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On self-interest and greed

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Abstract

First the assumption of self-interest as applied in Economics is presented. Here we also discuss areas in which (many) people behave less self- but more other-regarding than traditional economic models assume. Then, greedy behaviour is considered as existing in the political and economic ‘world’. Here we refer to corruption as well as to the role of money as a positional good. We also discuss such behaviour in the academic world, in which money plays a role as well as reputation. Thus, while the assumption of mutually disinterested rationality is a very powerful instrument for analysing individual behaviour, to explain some phenomena we have to recognise that people are not only sometimes other-regarding, but also sometimes greedy, and that they might value money much more than traditional Economics assumes. We conclude with some remarks on what we can learn in this respect from Behavioural Economics.

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Notes

  1. A detailed presentation of the economic model of behaviour is given in Kirchgässner (2008).

  2. On the weak rationality principle, see Kirchgässner (2013).

  3. Wicksteed (1910, p. 180) calls this assumption ‘non-tuism’: the individual is not interested, neither positively, nor negatively, in the well-being of those persons with whom he has market transactions. See, for example, also Brennan and Buchanan (1981, p. 156): “Homo economicus, by construction, is not predicted to act other than in furtherance of his interests, vis-à-vis that of his trading cohort, as he evaluates such interest at the moment of choice”.

  4. On this, see for example Kirchgässner (2010).

  5. For an overview of tests of the expected utility hypothesis, see Schoemaker (1982). For alternative approaches, see for example Kahneman and Tversky (1979) or Loomes and Sudgen (1982). Much earlier, Simon (1955, 1978) already challenged the neoclassical assumption of full or substantial rationality and presented as an alternative his concept of bounded or procedural rationality.

  6. On the dictator game, see for example Kahneman et al. (1986 ); for the ultimatum game, see Güth et al. (1986); and for the public good game, see Isaac and Walker (1988a, b).

  7. N. Häring, Der Homo oeconomicus ist tot, Financial Times Deutschland of March 14, 2001, http://ockenfels.uni-koeln.de/fileadmin/wiso_fak/stawi-ockenfels/pdf/Presse/Der_Homo_oeconomicus_ist_tot.pdf (17 June 14).

  8. There are also other experimental results that question the general validity of the results of simple dictator games. See for example Bromberg et al. (2006); List (2007) or Bardsley (2008).

  9. See for example Lawson (2009); McDonald (2009) or Kirman (2010).

  10. See for example Colander et al. (2009) or Willet (2010).

  11. See for example Willet (2010, p. 199), who refers to Adam Smith and his regard to the moral dimension. For the impact of greed and fear on fund performance see Li and Wang (2013).

  12. Aside from the literature mentioned above, see for example also Gintis (2010) or Bowles and Gintis (2009), who base their critique of the economic approach explicitly on the results of ultimatum and public good games (among other arguments).

  13. See for example Mason (2009), Kothari (2010), Matzunder and Ahmad (2010) or Platt et al. (2011). But this argument was much more prevalent in the press and in the Internet than in the scientific literature.

  14. In a recent book on “Economic Theory of Greed, Love, Groups and Networks” by Frijters and Foster (2013), for example, ‘greed’ is equated with wealth maximisation, the traditional assumption of economic analyses, and only ‘positive’ deviations from this assumption are discussed.

  15. For a more detailed elaboration on which this part is mainly based, see Kirchgässner (2008, Chapter 2), but see also Kirchgässner (2013).

  16. On the development of ideas of self-interest, see Monro (1987).

  17. For an analysis of such ‘as if’ behaviour that might occur in particular in competitive environments, see the classic contributions of Alchian (1950) and Friedman (1953).

  18. The following definition for opportunism is given by Williamson (1975, p. 47): “By opportunism I mean self-interest seeking with guile. This includes but is scarcely limited to more blatant forms, such as lying, stealing, and cheating. Opportunism more often involves subtle forms of deceit. Both active and passive forms and both ex ante and ex post types are included”.

  19. In this context the ‘socially best outcome’ is the one that would be chosen by the individuals if they did not know in which position they would finally be in, i.e., if they were behind a ‘veil of ignorance’, in Rawls’ (1971) terminology. Schüssler (1990), for example, has discussed several other social dilemmas that are much more difficult to solve than the prisoners’ dilemma and in which it is less clear what the ‘socially best outcome’ is.

  20. On this, see Kirchgässner (1990) or Zintl (1986).

  21. For the theory of cognitive dissonance developed by Festinger (1957), see for example Opp (1970, pp. 251ff), as well as the literature presented there. Akerlof and Dickens (1982) show how this theory can be used in the framework of economic analysis.

  22. See, as a recent example, the German newspapers’ discussion of Peer Steinbrück’s honorariums for speeches during recent years. See for example: Steinbrück veröffentlicht Nebeneinkünfte, Zeit.Online of October 30, 2012; http://www.zeit.de/politik/deutschland/2012-10/peer-steinbrueck-nebeneinkuenfte (17 June 14).

  23. See for example Opp (1985) on the effects (effectiveness) of so-called ‘soft incentives’.

  24. This also applies to the analysis of constitutional rules. On this, see Hume (1741, pp. 42f.). This line of reasoning is also followed within the framework of Constitutional Economics. On this, see for example Brennan and Buchanan (1983), but also Kirchgässner (2014).

