21st Case: Global Financial Crisis
In 2008, a global catastrophe jeopardized the global economy. The real estate values were increasing significantly in many countries including the States. Also, account deficits and leverage in many sectors were encountered in countries around the globe. Moreover, the United States as the world’s largest economy has jumped into its most dynamic financial market. The real question is, what has just exactly happened? And, how did it correlate with the economic man?
Subprime mortgages, an evolved financial transformation, have caused severe damage to the world’s economy. The rapid growth in subprime mortgages is also in line with the abrupt rise in house prices. Thus, it creates a crisis between the housing bubble and the advanced, yet untested financial system (Light, 2008).
Managing its crisis is definitely not an easy task to do. The role of “economic man” has been able to describe the decisions made on proposing the mortgages. It was well-calculated, well-analyzed—it was rational. However, homo economicus has failed to prove any mismanagement within the agents. As the purchases were made between contracts, the manager of the financial institution failed to conduct a better-written contract that would able to preserve the firm’s value (McDonald, 2009). The board of directors also played a big part in this implacable crisis. Why so? Neglecting its potential deficiency has made their ray of hope shred into tears. How complex and well-calculated the model is would be pure nonsense if a bliss of ignorance were applied in decision-making. Thereby, this financial failure on decision-making has demonstrated the flaw of homo economicus.
The Death of Homo Economicus?
As mighty as the concept is, we must admit how this notion conveyed a distorted reality of mankind. Its too little structure in the midst of humans’ complexity, made the explanations regarding the social phenomenon less tenable. Thus, how we viewed homo economicus should refrain as a choice machine that nominates the best means rather than a pleasure machine.
For Pareto once said,
“If we adopt the point of view that pleasure is a quantity, man is reduced to a pleasure machine which seeks to procure the greatest sum total of pleasure on every occasion. If we look at the matter from the point of view of one of the choices, homo economicus becomes a machine to affect those choices, and this machine, given the circumstances, constantly makes the same.”
Teresa Tiara Puspita | Economics 2022 | Staff of Kanopi FEB UI Economics Studies Division 2023/2024
Reference:
Anderson, E. (2000). Beyond Homo Economicus: New Developments in Theories of Social Norms. Philosophy & Public Affairs, 29(2), 170–200. http://www.jstor.org/stable/2672816
