Homo economicus

This article is about an economic concept. For a journal, see Homo Oeconomicus.

Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends. This theory stands in contrast to the concept of Homo reciprocans, which states that human beings are primarily motivated by the desire to be cooperative and to improve their environment.

History of the term

The term "Economic Man" was used for the first time in the late nineteenth century by critics of John Stuart Mill’s work on political economy.^[1] Below is a passage from Mill’s work that those 19th-century critics were referring to:

"[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end."^[2]

Later in the same work, Mill goes on to write that he is proposing “an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained.”

Although the term did not come into use until the 19th century, it is often associated with the ideas of 18th century thinkers like Adam Smith and David Ricardo. In The Wealth of Nations, Smith wrote:

"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."^[3]

This suggests the same sort of rational, self-interested, labor-averse individual that Mill proposes (although Smith did claim that individuals have sympathy for the well-being of others, in The Theory of Moral Sentiments). Aristotle's Politics discussed the nature of self interest in Book II, Part V.^[4]

"Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser's love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property."

A wave of economists in the late 19th century—Francis Edgeworth, William Stanley Jevons, Léon Walras, and Vilfredo Pareto—built mathematical models on these assumptions. In the 20th century, Lionel Robbins’ rational choice theory came to dominate mainstream economics and the term Economic Man took on a more specific meaning of a person who acted rationally on complete knowledge out of self-interest and the desire for wealth.

Model

Homo economicus is a term used for an approximation or model of Homo sapiens that acts to obtain the highest possible well-being for himself given available information about opportunities and other constraints, both natural and institutional, on his ability to achieve his predetermined goals. This approach has been formalized in certain social sciences models, particularly in economics.

Homo economicus is seen as "rational" in the sense that well-being as defined by the utility function is optimized given perceived opportunities. That is, the individual seeks to attain very specific and predetermined goals to the greatest extent with the least possible cost. Note that this kind of "rationality" does not say that the individual's actual goals are "rational" in some larger ethical, social, or human sense, only that he tries to attain them at minimal cost. Only naïve applications of the Homo economicus model assume that this hypothetical individual knows what is best for his long-term physical and mental health and can be relied upon to always make the right decision for himself. See rational choice theory and rational expectations for further discussion; the article on rationality widens the discussion.

As in social science in general, these assumptions are at best approximations. The term is often used derogatorily in academic literature, perhaps most commonly by sociologists, many of whom tend to prefer structural explanations to ones based on rational action by individuals.

The use of the Latin form Homo economicus is certainly long established; Persky^[1] traces it back to Pareto (1906)^[5] but notes that it may be older. The English term economic man can be found even earlier, in John Kells Ingram's A History of Political Economy (1888).^[6] The Oxford English Dictionary (O.E.D.) does not mention Homo economicus, but it is one of a number of phrases that imitate the scientific name for the human species. According to the O.E.D., the human genus name Homo is

Used with L. or mock-L. adjs. in names imitating Homo sapiens, etc., and intended to personify some aspect of human life or behaviour (indicated by the adj.). Homo faber ("feIb@(r)) [H. Bergson L'Evolution Créatrice (1907) ii. 151], a term used to designate man as a maker of tools.) Variants are often comic: Homo insipiens; Homo turisticus.^[7]

Note that such forms should logically keep the capital for the "genus" name—i.e., Homo economicus rather than homo economicus. Actual usage is inconsistent.

Amartya Sen has argued there are grave pitfalls in assuming that rationality is limited to selfish rationality. Economics should build into its assumptions the notion that people can give credible commitments to a course of conduct. He demonstrates the absurdity with the narrowness of the assumptions by some economists with the following example of two strangers meeting on a street.^[8]

“

"Where is the railway station?" he asks me. "There," I say, pointing at the post office, "and would you please post this letter for me on the way?" "Yes," he says, determined to open the envelope and check whether it contains something valuable.

”

Criticisms

Homo economicus bases his choices on a consideration of his own personal "utility function".

