The greatest mystery of economics: Why the hope of profit best serves the public interest

This material is a result of our PUBLISH WITH US cooperation with the young authors.

In acquiring wealth solely and exclusively for myself, I am acquiring, so to speak, for all […]

F. M. Dostoevsky^[1]

Introduction

Intentions do not determine results. There can be a vast discrepancy between what happens and what the person acting intended to achieve that it is difficult to speak of a direct connection between purpose and effect. However, actions should not be judged by their intended purpose, but by the consequences they bring about.^[2] Humanity will undoubtedly be better off if people act rightly for the wrong reasons than if they bring evil into the world with noble intentions.^[3]

Human actions do not affect only the person performing them, but also, nolens volens, impact certain other individuals. In order to determine under what circumstances various decisions produce particular results, it is therefore necessary to consider their consequences for others as well. Actions must hence be evaluated according to their overall impact, not solely their effect on the actor.

“Private Vices, Publick Benefits”^[4]

One can consciously serve the specific interests of only a small number of people whom one knows intimately.^[5] The larger the society in which individuals find themselves, the clearer the need to rely on mechanisms other than such limited immediate knowledge of the needs and desires of others. If, in an extended society, everyone had to take into account the interests of all its members in their actions, civilisation as we know it would collapse. It is precisely the economic relations based on the pursuit of personal profit that hold society together.

The market order – based precisely on what are called economic relations – allows individuals to benefit from the services of people whose existence they may not even be aware of, who may hold completely different beliefs, and who, if they had the opportunity to become acquainted with them, might even abhor them.^[6] A characteristic feature of this system is the maximisation of personal profit. Individuals pursuing their own interests are led to help others and thus act in the public interest.^[7] In order to make a profit, they must provide others with goods that are valuable enough for them to voluntarily purchase. The principle of the free market economy can thus be expressed by the Latin phrase do ut des – I give in order toreceive.^[8]

In a market economy, all people engage in exchange. If this exchange is voluntary, it is not, as might intuitively seem, parasitism – where one party benefits at the expense of others – but rather mutualistic coexistence, in which, ex definitione, every participating entity is better off. Although everyone seeks primarily their own gain, they serve the interests of others without being aware of it. A remarkable consequence of such an order is that even the most stubborn egoists have an interest in acting for the greater good.^[9]

However, if it is true that only those actions are morally justifiable which an individual performs with the awareness that they will primarily benefit other members of society,^[10] then it must follow that actions whose purpose is personal profit are immoral. Nevertheless, it remains the case that only the organisation of economic affairs based on profit management^[11] has made possible the extended order of human cooperation,^[12] where individuals unwittingly satisfy the needs of people completely unknown to them through their endeavours.^[13]

Within such an order, a process takes place whereby people act not according to their immediate knowledge, but on the basis of abstract signals that embody far more information than any mind could ever possess at any given moment. Yet it is precisely this ability to transcend the bounds of one's own ignorance – or the ability to act based on knowledge of which one is not aware – that is the source of most of the advantages of civilization.^[14]

Although human action is purposeful behaviour,^[15] the more complex a society becomes, the more the consequences of such action diverge from the original intentions.^[16] Many of the effects of human actions are therefore unexpected and unknown to the individual concerned. Human action is shaped by, and has unintended consequences due to, the institutional framework, customs, or rules – none of which are the product of human design, but arose spontaneously.^[17]

The real question is thus how to set social rules so that the natural pursuit of maximum personal profit yields results that are desirable not only for those individuals themselves but also for the greatest number of other members of society. The fundamental condition must be that these rules can be fair only insofar as they apply equally to all members of society and are designed and enforced without regard to particular individuals.^[18]

If private property^[19] is consistently protected, and the legal system is set up in such a way that it favours no one but outlines the same field for private activity to everyone, then it follows that actions pursued solely for personal profit produce outcomes that are also desirable for other members of society. It is even the case that such behaviour is closer to what is misleadingly called “public interest” than if the achievement of that state had originally and explicitly been considered.

Salus Publica Suprema Lex?

It may seem that while the behaviour of an entrepreneur tends toward a state that satisfies only himself, actions taken within a certain organisation could ensure results that serve the interest of society as a whole.^[20] Since such a “public interest” would benefit the greatest number of people, it is argued that social affairs should be managed centrally by organized groups rather than by entrepreneurs mesmerised by the dishonest prospect of personal profit.

