The Self-enforcing homo oeconomicus

The main foundation of contemporary economics and, for that matter, of modern capitalism, is the assumption of homo oeconomicus – a “rational”, i.e. strictly self-interested, (own) utility maximizing individual who is able to reasonably assess the consequences of her own doings (expressed inter alia in the assumption of full consumer sovereignty) and reveals its (unchanging) preferences through her consumption decisions. Homo oeconomicus is the core of successful economic activity (at least according to neo-classical economists) and, so the argument goes, a good simplification of human behavior. While there is much criticism of the accuracy of this model (see, e.g., Amartya Sen’s “Rational Fools” paper), my question here shall primarily be whether it is possible that the homo oeconomicus is a kind of a “self-enforcing prophecy”.

Since I am studying economics, I frequently hear economics and business students’ conversations. My observation is that since they learn in their courses that the homo oeconomicus is the best explanation of successful economic activity, they tend to justify egoistic actions (both own and others’) by claiming that egoism is “rational” and thus in some sense “good”, or at least the “right” way to behave.

As I already pointed out, there is the problem too that few people are really acting like the homo oeconomicus. We are more or less generous, altruistic, selfless. In a true world of homines oeconomici there would be no justification for the existence of social systems, NGOs, open source, neighbourhood help etc. Of course one may explain altruism using homo oeconomicus – through the incorporation of others’ utility in one’s own utility function. But this would lead straight to explanatory meaninglessness of the model, since every possible action could be explained.

Meanwhile, my concern here is of another kind: as suggested above, the homo oeconomicus may be a “self-enforcing prophecy”. People know that economists and politicians tell them that pursuing self-interest only is not “bad”, that because of Adam Smith’s invisible hand selfish actions contribute to an increase in well-being of the whole society. So people tend to feel that egoism is legitimate. It is only a few days ago that I heard from an economics Doctor that religions are “bad”, because they call us to be “nice” to each other, and this is bad for our economic performance. While this may be true for purely economic functioning of the society (although there are many arguments that even this does not hold), for the society as a whole it surely is not. Egoistic actions contribute to increasing distrust among people who are alienating from each other. True societal structures are imploding, and what is left are economic activities between ever more isolated individuals. Look in any newspaper and you will see what (groups of) people are ready to do while pursuing their economic self-interest: human right violations, environmental destruction, intensional erosion of social systems (e.g. through tax evasion) and many more.

One may claim that since economics is about economic activities, my points are meaningless. But this is not true. Economics is a social science dealing with much more than only narrowly defined economic activities (consider the work of Gary S. Becker who extended the model of homo oeconomicus to almost every imaginable life domain), and as such it must take into account “spill-overs” to other spheres of societies’ functioning. They cannot just be “defined away”.

Homo oeconomicus  appears to be a kind of a self-enforcing prophecy: people act like homines oeconomici because they are told that this is “rational” and “right” and a good simplification of their actions. But, no matter whether it is really good for the economy, it is dangerous for the long-term functioning of societies. Since distinguished economists (such as, for instance, Amartya Sen, Karl Polanyi, or the sociologist Ralf Dahrendorf) demonstrated that there is both a need and a possibility to abandon homo oeconomicus, it is odd why economists are still sticking to this model.

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4 thoughts on “The Self-enforcing homo oeconomicus

  1. It is said that the animals act as they act because of the instinct. While looking at my dogs their actions are somtimes very logical but somtimes escape logical explanation. At the same time, being of the same breed, they have distinct personalities. It is our human nature to codify and measure things. Without that, frequently, we are not able to attach any value to things/developments around us. So it is easy to say that economic incentives and/or economic rationale govern our actions – simple and easy.

    Regards,

  2. But, nevertheless, an oversimplification. Furthermore, abandoning homo oeconomicus does not mean that we abandon all “economic” explanations of human behaviour. It is just to extend and modify the model, since people are led by egoism only in some of their actions.

  3. “Economic” reasons are only one of many factors governing our life and behaviour. Some of us are influenced by them more others less. I think we are more or less in agreement.

    Regards,

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