Homo economicus
Encyclopedia
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational
Rationality
In philosophy, rationality is the exercise of reason. It is the manner in which people derive conclusions when considering things deliberately. It also refers to the conformity of one's beliefs with one's reasons for belief, or with one's actions with one's reasons for action...

 and narrowly self-interested
Rational egoism
In ethical philosophy, rational egoism is the principle that an action is rational if and only if it maximizes one's self-interest. The view is a normative form of egoism. However, it is different from other forms of egoism, such as ethical egoism and psychological egoism...

 actors who have the ability to make judgments toward their subjectively defined ends. This theory stands in contrast to the concept of Homo reciprocans
Homo reciprocans
Homo reciprocans, or Reciprocal human, is the concept in some economic theories of humans as cooperative actors who are motivated by improving their environment...

, 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
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...

’s work on political economy. 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."


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
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 and David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

. In The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

, 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."


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
The Theory of Moral Sentiments
The Theory of Moral Sentiments was written by Adam Smith in 1759. It provided the ethical, philosophical, psychological, and methodological underpinnings to Smith's later works, including The Wealth of Nations , A Treatise on Public Opulence , Essays on Philosophical Subjects , and Lectures on...

). Aristotle's Politics
Politics (Aristotle)
Aristotle's Politics is a work of political philosophy. The end of the Nicomachean Ethics declared that the inquiry into ethics necessarily follows into politics, and the two works are frequently considered to be parts of a larger treatise, or perhaps connected lectures, dealing with the...

discussed the nature of self interest in Book II, Part V.

"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
William Stanley Jevons
William Stanley Jevons was a British economist and logician.Irving Fisher described his book The Theory of Political Economy as beginning the mathematical method in economics. It made the case that economics as a science concerned with quantities is necessarily mathematical...

, Léon Walras
Léon Walras
Marie-Esprit-Léon Walras was a French mathematical economist associated with the creation of the general equilibrium theory.-Life and career:...

, and Vilfredo Pareto
Vilfredo Pareto
Vilfredo Federico Damaso Pareto , born Wilfried Fritz Pareto, was an Italian engineer, sociologist, economist, political scientist and philosopher. He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices....

—built mathematical models on these assumptions. In the 20th century, Lionel Robbins
Lionel Robbins
Lionel Charles Robbins, Baron Robbins, FBA was a British economist and head of the economics department at the London School of Economics...

rational choice theory
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...

 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 institution
Institution
An institution is any structure or mechanism of social order and cooperation governing the behavior of a set of individuals within a given human community...

al, on his ability to achieve his predetermined goals. This approach has been formalized in certain social sciences
Social sciences
Social science is the field of study concerned with society. "Social science" is commonly used as an umbrella term to refer to a plurality of fields outside of the natural sciences usually exclusive of the administrative or managerial sciences...

 models, particularly in economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

.

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
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...

 and rational expectations
Rational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...

 for further discussion; the article on rationality
Rationality
In philosophy, rationality is the exercise of reason. It is the manner in which people derive conclusions when considering things deliberately. It also refers to the conformity of one's beliefs with one's reasons for belief, or with one's actions with one's reasons for action...

 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
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...

, 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 traces it back to Pareto
Vilfredo Pareto
Vilfredo Federico Damaso Pareto , born Wilfried Fritz Pareto, was an Italian engineer, sociologist, economist, political scientist and philosopher. He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices....

 (1906) but notes that it may be older. The English term economic man can be found even earlier, in John Kells Ingram
John Kells Ingram
John Kells Ingram was an economist, Irish patriot and poet.-Academic contributions:Ingram was remarkable for his versatility....

's A History of Political Economy (1888). The Oxford English Dictionary
Oxford English Dictionary
The Oxford English Dictionary , published by the Oxford University Press, is the self-styled premier dictionary of the English language. Two fully bound print editions of the OED have been published under its current name, in 1928 and 1989. The first edition was published in twelve volumes , and...

 (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
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
Amartya Sen
Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...

 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.

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
Marshall Sahlins
Marshall David Sahlins is a prominent American anthropologist. He received both a Bachelors and Masters degree at the University of Michigan where he studied with Leslie White, and earned his Ph.D. at Columbia University in 1954 where his main intellectual influences included Karl Polanyi and...

