Self-interest and the free market are not ethical positions. I don’t mean that they’re unethical, but that they are not about ethics at all.
What we call “self-interest,” and claim to be a moral principle, is actually what philosophers call prudential reasons. Prudential reasons are part of moral reasoning but cannot be pieces of moral reasoning themselves. Suppose I state the following:
(A) It is good for me to exploit others if I can thereby gain more money, status, power, etc.
This is not a moral statement, but a factual statement. It may look like a moral judgment (it is good that X), but it is actually an instrumental principle (if you want X, do Y). Without the positive consequence, A would no longer be valid; if exploiting others turns out to give me less money, status or power, then according to the self-interest standard one should not do it. This means it relies on some moral foundation which presumably would demonstrate that money, status or power are good.
All statements of self-interest are of this type, even if they omit their motivations. For example:
(B1) It is good for me to steal this car.
But in self-interest, all such statements are instrumental. If B1 is motivated by self-interest, then it necessarily implies:
(B2) It is good for me to steal this car because it will give me some benefit, such as making me richer (for example).
This is a factual, causal statement (stealing a car = being richer) which can be tested. Although it may be used in a moral judgment, it is not such a judgment.
It is not only the case that self-interest is instrumental, but it must necessarily be the case. If we start treating self-interest as universal, we necessarily have to come to the conclusion that everyone‘s interests are equally valuable, and that therefore the good is that fulfills everyone’s interests, not just our own.
Let A be an egoist, and let B be the egoist’s next-door neighbor. The egoist regards his own life as an end in itself, and he says B ought to regard B’s life as an end in itself. But, insofar as A is concerned only for furthering his own life, A can not, himself, treat B’s life as an end in itself. A’s sole value is A’s life; therefore, A can value B’s life, if at all, only as a means (i.e. if B’s life furthers A’s). Similarly, when A recommends to B that B should be an egoist, he is recommending that B should regard A as being only valuable as a means. This necessarily follows from the supposition that B should regard B’s life as the sole end in itself, which is the meaning of egoism. A therefore seems to be caught in a contradiction: A holds that A’s own life is an end in itself, but at the same time A thinks that no one else ought to recognize A’s life as being an end in itself. In a parallel contradiction, A holds that other people are valuable only as means, but he holds that other people are correct in regarding themselves as valuable not merely as means but as ends in themselves. In other words: Each individual is correct in a belief which directly contradicts what every other individual correctly believes. A is correct to believe P, but B is correct to believe not-P. Is this not, in Moore’s words, “an absolute contradiction”?
This flaw is not particular to self-interest, but is shared by all systems which attempt to derive moral judgment from natural facts. One example is the attempt to derive moral judgment from well-being.
(C) That which is good is that which improves the well-being of individuals and societies.
C is not a moral judgment because it does not tell us why well-being (however you define such a vague term) is a valid moral goal. At best, well-being can only be one of the factors considered when making a moral judgment.
The same thing is true of free markets. The capitalist theory of free markets is that they convey information which is necessary for the coordination of productive activity.
Market prices are vital because they condense, in as objective a form as possible, information on the value of alternative uses of each parcel of property. Nearly every parcel of property has alternative uses. For example, a plot of land can be used to site a pumpkin patch, a restaurant, a suite of physicians’ offices, or any of many other things.
If this plot of land is to be used beneficially rather than wastefully, those responsible for deciding how it will be used must be able to determine the likely worth of each possible alternative. Making such determinations requires reliable information. And market prices are a marvelously compact and reliable source of such information.
This is the naive economist’s view. The more realistic view is that prices give us information about power relations (a price is a ratio of power between groups, mediated by the costs of production). Wages vary depending on the ratio between the power of the workers and the power of the owners of the means of production. Prices vary depending on the power of the providers and the consumers. The more economically powerful you are, the more influence you have over prices.
Either way, it is widely understood that free market doctrine and self-interest are related because they are both rooted in atomistic logic. They are also both instrumental. Whether you believe that free market prices return information about offer and demand or about power relations, neither is good unless you value the information conveyed.
All arguments for the free market are instrumental. For example, one argument states that the free market allocates scarce resources most efficiency. But (apart from the unfalsifiability of scarcity claims) this assumes that efficiency is a valuable goal and that prices are the best way to achieve this goal. So whatever else it is, it is not a moral claim.