Homo Economicus: Rational Man or Reluctant Consumer?

Economics, as a social science, is a study of human activity. It differs in this way from the natural sciences, though shares their search for regularity and predictability. Underlying this search are beliefs about human nature: economists since the time of Hobbes, Malthus, and Smith have debated whether we are self-interested and rational or naturally cooperative, and how to use this understanding to direct economic behaviour towards desirable ends. The belief in economic self-interest can be judged to have won this debate and is foundational to economic theory and policy. As such, its accuracy has great importance for the way we live our lives. In this article, we examine the impact of this belief, and whether it is fact or self-fulfilling prophecy.

The history of homo economicus

The term homo economicus (‘economic man’) describes the rationality of man in relation to his economic decisions. If human beings are a certain way, it was and is thought, then laws might be discovered as the basis of a system that produces greater wealth and prosperity for all. Perfect rationality would require people always to act in ways that maximise ‘utility’, or benefit, when faced with economic decisions such as the purchase of a good or service [1]. The term utility has its origins in the nineteenth century British moral philosophy of ‘utilitarianism’, which entails producing the best outcome for the greatest number of people.

Economic man was born in the minds of men such as Niccolo Machiavelli, who believed our first impulse is to act in our self-interest. His view was shared by Enlightenment philosopher Thomas Hobbes, who wrote that our primary good is self-preservation; in his Leviathan, he outlined the need for a powerful ruler to constrain our tendency towards division. Adam Smith argued that the profit motive is central to economic activity in his Wealth of Nations:

“…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…he intends only his own gain…By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”.

These were highly influential arguments. John Stuart Mill explicitly narrowed the scope of man in his work on political economy to one who desires wealth and acts in ways he believes most efficient to acquire it. Other philosophers believed that commerce and trade brought people together despite their natures. The view that people are inherently self-interested and primarily seek their own advantage did, however, represent a break from the those of Aristotle and Thomas Aquinas, who tied our individual interest - or good - to a common good, which we seek together in communities. For them, people are essentially social, both by nature and necessity. Some contemporary writers were also critical of the individualistic characterisation of man. One of the these was John Ruskin, a man of many talents once described as “an artist, critic and social reformer” [2]. In his essay Unto This Last, he wrote:

"The social affections," says the economist, "are accidental and disturbing elements in human nature; but avarice and the desire of progress are constant elements. Let us eliminate the inconstants, and, considering the human being merely as a covetous machine, examine by what laws of labour, purchase, and sale, the greatest accumulative result in wealth is obtainable. Those laws once determined, it will be for each individual afterwards to introduce as much of the disturbing affectionate element as he chooses…”

After this time, views on homo economicus evolved, though his nature remained somewhat primitive; that is, he still thinks primarily of himself. Modern ideas about decision-making tend to incorporate more sophisticated and nuanced psychological analyses on decision-making, producing ideas such as ‘bounded rationality’ and ‘satisficing’.

Utility in modern economic theory

Ideas of utility, and particularly the introduction of marginal utility [3] in the 1870s, is thought by some to mark the end of the classical economic era. In modern economic theory, economic utility is a measure of personal satisfaction, or the benefit a person gains from a decision as a producer or consumer. For example, a consumer might be expected to choose an option which gives him the greatest amount of a product, while a producer will seek to maximise his profit. Still, the motivating factor in achieving such utility is individual self-interest, which drives each person, usually unintentionally, to contribute to the primary goals of an economy: to maximise consumption and production [4]. By working for their own interests, people create wealth for society [5]. 

But people have access to limited information and are not always able to make optimal economic decisions. Governments recognise this and operate public policy ‘levers’ such as fiscal and monetary policy [6]  - the ‘invisible hands’ of authorities. As economies become more complex, choices become simpler; to acquire sufficient resources and survive in a modern society, people must make predictable choices regarding employment, spending, and debt. The need for people to make rational decisions helps economists transform us into a shape the economy (or greater good) finds useful – in a world of round holes, there are fewer places for square pegs. We must embrace, and become, homo economicus.

Rational man or reluctant consumer?

Under pressure from the economic elements, man becomes a sharpened tool. This is clearly of great material benefit, but drawbacks are increasingly evident. Economic life has come to eclipse all other aspects; the effort, or labour, required to achieve the goals of maximisation indefinitely is endless. Economic policy is now the primary means of organising society and it is sometimes hard to distinguish where economic life ends and civic and social life begin. We are disconnected from each other and any unifying purpose. We go where the work is and become transient; without roots or self-sufficiency, populations shift like sand as they follow the money. Our living spaces are functional and utilitarian, barren but often crowded. We are driven towards ends that are often undesirable and undermine the purpose of economic activity: to live well. The belief that human self-interest (or self-preservation) is our primary drive is justified, to an extent, but is not the full picture.

People often make decisions that do not lead to optimal economic outcomes. In reality, an entirely self-interested person would find it hard to exist in a community that expects reciprocation and consideration for the needs of others. A community of people who acted in such a way most of the time would surely break down in the ways Hobbes described [7]. Too much self-interest might motivate cynicism towards their fellow citizen. It might break down or inhibit the formation of necessary bonds. It might undermine the ability of ‘economic agents’ to see each other as members of communities and reduce the time we spend maintaining those communities. It might minimise the role of ethical considerations as part of economic decisions in favour of the primary, or ultimate, goal of material progress (which now approximates happiness as the ‘good’ of utilitarian ethics). A life preoccupied, and largely occupied, with stacking cash or managing debt and stocks while working for the benefit of those we will never meet is certainly an improvement on an existence that Hobbes described as ‘nasty, brutish, and short’. But can we do better? If we took a different view of ourselves as cooperative beings who live in defined communities (see this article), would this improve general happiness (the ‘good’ defined in utilitarianism)? Are there ways to encourage and increase purposeful collaboration at a local level? Answering these and similar questions might require the next Adam Smith to come along, but until then we can reflect on our place as rational, or somewhat reluctant, consumers.

The goal of maximising economic utility as homo economicus is built into the modern Western economic model. While the complexity of decision-making is better understood than in the classical economic era, these ideas still generally assume self-interest, which is arguably an incomplete analysis of who we are. The decisions we make are constrained within the bounds of the economic system, and there is a tension between collective and individual economic interests, particularly regarding freedom, autonomy, and community. Any re-think of how human nature and the economy work together would require us to step outside of utilitarian assumptions embedded in the economic system to re-examine why we do things, and for whose benefit.

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[1] This is not the reality, though need not be seen as a defect in our nature. In this context, ‘rationality’ only describes human behaviour under certain conditions and with access to limited information.

[2] Dunn, Daisy. BBC. Was Ruskin the most important man of the last 200 years? 

[3] The additional benefit gained from an extra unit of consumption. New ideas about utility, or how useful something is, affected the measurement of economic value.

[4] As measured by Gross Domestic Product (GDP), for example.

[5] It is important that the goal of maximisation is shared by individuals and the economic system. Individual and overall economic outcomes are taken to be, or mostly be, aligned. Were this not true, or not true in many cases, some public policy might go against people’s interests by creating pressures to act in certain ways.

[6] Fiscal policy involves government spending and taxation, which can be used to stimulate or reduce demand and economic growth (to provide individuals more disposable income, for example). Monetary policy can involve using interest rates to affect demand, inflation, and employment.

[7] It is perhaps not incidental to note that Hobbes wrote during the time of the English Civil War.