, Karl Polanyi
Karl Polanyi
Karl Paul Polanyi was a Hungarian philosopher, political economist and economic anthropologist known for his opposition to traditional economic thought and his book The Great Transformation...

, Marcel Mauss
Marcel Mauss
Marcel Mauss was a French sociologist. The nephew of Émile Durkheim, Mauss' academic work traversed the boundaries between sociology and anthropology...

 or Maurice Godelier
Maurice Godelier
Born in Cambrai, France in 28 February 1934, Maurice Godelier is one of the most influential names in French anthropology. Directeur d'études at the École des Hautes Études en Sciences Sociales...

 have demonstrated that in traditional societies, choices people make regarding production and exchange of goods follow patterns of reciprocity
Reciprocity (cultural anthropology)
In cultural anthropology and sociology, reciprocity is a way of defining people's informal exchange of goods and labour; that is, people's informal economic systems. It is the basis of most non-market economies. Since virtually all humans live in some kind of society and have at least a few...

 which differ sharply from what the "homo economicus" model postulates. Such systems have been termed gift economy
Gift economy
In the social sciences, a gift economy is a society where valuable goods and services are regularly given without any explicit agreement for immediate or future rewards . Ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community...

 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
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...

, John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

, Herbert Simon
Herbert Simon
Herbert Alexander Simon was an American political scientist, economist, sociologist, and psychologist, and professor—most notably at Carnegie Mellon University—whose research ranged across the fields of cognitive psychology, cognitive science, computer science, public administration, economics,...

, and many of the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 criticise Homo economicus as an actor with too great of an understanding of macroeconomics and economic forecasting in his decision making. They stress uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...

 and bounded rationality
Bounded rationality
Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision...

 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
Amos Tversky
Amos Nathan Tversky, was a cognitive and mathematical psychologist, a pioneer of cognitive science, a longtime collaborator of Daniel Kahneman, and a key figure in the discovery of systematic human cognitive bias and handling of risk. Much of his early work concerned the foundations of measurement...

 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
Decision theory
Decision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision...

 of which Rational Choice Theory
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...

 is only a subset.

Other critics of the Homo economicus model of humanity, such as Bruno Frey
Bruno Frey
Bruno S. Frey is a Swiss economist and a professor at the University of Zurich. He may be best known for his critique of Homo economicus or economic man, arguing that it places excessive emphasis on extrinsic motivation rather than intrinsic motivation...

, 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
Artisan
An artisan is a skilled manual worker who makes items that may be functional or strictly decorative, including furniture, clothing, jewellery, household items, and tools...

. 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
Psychoanalysis
Psychoanalysis is a psychological theory developed in the late 19th and early 20th centuries by Austrian neurologist Sigmund Freud. Psychoanalysis has expanded, been criticized and developed in different directions, mostly by some of Freud's former students, such as Alfred Adler and Carl Gustav...

 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
Rational egoism
In ethical philosophy, rational egoism is the principle that an action is rational if and only if it maximizes one's self-interest. The view is a normative form of egoism. However, it is different from other forms of egoism, such as ethical egoism and psychological 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
Free rider problem
In economics, collective bargaining, psychology, and political science, a free rider is someone who consumes a resource without paying for it, or pays less than the full cost. The free rider problem is the question of how to limit free riding...

, for example, would have a major negative impact on the provision of public good
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...

s. 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
Straw man
A straw man is a component of an argument and is an informal fallacy based on misrepresentation of an opponent's position, twisting his words or by means of [false] assumptions...

 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
Bounded rationality
Bounded rationality is the idea that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision...

 and of people suffering from envy
Envy
Envy is best defined as a resentful emotion that "occurs when a person lacks another's superior quality, achievement, or possession and either desires it or wishes that the other lacked it."...

 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.

Homo sociologicus

Comparisons between economics and sociology have resulted in a corresponding term Homo sociologicus (introduced by German Sociologist Ralf Dahrendorf
Ralf Dahrendorf
Ralf Gustav Dahrendorf, Baron Dahrendorf, KBE, FBA was a German-British sociologist, philosopher, political scientist and liberal politician....