  25. On the discussion of altruistic behaviour, see for example Andreoni (1988, 1990) or Kirchgässner (2010); on the discussion of heroic behaviour, see Kirchgässner (2002).

  26. See for example Matzunder and Ahmad (2010) or Platt et al. (2011).

  27. See for example Kirchgässner (2005) as well as Wang et al. (2011) and the literature cited there.

  28. See for example the contributions in Berdal and Malone (2000), the review essay by Berdal (2005), or Murshed and Tadjoeddin (2009).

  29. It is interesting to note that Smith speaks here of self-love and not of self-interest. He never uses the term greed, but he speaks of (excessive) avarice, and always with a negative connotation. On the history of economic thinking about greed, see for example Verburg (2012), who, however, does not see the negative connotation of greed.

  30. See for example Smith (1759, p. 51, p. 131), but also Smith (1776, p. 550).

  31. As Sen (1970) has shown in his paper on the Liberal Paradox, liberal rights might prevent a Pareto-efficient situation. Bernholz (1974) has shown that this might be the case when real external effects are at stake.

  32. See for example Deaton (1987, p. 592), who, in his contribution about “consumers’ expenditure”, shows “perhaps the most general specification of preferences that could be considered” is one in which lifetime utility only depends on current and expected future consumption.

  33. On money “in its role of providing a way to pursue acquisition for its own sake”, see also Levine (2000, p. 131).

  34. See Rose-Ackerman (1975, p. 190). The expected costs of corruption might include a moral component.

  35. On legal corruption, see also Kaufmann and Vincente (2011).

  36. On the extent of corruption in different countries, see Transparency International (2013). Of 177 countries evaluated, Switzerland is the seventh- and Germany the twelfth-least corrupt country.

  37. This holds not only for the explanation of corruption, but also, for example, for the ‘rational’ theory of addiction by Becker and Murphy (1988). The relevant implicit assumption in their model is also that rational drug consumers have an extremely high discount rate.

  38. See for example Piff et al. (2010, 2012), Kraus et al. (2012) or Trautmann et al. (2013).

  39. See for example Frey (1997).

  40. Potential losses might be very large even if expected losses are small. To restrict the impact of greediness on the behaviour of traders, Jin and Zhou (2013) propose to impose a priori limits to potential losses.

  41. This can be interpreted as a variant of the habit-persistence theory of consumption as originally developed by Duesenberry (1949). He already mentioned the ‘ratchet effect’ (p. 115), i.e., a possible asymmetry in consumer behaviour, but only when discussing the (macroeconomic) consumption function. To this day, whenever habit persistence is assumed, nearly always a symmetric version of this theory is applied.

  42. The theory of positional goods goes back to Hirsch (1976), who, however, relies on earlier work by Wicksteed (1910) and Harrod (1958). For policy applications, see for example Frank (2005).

  43. See for example Frank and Cook (1995, pp. 41ff).

  44. For examples of excessive executive compensation, even in cases of low performance, see for example Childs (2000, pp. 36ff) or Kothari (2010, p. 53ff).

  45. On inequity aversion, see for example Fehr and Schmidt (1999) or Bolton and Ockenfels (2000): Another group in which we can find excessively high incomes combined with even criminal acts to earn even more money are lawyers, as mentioned in Lerman (2005, p. 612), who at a workshop “described the recent spate of cases in which lawyers with enormously high incomes have gone to prison for stealing from their clients or partners.” She speaks of a “workaholic, money-hungry culture that has taken over so many large law firms eroding the integrity of many lawyers and ruining the life of some.”

  46. On the relation between greed and loss, see also Levine (2000).

  47. On this, see Ungern-Sternberg (1995).

  48. For an extreme example, see Hesse (1994, p. 18).

  49. See Lerner (2002/03: More recently, there was a similar case at the Swiss federal Institute of Technology in Zurich. It was impossible, however, to determine with certainty who was responsible for this fraud. See: Bericht über Forschungsbetrug, Neue Zürcher Zeitung No. 40 in February 2010, p. 13.

  50. See Abbot et al. (2007).

  51. On this, see Forscher im Solde von Philip Morris, Neue Zürcher Zeitung No. 122 of 28 May 2003, p. 16. For an evaluation of this case by the University of Geneva, see University of Geneva (2004); on the efforts of the tobacco industry to influence political decisions in Switzerland, see for example Lee and Glantz (2001) or Malka and Gregori ( 2008 ).

  52. For further examples, see Krimsky (2003) or Friedberg et al. (1999).

  53. On this, see Ferguson (2012, pp. 340ff).

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Acknowledgments

I thank two referees for helpful comments and suggestions and Mitch Cohen (Institute for Advanced Study, Berlin) for editing the paper in English.

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  1. Swiss Institute of International Economics and Applied Economic Analysis (SIAW-HSG), CESifo, and Leopoldina, University of St. Gallen, Bodanstrasse 8, 9000, St. Gallen, Switzerland

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Kirchgässner, G. On self-interest and greed. J Bus Econ 84, 1191–1209 (2014). https://doi.org/10.1007/s11573-014-0737-1

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