As noble as such a proposal may sound, it overlooks several fundamental aspects. First, no one knows what this “public interest” is. Everyone knows what benefits them personally, but no one is able to define with comparable precision what constitutes the public interest. Strictly speaking, there is no such thing as a public interest or a value for society as a whole.^[21] What we find are only the various preferences of individuals, which cannot be aggregated into a kind of society-wide scale of values.^[22] Since individual preferences manifest themselves only in the act of choosing, they cannot be known to any mind a priori.^[23]

Not only is it impossible to know the preferences of others, but they are incomparable. Because the individual interests of different people are irreconcilable, someone would have to decide, quite arbitrarily, whose interests should be preferred over others. It is plainly impossible to speak of the public interest when the measures taken serve only the interests of certain groups while harming the rest of society. Politicians, however, usually pursue the particular interests of a few groups instead of the public interest.^[24]

The public interest is, and arguably always has been,^[25] an extremely ambiguous and therefore dangerous phrase. It is no coincidence that the greatest evils are often committed in the name of this false ideal.^[26] Politicians like to claim this appealing but empty term, because it allows them to justify almost anything. It is telling that this phrase often conceals the very policies that the public would reject were their names better aligned with the outcomes they actually produce.

The Problem of Economic Calculation

It may seem trivial that in a market order, human activities are governed by the abstraction of monetary calculation rather than by any more grandiose intentions. However, it is the institution of money – often despised by intellectuals^[27] – by which the prices of goods are expressed, that makes possible the use of economic calculation, the only method by which an efficient allocation of resources can be ensured.^[28]

Prices and profits serve as the most effective guide for producers in their efforts to satisfy the preferences of people unknown to them.^[29] Without requiring knowledge of the causes of changes in the prices of particular goods, producers can nonetheless adjust their production to reflect this reality so that resources are neither wasted nor in short supply.^[30] The signal in the form of profits then informs them whether their activity benefits others or not.

If the entrepreneur is making a loss, the market puts pressure on him to alter his production to serve consumers better. If the firm fails to do so, it will collapse and be replaced by other producers who are more capable of meeting consumer preferences. In a free market, therefore, consumer sovereignty reigns. If the entrepreneur does not follow the commands of the public, as mediated by the price system, he will go out of business under the burden of losses and be displaced by more efficient producers.^[31]

But if the means of production were in the hands of governments, non-profit organisations, or other non-market subjects, those who make production decisions within these bodies would be deprived of any measure of their usefulness to the rest of society. Without private ownership of the means of production, prices become irrelevant,^[32] because they no longer reflect the true scarcity of resources or the need for them. Without knowledge of prices, rational economic decisions cannot be made, and all that remains are mere blind attempts to guess at consumer desires.

Although governments or charities may sincerely seek the public interest, they are condemned to cause inefficient allocation of resources. Lacking the only viable method of assessing how much their decisions help society, their actions ignore the real needs of people.^[33] Worse still, they have no way of recognising these problems and therefore cannot correct their mistakes. Society suffers greatly as a result, because resources are directed toward inferior uses.

Concluding Remarks

While a person pursuing his own profit is unwittingly driven to serve the interests of others, one who is guided solely by what he himself considers to be the public interest is often left – though it is not part of his intention – to serve specific private interests.^[34] It is precisely this favouring of particular groups of producers, as opposed to making a profit within the bounds of clearly defined rules, that constitutes the true injustice.^[35]

The conclusion, therefore, is that better outcomes are achieved when economic affairs are managed by entrepreneurs motivated by the hope of profit than when they are placed in the hands of non-market organisations, however sincerely these may claim to pursue the public interest. The notion of the public interest proves to be little more than a mirage. Moreover, governments and charities are incapable of economic calculation and are thus left to stumble in the dark, creating inefficiencies of which they may not be fully aware.

