| Homo economicus, or Economic man, 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 science models,
particularly in economics.
Homo economicus is seen as "rational". But in what sense? Usually it is 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.
Criticisms
Homo economicus bases his choices on a consideration of his own personal "utility function". Worse, economic man is amoral, ignoring all social values unless adhering to them gives
him utility. Some believe such assumptions about humans are not only empirically inaccurate but unethical.
Economists Thorstein Veblen, John Maynard Keynes, Herbert Simon, and
many of the Austrian School criticise homo economicus as an
actor in understanding macroeconomics and economic forecasting. 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.
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.
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.
Yet others, especially sociologists, argue that the model 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 the homo economicus 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.
One criticism contends that the homo economicus model works as a self-fulfilling prophecy if a group of people (a company, a society) accepts its premises,
particularly the idea that individuals only ever consider their personal utility function and that -- as is often claimed -- the
invisible hand works to make these purely selfish decisions promote the
interest of society. Governance structures and social norms of such a group will effectively reward selfishness and discourage or
ridicule deviant behavior like altruism, fairness, or teamwork; its idols will be those who most ruthlessly maximize their own utility function. This aspect has
risen to wider attention in disciplines like organization science where extrinsic
motivation has been found to be not nearly as effective with knowledge workers as it had been for traditional industries, creating a renewed interest in forms of
motivation that do not fit into the homo economicus model.
The clearest case of a self-fulfilling prophecy concerning homo economicus has been in the teaching of economics.
Several research studies have indicated that those students who take economics courses end up being more self-centered than
before they took the courses. For example, they are less willing to co-operate with the other player in a prisoner's dilemma-type game. See, for example, the article by Thomas
Frank et al. (1993), cited below.
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 worthwile 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. If there are
free riders, for example, that has a major negative impact on
the provision of public goods. On the other hand, it may be that only a
significant minority of market participants act like homo economicus for the economists' predictions concerning supply and
demand to be accurate. 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 is very 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 inbuilt
ability to process it, in no time at all." However, in advanced-level theoretical economics, scholars have found ways of
acknowledging these facts, modifying the model enough to be a more realistic picture of some decision-making. For example, models
of individual behavior under bounded rationality and of
people suffering from envy can be found in the literature. 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. The fact
that many economists advocate the most individualistic and simplistic version of homo economicus at the expense of
empirical validity may reflect their own (conscious or unconscious) political commitments more than efforts to be scientific.
One problem with making the homo economicus model more sophisticated is that sometimes the model becomes tautologically true, i.e., true by definition. If someone has a "taste" for variety, for
example, it becomes difficult if not impossible to distinguish economic rationality from irrationality. In this case, the homo
economicus model may not add any new information at all to our economic understanding.
Comparisons between economics and sociology have resulted in a corresponding term homo sociologicus, to parody the
image of human nature given in some sociological models which attempt to limn the social forces that determine individual tastes
and social values. (The alternative or additional source of these would be biology.) Hirsch, Michaels, and Friedman (1990, p. 44)
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. This "individual" may appear to be all society and no individual. This suggests the need to combine the
insights of homo economicus models with those of homo sociologicus models in order to create a synthesis, rather
than rejecting one or the other.
Related Articles
External links and references
- 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).
- Frank, Robert H., Thomas Gilovich, and Dennis T. Regan. 1993. "Does Studying Economics Inhibit Cooperation?" Journal of
Economic Perspectives, 7: 2 (Spring): pp. 159-72.
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