Homo Economicus

Homo economicus is translated from Latin as an “economic man”. Basically, it’s a theoretical model of a person who consistently make rational decisions in order to benefit oneself. The term was introduced in the 19th century by the English political economist John Stuart Mill. It has been used in economics to these days. However, some contrary theories providing another view on the term “economic man” as the subject of decision-making have also developed during this time.

Origins of the term

As mentioned, the term “homo economicus” was suggested by John Stuart Mill in 1836 in his essay on the political economy. Inspired by Adam Smith’s perception of economic decision-making, Mill defined homo economicus as an economic man who is eager to become financially prosperous and capable of reaching wealth. Also, he stated that this tendency of reaching wealth has been passed down through generations. Therefore, family was another value that Mill outlined in his works.

The author believed that any characteristics, besides the ones related to the subject’s wealth, are insignificant within the field of political economy.

Characteristics of Homo Economicus 

There are a few traits that characterize homo economicus as the concept:

• aspiration to gain profits and become prosperous;
• ability to constantly make effective and reasonable decisions;
• ability to make these decisions consistently;
• immaculate rationality uninfluenced by personal assumptions or preferences;
• focus on personal goals, needs, and interests only;
• free access to all the needed data;
• unlimited and unquestionable cognitive performance despite the quantity, quality, and complexity of given information;
• strong attachment to the goals.

Desire for profits isn’t always refers to the production of something. It might also be applied to the consumption. Homo economicus as a consumer is eager to gain as much use as possible, which might be considered to be the profit as well.

We’ve mentioned several times that homo economicus is guided by the rationality. However, the famous sociologist Max Weber outlined two types of rationalities – instrumental rationality and value rationality. The first one is aimed to find the most efficient decision, while the latter – to find the right one. In terms of this classification, homo economicus is guided by the instrumental rationality and sometimes even considered to be amoral.

Current meaning of the term

Nowadays, the concept of homo economicus is still used in economics. Most neoclassical theories are based on the following principles:

1. Economic man is guided by faultless rationality.
2. Economic man places self interests above anyone else’s.
3. Economic man’s interest is to maximize profits and utility.

As you can see, an initial meaning of the term introduced by Mill still has been crucial to the neoclassical economists. But now some of these neoclassical principles might be softened and presented as orienting points rather than rigid rules.

Contradictory concepts of Homo Economicus 

Some neoclassical economic theories describe homo economicus as a rationally thinking subject who always makes foolproof decisions based on the perfect preliminary analysis of the given information. Moreover, all these decisions are consistently made in accordance with the subject’s self-regarding goals. The subject’s rationality also implies a prudent budget spending.

On the other hand, contemporary theories of behavioral economics consider the economic man as an imperfect subject who make irrational decisions from time to time. These decisions aren’t always guided by the goal of maximizing profits or acting according to the subject’s interests only. Also, people don’t usually have all the needed information, and their goals might change under different circumstances. Therefore, the economists adhering to the behavioral economics theories insist on more realistic and practical representation of the economic man.

Flaws of the Homo Economicus concept

In 1979 Daniel Kahneman and Amos Tversky developed a theory revealing the main flaw of the homo economicus concept – tendency of people to be more risk averse. The scholars conducted research which showed that people’s decisions are affected by their own prejudices, biases, and fears. Therefore, they’re not always capable of making rational decisions. Also, this research outlined that people are more afraid of losses, than excited about their profits. For example, if people are offered to get $500 or take a risk of getting $1000 under the condition of losing everything in case of failing, most of them will choose the first option. Meanwhile, the homo economicus will be ready to get the risk in order to maximize the profit.

Also, it’s important to mention that homo economicus contradicts itself by stating opposing principles of decision-making. For example, the economic man has to spend profits sparingly, but at the same time, he should value luxury items. Moreover, he also should value philanthropy. These characteristics come into conflict with each other and with the main trait of homo economicus as a perfectly rational man.

Other concepts of decision-making

Homo Economicus is quite a controversial concept of decision-making. Therefore, other concepts were developed:

• Homo reciprocans as the concept of a man who looks not only for own interests, but for the interests of others as well. According to this model, people motivate each other by rewarding positive actions and punishing the negative ones.
• Homo politicus is the concept of a man who aims to benefit society and acts in its favor.
• Homo sociologicus is the concept of a man who is also devoted to society, but can’t always act rationally due to the societal impact.

Note that all of these concepts aren’t opposed to each other. It’s possible to combine them because people act differently depending on the situation.