of self-interest. The concept of markets also places an emphasis on extrinsic
rewards. Indeed, the concept of markets and market metaphors pervade economic
assumptions and language. Competition purportedly leads to optimal results when
people pursue their own narrow self-interests.
Here are some research findings from various research studies conducted on the
issue.
 When Black-Scholes options pricing model was first introduced publically,
the outputs of the model’s calculations were compared to the actual prices of
options at the Chicago Board of Trade. During the first year of comparative
measurements (the same year the model was published), the market’s prices
showed a 35-40% deviation from the results of model’s calculations. Five
years later, the deviation had declined to 2% and has remained close to that
deviation ever since.
 Studying economics and business leads to learned behaviors. Twelve
different experiments have shown that subjects will contribute significant
resources (42% those available) to the provision of a public good, as opposed
to graduate economics students (20% those available).
 Economics majors keep more resources for themselves in games / behavioral
experiments than students who have declared non-economic majors or were
not enrolled in an economics course.
 Economists defect more often in prisoner’s dilemma games than other
academics.
 Economic professors are less likely to donate to charities than professors in
other disciplines.

6. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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 Libertarian conservatives (i.e., those who believe in the power of markets, in
individual self-reliance, and in the power of human rationality) are least
disturbed by tradeoffs between money and harming people.
Research in sociology indicates that those subjects that do not observe societal
norms, such as the kind that economics provides, will appear foolhardy and
illegitimate socially.
Research in language studies indicates that words and labels evoke certain
associations, certain motives, and certain norms of behavior. Behaving consistently
with language (and meaning to do so) produces a social reality that reinforces and
validates the very terminology that is used. When people use a discipline-specific
language, it tends to prime (or limit) people’s choices and their behaviors.
Granted, many people may not act selfishly themselves or may not be motivated by
extrinsic incentives, but they often expect others to be so. Hence, they will design
institutions under those assumptions that produce those behaviors. For example,
 It is clear to everyone that more outside contracting and contract labor exists
than a few decades ago. There seems to have been an increase in the
“employability model of employment” in organization today. Everyone now
appears to be considered a free agent pursuing his or her own narrow self
interests.
 There is an apparent increased emphasis on shareholder value as the
ultimate measure of firm performance. No other objective seems close in
importance.
 It is no longer the case that the image of the firm as a community or family, or
a coalition of stakeholders, is prevalent as it was before WWII. Now the
employee is a commodity (an asset, a resource) that can be acquired,
dismissed, or traded. What matters is corporate profitability and shareholder
wealth. As a natural matter of course, this leads to decreased employee
loyalty and trust, an increase in turnover, and decreasing job tenure. An
increased emphasis on employee pay by both the firm and its employees only
further stresses these issues.
In Conclusion
It is clear that rational actor modeling of economics has been remarkably successful
in encouraging men and women toward libertine self-government, and in avoiding
internal civil strife.
What’s interesting now are the rising complaints against (narrow) self-interest that
has driven today’s men and women to demand increased personal enrichment and

7. Mike Levenhagen, Ph.D. University of Washington, Bothell (2015)
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the things which rational actors were supposed to repress initially—passion,
emotion, desire, culture, spontaneity, morality, and even religious virtue.
Now it appears there are two abstractions feeding off of each other in a dialectical
frenzy. Narrow self-interest begets passions beget narrower self-interests and so on.
Neither the appeals of religion nor the metaphysical voices of reason can be
abolished from human nature, said Hobbes.
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