Peter Fleming — Is Homo Economicus Dead?

Peter Fleming tells what his book, The Death of Homo Economicus, is about.

Economic Sociology and Political Economy

Is Homo Economicus Dead?

Peter Fleming | Professor of Business and Society at Cass Business School, City, University of London

Brian Davey — Mismodelling human beings – “rational economic men” in love, politics and everyday life

This chapter explores the assumptions about human nature on which mainstream economics is based. The description of “rational economic man” ignores most psychological and psychotherapy understandings of people. — Brian Davey, Credo: Economic beliefs in a world in crisis, Chapter 9

Key to the conceptual confidence trick are assumptions about what people in general are like. It is all based on an implicit modelling of human beings. Certain types of behaviour (the type that allows economists to model people and markets) are called “rational”. Now, you might think that this description of people is meant by economists to be applicable only to economic and market activities. Certainly this was the point of view of one of the founders of the famous Chicago school of economics, Frank Knight. Although committed to the alleged virtues of the market, Knight was not naive about how far you could take economic analysis. In his book Risk, Uncertainty and Profit he concluded that economics only applied to the satisfaction of wants, and that this business of satisfying wants by no means accounted for all of human activity. Indeed Knight questioned how far one could go with a “scienti c treatment” of human activity and wrote of his own views:

In his views on this subject the writer is very much an irrationalist. In his view the whole interpretation of life as activity directed towards securing anything considered as really wanted, is highly artificial and unreal. (Backhouse, 2002, p. 204)

Some contemporary economists of the Chicago school don’t see it this way. If people are calculating their individual self interest in their economic dealings why should one assume that they do not do the same thing in their political, their social and their interpersonal dealings? Should we not also assume that government ocials are calculating their interests too? At the very least, why should contact between business and government not lead to a cosy relationship, particularly if people can leave government posts and get lucrative jobs with industry? What about bribes and kickbacks from business for special favours? 

As I argued earlier, we can take the idea from Anaïs Nin that we do not see things as they are – we see things as we are. There is likely to be a loop in which a theory which describes how people are assumed to be, when powerfully propagated in textbooks as “social science”, will have an influence on how people behave. With economics we have a theory which argues that if people just look after their own interest that’s OK because “an invisible hand” described by wizard intellectuals delivers an approximation to an optimal allocation of resources. Under the influence of a view like this, concern about what is in a wider interest is not likely to blossom. It is unlikely to figure as a motivation or concern. As individualists people will look no further than themselves. They do not need to look further than themselves because the “invisible hand” will do the rest.

It is quite logical to believe that if people are actually like this then their attitude to the community and to the state will be framed in the same terms. Such people, customers of the state, rather than citizens and members of communities, will then have an interest in getting the best deal from the state to pursue their own individual agendas.…

This is an interesting post and the book is a free download.

Frank Knight assumed that utility maximization applied only to economic behavior, while Gary Becker extended that assumption to human behavior in general. This assumption that humans act in their self-interest to gain maximum satisfaction "naturally" or "by nature" rests on the assumption of methodological individualism, which in turn presumes an assumption of ontological individualism.

Extreme individualism contradicts the longstanding assumption that humans are social animals dating at least to Aristotle's Politics.* The assumption of sociality that has greater biological and psychological evidence than the assumption that humans are chiefly individualistic in interests, motivation, decision making and behavior, and act independently of other factors and influences.

The Western intellectual tradition has viewed "rationality" as the distinguishing characteristic of humanity and since its inception in ancient Greece, the Western intellectual tradition has also viewed rationality as moral and pro-social.

Radical (Jacobin) and reactionary (liberal) individualism are innovations that developed in reaction to overbearing government as a residual of the feudalism system that was an obstacle to rising capitalism. This was also a reaction of the Protestant Reformation to the Church's dogmatism and monopoly on knowledge asa means of social control. While these forms of individualism are "rational" in terms of the historical dialectic, given conditions prevailing at the beginning of the modern period, they are neither intrinsic to humanity as indicative of "human nature," nor naturalistic in terms of the course of human development and history.

Emphasis on individualism ignores the broad and deep social and economic influence of culture and institutions, for instance. Conventional economics excludes institutionalism as heterodox, for example, and ignores economic sociology.

Radical and reactionary individualism are pernicious assumptions both socially and also personally, for they are separative. Rather than resulting in spontaneous natural order, pursuit of self-interest primarily leads to egotism and social dysfunction. Extreme liberalism is opposed by both traditionalism and socialism for this reason. Freedom without responsibility confuses liberty with license.

