Homo Economicus [4]: Enlightened Self-Interest

homo economicus

The concept of “homo economicus” captures the belief that the rigorous pursuit of self-interest in a free market improves things for everyone. This belief powered Milton Friedman’s famous dictum that “the social responsibility of business is to increase profits,” and finds a philosophical ally in Ayn Rand’s “objectivism”:

“The core of Rand’s philosophy… is that unfettered self-interest is good and altruism is destructive. [The pursuit of self-interest], she believed, is the ultimate expression of human nature, the guiding principle by which one ought to live one’s life. In “Capitalism: The Unknown Ideal,” Rand put it this way:

‘Collectivism is the tribal premise of primordial savages who, unable to conceive of individual rights, believed that the tribe is a supreme, omnipotent ruler, that it owns the lives of its members and may sacrifice them whenever it pleases.’

“By this logic, religious and political controls that hinder individuals from pursuing self-interest should be removed.”

What Happens When You Believe in Ayn Rand and Modern Economic Theory, Evonomics (Feb. 17, 2016)

Thus Ayn Rand became the patron saint of American capitalism in its current iteration. This is from a 2017 Atlantic article:

“’I grew up reading Ayn Rand,’ … Paul Ryan has said, ‘and it taught me quite a bit about who I am and what my value systems are, and what my beliefs are.’ It was that fiction that allowed him and so many other higher-IQ Americans to see modern America as a dystopia in which selfishness is righteous and they are the last heroes. ‘I think a lot of people,’ Ryan said in 2009, ‘would observe that we are right now living in an Ayn Rand novel.’”

Critics point out that there is no such thing as a free market or objectively rational self-interest, arguing instead that the market is inescapably skewed toward policy-makers’  beliefs and values — i.e., their particular interpretations of what “self-interested” behavior looks like.[1] As a result, economic policy always comes laden with ethical and moral beliefs about “good” vs. “bad” outcomes, which the not-so-free market then dutifully delivers:

“Milton Friedman argued that competition between big businesses suffices to safeguard the public interest, but in practice it is almost always insufficient, especially where there is collusion among the players to safeguard their market dominance – and their political influence.

“Free-market economists have an unwarranted faith in the capacity of price adjustments to produce technological changes in production and patterns of consumer demand. Their theories imply that the price system has infinite capacity to shape sustainable outcomes.

“But if the self-interested market behaviours continue to seek an unchanged goal – more personal incomes with which to purchase more material goods – ultimately they cannot be fulfilled.

 “Ultimately, the short-term self-interested economic arrangements are not sustainable anyway. As the US economist Kenneth Boulding once said: “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist”.

“Economic inequalities also predictably widen where self-interested market behaviours dominate. Capital makes capital, while those without capital often remain consigned to poverty. Certainly, the very rich have become notably much wealthier during the last three decades while neoliberal ideologies and policies have been dominant. In the absence of strong unions and governments committed to some degree of egalitarian redistribution, the unequalising tendency is inexorable. The result is predictably unhappier societies that experience a higher incidence of social problems, as empirical research complied by Richard Wilkinson and Kate Pickett clearly demonstrates.

“Something has to give. An economic system that rewards amoral self-interest creates economic instability, fractures economic insecurity, fosters concentrations of economic power, exacerbates economic inequality and violates ecological sustainability. So much for the self-regulating market economy!

“There is currently much talk of ‘social responsibility’ in business and of ‘triple bottom line accounting’ that emphasises the use of social and environmental criteria, as well as a financial criterion, in assessing business performance… Indeed, businesses developing reputations for responsible behaviours may reap benefits in the form of worker and customer loyalty. But unless and until ethical behaviours become integral to how markets function – by directly affecting ‘shareholder value’, for example – it is hard to see the overall effect as much more than window dressing for ‘business as usual’.”

Oh, The Morality: Why Ethics Matters In Economics, The Conversation (in partnership with the University of Sydney) (March 22, 2012)

More on ethics and economics next time.

[1] For more on whether the market is truly “free,” see this article and this one. Or if you prefer, here’s a short video and here’s a TEDX talk.

Homo Economicus [2]

homo economicus

Despite its detractors, the concept of homo economicus is a mainstay of economic theory and policy-making because it has become a cultural myth, and cultural myths hold tight even if they perpetuate societal ill health. That’s is the perspective offered by London economist and Guardian columnist Peter Fleming in his book The Death of Homo Economicus: Work, Debt and the Myth of Endless Accumulation (2017). This is from the book blurb:

“In today’s workplaces we work harder and longer, labouring under the illusion that this will bring us more wealth. As this myth becomes increasingly preposterous, it’s time to understand why we believe in it, and where it came from.

