2014 : WHAT SCIENTIFIC IDEA IS READY FOR RETIREMENT?

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Director, Center For Advanced Study in Behavioral Sciences, professor, Stanford University; Jere L. Bacharach Professor Emerita of International Studies, University of Washington
Homo Economicus

Homo economicus is an old idea and a wrong idea, deserving a burial of pomp and circumstance but a burial nonetheless. People can be individualistic and selfish, yes, and under some circumstances narrowly focused on economic wellbeing. But, even those most closely associated with the concept never fully believed it. Hobbes argued that people prefer to act according to the golden rule but that their circumstances often made it difficult. Without rule of law and in a world of theft and predation, people act with defensive selfishness. Adam Smith, whose invisible hand required individual pursuit of narrow interest, recognized that individuals have emotions, sentiments, and morals that influence their thinking. Even Milton Friedman was not sure if narrowly selfish individualism was a correct assumption about human behavior; he didn't care if the supposition was right or wrong but only cared if it was useful. It no longer is.

The theories and models derived from the assumption of homo economicus generally depend on a second, equally problematic assumption: full rationality. Related but distinct sets of scientific findings make suspect each piece of the pairing of narrowly selfish motivation with rational action. Philosophers, such as Nietzsche, and psychoanalytic theorists, such as Sigmund Freud, argued that people acted in a whole variety of ways that were explicable perhaps but were closer to animal instincts than calculative instrumentality. Herbert Simon and certainly Daniel Kahneman and Amos Tversky revealed the extent to which cognitive limitations undermine rational calculations.

Even if individuals can do no better than "satisfice," that wonderful Simon term, they might still be narrowly self-interested, albeit—because of cognitive limitations—ineffective in achieving their ends. This perspective, which is at the heart of homo economicus, must also be laid to rest. Darwin and those influenced by him long recognized that our species, like others, is altruistic at least in the narrow sense of acting to preserve one's gene pool by protecting one's young. Most people do much more than that. The overwhelming finding of experimental research confounds the presumption that, given the opportunity, individuals usually free ride. Indeed, most act according to norms of fairness and reciprocity. Many will make small sacrifices or forego larger returns, and some will even engage in costly action (up to a point) to "do the right thing." Anthropologists and biologists have long provided evidence of the human animal as a social animal. The understanding that individuals are in social networks and communities opens the door to more complex models of reciprocity and ethical obligation. Consequently, social scientists can now account for aggregate outcomes they otherwise could not: large-scale volunteering for the military in times of war, protest behavior, and contributions to public good provision.

The rejection of homo economicus does not mean a total absence of conditions under which narrow self-interest dominates. Experiments suggest very different socializations can produce quite distinct reasoning: economic graduate students are far more likely to free ride than other students. At least two sets of circumstances can induce individualistic selfishness and significantly narrow a person's community of fate, that is, those with whom one feels interdependent and to whom one feels an obligation to help. The first is extreme poverty and the second extreme competition. Those suffering hunger and deprivation tend to focus on meeting their needs. As the growing number of dystopian novels suggest, the result may be theft and murder in the interest of obtaining food, shelter, and security. The classic experiments with rats come to the same conclusions.

Extreme competition, at the least, narrows focus to the goal at hand. In some forms, however, striving to be king of the hill and sometimes literally to be king does provoke something akin to a Hobbesian world. Shakespeare, as he often does, captures the power of circumstance and ambition; his version of the War of the Roses is a testament to narrow self-interested instrumentality dressed in the rhetoric of serving the country. Or witness the recent revelations about business ethics (or, rather, lack of ethics).

That people are often—perhaps more often than not—motivated to act beyond narrow self-interest is fully compatible with the importance of material incentives in motivating behavior. We are all susceptible to rewards, and we all fear punishment. Ceteris paribus, we prefer the first and wish to avoid the second. However, ethics, morality, and the obligations of reciprocity can affect our decisions even when there is considerable money at stake or serious threats to wellbeing. Few are willing to sacrifice everything for a cause or principle, but most of us are willing to sacrifice something.

The reliance on homo economicus as the basis of human motivation has given rise to a grand body of theory and research over the past two hundred years. As an underlying assumption, it has generated some of the best work in economics. As a foil, it has generated findings about cognitive limitations, the role of social interactions, and ethically based motivations. The power of the concept of homo economicus was once great, but its power has now waned, to be succeeded by new and better paradigms and approaches grounded in more realistic and scientific understandings of the sources of human action.