Credo
Mismodelling human beings – “rational economic men” in love, politics and everyday life

Brian Davey

* From these things therefore it is clear that the city-state is a natural growth, and that man is by nature a political animal, and a man that is by nature and not merely by fortune citiless is either low in the scale of humanity or above it (like the “ clanless, lawless, hearthless” man reviled by Homer,1 for one by nature unsocial is also ‘a lover of war’） inasmuch as he is solitary, like an isolated piece at draughts. And why man is a political animal in a greater measure than any bee or any gregarious animal is clear. For nature, as we declare, does nothing without purpose; and man alone of the animals possesses speech. The mere voice, it is true, can indicate pain and pleasure, and therefore is possessed by the other animals as well （for their nature has been developed so far as to have sensations of what is painful and pleasant and to indicate those sensations to one another）, but speech is designed to indicate the advantageous and the harmful, and therefore also the right and the wrong; for it is the special property of man in distinction from the other animals that he alone has perception of good and bad and right and wrong and the other moral qualities, and it is partnership in these things that makes a household and a city-state.

David Sloan Wilson — The Death of the Invisible Hand: Why the Narrow Pursuit of Self Interest Always Fails

Good read. I recommend reading the whole thing. It is not long. It relates to recent discussion about "Darwinism" in the comment.

Evonomics
The Death of the Invisible Hand: Why the Narrow Pursuit of Self Interest Always Fails
David Sloan Wilson | SUNY Distinguished Professor of Biology and Anthropology at Binghamton University and Arne Næss Chair in Global Justice and the Environment at the University of Oslo

Alex Tabarrok — What Was Gary Becker’s Biggest Mistake?

Gary Becker on rational choice theory applied to crime and punishment.

Marginal Revolution
What Was Gary Becker’s Biggest Mistake?
Alex Tabarrok | Bartley J. Madden Chair in Economics at the Mercatus Center and am a professor of economics at George Mason University. I am also a research fellow with the Mercatus Center

See also

Publisher's blurb:

It is widely believed today that the free market is the best mechanism ever invented to efficiently allocate resources in society. Just as fundamental as faith in the free market is the belief that government has a legitimate and competent role in policing and the punishment arena. This curious incendiary combination of free market efficiency and the Big Brother state has become seemingly obvious, but it hinges on the illusion of a supposedly natural order in the economic realm. The Illusion of Free Markets argues that our faith in “free markets” has severely distorted American politics and punishment practices.

Bernard Harcourt traces the birth of the idea of natural order to eighteenth-century economic thought and reveals its gradual evolution through the Chicago School of economics and ultimately into today’s myth of the free market. The modern category of “liberty” emerged in reaction to an earlier, integrated vision of punishment and public economy, known in the eighteenth century as “police.” This development shaped the dominant belief today that competitive markets are inherently efficient and should be sharply demarcated from a government-run penal sphere.

This modern vision rests on a simple but devastating illusion. Superimposing the political categories of “freedom” or “discipline” on forms of market organization has the unfortunate effect of obscuring rather than enlightening. It obscures by making both the free market and the prison system seem natural and necessary. In the process, it facilitated the birth of the penitentiary system in the nineteenth century and its ultimate culmination into mass incarceration today.

The Illusion of Free Markets: Punishment and the Myth of Natural Order
Bernard E. Harcourt

Alexander Douglas — Individuals don’t have preferences

This is just a vague stab at a germ of an idea. It’s what I hope to work on in the future by looking at the history and philosophy of political economy. It’s not properly formed at all; I’m just getting the idea out there to be discussed by all the smart people who read my blog and have offered so much helpful advice in the past.

The basic claim I want to make is that the theory of individual preferences that lies at the basis of economic analysis, public choice theory, and other related social sciences, is wrong. Individuals don’t have preferences.…

Origin of Specious
Individuals don’t have preferences
Alexander Douglas | Lecturer in Philosophy at Heythrop College, London

Yanis Varoufakis — How Do the Economic Elites Get the Idea That They ‘Deserve’ More? Lessons from Game Theory

The ‘haves’ of the world are always convinced that they deserve their wealth. That their gargantuan income reflects their ingenuity, ‘human capital’, the risks they (or their parents) took, their work ethic, their acumen, their application, their good luck even. The economists (especially members of the so-called Chicago School. e.g. Gary Becker) aid and abet the self-serving beliefs of the powerful by arguing that arbitrary discrimination in the distribution of wealth and social roles cannot survive for long the pressures of competition (i.e. that, sooner or later, people will be rewarded in proportion to their contribution to society). Most of the rest of us suspect that this is plainly false. That the distribution of power and wealth can be, and usually is, highly arbitrary and independent of ‘marginal productivity’, ‘risk taking’ or, indeed, any personal characteristic of those who rise to the top. In this post I present a body of experimental work that argues the latter point: Arbitrary distributions of roles and wealth are not only sustainable in competitive environments but, indeed, they are unavoidable until and unless there are political interventions to keep them in check.…

Evonomics
How Do the Economic Elites Get the Idea That They ‘Deserve’ More? Lessons from Game Theory
Yanis Varoufakis

Peter Radford — Coase and Reality

Another screed on why conventional economics is unrealistic from Peter Redford, this one based on Ronald Coase.

