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Most economists follow the lead of Adam Smith, the eighteenth-century philosopher who laid the foundations for modern economics, by assuming that people act purposefully to maximize their satisfactions, given their limited time, information, resources, and budgets. This characterization of Homo sapiens as Homo economicus (not to be confused with home economists) views all human behavior as rationally self-interested. Why Smith adopted this approach is addressed in Focus 1.

You might object that a lot of people seem irrational, but the economist's notion that people act “rationally” merely implies that people try to act in ways consistent with their own objectives—even if their goals sometimes seem absurd to outsiders. For example, if misanthropes used grotesque facial tattoo to signal their contempt for society, economists would view their disfigurement as rational—the tattoos are consistent with their objectives. But we would not try to explain why the group was so intensely anti-establishment. (Economists are not psychiatrists!)

Focus : Is Self-Interest Immoral or Unavoidable?

If you sliced off a fingertip while buttering your toast while hearing on the “Today” show that an earthquake had swallowed China and its 1.3 billion people, which event would dismay you more? In his Theory of Moral Sentiments (1759), Adam Smith argued that loss of a little finger would keep the average European from sleeping that night, “but, provided he never saw them, he will snore with the most profound security over the loss of millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own.”

Smith illustrated the power of self-interest with this example, arguing that disasters to others elicit sympathy when only to the extent that we can imagine ourselves in similar straits. Suppose poking your pinkie into a crack in the space/time continuum would prevent the China earthquake, but at the cost of your finger. Would you do it? Smith thought most of us would, not out of love for humanity, but rather because of “… love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters”—you would probably feel terribly guilty if you did not sacrifice your finger.

Self-interest tends to limit—but not eliminate—charitable acts. Our personal compasses yield a spectrum of willingness to sacrifice for others. If you would surrender your finger to save 1.3 billion anonymous Chinese, would you give up an arm? (Would whether others knew about your sacrifice matter?) Would you sacrifice your life? Only a saint could automatically answer this last question.

The assumption of self-interest need not imply total selfishness—that people never worry about other people's well-being. Personal values powerfully influence our perceptions of costs and benefits. No society could function if everyone were willing to use a $1 bullet to gain a $99 profit by shooting any stranger flashing a $100 bill in a dark alley. But we all recognize that some sociopaths will maximize these sorts of “profits” in a flash. Fortunately, most of us do consider others to some extent; we want our actions to benefit others, and try to do more good than harm. Thus, humanitarianism is not an exception to self-interested behavior. Picking up litter or contributing to charity boosts people’s self-esteem and their reputations. Audience members often share in a “warm glow” when benefit concerts generate funds to support human rights, aid the homeless, or improve environmental quality.

You may agree with philosophers who deny that behavior universally reflects attempts to maximize pleasure and minimize pain—a notion that seems to reduce motivation to its lowest common denominator. Nevertheless, theories based on assumptions that individuals try top maximize their own wealth or happiness are usually more realistic and predictive than models based on purely humanitarian motives. Moreover, even people who view behavior as driven by loftier motives concede that personal interest is important at the margin.

Self-interest need not condemn humanity to constant conflict. You may wonder why most economists view self interest as a powerful force that helps coordinate people's plans, indirectly leading to broad forms of social cooperation. In fact, so-called selfish people and so-called altruists react similarly to many events. For example, if the price of fruit falls relative to the prices of other foods, both a selfish person and an altruist may buy more—the selfish person to personally devour the fruit and the altruist to distribute it to needy children. And economics is more focused on the fact that both groups buy more fruit than on who eats it.