How Self Interest Builds Prosperity and Community

Markets guided by prices daily lead each of us to share happily and abundantly with each other despite the reality that we are, to each other, mostly strangers. Familiarity, affection, and brotherly love are virtuous feelings but these feelings do not contribute as reliably to our material well being as does market exchange.

Here is a parable to make the point.

The year is 1695 and each of two Smith brothers - who are very close to each other as family members - sets up a farm in Massachusetts. Ethan Smith cultivates fields that lie east of the Berkshire mountains while William Smith cultivates fields that lie west of these mountains. Both Ethan and William are hard-working, industrious, and knowledgeable farmers. Unfortunately, while ideal growing-season weather east of the Berkshires results in Ethan enjoying a bountiful harvest, a hail storm destroys nearly all of William’s crops.

Immediately upon hearing of his brother’s misfortune, Ethan loads up a wagon with half of his harvest and drives it across the Berkshires. Ethan gives to William all of the bushels in the wagon. That’s what loving siblings do. They share in each other’s fortunes, good and bad.

A Mysterious Stranger

But what if, instead, Ethan and William intensely dislike each other? When learning of his brother’s misfortune, Ethan then just shrugs and goes about his business, keeping all of his bountiful harvest. Ethan will consume with his family part of his harvest, and he will profitably sell the rest of it to local townsfolk.

Just to the west, on the other side of the Berkshires, William wonders if he and his family will survive the winter. He knows that if he were to ask Ethan for help, Ethan would say no. So William doesn’t even bother to ask.

What William doesn’t know, though, is that a stranger just drove a wagon onto Ethan’s farm. The stranger heard of Ethan’s bountiful harvest and offers to buy half it. Precisely because Ethan’s harvest was so bountiful, he’s willing to sell half of it to the stranger and to do so, after some bargaining, at a low price.

As Ethan and the stranger thank each other for their business, the stranger turns his wagon, loaded with half of Ethan’s harvest, westward. For a moment Ethan wonders what the stranger will do with the newly bought bushels, but it’s really none of Ethan’s business. Soon forgetting about the stranger, Ethan strides inside to celebrate with his wife the profits he earned by selling half of his harvest.

Two days later the stranger drives his wagon onto William’s farm. William sees that the wagon is loaded with wheat, rye, and other foodstuffs. William hopes that this stranger is a charitable soul who comes to give these bushels to William and his family.

Alas, the stranger hasn’t one spark of charitable impulse in his soul or body. The stranger has only one goal in mind: to make as much money as possible. Pulling his wagon to a halt in front of William’s house, the stranger offers to sell to William all of the bushels that are in the wagon.

“At what price?” William asks.

The stranger quotes a price four times higher than what he paid Ethan for the bushels. William balks. Paying that price would wipe out all of his life’s savings. So William bargains for a lower price. Eventually, after higgling and haggling with William, the stranger agrees to sell all of the bushels to William at a price ‘only’ three times higher than what the stranger paid for the bushels.

William, of course, would have preferred to pay a lower price for the bushels - a price, indeed, as low as $0. But given that he and his family were facing the prospect of starving during the coming winter, he is pleased that he had the opportunity to purchase the bushels even at the high price that he paid. William, his wife, and his children all sleep soundly that night.

The stranger drives home to Boston, pleased with his profits.

Strangers Sharing with Strangers

What’s remarkable is that the stranger here plays a key role in causing Ethan to share his harvest with someone - William - about whom Ethan doesn’t care. Ethan, caring only about himself and his family, nevertheless is motivated by the prospect of profit to voluntarily transfer half of his harvest to someone else. Perhaps even more remarkable is that, in playing this role, the stranger himself cares only about himself and not a whit about Ethan or William.

The name we have for the stranger in this example is “speculator.” It’s a name that carries negative connotations. But these connotations are unwarranted.

It’s true that the stranger - the speculator - is here motivated exclusively by his own narrow self-interest. The stranger was alert to an opportunity to personally profit by buying low and selling high. And his self-interest led the stranger to seize this opportunity. The stranger ‘took advantage’ (as some describe it) both of Ethan’s willingness to sell half of his abundant harvest at a relatively low price, and of William’s willingness to buy half of Ethan’s harvest at a relatively high price. And yet in acting in this manner, the stranger prompted Ethan to behave toward his brother very much as he would have behaved had Ethan felt deep brotherly love for William.

Of course, Ethan’s behavior toward William in the two cases isn’t identical. When Ethan loves his brother, he gives half of his harvest to William. In contrast, when Ethan cares nothing for his brother, he effectively sells half of his harvest to William. In the first case - the one with brotherly love - the cost of relieving William from the burdens of William’s poor harvest is absorbed by Ethan (in the form of giving, free of charge, half of his harvest to William). In the second case - the one without brotherly love - the cost of relieving William from the burdens of his poor harvest is absorbed by William himself (in the form of paying a high price to acquire half of Ethan’s harvest).

Yet in both cases, half of the bountiful harvest is allocated away from someone for whom the consumption of it matters less to someone for whom the consumption of it matters more. In both cases, half of Ethan’s harvest is moved from where it generates less human well-being to where it generates more human well being. And in both cases, half of Ethan’s harvest is shared.

It’s a beautiful thing: free markets routinely encourage this sort of sharing, even when each and every one of the transactors is motivated exclusively by narrow self-interest.

Perhaps the world would be a better place if we all had within us a great deal more brotherly love not only for our actual siblings, but also for strangers. (But perhaps not. Loving siblings, after all, sometimes butt officiously and injuriously into each other’s private affairs.) But we must take humankind as it is. And as it is, none of us cares for strangers as much as we care for ourselves, our families, and our friends.

Fortunately, private-property markets guided by prices daily lead each of us to share happily and abundantly with each other despite the reality that we are, to each other, mostly strangers. It’s a beautiful thing.

 

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Donald J. Boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.