In his introduction to a collection of his own work, Ronald Coase tells us:

‘Becker points out that: “what most distinguishes economics as a discipline from other disciplines in the social sciences is not its subject matter but its approach”’.

He then goes on:

‘One result of this divorce of the theory from its subject matter has been that the entities whose decisions economists are engaged in analyzing lack any substance. The consumer is not a human being but a consistent set of preferences. The firm, to an economist, as Slater has said, “is effectively defined as a cost curve and a demand curve, and the theory is simply the logic of optimal pricing and input combination”. Exchange takes place without any specification of its institutional setting. We have consumers without humanity, firms without organization, and even exchange without markets.’ 

All true, too true.

A philosopher would say that the chief difference between economics and the other social science is the level of abstraction. Economics is so abstract that it is difficult to connect with reality through actual behavior, in spite of the demand of conventional economics for "microfoundations" based on methodological individualism as a foundational assumption. 

In conventional economics, the individual, either "representative agent" or representative firm," is an imaginary construct rather than an observable. When agents and firms are observed, they do not match the characteristics of the methodological abstractions that represent them in conventional economic models. There is no homo economicus to be found, only homo socialis. Homo Socialis is the subject of study of the social sciences. 

The result of economists pursuing the "trail"of a non-existent homo economicus is something that resembles metaphysics more closely than physics, which is the opposite of what conventional economists are aiming for. The result is dogmatism rather than science.

Or maybe it is just snark hunting.

The Radford Free Press
Coase and Reality
Peter Radford

Robert Paul Wolff — Human Capital

Enter Gary Becker, who resurrected the concept of "human capital" to take account not of the worker's body or her food and clothing but rather to incorporate into Economic Theory the important fact that in a modern capitalist economy, some categories of workers regularly earn wages significantly higher than the standard pay for semi-skilled machine operatives, as a consequence of their educational credentials and the skills supposedly thereby represented. These workers, it is suggested, have invested in themselves by holding themselves off the labor market while they acquire further education, often at considerable expense, thereby accumulating "human capital." . They are thus like business owners who use a portion of their profits [or take loans] to purchase more sophisticated machinery, the cost of which, amortized over the life of the machines, is a good deal less than the market value of the additional product churned out by the improved capital goods. 

This modern version of the old notion of human capital allows economists to blame the low wages of unskilled workers on their own improvident failure to invest rather than consume, an interpretation of poverty that is quite comforting to those sitting atop piles of accumulated capital. 

But the analytical concept of human capital has other interesting uses in our attempts to understand modern capitalism, which exhibits a segmented and highly pyramidal wage structure. It can, for example, be deployed to make sense of the notion of relative exploitation. High wage workers can be understood as both exploited by their employers and exploiting lower wage workers, a construal that seems to comport with our intuitive sense that corporate executives, lawyers, professors, and such like high wage employees occupy a social position more akin to the owners of capital than to hourly wage earners at the bottom of the income pyramid.

The Philosopher's Stone

Human Capital

Robert Paul Wolff | American political philosopher[ and professor emeritus at the University of Massachusetts Amherst

Matt Bruenig — The Rise of New Capitals

In his 1776 book Wealth of Nations, Adam Smith provided the classical definition of capital:

When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours by his labour to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries. 

But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it; reserving only so much for his immediate consumption as may maintain him till this revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which, he expects, is to afford him this revenue, is called his capital

Under this classical definition, capital refers to surplus wealth employed to provide non-labor income to its owner. It is from this definition, which was repeated for centuries, that we get such political-economic dichotomies as capital versus labor, capital's share versus labor's share, and earned income (wages, salaries, farm income, self-employment income) versus unearned income (rents, dividends, interest, capital gains).…
In the last few decades, this centuries-old idea of "capital" has been stretched to the point of unrecognizability by the rapid proliferation of things being newly branded with the word capital. We have, of course, the heavy hitters among newly designated capitals: human, social, and cultural,…organizational, institutional, … intellectual, … gender capital.… 

I am not going to argue that these things aren't really capital because capital can mean whatever you want it to mean. But it's clear these things are not capital in the sense that Smith, Marx, and basically everyone prior to 1950 used the word (and the way Piketty used it). Whereas old capital referred, basically, to wealth that provided its owners passive (non-labor) income, these new capitals, taken as a whole, don't coherently describe anything more than things that provide economic advantages.… 

…one of the problems with the late 20th century academic fad of calling everything capital is that it can and does generate some serious confusion via category errors.…
…the phrase "human capital" literally swallows the entire capital versus labor distinction. 

