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What is Homo Economicus?

Homo Economicus, literally meaning the economic man, is a basic concept referring to the way that economic actors, people, make economic decisions. Homo Economicus describes all people as “being rational and broadly self-interested actors with the ability to make their own judgments and decisions toward a desired end.” Making rational decisions and acting self-interested, in this case, means making decisions that leave the actor better off than they originally were, regardless of others. Gaining the highest amount of utility also requires that the predetermined goals of an individual’s rational and self-interested choice will require the lowest amount of cost relative to the desired gain.

The term rational applied here means strictly rational to one’s well-being and does not intend to imply that the choice made is rational in the sense of a moral or socially acceptable standard. Many economists also apply the term rational only to decisions made that will knowingly produce higher utility in the short-run and not knowingly produce disutility in the long-run. Only very strict interpretations of the term perceive individuals to know exactly what will be the most rational decision in the long-run.


History of Homo Economicus:

The term Homo Economicus was “used for the first time in the late nineteenth century by critics of John Stuart Mill’s work on political economy.” Mill’s nineteenth century work describes the “Economic Man” without actually referring to the term:

"Political economy does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end."

Many argue, however, that the “Economic Man” as it is understood today actually came from the writing of Adam Smith in the eighteenth century:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." 

Although rational self-interest has always been applied to accumulation of wealth and personal gain, Homo Economicus has evolved from its original meaning. In recent times Homo Economicus “emerged as a human with an insatiable appetite for financial gain and wealth accumulation” with “GDP per capita becoming the ultimate measure of the quality of life for humans.”


Inherent Criticisms:

Although widely accepted and applied to nearly all economic decisions in past decades, many economists of the 21st century are not nearly as likely to accept the concept of Homo Economicus. Economists such as Veblen and Keynes have criticized this concept for having too much knowledge and information about the macroeconomic world and impacts of the future. 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.” Another criticism is that even if perfect information was possible, human beings are known to act irrationally. In an economically rational world, investors would never risk losing money for a chance to gain a large sum of money if there was a guarantee that a small portion could be gained otherwise. In this case the economic man would simply take the guaranteed smaller sum. The final powerful criticism of the practicality of Homo Economicus is that every individual actor has individual goals and motives that will influence his/her decision making. Many humans do act with others in mind, which goes against the theory, and will make economic decisions that may help out a friend or family member while perhaps risking an economic loss. This research has lead Professor of Economics in Edinburgh Gavin Kennedy to proclaim: “Homo economicus cannot be improved; it is just plain wrong as it pretends to model behaviour in an economy representative of the real world. It isn't. It models behaviour in an imaginary economy that does not exist.” With Homo Economicus being strongly doubted by many respected economists in recent years, there must be another method of studying why and how humans make their economic decisions.