http://www.investopedia.com/terms/e/economic-man.asp
DEFINITION of 'Economic Man '
First coined in the late 19th century, the term 'Economic Man' has developed to refer to a hypothetical individual who acts rationally and with complete knowledge, but entirely out of self-interest and the quest to maximize personal utility. Economic Man is an imaginary figure who is able to satisfy economic models that push for consumer equilibrium. All of Economic Man's choices are based on the fulfillment of his or her "utility function", meaning the ability to maximize any situation that involves choice.
INVESTOPEDIA EXPLAINS 'Economic Man '
Many economic models are hypothetical, and the assumptions on which they are built deviate from real-world conditions. For example, many economic-modeling assumptions assume that demand is a linear function of price. While this may sometimes be the case with certain goods, it is not reflective of the actual consumer environment. Economic Man is the principal, symbolic of every individual in society, whose preferences satisfy the condition specified in the models.
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http://en.wikipedia.org/wiki/Homo_economicus
Homo economicus
From Wikipedia, the free encyclopedia
This article is about the economic concept. For the journal, see Homo Oeconomicus.
In economics, homo economicus, or economic human, is the concept in many economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends. Using these rational assessments, homo economicus attempts to maximize utility as a consumer and economic profit as a producer.[1] This theory stands in contrast to the concept of e.g. which states that human beings are primarily motivated by the desire to be cooperative and to improve their environment.
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[hide]History of the term[edit]
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.[2] Below is a passage from Mill’s work that those 19th-century critics were referring to:
Later in the same work, Mill goes on to write that he is 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.”
Although the term did not come into use until the 19th century, it is often associated with the ideas of 18th century thinkers like Adam Smith and David Ricardo. In The Wealth of Nations, Smith wrote:
This suggests the same sort of rational, self-interested, labor-averse individual that Mill proposes (although Smith did claim that individuals have sympathy for the well-being of others, in The Theory of Moral Sentiments). Aristotle's Politics discussed the nature of self-interest in Book II, Part V.[5]
A wave of economists in the late 19th century—Francis Edgeworth, William Stanley Jevons, Léon Walras, and Vilfredo Pareto—built mathematical models on these assumptions. In the 20th century, Lionel Robbins’rational choice theory came to dominate mainstream economics and the term economic man took on a more specific meaning of a person who acted rationally on complete knowledge out of self-interest and the desire for wealth.
Model[edit]
Homo economicus is a term used for an approximation or model of Homo sapiens that acts to obtain the highest possible well-being for him or herself given available information about opportunities and other constraints, both natural and institutional, on his ability to achieve his predetermined goals. This approach has been formalized in certain social sciences models, particularly in economics.
Homo economicus is 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 he tries to attain them at minimal cost. Only naïve applications of the homo economicus model assume that this hypothetical individual knows what is best for his long-term physical and mental health and can be relied upon to always make the right decision for himself. See rational choice theory and rational expectations for further discussion; the article on rationality widens the discussion.
As in social science, these assumptions are at best approximations. The term is often used derogatorily in academic literature, perhaps most commonly by sociologists, many of whom tend to prefer structural explanations to ones based on rational action by individuals.
The use of the Latin form homo economicus is certainly long established; Persky[2] traces it back to Pareto (1906)[6] 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).[7] 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.
Amartya Sen has argued there are grave pitfalls in assuming that rationality is limited to selfish rationality. Economics should build into its assumptions the notion that people can give credible commitments to a course of conduct. He demonstrates the absurdity with the narrowness of the assumptions by some economists with the following example of two strangers meeting on a street.[10]
| “ | "Where is the railway station?" he asks me. "There," I say, pointing at the post office, "and would you please post this letter for me on the way?" "Yes," he says, determined to open the envelope and check whether it contains something valuable. | ” |
Criticisms[edit]
Homo economicus bases his choices on a consideration of his own personal "utility function".
Consequently, the 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,[11] Karl Polanyi,[12] Marcel Mauss[13] and Maurice Godelier[14] 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.
Economists Thorstein Veblen, John Maynard Keynes, Herbert A. Simon, and many of the Austrian School criticise homo economicus as an actor with too great of 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.
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 indecision theory of which rational choice theory is only a subset.
