Homo economicus

Homo economicus, or Economic man, is the concept in some economic theories of man as a rational and "self-interested" actor.

The 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 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" 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 na&iuml;ve 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.

The use of the Latin form Homo economicus is certainly long established; Persky (1995) traces it back to Pareto (1906) but notes that it may be older. The Oxford English Dictionary (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 "Used with L. or mock-L. adjs. in names imitating Homo sapiens, etc., and intended to personify some aspect of human life or behaviour (indicated by the adj.). Homo faber ('feIb@(r)) [H. Bergson L'Evolution Créatrice (1907) ii. 151], a term used to designate man as a maker of tools.) Variants are often comic: Homo insipiens; Homo turisticus. (This is from the CD edition of 2002.)"

Note that such forms should logically keep the capital for the "genus" name&mdash;i.e.,  H omo economicus rather than  h omo economicus. Actual usage is inconsistent.

Criticisms
Homo economicus bases his choices on a consideration of his own personal "utility function". Economic man is also 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&mdash;as is often claimed&mdash;the "Invisible Hand" works to make these purely self-interested 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. This view however does not account for the fact that acting selfishly is not necessarily the same as acting in a self-interested manner, which can explain altruism to some extent.

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. Free riders, for example, would have a major negative impact on the provision of public goods. 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 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 to more realistically depict real-life 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.

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 that attempt to limit 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.