The term Homo economicus, or economic man, is the portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally. It is a wordplay on Homo sapiens, and is used in some economic theories and in pedagogy.
In game theory, Homo economicus is often (but not necessarily) modelled through the assumption of perfect rationality. It assumes that agents always act in a way that maximize utility as a consumer and profit as a producer, and are capable of arbitrarily complex deductions towards that end. They will always be capable of thinking through all possible outcomes and choosing that course of action which will result in the best possible result.
The rationality implied in Homo economicus does not restrict what sort of preferences are admissible. Only naive applications of the Homo economicus model assume that agents know what is best for their long-term physical and mental health. For example, an agent's utility function could be linked to the perceived utility of other agents (such as one's husband or children), making Homo economicus compatible with other models such as Homo reciprocans, which emphasizes human cooperation.
As a theory on human conduct, it contrasts to the concepts of behavioral economics, which examines cognitive biases and other irrationalities, and to bounded rationality, which assumes that practical elements such as cognitive and time limitations restrict the rationality of agents.
History of the term
The term "economic man" was used for the first time in the late nineteenth century by critics of John Stuart Mill's work on political economy.Persky, Joseph. "Retrospectives: The Ethology of Homo economicus." The Journal of Economic Perspectives, Vol. 9, No. 2 (Spring, 1995), pp. 221–231 Below is a passage from Mill's work that critics referred to:
[Political economy] does not treat the whole of man's nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.Mill, John Stuart. "On the Definition of Political Economy, and on the Method of Investigation Proper to It," London and Westminster Review, October 1836. Essays on Some Unsettled Questions of Political Economy, 2nd ed. London: Longmans, Green, Reader & Dyer, 1874, essay 5, paragraphs 38 and 48.
Later in the same work, Mill stated that he was proposing "an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained."
Adam Smith, in The Theory of Moral Sentiments, had claimed that individuals have sympathy for the well-being of others. On the other hand, in The Wealth of Nations, Smith wrote:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.Smith, Adam. “On the Division of Labour,” The Wealth of Nations, Books I–III. New York: Penguin Classics, 1986, p. 119.
The early role of Homo economicus within neoclassical theory was to discover general laws governing economic growth and welfare. These laws and principles were determined by two governing factors, natural and social. It had been found to be the foundation of neoclassical theory of the firm which assumed that individual agents would act rationally amongst other rational individuals. Within this framework, it was assumed that rational and self-interested actions would promote the efficient allocation of material resources. However, social scientists had doubted the actual importance of income and wealth to overall happiness in societies.
The term "Homo economicus" was initially critiqued for its portrayal of the economic agent as a narrowly defined, money-making animal, a characterization heavily influenced by the works of Adam Smith and John Stuart Mill. Authors from the English Historical School of Economics sought to demote this model from its broad classification under the 'genus homo', arguing that it insufficiently captured the complex ethical and behavioral dimensions of human decision-making. Their critique emphasized the need for a more nuanced understanding of human agency beyond the mere pursuit of economic rationality.Rodriguez-Sickert, C. (2009). Homo economicus. In Handbook of Economics and Ethics (Edward Elgar).
Economists in the late 19th century—such as Francis Edgeworth, William Stanley Jevons, Léon Walras, and Vilfredo Pareto—built mathematical models on these economic assumptions. In the 20th century, the rational choice theory of Lionel Robbins came to dominate mainstream economics. The term "economic man" then took on a more specific meaning: a person who acted rationally on complete knowledge out of self-interest and the desire for wealth.
The use of the Latin form Homo economicus is certainly long established; Persky traces it back to Pareto (1906)Pareto, Vilfredo (1906). "Manual of political economy". but notes that it may be older. The English term economic man can be found even earlier, in John Kells Ingram's A History of Political Economy (1888).Zabieglik, Stefan (2002). "The Origins of the Term Homo Oeconomicus", Gdansk, 123–130. The Oxford English Dictionary (O.E.D.) cites the use of Homo oeconomicus by C. S. Devas in his 1883 work The Groundwork of Economics in reference to Mill's writings, as one of a number of phrases that imitate the scientific name for the human species:
According to the OED, the human genus name Homo is
Note that such forms should logically keep the capital for the "genus" name—i.e., Homo economicus rather than homo economicus. Actual usage is inconsistent.
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 themself given available information about opportunities and other constraints, both natural and institutional, on their ability to achieve their predetermined goals. This approach has been formalized in certain social sciences models, particularly in economics.
Homo economicus is usually 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 they try to attain them at minimal cost. Only naïve applications of the Homo economicus model assume that this hypothetical individual knows what is best for their long-term physical and mental health and can be relied upon to always make the right decision for themself. See rational choice theory and rational expectations for further discussion; the article on rationality widens the discussion.
Criticisms
Economists Economists Thorstein Veblen, John Maynard Keynes, Herbert A. Simon, and many of the Austrian School criticise Homo economicus as an actor with too great an understanding of macroeconomics and economic forecasting in his decision making. 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. Austrian economists rather prefer to use as a model tool the Homo agens.
Homo economicus assumptions have been criticized not only by economists on the basis of logical arguments, but also on empirical grounds by cross-cultural comparison. Economic anthropologists such as Marshall Sahlins,Marshall Sahlins: The Original Affluent Society , in: Marshall Sahlins (1972): Stone Age Economics. London: Routledge 2003 Karl Polanyi,Karl Polanyi (1944): The Great Transformation. Beacon Press 2001 Marcel MaussMarcel Mauss (1924): The Gift. The Form and Reason for Exchange in Archaic Societies. London: Routledge 2006 and Maurice GodelierMaurice Godelier: The Enigma of the Gift. University Of Chicago Press 1999 have demonstrated that in traditional societies, choices people make regarding production and exchange of goods follow patterns of reciprocity which differ sharply from what the Homo economicus model postulates. Such systems have been termed gift economy rather than market economy. Criticisms of the Homo economicus model put forward from the standpoint of ethics usually refer to this traditional ethic of kinship-based reciprocity that held together traditional societies. Philosophers Amartya Sen and Axel Honneth are noted for their criticisms of the normative assumptions made by the self-interested utility function.Archived at Ghostarchive and the Wayback Machine:
Swiss economist Bruno Frey, points 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.
Behavioral economists 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. Some of the broader issues involved in this criticism are studied in decision theory, of which rational choice theory is only a subset.