Other critics of the homo economicus model of humanity, such as Bruno Frey, point 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.
Another weakness is highlighted by economic sociologists and anthropologist, who argue that homo economicus ignores an extremely important question, i.e. the origins of tastes and the parameters of the utility function by social influences, training, education, and the like. The exogeneity of tastes (preferences) in this model is the major distinction from homo sociologicus, in which tastes are taken as partially or even totally determined by the societal environment (see below).
Further critics, learning from the broadly defined psychoanalytic tradition, criticize the homo economicus model as ignoring the inner conflicts that real-world individuals suffer, as between short-term and long-term goals (e.g., eating chocolate cake and losing weight) or between individual goals and societal values. Such conflicts may lead to "irrational" behavior involving inconsistency, psychological paralysis, neurosis, and psychic pain. Further irrational human behaviour can occur as a result of habit, laziness, mimicry and simple obedience.
The emerging science of "neuroeconomics" suggests that there are serious short-comings in the conventional theories of economic rationality. Rational economic decision making has been shown to produce high levels of cortisol. epinephrine and cortico-steroids, associated with elevated levels of stress. It seems that the doperminic system is only activated upon achieving the reward, and otherwise the "pain" receptors, particularly in the pre-frontal cortex of the left hemisphere of the brain ahow a high level of activation.[15] Serotonin and oxytocin levels are minimised, and the general immune system shows a level of suppression. Such a pattern is associated with a generalised reduction in the levels of trust. Unsolicited "gift giving", considered irrational from the point of view of homo-economicus, by comparison, shows an elevated stimulation of the pleasure circuits of the whole brain, reduction in the levels of stress, optimal functioning of the immune system, reduction in cortico-steroids and epinephrine and cortisol, activation of the substancia negra, thestriatum and the nucleus acumbens (associated with the placebo effect, all associated with the building of social trust. Mirror neurones result in a win-win positive sum game in which the person giving the gift gives a pleasure equivalent to the person receiving it.[16] This confirms the findings of anthropology which suggest that a "gift economy" preceded the more recent market systems where win-lose or risk avoidance lose-lose calculations apply.[17]
Responses[edit]
 | This article needs additional citations for verification. (December 2008) |
Economists tend to disagree with these critiques, arguing that it may be relevant to analyze the consequences of enlightened egoism just as it may be worthwhile to consider altruistic or social behavior. Others argue that we need to understand the consequences of such narrow-minded greed even if only a small percentage of the population embraces such motives. Free riders, for example, would have a major negative impact on the provision of public goods. However, economists' supply and demand predictions might obtain even if only a significant minority of market participants act like homo economicus. In this view, the assumption of homo economicus can and should be simply a preliminary step on the road to a more sophisticated model.
Yet others argue that homo economicus is a reasonable approximation for behavior within market institutions, since the individualized nature of human action in such social settings encourages individualistic behavior. Not only do market settings encourage the application of a simple cost-benefit calculus by individuals, but they reward and thus attract the more individualistic people. It can be difficult to apply social values (as opposed to following self-interest) in an extremely competitive market; a company that refuses to pollute, for example, may find itself bankrupt.
Defenders of the homo economicus model see many critics of the dominant school as using a straw man technique. For example, it is common for critics to argue that real people do not have cost-less access to infinite information and an innate ability to instantly process it. However, in advanced-level theoretical economics, scholars have found ways of addressing these problems, modifying models enough to more realistically depict real-life decision-making. For example, models of individual behavior under bounded rationality and of people suffering from envy can be found in the literature.[18] It is primarily when targeting the limiting assumptions made in constructing undergraduate models that the criticisms listed above are valid. These criticisms are especially valid to the extent that the professor asserts that the simplifying assumptions are true or uses them in a propagandistic way.
The more sophisticated economists are quite conscious of the empirical limitations of the homo economicus model. In theory, the views of the critics can be combined with the homo economicus model to attain a more accurate model.