Consequently, the "homo economicus" assumptions have been criticized not only by economists on the basis of logical arguments, but also on empirical grounds by cross-cultural comparison. Economic anthropologists such as Marshall Sahlins,^[9] Karl Polanyi,^[10] Marcel Mauss^[11] or Maurice Godelier^[12] have demonstrated that in traditional societies, choices people make regarding production and exchange of goods follow patterns of reciprocity which differ sharply from what the "homo economicus" model postulates. Such systems have been termed gift economy rather than market economy. Criticisms of the "homo economicus" model put forward from the standpoint of ethics usually refer to thís traditional ethic of kinship-based reciprocity that held together traditional societies.

Economists Thorstein Veblen, John Maynard Keynes, Herbert Simon, and many of the Austrian School criticise Homo economicus as an actor with too great of an understanding of macroeconomics and economic forecasting in his decision making. They stress uncertainty and bounded rationality in the making of economic decisions, rather than relying on the rational man who is fully informed of all circumstances impinging on his decisions. They argue that perfect knowledge never exists, which means that all economic activity implies risk. Austrian economists rather prefer to use as a model tool the Homo agens.

Empirical studies by Amos Tversky questioned the assumption that investors are rational. In 1995, Tversky demonstrated the tendency of investors to make risk-averse choices in gains, and risk-seeking choices in losses. The investors appeared as very risk-averse for small losses but indifferent for a small chance of a very large loss. This violates economic rationality as usually understood. Further research on this subject, showing other deviations from conventionally-defined economic rationality, is being done in the growing field of experimental or behavioral economics. Some of the broader issues involved in this criticism are studied in Decision Theory of which Rational Choice Theory is only a subset.

Other critics of the Homo economicus model of humanity, such as Bruno Frey, point to the excessive emphasis on extrinsic motivation (rewards and punishments from the social environment) as opposed to intrinsic motivation. For example, it is difficult if not impossible to understand how Homo economicus would be a hero in war or would get inherent pleasure from craftsmanship. Frey and others argue that too much emphasis on rewards and punishments can "crowd out" (discourage) intrinsic motivation: paying a boy for doing household tasks may push him from doing those tasks "to help the family" to doing them simply for the reward.

Another weakness is highlighted by sociologists, who argue that Homo economicus ignores an extremely important question, i.e., the origins of tastes and the parameters of the utility function by social influences, training, education, and the like. The exogeneity of tastes (preferences) in this model is the major distinction from Homo sociologicus, in which tastes are taken as partially or even totally determined by the societal environment (see below).

Further critics, learning from the broadly-defined psychoanalytic tradition, criticize the Homo economicus model as ignoring the inner conflicts that real-world individuals suffer, as between short-term and long-term goals (e.g., eating chocolate cake and losing weight) or between individual goals and societal values. Such conflicts may lead to "irrational" behavior involving inconsistency, psychological paralysis, neurosis, and/or psychic pain. Further irrational human behaviour can occur as a result of habit, laziness, mimicry and simple obedience.

Responses

Economists tend to disagree with these critiques, arguing that it may be relevant to analyze the consequences of enlightened egoism just as it may be worthwhile to consider altruistic or social behavior. Others argue that we need to understand the consequences of such narrow-minded greed even if only a small percentage of the population embraces such motives. Free riders, for example, would have a major negative impact on the provision of public goods. However, economists' supply and demand predictions might obtain even if only a significant minority of market participants act like Homo economicus. In this view, the assumption of Homo economicus can and should be simply a preliminary step on the road to a more sophisticated model.

Yet others argue that Homo economicus is a reasonable approximation for behavior within market institutions, since the individualized nature of human action in such social settings encourages individualistic behavior. Not only do market settings encourage the application of a simple cost/benefit calculus by individuals, but they reward and thus attract the more individualistic people. It can be difficult to apply social values (as opposed to following self-interest) in an extremely competitive market; a company that refuses to pollute (for example) may find itself bankrupt.

Defenders of the Homo economicus model see many critics of the dominant school as using a straw man technique. For example, it is common for critics to argue that real people do not have cost-less access to infinite information and an innate ability to instantly process it. However, in advanced-level theoretical economics, scholars have found ways of addressing these problems, modifying models enough to more realistically depict real-life decision-making. For example, models of individual behavior under bounded rationality and of people suffering from envy can be found in the literature.^[13] It is primarily when targeting the limiting assumptions made in constructing undergraduate models that the criticisms listed above are valid. These criticisms are especially valid to the extent that the professor asserts that the simplifying assumptions are true and/or uses them in a propagandistic way.

