Posts tagged with: homo economicus

Blog author: eamyx
posted by on Tuesday, August 2, 2011

In a recent Reuters opinion column, Mark Thoma faults academic economists for their failure to predict the housing crash. He says their failure can be attributed to the disconnect between academia and economic forecasters. I don’t agree with Thoma, but I do think he gets it right when he says the failure of modern day economics,

May have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.

During the classical period, economics was closely linked to psychology. In the early 20th century, neoclassical economics veered from the study of psychology as economists sought to reshape the discipline as a natural science.

Modern neoclassical economics draws influence dating back to René Descartes. According to Dr. Robert Nelson’s review of Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlack, Cartesian thought encouraged a belief that mathematical equations are equivalent to religious truths. The economic man is seen as,

 ‘A mechanical construct that works on infallible mathematical principles, … and economists are [therefore] capable of explaining even his innermost motives’ through mathematical methods.

Philosophical implications suggest modern economics is essentially attempting to reduce individuals to numbers. Economic models that operate in a perfect abstract framework with absolute assumptions conflict with the unpredictable and sometimes irrational behavior of human nature. This may explain why data forecasting without a full picture of the human person is not sufficient in predicting major market failures like the housing crash.

Karen Ho takes an anthropological approach to the financial crisis in her 2008 book  Liquidated: An Ethnography of Wall Street. As an anthropology graduate from Princeton, Ho is hired to work at an investment bank and writes about the corporate culture on Wall Street prior to the housing collapse. Homogenous recruitment, constant downsizing, high risk/high reward job liquidity, short-sighted bonuses, and deception of shareholder value were among many behaviors she observed. Such irrational and risky behavior should have been a red flag for any economist, shedding light on a major incentive problem.

Though it can be argued that the separation between modern economics and behavioral economics is necessary for empirical data and analysis, some economists want to see the gap close. According to Sedlack, modern economics should deemphasize the role of mathematics. Math is only the tip of the ice berg; it is vital, but not sufficient in economics. Nelson quoted him saying,

‘Below the mathematics lie much more fundamental issues’ of institutions, culture, and basic belief — even of religion. These issues do not readily lend themselves to mathematical methods.

Some human desires simply cannot be fulfilled by economic objects. A price value cannot be placed on the community, family, knowledge of God and so on. It is impossible to commodify or quantify these desires into an economic model. Richard Neuhaus famously said,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The number one failure of modern economics is an understanding of the human person that is incomplete. Economists must draw on anthropology, sociology, psychology, philosophy, and theology to better understand what drives human behavior and decision making. Forecasters will never be able to predict the future the way they would like, but social studies coupled with empirical economic analysis may help economists better understand the why questions that numbers cannot explain.

Blog author: jballor
posted by on Friday, July 23, 2010

Courtesy Evangelical Outpost and the always-interesting 33 Things, here’s a video on the strangeness of the economics of incentives and punishments:



The lesson here is that people in real life, body and soul, are not simple rational economic actors who respond only to material realities.

We exist in the context of social webs and relationships. But we also have non-material faculties; consciences, free choice, creativity, speculative reason.

Homo economicus is useful as a partial model of human behavior, but it is not exhaustive, comprehensive, or reliably predictive. Why do economists try to universalize this model?

My theory is that it is in part a response to the post-Englightenment subversion of the unified field of learning. Theology was displaced, albeit briefly, as the queen of the sciences. Philosophy could not hold on, and was torn down by the clamoring crowd of other disciplines. Now each discipline seeks to place itself upon the throne, thus we get tyrannizing and universalizing claims from every academic discipline. Everyone tries to explain everything in the terms of their own discipline, and these explanations are therefore by necessity reductive.

For a bit more, see “Requiem for Homo Economicus,” from the Journal of Markets & Morality 10, no. 2 (Fall 2007): 321-38, in which Edward O’Boyle argues, “Burying homo economicus and substituting homo socioeconomicus brings the basic unit of economic analysis out of the individualism of the seventeenth and eighteenth centuries into the personalism of the twentieth century.”

To these models, we ought also add homo religiosus, all the while recognizing the each are models and therefore limited, partial, and provisional relative to the comprehensive picture of humanity in imago Dei.

Blog author: jballor
posted by on Wednesday, June 18, 2008

Shankar Vedantam on the problems of “social” governmental intervention, including increased moral hazard (HT: Arts and Letters Daily):

While it seems like common sense to pump money into an economy that is pulling the bedcovers over its head, the problem with most social interventions is that they target not robots and machines but human beings — who regularly respond to interventions in contrarian, paradoxical and unpredictable ways.

Too true. So much for homo economicus. I might also add that the unpredictability, or should I say spontaneity, of human reactions in all kinds of situations is pretty strong evidence for the reality of free choice and against mechanical determinism.