...which is why people spend a significant amount of time dreaming up both incentives and enforcement mechanisms to ensure that it's not in one's self-interest to be really shitty to your neighbors.

It's not a perfect system - in particular, it's reactionary, which means that enough people a.) need to be harmed and b.) need to complain effectively before the broken incentives are fixed. In practice, it seems to work a lot better than societies where people act for the nebulous "common good", which always seems to end up being defined in a way that suits the self-interests of the people doing the defining anyway.