Endnotes
1 Dostoevsky (2008 [1866], p. 274), via the character of his novel Pyotr Petrovitch. The main thesis of this essay, however, is best expressed in the quote by Hayek (1998 [1976], p. 145): “[…] quite apart from the question of what he wants to do with his profits after he has earned them, he is led to benefit more people by aiming at the largest gain than he could if he concentrated on the satisfaction of the needs of known persons.“

2 See Hayek (2001 [1944], p. 151): “The principle that the end justifies the means is in individualist ethics regarded as the denial of all morals.“

3 Frazer (1909, p. 82).

4 Reference to the subtitle of Bernard Mandeville's “The Fable of the Bees: or, Private Vices, Publick Benefits“.

5 See in particular Hayek (1988).

6 Friedman (1980, p. 13).

7 David Hume already noticed that the market allows “to do a service to another without bearing him a real kindness“, with the result that it is in the “interest, even of bad men to act for the public good“ (quoted in Hayek, 1988, p. 47).

8 Mises (1998 [1949], p. 195).

9 This insight was clearly articulated by Adam Smith (1776, Bk. 1, Ch. 2) in his famous statement: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Elements of this idea can also be found in several parts of Smith’s (1759) work “The Theory of Moral Sentiments“.

10 For example, this is how Aristotle argued, see Hayek (1988, p. 46).

11 Mises (1944) distinguishes between two ways of organising human activities – profit management and bureaucratic management, showing that only the former can ensure the efficient allocation of scarce resources.

12 A term used by Hayek (1988) to refer to the same thing that Smith (1759) referred to as the “Great Society” and Popper (1945) referred to as the “Open Society”. In this context, see also the introduction to Hayek's (1998 [1973]) Law, Legislation, And Liberty.

13 Hayek (1998 [1976], p. 144).

14 Hayek (2011 [1960], p. 73).

15 Mises (1998 [1949], p. 11).

16 Hayek (1984 [1978], p. 179).

17 Ibid. On the spontaneous genesis of the legal order, see Hayek (1998 [1973]).

18 See Hayek (1998 [1973]) and Hayek (1998 [1976]).

19 As John Locke claims, “where there is no property there is no justice” (quoted in Hayek, 1988, p. 34). See also Hayek (1998 [1973], p. 107): “Law, liberty, and property are an
inseparable trinity.”

20 While the spontaneous order of society allows an individual to pursue any purpose and achieve it through methods that conform to defined rules, an organization is the product of deliberate human effort and is based on a certain hierarchy of goals to be served by the individuals involved. See Hayek (1998 [1973]) for further contrasts between organization and organism, a structure that the spontaneous order of society rather resembles.

21 Hayek (1998 [1976], p. 75).22 Buchanan (1959, p. 126).

23 Ibid.

24 See Stigler (1971).

25 Leube (2024, p. 53).

26 The meaning of the phrase “public interest,” like that of “freedom“ or “justice,” is often one of the first victims of totalitarian regimes, which use these appealing concepts to express their ideals and justify the use of means that would otherwise be considered reprehensible. It is also worth mentioning what Hayek (2001 [1944], p. 161) wrote about the misuse of language: “Few traits of totalitarian regimes are at the same time so confusing to the superficial observer and yet so characteristic of the whole intellectual climate as the complete perversion of language, the change of meaning of the words by which the ideals of the new regimes are expressed.”

27 See, for example, Einstein's (1949) essay criticizing production for profit rather than utility.

28 As Ludwig von Mises (2012 [1920], p. 14) observes, economic calculation affords us “a guide through the oppressive plenitude of economic potentialities. […] Without it, all
production […] would be gropings in the dark.“

29 Hayek (1988, p. 104).

30 See Hayek (1945).

31 Mises (1998 [1949], p. 270).

32 Socialist economies such as the former Soviet Union are a clear example of how, when prices are arbitrarily set by central planners, the inevitable result is either a shortage of resources, which was the more common case, or, conversely, their wasteful use.

33 See Mises (1944, p. 29): “To the entrepreneur of capitalist society a factor of production through its price sends out a warning: Don't touch me, I am earmarked for the satisfaction of another, more urgent need. But under socialism these factors of production are mute. They give no hint to the planner.“

34 Friedman (1981, p. 11). See also Hayek (1998 [1976], p. 138): “The important fact which most people are reluctant to admit, yet which is probably true in most instances, is that, though the pursuit of the selfish aims of the individual will usually lead him to serve the general interest, the collective actions of organized groups are almost invariably contrary to the general interest.” Or, as Mandeville (1988 [1714], p. 24) poetically expressed a similar thesis: “The worst of all the Multitude Did something for the Common Good.”

35 For clarification of the meaning of justice, see Hayek (1998 [1976]).