The more sophisticated economists are quite conscious of the empirical limitations of the Homo economicus model. In theory, the views of the critics can be combined with the Homo economicus model to attain a more accurate model.

Homo sociologicus

Comparisons between economics and sociology have resulted in a corresponding term Homo sociologicus (introduced by German Sociologist Ralf Dahrendorf in 1958), to parody the image of human nature given in some sociological models that attempt to limit the social forces that determine individual tastes and social values. (The alternative or additional source of these would be biology.) Hirsch et al. say that Homo sociologicus is largely a tabula rasa upon which societies and cultures write values and goals; unlike economicus, sociologicus acts not to pursue selfish interests but to fulfill social roles^[14] (though the fulfillment of social roles may have a selfish rationale—e.g. politicians or socialites). This "individual" may appear to be all society and no individual.

See also

• Agent (economics)
• Dictator game
• Economic rationalism
• Economism
• Homo biologicus
• List of alternative names for the human species
• Modern portfolio theory
• Pirate game
• Post-autistic economics
• Rational agent
• Rational choice theory
• Rational pricing
• Rationality
• Unproductive labour in economic theory

Notes

1. ^ ^{a b} Persky, Joseph. "Retrospectives: The Ethology of Homo Economicus." The Journal of Economic Perspectives, Vol. 9, No. 2 (Spring, 1995), pp. 221-231
2. ^ Mill, John Stuart. "On the Definition of Political Economy, and on the Method of Investigation Proper to It," London and Westminster Review, October 1836. Essays on Some Unsettled Questions of Political Economy, 2nd ed. London: Longmans, Green, Reader & Dyer, 1874, essay 5, paragraphs 38 and 48.
3. ^ Smith, Adam. “On the Division of Labour,” The Wealth of Nations, Books I-III. New York: Penguin Classics, 1986, page 119
4. ^ http://classics.mit.edu/Aristotle/politics.html
5. ^ Pareto, Vilfredo (1906). "Manual of political economy".
6. ^ Zabieglik, Stefan (2002). "The Origins of the Term Homo Oeconomicus", Gdansk, 123-130.
7. ^ This is from the CD edition of 2002.
8. ^ AK Sen, ‘Rational Fools: A Critique of the Behavioural Foundations of Economic Theory’ (1977) 6 Philosophy and Public Affairs 317, 332
9. ^ Marshall Sahlins: The Original Affluent Society, in: Marshall Sahlins (1972): Stone Age Economics. London: Routledge 2003
10. ^ Karl Polanyi (1944): The Great Transformation. Beacon Press 2001
11. ^ Marcel Mauss (1924): The Gift. The Form and Reason for Exchange in Archaic Societies. London: Routledge 2006
12. ^ Maurice Godelier: The Enigma of the Gift. University Of Chicago Press 1999
13. ^ Geoffrey Brennan: [1] Pareto Desirable Redistribution: The case of Malice and Envy, in: Culture, Social Norms and Economics(1997)
14. ^ Hirsch, Paul, Stuart Michaels and Ray Friedman. 1990. "Clean Models vs. Dirty Hands: Why Economics Is Different from Sociology." In Sharon Zukin and Paul DiMaggio, eds. Structures of Capital: The Social Organization of the Economy: 39-56. Cambridge; New York and Melbourne: Cambridge University Press, 1990 (ISBN 0-521-37523-1)

References

• JS Mill, 'On the Definition of Political Economy, and on the Method of Investigation Proper to It' (1836) London and Westminster Review
• JS Mill, Essays on Some Unsettled Questions of Political Economy (2nd edn Longmans, Green, Reader & Dyer 1874)
• AK Sen, ‘Rational Fools: A Critique of the Behavioural Foundations of Economic Theory’ (1977) 6 Philosophy and Public Affairs 317

External links

• Rational self interest, Prof. Roger A. McCain, Drexel University
• Self-Interest, Homo Islamicus and Some Behavioral Assumptions in Islamic Economics and Finance (DOC) by Dr. Mohammad Omar Farooq
• Requiem for Homo Economicus Edward J. O’Boyle, Mayo Research Institute, a refutation of reductionism in free will using tenets of natural law