Homo economicus, or "economic man," is the characterization of man in some economic theories as a rational person who pursues wealth for his own self-interest. The economic man is described as one who avoids unnecessary work by using rational judgment. The assumption that all humans behave in this manner has been a fundamental premise for many economic theories.
However, many behavioral economists disagree with this theory, noting that humans tend to be irrational in their decision making, and anticipating irrational behavior when it comes to man and economic decisions is more useful for economic modeling.
- Homo economicus is a model for human behavior that suggests a person has an infinite capacity to make rational decisions.
- The idea, as used in economics, was introduced by John Stuart Mill in the 19th century in an essay about the political economy.
- Mill's theory was an extension of other ideas proposed by economists such as Adam Smith and David Ricardo, who also saw humans as primarily self-interested economic agents.
- However, modern behavioral economists have disputed this theory, noting that human beings are actually irrational in their decision-making processes.
Understanding Homo Economicus
The history of the term dates back to the 19th century when John Stuart Mill first proposed the definition of homo economicus. He defined the economic actor as one "who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labor and physical self-denial with which they can be obtained."
He discussed the term in an 1836 essay titled "On the definition of Political Economy and on the method of investigation proper to it." His essay argued that the political economy removes other human desires, except those that help the political person pursue wealth.
The idea that man acts in his own economic self-interest often is attributed to other economists and philosophers, like economists Adam Smith and David Ricardo, who considered man to be a rational, self-interested economic agent, and Aristotle, who discussed man's self-interested tendencies in his work Politics. But Mill is considered the first to have defined the economic man completely.
Criticisms of the Theory
The theory of the economic man dominated classical economic thought for many years until the rise of formal criticism in the 20th century from economic anthropologists and neo-classical economists. One of the most notable criticisms can be attributed to famed economist John Maynard Keynes. He, along with several other economists, argued that humans do not behave like the economic man. Instead, Keynes asserted that humans behave irrationally. He and his fellows proposed that the economic man is not a realistic model of human behavior because economic actors do not always act in their own self-interest and are not always fully informed when making economic decisions.
Although there have been many critics of the theory of homo economicus, the idea that economic actors behave in their own self-interest remains a fundamental basis of economic thought.