Self-Interest vs Social Interest, the invisible hand and resource allocation


Self-interest is when individuals make decisions that are in their own best interest.  Like when you decide to get up in the morning to go to work and make money, or when you pay the grocery store for food that you would like to eat.  

Social interest is when choices are made that benefit society as a whole.  Imagine one person, who is all knowing and really cares about the people.  Every action this benevolent dictator made would be in the social interest of the society.  The cool thing about social interest is that it can also be attained by individual decision makers acting in their own self-interest.  This process is what Adam smith called the invisible hand.

When individuals act in their self-interest, they go to work and buy things because
it makes them happy.  But by working and purchases things, they are also contributing to society and the social interest.  Think about the creators of Facebook, they acted in their own self-interest creating it for profit.  However, in the process, we all benefited from the increased networking and communication with friends.  Thus individuals acting in self-interest can lead to optimal social interest outcomes, just like if a benevolent dictator was in charge.

Remember:  Common questions for this topic include giving you an example of a business and asking you if they are acting in self-interest or social interest.  Businesses are always acting in their own self-interest, yet by doing this they are contributing to the social interest.  Only by volunteering, donating, or acting as a non-profit are entities ONLY acting in for the social interest.

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