Perspectives[edit]
According to Sergio Caruso, when talking of Homo economicus, one should distinguish between the purely “methodological” versions, aimed at practical use in the economic sphere (e.g. economic calculus), and the” anthropological” versions, more ambitiously aimed at depicting a certain type of man (supposed to be actually existing), or even human nature in general. The former, traditionally founded on a merely speculative psychology, have proved unrealistic and frankly wrong as descriptive models of economic behaviour (therefore not applicable for normative purposes either); however, they are liable to be corrected resorting to the new empirically based economic psychology, which turns quite other than the philosophers’ psychology that economists have used until yesterday. Among the latter (i.e. the anthropological versions), one can make a further distinction between the weak versions, more plausible, and the strong ones, irreparably ideological. Depicting different types of “economic man” (each depending on the social context) is in fact possible with the help of cultural anthropology, and social psychology (a branch of psychology economists have strangely ignored), if only those types are contrived as socially and/or historically determined abstractions (such asWeber's, Korsch's, and Fromm's concepts of Idealtypus, “historical specification”, and “social character”). Even a Marxist theoretician such as Gramsci – reminds Caruso – admitted of the homo economicus as a useful abstraction on the ground of economic theory, provided that we grant there be as many homines oeconomici as the modes of production. On the contrary, when one concept of homo economicus claims to grasp the eternal essence of what is human, at the same time putting aside all other aspects of human nature (such as homo faber, homo loquens, homo ludens, homo reciprocans, and so on), then the concept leaves the field of good philosophy, not to speak of social science, and is ready to enter a political doctrine as the most dangerous of its ideological ingredients.[19]
Homo sociologicus[edit]
Comparisons between economics and sociology have resulted in a corresponding term homo sociologicus (introduced by German Sociologist Ralf Dahrendorf in 1958), to parody the image of human nature given in some sociological models that attempt to limit the social forces that determine individual tastes and social values. (The alternative or additional source of these would be biology.) Hirsch et al. say that homo sociologicus is largely a tabula rasa upon which societies and cultures write values and goals; unlike economicus, sociologicus acts not to pursue selfish interests but to fulfill social roles[20] (though the fulfillment of social roles may have a selfish rationale—e.g. politicians or socialites). This "individual" may appear to be all society and no individual.
See also[edit]
Homo reciprocans
From Wikipedia, the free encyclopedia
Homo reciprocans, or reciprocal human, is the concept in some economic theories of humans as cooperative actors who are motivated by improving their environment. This concept stands in contrast to the idea ofhomo economicus, which states the opposite theory that human beings are exclusively motivated by self-interest.
Contents
[hide]Kropotkin[edit]
Russian theorist Peter Kropotkin wrote about the concept of "mutual aid" in the early part of the 20th century.
Examples[edit]
The homo reciprocans concept states that human being players interact with a propensity to cooperate. They will compromise in order to achieve a balance between what is best for them and what is best for the environment they are a part of. Homo reciprocans players, however, also are motivated by justification. If a second player is perceived as having done something wrong or insulting, the first player is willing to "take a hit," even with no foreseeable benefits, in order for the second player to suffer.
A common example of this interaction is the haggler and shopkeeper. If the haggler wants a deal and the shopkeeper wants a sale, the haggler must carefully choose a price for the shopkeeper to consider. The shopkeeper will consider a lower price (or a price in between) based on the benefit of selling a product. If the haggler's offer is a low-ball, which may be offensive to the shopkeeper, the shopkeeper may refuse simply on the grounds that he is offended, and will knowingly and purposely lose the sale.
Positive and negative reciprocity[edit]
Reciprocal players are willing to reward behaviour that is just or fair, and to punish unjust or unfair behaviour. Empirical evidence suggests that positive and negative reciprocity are fundamentally different behavioral dispositions in the sense that the values for positive and negative reciprocity in individuals are only weakly correlated and that these values correlate differently with factors such as gender or age.[1][2] A possible explanation is “that negative and positive reciprocity are different because they tap into different emotional responses”.[3]
Positive reciprocity correlates with height, with increasing age, with female gender, with higher income as well as higher number of hours of work, with a higher number of friends and with higher over-all life satisfaction.[1] Evidence indicates that “married individuals are more positively reciprocal, but are not different from the unmarried in terms of negative reciprocity”.[4] Among employees, negative reciprocity appear to be correlated with a higher number of sick days.[5] Positive reciprocity correlates with low unemployment, and negative reciprocity strongly correlates with unemployment.[6] High levels of positive reciprocity correlate with higher income, but no correlation appears to exist between negative reciprocity and income.[7]
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