Examples of Enlightened Self-Interest in the following topics:
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- The tragedy of the commons is the depletion of a common good by individuals who are acting independently and rationally according to each one's self-interest.
- If individuals have enlightened self-interest, they will realize the negative long-term effects of their short-term decisions.
- In the absence of enlightened self-interest, the government may step in and impose regulations or taxes to discourage the behavior that leads to the tragedy of the commons.
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- Classical theory, the first modern school of economic thought, reoriented economics from individual interests to national interests.
- Classical theory reoriented economics away from individual interests to national interests.
- Self-regulating markets: classical theorists believed that free markets regulate themselves when they are free of any intervention.
- Adam Smith referred to the market's ability to self-regulate as the "invisible hand" because markets move towards their natural equilibrium without outside intervention.
- Equality of savings and investment: classical theory assumes that flexible interest rates will always maintain equilibrium.
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- The principal hires the agent to perform specific to duties that represent its best interest.
- The two parties have different interests and asymmetric information.
- It serves as a guide and agreement to safeguard the best interests of both parties.
- It is usually in best interest of both parties to work together.
- It clearly illustrates the working relationship between the principle and the agent while highlighting the presence of business partnership as well as self-interest.
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- In February of 2004, Greenspan suggested that homeowners should consider taking out adjustable-rate mortgages (ARMS) where the interest rate adjusts to the current interest rate in the market.
- A few months later, Greenspan began raising the interest rates.
- Interest rate funds increased to 5.25% about two years later.
- In 2008, Greenspan admitted during Congressional testimony that he had put too much faith in the self-correcting power of free markets.
- He had not anticipated the self-destructive power of irresponsible mortgage lending.
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- During the 17th and 18th centuries, the "age of Enlightenment" was fueled by technological change.
- The other view is that technology is a self-generating process.
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- Preferences are shaped by perceptions of duty, authority and self-interest.
- Since neoclassical economics is based on a consequentialist ethic that is expressed through markets, the incentive provided by the satisfaction of self-interest is perceived as dominant.
- The perception of a self-interested individual is that the cost of an action or choice is greater than the benefit; it is not an appropriate alternative.
- If the benefits associate with an action exceed the cost; it is an alternative that is consistent with self-interest.
- Adam Smith believed that behavior to achieve self-interest would be constrained by feelings of sympathy expressed as a system of morality.
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- It was an interesting time for economic speculation considering the dramatic adverse effect of the Great Depression .
- Put simply, people have infinite needs and the market will self-correct to the aggregate demands and available resources.
- Keynes positioned his argument in contrast to this idea, stating that markets are imperfect and will not always self correct.
- In this figure, the IS (Interest - Saving) curve is shifted outward in a way that raises both interest rates (i) and the 'real' economy (Y).
- The implication is that interest rates affect investment levels, and that these investment levels in turn affect the overall economy.
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- The prisoner's dilemma shows why two individuals might not cooperate, even if it is collectively in their best interest to do so.
- The prisoner's dilemma is a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so.
- As a result, all purely self-interested prisoners would betray each other, resulting in a two year prison sentence for both.
- Similarly to the prisoner's dilemma scenario, cooperation is difficult to maintain in an oligopoly because cooperation is not in the best interest of the individual players.
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- In light of recent market and banking failures, the economic analysis of banking crises both historically and presently is a constant source of interest and speculation.
- There is a profound truth to this, creating an interdependent and potentially self-fulfilling investment thought process.
- This chart is an interesting take on the relatively consistent frequency in which financial crises occur across the globe.
- It is interesting to note both the efficacy of Bretton Woods alongside the increasing risk of financial collapse in modern times.
- As the market falls, investors create a positive feedback loop and self-fulfilling prophecy due to a lack of confidence that drives it down even further.
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- When inflation falls below this range, the Fed would lower interest rates and raising the money supply in order to push inflation up.
- While the inflation rate and the interest rate generally have an inverse relationship, these tools are not always successful in affecting inflation - for example, in response to the 2008 financial crisis and ensuing recession, the Fed raised its target inflation level to 2% and lowered interest rates to nearly zero.
- Further, inflation targeting is a transparent way to explain interest rate policy and to anchor consumers' expectations about future inflation.
- Further, the public's expectations about inflation tend to be a self-fulfilling prophecy.
- During a recession, for example, central banks shouldn't raise the interest rate even if inflation is above the target level.