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Homo economicus

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The dismal science
Economics
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Economic Systems

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In contrast to the empirically rich forms of economic inquiry, much work in neoclassical economics is instead concerned with the largely theoretical analysis of how markets would work if they were populated with individuals endowed with perfect rationality. In other words, this work concerns creatures of fantasy. We might be tempted to classify these areas of economics as science fiction. Alternatively, we might think that this brand of economics does not tell us how the world is; instead, it tells us how the world ought to be, if only people would think straight. Both reactions suggest a gulf between neoclassical economics and the typical practice of science.
Tim LewensWikipedia's W.svg, The Meaning of Science: A Pelican Introduction[1]

Homo economicus[Note 1] is the theoretical ideal of the "rational" person, often used in economics and political science as part of the precise model making and "physics envy" featured within those disciplines. The idea is often derided, however, with critics claiming that people are mostly irrational. However this is probably too much of a simplification of why homo economicus isn't an accurate representation of reality. In economics, rationality merely means that people follow easy to model choices; if a person prefers A to B, and B to C, they will then prefer A to C. Most theories do not expect much more from people, and in fact several theories have been created to explain how the lack of information can lead a rational person to making an irrational choice.

Chicago schoolers are known for a near-mystical belief in homo economicus, which ironically separates them from the Austrians who have already abandoned this concept as backward. Two decades into ad-hoc, empirically dubious justifications for why it is reasonable to continue using Homo Economicus and the so-called "Real Business Cycle" model, even the educated public has come to realise that their school is dependent upon what is akin to adding epicycles to epicycles.

This theory is also very important in voter choice in politics, however the incentives in voting are much harder to quantify.

Problems with the "rational" man[edit]

...the Economic Man, whose every action is prompted by the single spur of selfish advantage and directed to the single end of monetary gain.
—A. P. Herbert, Fardell v. Potts (Misleading Cases)
Addiction is a major challenge to the theory of rational behavior.
Chicago schoolers Gary BeckerWikipedia's W.svg and Kevin M. MurphyWikipedia's W.svg in a stopped clock moment[2]

One problem with this theory is that one object may not be objectively better than another. Take cars for example: if car A is more comfortable than car B, and car B is more efficient than car A, which is the better car? A very careful person could list the qualities of each car, assign each a value and add them up to decide which is better.[Note 2] Most people (assuming they can afford both cars), will decide based on a more instinctual process,[Note 3] which may or may not be a rational decision. The A > B, B > C therefore C > A might also just be one of those irrational things that real people engage in and can't quite explain.

Rationality in decision making is affected greatly by a lack of information. A rational decision made on incomplete information may not be the same decision made with every aspect of the problem known. This is what happens when you buy something online and promptly frown when you open up the package.

But there is also the brute irrational side; the economic man is prone to emotional purchasing, such as impulse buying. The candy and gadgets at the front register[Note 4] are probably not the ideal rational purchase, but people purchase them anyway. Advertising also affects emotional purchasing, as does popularity[Note 5] and luxury items.[Note 6]

Another inescapable problem is that while it is conceivable to assume economic agents can pick the optimal combination if there are very few options, things turn out absurd pretty fast if numbers increase. In the words of Steven Keen:

Consider, for example, your regular visit to a supermarket. The typical supermarket has between 10,000 and 50,000 items, but let’s segment them into just 100 different groups. How many different shopping trolleys could you fill if you limited your decision to simply whether to buy or not buy one item from each group? You would be able to fill two to the power of one hundred shopping trolleys with different combinations of these goods: that’s 1,267,650,600,228,229,401,496,703,205,376 trolleys in total, or in words over 1,000 million trillion trillion shopping trolleys. If you could work out the utility you gained from each trolley at a rate of 10 trillion trolleys per second, it would take you 100 billion years to locate the optimal one. Obviously you don’t do that when you go shopping.[3]

The field of behavioral economics takes the side of sanity (i.e. actual empirical data on decision-making) and scraps the concept of homo economicus entirely, assuming some amount of irrationality and attempting to identify where rational thinking fails and what mistakes are common enough to be predictable.

Notes[edit]

  1. Yes, classicists, we know it should be "Homo œconomicus", but we didn't create the term.
  2. Engineers do this sort of thing all the time, but engineers are total nerds.
  3. I.e. "I just like car A better, even if I'll have to pay a little more for gas."
  4. That's a till for you goofy kids across the ocean.
  5. Name brand clothing isn't usually functionally good enough to justify the increase in price over off brands, for example.
  6. For certain items, such as Rolex watches and high-end cars, even the laws of supply and demand break down.

References[edit]

  1. The Meaning of Science: A Pelican Introduction, Tim LewensWikipedia's W.svg, 2015, ISBN 978-0-141-97742-3. Page 50-51.
  2. Becker, Gary S., and Kevin M. Murphy. 1988. "A Theory of Rational Addiction." Journal of Political Economy 96 (August): p. 695
  3. Debunking Economics - Revised and Extended edition: The naked emperor dethroned?, Steven Keen, 2011, p. 88.