Homo Economicus: The Distorted Reality of Humankind?

Delved into my first year as an undergraduate economic student, I was taught that humans are assumed as a rational beings. The notion of economic man has been the central postulate of most standard economics theories. It articulates that humans’ motivations are driven by naked self-interest. Thus, it imposes a peripheral figure called Homo Economicus. Let alone it was described as a rational and utility-maximizing agent. However, as divine as how it was designed, the Homo Economicus narratives let you raise a question—are WE truly rational as to how it may seem?

Homo Economicus: The Genesis

In the 1830s, “On the Definition of Political Economy and Method of Investigation Proper to It” was proposed to encounter the current political economy state. John Stuart Mill, as the writer of the essay, was believed to be the “inventor” of the term “economic man” (Blaug, 1992). Mill then defined the political economy as “the science which treats of the production and distribution of wealth, so far as they depend upon the laws of human nature” (Mill, 1836). As he believed that political economy is an abstract science, an assumed hypothesis is needed to construct deductive reasoning. Therefore, an assumed hypothesis of mankind’s behavior in one motive at a time is conducted to understand how mankind would behave in real settings (Bee, 2019).

In the midst of its pragmatic view, the expression of “homo economicus” has been retrieved to the discourse due to the neoclassical economist like Francis Y. Edgeworth. Edgeworth configured the image of “homo economicus” as a positive figure of science. The term “economic man” or “homo economicus” was believed by Edgeworth that it captures the essence of economics. Rather than the "economic man" narratives being restrained in its political economy perspective, this one-dimensional figure has broadened its view by also spotlighting the motive of “material interest” (Johnson, 1894). Through that notion, the concept of “Maximum Satisfaction”, “Total Utility”, as well as “Indifference Curve” exist until this time being. Therefore, the ‘brand’ of “economic man” has slowly indulged with the mathematical economics which is expressed in the modern microeconomics textbook.

The History's Biggest Fraud?

“The purely economic man is indeed close to being a social moron.”

Daring, yet also frank. The statement above was stated by the world’s Nobel laureate, Amartya Sen in his essay “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory”. It encompasses how the idea of “economic man” shares wavering fundamentals to explain the socio-economic phenomenon. I (or you may so) believe any phenomenon isn’t about the matter of black and white. It conveys much more complex features rather than a mere mathematical model analysis. This also implies that there’s a dysfunction in the homo economicus notion which creates a distorted reality in humankind. 

Strictly, any mathematical model analysis wouldn’t be enough to cater entire analysis. There’s definitely much more beyond it. Social and ethical values, altruism, and desires for social status were some of the many complex features that drive the motive of individual acts (Anderson, 2000). Thereby, the “homo economicus” concept has limited the realm of the neoclassical analysis by excluding social interactions (Weyand, 2018). Ferber and Nelson (1993) then tried to elaborate the argument by giving examples through the current status quo of women’s experience in making decisions that are formed under social constraints—which can’t be explained under the notion of homo economicus.

Also, the word ‘human’ is complex as well as how it reflects the reality of human beings. We, psychological beings, aren’t nurtured to pursue the idea of a perfectly rational man. The problem in terms of rationality lies under the preferences mechanism among individuals during making decisions. Sen argued that there’s a definitional egoism established under rational choice. Under this notion, man’s choices are considered “rational”, if and only if all these choices propose consistency. In contrast, Sen (1977) argued that the idea of commitment is a better fit rather than proposing the idea of consistency in making decisions. It permits the potential for sincere action.

This whole concept of economic man has deliberately shown how the idea of “homo economicus” has oversimplified the structure of human beings. Thus, its too little structure embodied an economic agent that is close to being a social moron (Sen, 1977).

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

Bee, M., & Desmarais-Tremblay, M. (2023). THE BIRTH OF HOMO ŒCONOMICUS: THE METHODOLOGICAL DEBATE ON THE ECONOMIC AGENT FROM J. S. MILL TO V. PARETO. Journal of the History of Economic Thought, 45(1), 1-26. doi:10.1017/S1053837221000535

Blaug, M. (1992). The Methodology of Economics: Or, How Economists Explain (2nd ed., Cambridge Surveys of Economic Literature). Cambridge: Cambridge University Press. doi:10.1017/CBO9780511528224

Ferber, M. and Nelson, J. (eds) 2009.  Introduction Beyond economic man: Feminist theory and economics. Chicago: University of Chicago Press.

Johnson, William E. 1894. “Economic Man.” In Robert Harry Inglis Palgrave, ed., Dictionary of Political Economy. Volume 1. London: Macmillan, pp. 676–677.

McDonald, I.M. (2009), The Global Financial Crisis and Behavioural Economics. Economic Papers: A journal of applied economics and policy, 28: 249-254. https://doi.org/10.1111/j.1759-3441.2009.00026.x

Mill, John Stuart. [1836] 2006. “On the Definition of Political Economy; and on the Method of Investigation PropertoIt.”In The Collected Works of John Stuart Mill. Volume IV: Essays on Economics and Society. Indianapolis, IN: Liberty Fund, pp. 309–339.

Sen, Amartya K. “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory.” Philosophy & Public Affairs 6, no. 4 (1977): 317–44. http://www.jstor.org/stable/2264946.

Weyand, J. (2018). Not-So-Rational : Reflections on the Homo Economicus.