“The Death of Homo Economicus explores the origin of this oppressive myth, in order to destroy it. The story begins with the creation of a fake persona labelled the ‘dollar-hunting man’, invented by economists Adam Smith and Friedrich Hayek. Today, this persona, driven by competition and ego, is used by politicians and managers to draw a veil over the terrible reality of work under capitalism.

“Creeping into all aspects of life, the desire to constantly compete and accumulate must be resisted if we are to create a better way of life for all.”

In this short book promo video, Prof. Fleming challenges the notion that humans are “a money-chasing animal” and that society as a whole prospers when dominated by “self-interested individualism.”  “The [homo economicus] ideal never really gained traction from the beginning.” he says, “because we don’t act as individual self-seeking beings, we live in a society and we live in communities.”

Author and entrepreneur Jeremy Lent agrees:

“Capitalism is based on the premise that the most desirable state of affairs is economic growth, which can be attained most effectively through free markets in which assets are privately owned. Based on this credo, the primary responsibility of government is to provide the infrastructure necessary for the free market to conduct its business with minimal constraints.

“Some important assumptions about human nature underlie these beliefs. Individuals are understood to be motivated primarily by financial self-interest. They are assumed to be rational in pursuit of this goal, and their “rationality” is believed to lead them to act competitively rather than cooperatively in the marketplace.

“Another crucial assumption holds that the aggregation of all these individuals competitively their own financial gain leads to the most beneficial outcome for society.

“These assumptions about human nature are not self-evident truths; however, the money-based system constructed by capitalism encourages and rewards these traits over other traditional, community-oriented values, creating a self-fulfilling prophecy about the nature of human behavior.”

The Patterning Instinct:  A Cultural History of Humanity’s Search for Meaning, Jeremy Lent (2017)

As The Guardian said in its review of The Death of Homo Economicus:

“‘Homo economicus’ is the totally made-up creature who is the proletarian hero of mid-20th-century economics: going about his daily life with unimpeachable rationality, efficiently calculating ways to maximise his self-interest.

“But people don’t actually live like that, as the behavioural economists Amos Tversky and Daniel Kahneman pointed out. It is a refuted model, yet its malign influence persists.”

“Malign” or not, competitive capitalism has become a cultural norm. Again from The Guardian’s book review:

“Our entire lives, [Fleming] argues, have been economified. The ruling narratives of work and commerce hypnotise us into thinking of our very selves as micro-businesses, so that it becomes ever harder to imagine life outside the paradigm of capital investment, productivity and profit.”

Free market champion Mises Institute agrees that economics would be better off if homo economicus went extinct.

“The problem … is that homo economicus is not actually necessary to understanding human behavior or how markets work. In fact, understanding of markets would be improved by not resorting to the homo economicus model at all… because it fails to provide a useful or accurate metric or model for human behavior.

“Thus, Ludwig von Mises noted that the homo economicus model described behavior for only one small type of human action, and failed to account for the behavior of consumers:

‘The much talked about homo economicus of the classical theory is the personification of the principles of the businessman. The businessman wants to conduct every business with the highest possible profit: he wants to buy as cheaply as possible and sell as dearly as possible. By means of diligence and attention to business he strives to eliminate all sources of error so that the results of his action are not prejudiced by ignorance, neglectfulness, mistakes, and the like…

‘The classical scheme is not at all applicable to consumption or the consumer. It could in no way comprehend the act of consumption or the consumer’s expenditure of money. The principle of buying on the cheapest market comes into question here only in so far as the choice is between several possibilities, otherwise equal, of purchasing goods; but it cannot be understood, from this point of view, why someone buys the better suit even though the cheaper one has the same “objective” usefulness, or why more is generally spent than is necessary for the minimum — taken in the strictest sense of the term — necessary for bare physical subsistence.’

“If an economics model tells us very little about consumer behavior, then its value is limited, to say the least.”

The Homo Economicus Straw Man, Mises Institute (Oct. 26, 2016).[i]

Curiously, von Mises’ argument suggests why homo economicus persists in capitalism theory:  it may not describe consumer behavior but it does describe his prototypical “businessman,” who is also his prototypical capitalist.

Continued next time.

[i]  The image above is from this article.