“Gregg: What is self-interest, properly understood?
Smith: Well, it means that the individual peers more to less. In terms of traditional kind of utility theory, it means that the subjective value, say, of something like money is monotone increasing. You are worse off if you get less of it, better off if you get more of it. Now, Adam Smith in Theory of Moral Sentiments says that we are all self-loving. [...] His point is that although we are all self-loving, in the process of maturation, of growing up in a social world, we are led to modify our decisions to take into account others, so that, as he says, we humble that self-interest and bring it down to what other people will go along with. So there is never a denial of the self-interest. If in an experiment in which I can take an action in which you are better off—you get more money and I get less—how do we now that more is better for someone else and less is worse? It’s because we have common knowledge of that. So in other words, being self-interested is necessary in order to know that when you take an action it can be hurtful to someone else. If you didn’t have that, then you wouldn’t know whether a particular action was hurtful or beneficial.”