The term Homo economicus, or economic man, is the portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally.
It assumes that agents always act in a way that maximize utility as a consumer and profit as a producer,[2] and are capable of arbitrarily complex deductions towards that end.
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.
[5]This comment is perfectly in line with the notion of Homo economicus and the idea, propounded by Smith in The Wealth of Nations and, in the 20th century, by the likes of Ayn Rand (in The Virtue of Selfishness, for example), that pursuing one's individual self-interest promotes social well-being.
In Book V, Chapter I, Smith argues, "The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur.
The early role of Homo Economicus within neoclassical theory was summarised to include a general objective of discovering laws and principles to accelerate further growth within the national economy and the welfare of ordinary citizens.
[7] In which Adam Smith explains that the actions of those that are rational and self-interested under homo economicus promotes the general good overall which was understood as the efficient allocation of material wealth.
[8] The term 'Homo economicus' was initially critiqued for its portrayal of the economic agent as a narrowly defined, money-making animal, a characterization heavily influenced by the works of Adam Smith and John Stuart Mill.
Authors from the English Historical School of Economics sought to demote this model from its broad classification under the 'genus homo', arguing that it insufficiently captured the complex ethical and behavioral dimensions of human decision-making.
[9] Economists in the late 19th century—such as Francis Edgeworth, William Stanley Jevons, Léon Walras, and Vilfredo Pareto—built mathematical models on these economic assumptions.
The term "economic man" then took on a more specific meaning: a person who acted rationally on complete knowledge out of self-interest and the desire for wealth.
Only naïve applications of the Homo economicus model assume that this hypothetical individual knows what is best for their long-term physical and mental health and can be relied upon to always make the right decision for themself.
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[3] traces it back to Pareto (1906)[11] 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).
[17] Economists Thorstein Veblen, John Maynard Keynes, Herbert A. Simon, and many of the Austrian School criticise Homo economicus as an actor with too great an understanding of macroeconomics and economic forecasting in his decision making.
Behavioral economists Richard Thaler and Daniel Kahneman have criticized the notion of economic agents possessing stable and well-defined preferences that they consistently act upon in a self-interested manner.
Kahneman also argued against the rational-agent model in which agents make decisions with all of the relevant context including weighing all possible future opportunities and risks.
Further findings of their experiments that opposed Homo Economicus had found that individuals will constantly adjust their choices according to changes in their income and market prices.
Economic anthropologists such as Marshall Sahlins,[19] Karl Polanyi,[20] Marcel Mauss[21] and Maurice Godelier[22] 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.
Another weakness is highlighted by economic sociologists, 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.
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 substantia nigra, the striatum and the nucleus accumbens (associated with the placebo effect), all associated with the building of social trust.
[28] 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.
Marxist theoretician Gramsci 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.