Positive Economics and Psychology

Economists often argue that in their research their engage in positive science, which means that they use models of human behaviour to test the consequences of various policy scenarios. Importantly, they do not engage–in their own contention–in normative analysis, i.e., they do not attempt to formulate prescriptions as to which policies/modes of behaviour are the right ones (except when “right” means “welfare maximising”). There is much to be questioned about that, including whether economics actually deserves being called a science or whether welfare maximisation is or, in fact, can be normatively neutral as a source of guidance for analysis. I will not dwell upon these questions today. Rather, today’s topic is the model of human behaviour conventional economics rests upon and whether one can call the application of this model–the so-called homo oeconomicus–positive analysis.

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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”.