"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Wednesday, April 6, 2016

Homo Economicus–How Economic Self-Interest Determines All Decisions

In economics, homo economicus, or economic man, is the concept in many economic theories portraying humans as consistently rational and narrowly self-interested agents who usually pursue their subjectively-defined ends optimally. Generally, homo economicus attempts to maximize utility as a consumer and profit as a producer (Wikipedia)
Originating in classical economics, the idea is based in part on an understanding of human nature (always self-interested); in part on philosophical conclusions about equally innate rationality; and finally on a historical review of trade, barter, and commercial activity from the earliest civilization of man.

The theory of Economic Man has many detractors.  The most insistent critics are behavioral economists who insist that man is anything but rational:
Behavioral economics, along with the related sub-field, behavioral finance, studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. Behavioral economics is primarily concerned with the bounds of rationality of economic agents (Wikipedia)
The two theories are not inconsistent.  Consumers will always base their decisions on what they perceive as optimization; but will fail to completely and rationally analyze the costs and benefits of their choices.   Impulse buying is a well-known phenomenon, and stores are configured to encourage it.  Advertising is based on ascribed not real value.  A car it not simply a vehicle but a symbol of sexual prowess and appeal, social status, taste, and wealth.

It is only within the narrow sphere of commercial activity that such muddle occurs. In every other sphere of human activity the principles of supply demand and cost-benefit apply.

Until relatively recently marriages were concluded on the basis of comparative wealth and privilege.  Jane Austen’s Pride and Prejudice is perhaps the best example of the economic calculation of marriage.  Mr. and Mrs. Bennet have five daughters to marry, and the novel chronicles in detail the careful, meticulous assessment of the relative worth of prospective husbands and the compromises that had to be be made to secure the best economic and financial match.  Love interests always made the selection process difficult, but in the end practical considerations usually prevailed.  Charlotte Lucas, a friend of the Bennet family agrees to marry the clergyman Collins even thought Jane and Elizabeth have rejected him out of hand as a clueless buffoon.  

                         www.talklikejaneausten.com

Charlotte explains her choice to Jane in economic terms.  She realizes that she is without wealth, beauty, or charm; and as she gets older her chances of marriage to anyone diminish rapidly.  A match with the soon-to-be wealthy Collins is ideal and inevitable.

Love marriages are now the norm, but a recognition of the economic nature of the alliance is only deferred. While men and women may marry more subjectively, the pre-nuptial contracts concluded as a condition of union are anything but romantic.  Both parties know that their partnership has been based on flimsy, idealistic premises; and while they hope that the romance will continue, they rationally know that it might not. 

                        www.fellheimerfamilylaw.com

Aside from the formal and legal marriage contracts, most couples quickly settle in to an informal negotiation of of rights, authority, and power.  Household tasks, because they have been so conditioned on sexual roles, must be negotiated within a new context.  Men who do not pull their own weight according to women’s valuation risk alienation and divorce by their independent wives.  Men carefully calculate the risks and benefits of extramarital affairs based on the likelihood of discovery and its probable results.  A man who is more or less the economic equal of his wife but who has gained economic advantage through marriage may be less willing to stray than a man secure in his own wealth.

                                www.alsiasi.com

Decisions by both husbands and wives are always taken within a cost-benefit framework.  Shifts of power and authority which represent control of the household are even more fundamental.  A man or woman who gains and retains ultimate authority within a marriage has more freedom to maximize his or her own individual value outside it.

Children, for all their innocence and beauty, quickly become assets to be negotiated between husband and wife.  Decisions concerning their upbringing, education, and career paths – i.e. potentially adding to the value of the family – are not incidental but critical; and marriages either consolidate or disassemble because of them.  Unhappy marriages often survive longer than they ever should because of ‘the children’ and the ascribed value of successful offspring for the parents.  Children are bargaining chips in divorce courts.

Economic self-interest is not restricted to family affairs.  Most non-professional social choices are made on its basis.   Local community activism is always based on individual self-interest.   Lifelong liberals will veto proposed low-inc0me housing developments in their neighborhoods because of an inevitable erosion of home values.  Parents volunteer at their local public schools to supplement often insufficient resources for the more able and talented. 

Environmentalists may claim to want to save the planet, but also see that rapid development of formerly open or wooded spaces for homes and industry increase traffic volume, pollution, and pressure on traditional values based on simplicity and order.   In addition their fight for environmental rights provides them with a certain progressive status and cachet and raises their social and often market value.

                              www.urbancusp.com

Feminists want opportunity for their daughters.  Gay men and women want marriage not to sanctify their love but for the civil, legal, and fiscal rights of straight Americans.

Personal decisions need not be based on classical theory to be economic in nature.  Image, status, and respect cannot be measured in dollars and cents; but are measures of individual worth nonetheless.  A woman who demands authority within a marriage does not do so only to control the family’s purse; but as a statement of her feminism.  A man who does wishes to retain his own idea of masculinity and male power.

In other words, whether decisions are based on money or perceived worth, they both represent a consistently self-interested concern for value.  Office politics and the scrambling for advancement are rarely about higher salaries but the status that rank and privilege confers.   Directors of community service organizations make their way to the top not for the money and the perks but for status, image, and influence – all currency as commonly traded as equities or real estate.

All economics is based on assumptions about human nature and behavior.  Marx’s understanding of man’s fundamental drives conditioned his philosophy of communism:
Man is directly a natural being. As a natural being and as a living natural being he is on the one hand endowed with natural powers, vital powers – he is an active natural being. These forces exist in him as tendencies and abilities – as instincts. On the other hand, as a natural, corporeal, sensuous objective being he is a suffering, conditioned and limited creature, like animals and plants. That is to say, the objects of his instincts exist outside him, as objects independent of him; yet these objects are objects that he needs – essential objects, indispensable to the manifestation and confirmation of his essential powers (1844 Manuscripts)

                       www.fr.wikipedia.org
Classical economists believe in an ineluctable, innate, and permanent human nature – aggressive, self-serving, territorial, and protective – and that these drives will always be behind man’s economic decisions or valuations of being or events.

Between the two extremes there are rationalists, behaviorists, idealists, and every other combination and permutation of economic theorists.  Yet all tend to agree on one thing.  Regardless of one’s conception of human nature and whether it is hardwired or environmentally determined, man and the society he has constructed operate according to calculated valuation and economic principles.  Whether subjective or rational, personal decisions always hinge on the degree to which they will enhance either actual economic value or ascribed value.


Man is an economic animal.  Always has been and always will be.

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