Homo economicus (economics)
Homo economicus, often referred to as the "economic man," is a theoretical model in economics that represents an idealized human being who behaves rationally and makes decisions solely based on self-interest, without the influence of emotions or irrational impulses. This concept emerged in the nineteenth century, notably defined by economist John Stuart Mill, who suggested that individuals seek to maximize their utility with minimal effort. The model has historically been used in economic theories to illustrate consumer behavior and market dynamics, positing that individuals will always act to obtain the best possible value as consumers and the highest profit as sellers.
Despite its utility, the Homo economicus model has faced criticism, especially during the twentieth century, as other disciplines like psychology began to highlight the complexities of human behavior. Researchers like Daniel Kahneman and Amos Tversky introduced behavioral economics, emphasizing that people often make decisions based on biases and emotions rather than pure rationality. Critics argue that the Homo economicus model oversimplifies human motivations, ignoring factors such as altruism and ethical consumerism that increasingly characterize modern economic behaviors. In contemporary discussions, some economists advocate for a more nuanced understanding of human decision-making that incorporates these social and psychological elements, reflecting a shift towards models that more accurately depict the unpredictable nature of human motivations in economic contexts.
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Homo economicus (economics)
Homo economicus is the theoretical human who is rational in economic decisions rather than influenced by emotions. This created being, also called economic man, is theoretical because humans are easily and often strongly influenced by many factors, including emotions. Homo economicus is often used in economic theory models, in which the actor tries to get the best value as a consumer and profit as a seller without being swayed by irrational impulses. Homo economicus provides a simplified version of humankind.
The concept of Homo economicus was defined during the nineteenth century, but the ideas about human behavior were being discussed by philosophers thousands of years ago. The ideal human in economic terms figured into theory less during the middle of the twentieth century as psychology became a greater factor in economic studies but is frequently used in modern modeling.
Background
Homo economicus was first defined by John Stuart Mill in the nineteenth century. His artificial economic agent made decisions to gain the most in the most convenient fashion, with the least effort and least self-denial. Other economists had similar ideas about human nature in economics. Even ancient Greek philosopher Aristotle wrote about humankind's tendency to make decisions based on one's own interests. Mill, however, clearly defined his economic agent in his 1848 works Essays on Some Unsettled Questions of Political Economy and Principles of Political Economy. Mill did not coin the term Homo economicus, however; it was created by his critics as a scathing reference to his ideas, in particular his notion that humans are often selfish and act in their own self-interests. Some felt that Mill espoused an idea that, if true, would result in an every-man-for-himself society.
Decades earlier, Adam Smith had proposed similar ideas with his invisible hand theory. He believed that in a free market, the economy regulates itself because everyone is working for one's own interests without government interference. Traders would act in their own self-interest by pricing goods fairly to compete with others, for example. The consumer will demand the lowest price—because it is in their best interest to pay the least amount—and will achieve satisfaction when the market responds with low, competitive prices.
Homo economicus was essential to economic study for decades. During the twentieth century, however, economic anthropologists and neoclassical economists—who believed in using the scientific model as a means to understand human behavior—rejected the rational human theory. British economist John Maynard Keynes and others argued that humans are irrational and often make decisions without having all the information they need. They also make decisions that are not in their best interests.
Economic study during the twentieth century included both economics and psychology. Economics gradually turned away from psychology, yet eventually, an understanding of the importance of studying human behavior emerged. The field of behavioral economics can be traced to 1979 when Daniel Kahneman and Amos Tversky published the paper "Prospect Theory: An Analysis of Decision under Risk" in Econometrica. They were studying human perspectives on risks and found the perceptions of risks from which persons benefited were different from those from which they experienced losses. People want to avoid risks, and this risk aversion colors their decision-making. As an example, people who are given a choice of a guaranteed $1,000 or a 50 percent chance of getting $2,500 usually opt for the guaranteed $1,000. Humans feel the loss more keenly than the gain: Loss hurts about twice as much as the pleasure derived from gain. These researchers and others embraced the importance of understanding the psychological elements of human behavior to study economics. Humans often act irrationally, and economists must take this into consideration in research.
Some researchers have theorized that Homo economicus may also explain evolution. The economic model's traits may have helped Homo sapiens rout Homo neanderthalensis about thirty thousand years ago. One theory is that Homo sapiens learned to specialize in ways that benefited them. For example, the most successful hunters hunted while other members of the community performed other tasks. They traded—meat for gathered nuts or berries, for example, or for new weapons—which benefited all members. In this way, Homo sapiens prospered, became healthier and more fertile, and dominated the earth.
Overview
Many economics scholars disagree as to how useful and appropriate Homo economicus is in models. Some believe that cognitive and social psychology are of little or no use in economic models, while others say having a standard model allows researchers to formalize studies and compare outcomes.
Homo economicus can be useful in models because it makes assumptions that remain constant. Examining demand, for example, allows the consumer to remain constant while models explore how changes in price affect demand. Consumers are seen as concerned with price and likely to choose an item at a lower price, while sellers are concerned with profit. A higher price should result in lower demand if the agent remains unchanged in motivation. Although Homo economicus is a standard in many economic models, it may differ from application to application. Some researchers may apply different abilities, such as intelligence, to their rational human.
Because a purely rational human is impossible, many economics experts have noted that using Homo economicus alone in models leads to inaccurate results. As a result, many models have introduced other agents, making less rational choices to balance out the actions of Homo economicus. This presents a more realistic result.
Researchers have noted many concerns with Homo economicus. For example, many humans exhibit altruism, such as choosing products from companies that perform charitable works even though the items may cost more. Homo economicus presupposes that humans are greedy and that material goods bring happiness. Some economists have argued with this point of view, saying that it ignores ethical and empathetic human impulses. In the twenty-first century, many younger consumers and entrepreneurs, for example, place a greater emphasis on green products and altruism and promote a business model called ethical capitalism. Companies such as Warby Parker, Bombas, TOMS Shoes, and others offer consumers opportunities to help others, such as grassroots activists or disadvantaged people who need shoes, simply by buying the products. Economists have noted that many modern companies sell themselves as socially conscious, which is not accounted for in the Homo economicus models. If consumers achieve satisfaction from purchases that align with their beliefs or from decisions that benefit their communities, Homo economicus becomes less useful because human self-interest becomes more unpredictable and does not match economic consumer models.
Bibliography
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