 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
Biology
Biology is a natural science concerned with the study of life and living organisms, including their structure, function, growth, origin, evolution, distribution, and taxonomy. Biology is a vast subject containing many subdivisions, topics, and disciplines...

.) Hirsch et al. say that Homo sociologicus is largely a tabula rasa
Tabula rasa
Tabula rasa is the epistemological theory that individuals are born without built-in mental content and that their knowledge comes from experience and perception. Generally proponents of the tabula rasa thesis favour the "nurture" side of the nature versus nurture debate, when it comes to aspects...

upon which societies and cultures write values and goals; unlike economicus, sociologicus acts not to pursue selfish interests but to fulfill social roles (though the fulfillment of social roles may have a selfish rationale—e.g. politicians or socialite
Socialite
A socialite is a person who participates in social activities and spends a significant amount of time entertaining and being entertained at fashionable upper-class events....

s). This "individual" may appear to be all society and no individual.

See also

  • Agent (economics)
    Agent (economics)
    In economics, an agent is an actor and decision maker in a model. Typically, every agent makes decisions by solving a well or ill defined optimization/choice problem. The term agent can also be seen as equivalent to player in game theory....

  • Dictator game
    Dictator game
    The dictator game is a game in experimental economics, similar to the ultimatum game. Experimental results offer evidence against the rationally self-interested individual concept of economic behavior, though precisely what to conclude from the evidence is controversial.-Description:In the...

  • Economic rationalism
    Economic rationalism
    Economic rationalism is an Australian term in discussion of microeconomic policy, applicable to the economic policy of many governments around the world, in particular during the 1980s and 1990s....

  • Economism
    Economism
    Economism is a term used to describe economic reductionism, that is the reduction of all social facts to economical dimensions. It is also used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring literally...

  • Homo biologicus
  • List of alternative names for the human species
  • Modern portfolio theory
    Modern portfolio theory
    Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...

  • Pirate game
    Pirate game
    The pirate game is a simple mathematical game. It illustrates how, if assumptions conforming to a homo economicus model of human behaviour hold, outcomes may be surprising. It is a multi-player version of the ultimatum game.-The game:...

  • Post-autistic economics
    Post-autistic economics
    The movement for Post-Autistic Economics was born through the work of Sorbonne economist Bernard Guerrien. The movement is best seen as a forum of different groups critical of the current mainstream: from behavioral and heterodox to feminist, green economics and econo-physics...

  • Profit motive
  • Rational agent
    Rational agent
    In economics, game theory, decision theory, and artificial intelligence, a rational agent is an agent which has clear preferences, models uncertainty via expected values, and always chooses to perform the action that results in the optimal outcome for itself from among all feasible actions...

  • Rational choice theory
    Rational choice theory
    Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...

  • Rational pricing
    Rational pricing
    Rational pricing is the assumption in financial economics that asset prices will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away"...

  • Rationality
    Rationality
    In philosophy, rationality is the exercise of reason. It is the manner in which people derive conclusions when considering things deliberately. It also refers to the conformity of one's beliefs with one's reasons for belief, or with one's actions with one's reasons for action...

  • Unproductive labour in economic theory
    Unproductive labour in economic theory
    Unproductive labour is labour which does not further the end of the system. Therefore this concept has sense only with reference to a determined system. In classical economics the end is growth and development, in Marxian economics the end is capitalistic profit and in business the end is to place...


External links

  • Rational self interest, Prof. Roger A. McCain, Drexel University
    Drexel University
    Drexel University is a private research university with the main campus located in Philadelphia, Pennsylvania, USA. It was founded in 1891 by Anthony J. Drexel, a noted financier and philanthropist. Drexel offers 70 full-time undergraduate programs and accelerated degrees...

  • 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
    Free will
    "To make my own decisions whether I am successful or not due to uncontrollable forces" -Troy MorrisonA pragmatic definition of free willFree will is the ability of agents to make choices free from certain kinds of constraints. The existence of free will and its exact nature and definition have long...

     using tenets of natural law
    Natural law
    Natural law, or the law of nature , is any system of law which is purportedly determined by nature, and thus universal. Classically, natural law refers to the use of reason to analyze human nature and deduce binding rules of moral behavior. Natural law is contrasted with the positive law Natural...

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