Mises Wire

The Homo Economicus Straw Man

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Among the larger albatrosses hanging around the neck of the economics profession is the idea of homo economicus. To this day, most economics undergraduates hear about it in the context of neo-classical economics. Homo economicus, we are told, is the ideal economic man who always seeks to maximize profits and minimize costs. He only acts “rationally,” and rationalism is defined as, well, always seeking to maximize profits and minimize costs. Even worse, “profit” is often assumed to mean “monetary profit” measurable only in dollars (or some other currency). 

Yes, many economists will say “it’s just a model” and note there are many caveats that come with the its use. These protestations are often less than convincing given the use of models based on “rational” behavior. But, for now, let’s just take the the economists at their word. Even if what the defenders of homo economicus say is true, however, the fact remains that the vast majority of sociologists, political scientists, politicians, and journalists never got that memo. Throughout scholarship and media pieces on public policy, “homo economicus“ is routinely employed to illustrate the problems with economic theory. What’s worse, anti-capitalists — many of whom view neo-classical economics as the primary ideological foundation of laissez-faire ideology — present the shortcomings of homo economicus as an illustration of the foolishness of market economies.

In The New Statesman, for example, George Monbiot, a perennial critic of free markets, imagines that homo economicus has turned society on its head:

Our dominant ideology is based on a lie. A series of lies, in fact, but I’ll focus on just one. This is the claim that we are, above all else, self-interested — that we seek to enhance our own wealth and power with little regard for the impact on others. Some economists use a term to describe this presumed state of being — Homo economicus, or self-maximising man. The concept was formulated, by J S Mill and others, as a thought experiment. Soon it became a modelling tool. Then it became an ideal.

In this, Monbiot (who rather oddly believes free-market capitalism to be the “dominant ideology”) is building on the established criticism of laissez faire economics — couched as an attack on so-called “neoliberalism“ — as described by Wendy Brown in her 2015 book Undoing the Demos. For Brown, homo economicus has replaced all other models of human nature and has become “normative in every sphere.” 

But it’s not just hard-line leftists who take issue with homo economicus. Richard Butrick at the American Thinker attacks homo economicus, thinking it provides the primary theoretical justification for free trade. And, in a fairly convincing comment at the Financial Times, business professor Yeomin Yoon, recently blamed the economics profession’s obsession with homo economics for the discipline’s alleged inability to develop a “holistic view of humans.”

So, it’s not enough to just wave away critics of homo economicus as a bunch of people who don’t understand the sophisticated ways of the professional-economist class. The theory’s shortcomings remain a real-world problem. 

Homo Economicus Is Not Foundational to Sound Economics 

The problem for the anti-market attackers of homo economicus, though, is that homo economicus is not actually necessary to understanding human behavior or how markets work. In fact, understanding of markets would be improved by not resorting to the homo economicus model at all.

Austrian economists, for example, have never relied on homo economicus, precisely because it fails to provide a useful or accurate metric or model for human behavior. 

Thus, Ludwig von Mises noted that the homo economicus model described behavior for only one small type of human action, and failed to account for the behavior of consumers:

The much talked about homo economicus of the classical theory is the personification of the principles of the businessman. The businessman wants to conduct every business with the highest possible profit: he wants to buy as cheaply as possible and sell as dearly as possible. By means of diligence and attention to business he strives to eliminate all sources of error so that the results of his action are not prejudiced by ignorance, neglectfulness, mistakes, and the like...

The classical scheme is not at all applicable to consumption or the consumer. It could in no way comprehend the act of consumption or the consumer’s expenditure of money. The principle of buying on the cheapest market comes into question here only in so far as the choice is between several possibilities, otherwise equal, of purchasing goods; but it cannot be understood, from this point of view, why someone buys the better suit even though the cheaper one has the same “objective” usefulness, or why more is generally spent than is necessary for the minimum — taken in the strictest sense of the term — necessary for bare physical subsistence.

If an economics model tells us very little about consumer behavior, then its value is limited, to say the least. 

Mises further commented on homo economics in Human Action when he wrote:

It was a fundamental mistake ... to interpret economics as the characterization of the behavior of an ideal type, the homo oeconomicus. According to this doctrine traditional or orthodox economics does not deal with the behavior of man as he really is and acts, but with a fictitious or hypothetical image. It pictures a being driven exclusively by “economic” motives, i.e., solely by the intention of making the greatest possible material or monetary profit. Such a being does not have and never did a counterpart in reality; it is a phantom of a spurious armchair philosophy. No man is exclusively motivated by the desire to become as rich as possible; many are not at all influenced by this mean craving. It is vain to refer to such an illusory homunculus in dealing with life and history.

As Mises notes, it is not true that all persons seek to become as wealthy as possible in monetary terms, and profit takes many forms other than money. Nor is it true that all persons seek the same goals in life. And, since persons have an uncountable number of diverse goals for themselves, it is also therefore impossible to generalize about what is rational or irrational for them. For some people, a life of austerity and asceticism in a hermitage may be the most desirable, and thus it is rational to pursue that lifestyle. For others, a life spent playing video games and visiting shopping malls be the most desirable. It is thus quite impossible to generalize and certainly impossible to create a model for an ideal of human behavior.

And yet, economists today remain saddled with the concept of homo economicus which provides fodder to the left in building straw man after straw man. 

Do Markets Require the Existence of Homo Economicus?

In the minds of the left-wing market critics such as Brown and Monbiot, the whole market system relies on an imposed view of human nature to make it work. The anti-capitalist fable goes like this: once upon a time, all human beings recognized that humanity was naturally community-minded and motivated by pursuits other than monetary profits. But then came the economists who created a new “normative,” “hegemonic,” and “imposed” world view in which human being are all selfish profit maximizers. Thanks to generations of brainwashing by capitalist economists, people now really believe that the relentless competition in the marketplace is the way to happiness, and all other human institutions are secondary at best. Society has been destroyed as a result. 

In truth, of course, the market does not depend on any imposed ideology whatsoever, and Mises and the Austrians have never based their analysis on any such assumption. No good economist denies that human beings tend to be social, and Mises himself writes that “[m]an appeared on the scene of earthy events as a social being.” Far from depending upon the existence of anti-social or atomistic human beings, the market economy simply responds to human beings as they are. Indeed, it is the consumers who impose on the market by deciding what is produced by the marketplace and when. 

Homo Economicus is a tool for Central Planners 

Moreover, far from being a foundation of market economies, homo economicus is far more useful in providing theoretical help to enemies of markets. After all, in opposing the construct of homo economicus, Mises notes that human desires are far too diverse to allow for generalization about what can and should be produced by markets, or what consumers should do. By extension, given the unpredictable nature of human wants and talents, it is impossible to centrally plan an economy, or even intervene in an economy, without impoverishing the consumers who may want something different than what is assumed by government planners. Homo economicus in many ways buttresses the conceit that we can know ahead of time what consumers and producers will want and what they will do. 

When anti-capitalists think they are somehow striking at the heart of laissez faire liberalism when they denounce homo economicus, they are doing nothing of the sort.

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