Monday, December 28, 2009

Boxing Day and Self Interest

On Boxing Day, many people go back to the shops to exchange their Christmas presents for something they like better or need more. The problem is that no matter how hard we try to buy an appropriate gift for someone we love, we often get it wrong. We buy something that they already have or something that they do not need. And even if we do not exchange our gifts, we are often disappointed in them, because we would have chosen a different brand or a different colour. The perfect gift is quite rare.

This illustrates an important principle of economics: the concept of “self interest”. This idea does not get a very good press among Christians, because we think it smacks of selfishness. However, the concept of “self interest” means an economy functions better when people are able to decide what they want for themselves.

An economy based on people deciding what is good for other people does not function so well, because none of us really know what other people want. The strength of the market system is that it allows people to buy what they want, because they are in the best place to decide what they need.

The Christmas present problem illustrates this neatly. Even if we know the person well and really care about them, we can still buy them the wrong gift. Imagine how many mistakes we would make for if we were buying for people we do know and do not care about. We would buy the wrong thing many times. This does not mean they are a selfish. Rather, they just have different tastes, or they have a greater need for something else. Self interest assumes that consumers know best what they need. People can decide what they want for themselves, better than other people can decide for them.

Producers face a different problem. If consumers are free to buy what they want, producers will only be successful if they are producing things that consumers want. To be successful, producers have to do better than most of us do at buying gifts, because the free market system rewards those who are the most skilled at guessing what other people want. A producer will earn a profit if they supply what people want, at a price they will pay. Producers who guess wrong will end up with full warehouses and no profits. To be successful, a producer has to do much better at deciding what other people want, than most buyers of Christmas presents.

Self interest means that consumers can choose what they want , but producers must supply what other people want. The free market places power in the hands of consumers and makes producers into servants.

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