Homo Economicus Myth or Reality - Essay Example

Homo Economicus – Myth or Reality In the literal sense, the term Homo Economicus means ‘economic man’. The genesis of the Latin form of the term can be traced back to Pareto (1906) but there is likelihood that it may be even older. The English form of the term is usually attributed to John Kells Ingram’s A History of Political Economy (1888). [ ]. As a concept the term Homo-Economicus denotes a model of a man who is rational and self-interested. According to the on-line encyclopedia “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.” [1]. From this definition we can deduce that the model envisages a person who has perfect self-interest, perfect rationality and perfect information. [1]. This concept owes its genesis to Utilitarian economists like Jeremy Bentham and John Stuart Mill who propound that society should aim for the greatest happiness of the greatest number by maximizing the total utility of individuals. Homo Economicus model believes that because all human beings are rational they will always attempt to maximize their utility - whether it is from monetary or non-monetary gains. This concept is strongly contested by sociologists who maintain that human behaviour is “complex, contradictory, imperfect and unpredictable.” [2]. Due to these divergent views the concept of Homo Economicus remains a point of contention between economists and sociologists. The question which arises at this point is; why do economists use this model of Homo Economicus? There are basically three reasons for this practice:- In real life it is very difficult to accurately predict or explain human behaviour. Therefore, economists assume humans to be perfect i.e. perfectly rational, perfectly self-interested etc. Thus by simplifying humans they simplify their task of economic analysis. [1]. This practice enables economists to enumerate their assumptions in mathematical terms which makes them easier to understand. [1]. Picking the right assumptions enables economists to generate the desired results. [1]. Prominent economists of the Austrian school like Thorstein Veblen, John Maynard Keynes, Herbert Simon etc. consider homo economicus as an actor in understanding macroeconomics and economic forecasting. [3]. In their view, since perfect knowledge never exists therefore, all economic activity entails risk. Their stress is on bounded rationality and uncertainty in making economic decisions. [3]. Another angle to the concept of Homo Economicus is that “ Classical economics did not assert that the economizing individual, whether engaged in trade or as a consumer, acts as if the greatest monetary profit were the sole guiding principle of his conduct. The classical scheme is not at all applicable to consumption or the consumer. It did not escape even the classical economists that the economizing individual as a party engaged in trade does not always and cannot always remain true to the principles governing the businessman, that he is not omniscient, that he can err, and that, under certain conditions, he even prefers his comfort to a profit-making business. with the scheme of the homo economicus classical economics comprehended only one side of man—the economic, materialistic side.” [4]. In 1995, Amos Tversky carried out an empirical study in which he demonstrated that investors tend 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. [4]. Sociologists have always contended that the homo economicus model ignore the effects of social influences, education, training etc. It ignores the inner conflicts that real-world individuals suffer, as between short-term and long-term goals or between individual goals and societal values. Such conflicts may lead to "irrational" behavior involving inconsistency, psychological paralysis, neurosis, and/or psychic pain. [5]. 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 prisoners dilemma-type game. [9]. The flaws of homo economicus model can be best evaluated by considering its three main tenets one by one. Rationality. Rationality is defined as "the ability to reason" and "to exercise good judgment. One of the basic facts of modern psychology is that our intellect serves our emotions, not vice versa. Human behavior is not primarily the result of logical cost-benefit analysis, but of emotions like love, hate, loneliness, fear, greed, anxiety, sexual attraction, pleasure, pain, etc. We use our intellect only to fulfill or avoid these emotional states. [10]. Self-interest. The strong version of Homo economicus assumes that everything people do is for their own material gain Both sociologists and biologists agree that humans compete for limited resources. Those with more resources are able to compete better and survive longer. [8].It is a scientific fact that people are not 100 percent self-interested. If they were, we would not see such altruistic behavior as charity (especially towards strangers), volunteerism, parenting, lending a helping hand, sacrifice, martyrdom or giving up ones life for ones country. Nor would we see such self-destructive behavior as substance abuse, negative addiction, negative risk-taking, procrastination, inability to complete projects, masochism, suicide, etc. Objectively, parenting is one of the most anti-individual things a person can do. [9]. Biologists recognize four levels of survival: the gene, the individual, the group, and the specie. All of them interact to produce the complex and often paradoxical behavior we witness in humans. The error of Homo economicus is that it focuses only on one level: the individual. [10]. Information. People cannot be true experts in all their affairs -- only a few of them. This means that ignorance, not informed analysis, is the chief characteristic of society. The only reason why society appears so successful is because everyone is an expert at something, and they socially and economically interact. In sum, it is our collective knowledge, not individual knowledge, which solves national problems. [8]. Gary Becker, a Chicago school economist and a Nobel Prize winner, preempts criticism by psychology, sociology, political science, and other social sciences by contending that people do no behave irrationally—they just don’t have enough information or the transactions are costly. He says that “the economic approach does not assume that decision units are necessarily conscious of their efforts to maximize or can verbalize or otherwise describe in an informative way reasons for the systematic patterns in their behavior. In other words, even when they don’t know it, human beings are acting in maximizing behavior.” [7]. To support his point Becker gives examples of where it has been applied successfully: “the evolution of language, church attendance, capital punishment, the legal system, the extinction of animals, and the incidence of suicide”. [7]. By this rule economic approach should apply also to controversial areas such as smoking even when people know it will cut their life shorter. Stretching things a bit marriage and divorce can also be explained by economic approach, since “a married person terminates his or her marriage when the utility anticipated from becoming single or marrying someone else exceeds the loss in unity from separation, including losses due to physical separation from one’s children, division of joint assets, legal fees and so forth”. [7]. Looking from a philosophical perspective, Alexander Rosenberg claims that Becker’s theory is similar to Newtonian mechanics, since they look at maximizing equations, employ differential calculus, and is comprehensive. Rosenberg states that “Becker’s account may be neither an economic theory, for it does not explain behavior in terms of rational choice properly understood, nor a theory of distinctly human behavior, for its lack of interpretation makes it formally applicable to behavior which is not peculiarly human, nor, in the end, may it turn out to be a theory, as opposed to one of an indefinitely large number of axiomatic formalisms, whose lack of interpretation make them incompatible with anything happening at all, and thereby deprive them of any real explanatory power at all”. Rosenberg’s thesis is that “this best case for the claim that economics explains everything about human behavior ultimately either fails to show that the explanation is particularly economic in any important sense, or else succeeds at explaining everything in its alleged domain only at the expense of explaining nothing”. [6]. As Woody Allen once said “Intellectuals are like mafia—they only kill each other.” So these confrontation amoung economists and other social scientists rage on. Comparisons between economics and sociology have resulted in a corresponding term Homo sociologicus introduced by German Sociologist Ralf Dahrendorf in 1958. 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. [1]. Works Cited 1. 2. 3. 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 University Press, 1990 (ISBN 0-521-37523-1). 4. Mises, Ludwig von. Remarks on the Fundamental Problem of the Subjective Theory of Value. Available at 5. 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.de:Homo oeconomicus? 6. Alexander Rosenberg “Can Economic Theory Explain Everything?” Philosophy of Social Sciences, Vol. 9. Mp/ 4 [December 1979]: 509. 7. Gary Backer. The Economic Approach to Human Behavior. University of Chicago Press; Chicago, 1976. 8. Marvic M.V.F. Leonen. The Narrative of Homo Economicus. Available at 8. Herb, Gintis. Game Theory Evolving: A Problem-centered Introduction for Modeling Strategic Interaction. Ch 11. 9. 10. Read More