What Do We Need Homo Oeconomicus For?

A few days ago, the celebrity among German economists, Hans Werner Sinn, published a short piece in the Süddeutsche Zeitung in which he defends economics against common and, according to him, mistaken criticisms. I won’t take issue with all 6 points he raised (invisible hand, ecology vs economics, Keynesianism vs neoclassical economics, competition, neoliberalism and homo oeconomicus), instead focusing on the last one. I had started writing a post on this anyway, so Sinn’s commentary comes just-in-time. The main question behind my criticism of Sinn’s presentation of the problem is: what do we need homo oeconomicus for? Continue reading

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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. Continue reading

Is the Economy Ever in Equilibrium?

An important criticism of traditional economic analysis is that is often is comparative-static, i.e., it deals with equilibria in the economic system by comparing two or more of them with each other. Whereas more complex models allow for dynamic analysis, much of the simpler (and widely used) ones do in fact ignore adjustment processes between equilibria. Continue reading

The Farce Called the Nobel Prize in Economics

In about a month the winner of the so-called Nobel Prize in economics (as already has been pointed out here, it actually isn’t one) for the year 2011 will be announced. Many distinguished economists can be found among the laureates – others, no less distinguished, cannot. But when you look at the Prize’s record carefully, at what the particular laureates have stood for, you will probably have the feeling that the Swedish Royal Bank Nobel Memorial Prize in Economic Sciences is a farce. And rightly so. Continue reading

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”. Continue reading