When slaves existed, you really did have "human capital" in the old sense of assets that provided passive income to their owners. But that's not what "human capital" in the Gary Becker sense refers to. In the Gary Becker sense, "human capital" is essentially just the present value of one's future labor income. And since labor's share of the national income is greater than 50%, capitalizing labor income into the present and calling it "human capital" renders the conclusion that most capital is "human capital."…

And this is the point of the exercise — to render "capital" ambiguous if not meaningless as an economic term by making it synonymous with economic advantage. Similarly, rent is conflated with earned income.

Demos
The Rise of New Capitals

Matt Bruenig

Bill Black — Gary Becker’s Imperialistic Blunders about Crime

This is the fourth installment of my series of articles about the absurdity of the Swedish Central Bank’s selection of Gary Becker for its Prize in 1992 on the basis of his embarrassing imperialistic forays into other disciplines.  One of the forays the Swedish Central Bank cited was Becker’s work on crime.  Becker was a terrible criminologist, just as he embarrassed himself in his related work on families, “human capital,” and discrimination.  He may have done the most damage in the field of criminology because he, and his disciples, influenced harmful policy changes.  As I have explained in earlier articles in this series, parents were far smarter than Swedish Central Bankers.  American parents ignored his advice that it was “optimal” not to educate girls.  Conservative politicians involved in setting our policies about crime, sadly, loved Becker’s ideas.

New Economic Perspectives
Gary Becker’s Imperialistic Blunders about Crime
William K. Black | Associate Professor of Economics and Law, UMKC

Bill Black — Gary Becker’s Nobel Prize for Getting It all Wrong: The Family

George Stigler celebrated Gary Becker as theoclassical economics’ schwerpunkt that led their blitzkrieg assault on other social sciences. Stigler proudly called economics the “Imperial” discipline. The idea that imperialism was a desirable trait is a typical example of Stigler’s blindness to history and human suffering. Stigler famously proclaimed that economics alone was actually a social “science” because only it had a theory of human motivation (maximizing self-interest)....

In this five part series I discuss these four areas and Becker’s role with regard to financial crises. Stigler was incorrect about other social sciences lacking a theory of human motivation or ignoring rationality and incentives. The series will become part of the book that I am co-authoring with Wesley Marshall on economists and economics that studies the manifold failures of recipients of the Sveriges Riksbank Prize. Theoclassical economics’ reductionist dogma of human motivation is one of its great weaknesses of these Prize winners. One of the ironies that I will develop in this series of articles about Becker’s embarrassing forays into other disciplines is that he abandons the dogma that all behavior is self-interested in his work on the family, uses the dogma in the fields of crime and addiction where it makes particularly poor sense and produces a series of errors, and inadvertently demonstrates the circularity of the dogma in his work on discrimination and on “rational addiction.”

New Economic Perspectives
Gary Becker’s Nobel Prize for Getting It all Wrong: The Family
William K. Black | Associate Professor of Economics and Law, UMKC

Theoclassical economics can simultaneously shrink the “pie” and in the infamous words of Citicorp’s ode to “plutonomy”:

“In a plutonomy there … are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the ‘non-rich’, the multitudinous many, but only accounting for surprisingly small bites of the national pie.”

Becker never evinced the slightest understanding of how discrimination systematically denies its victims the ability to make “the most of life.”

Bill does an excellent job of showing how Becker was both an intellectual fool and an ideological tool, not to mention being emotionally impoverished and morally deviant*. So much for his "rationality." And as Bill adds, "I need to emphasize that I am not making any of this up." Summary, "All of this is incoherent and bizarre."

On the Nobel Sveriges Riksbank Prize: "Economics is the only discipline in which one can achieve top honors for being proven disastrously wrong and having relied on obvious logical and theoretical flaws and abundant evidence."

*Confounding morality with efficiency is deviant. It is tantamount to claiming that morality is amorality. But such is the logic of maximizing self-interest "rationally."
 

David F. Ruccio — Imperialism, the highest stage of neoclassical economics

The basic idea (as presented on Wikipedia, by Edward P. Lazear [pdf], and in this interview with Becker himself) is that economics imperialism refers to an “economic analysis of seemingly non-economic aspects of life,” such as crime, law, the family, racial discrimination, tastes, religion, and war.*

Actually, that’s wrong. Economics imperialism is not the economic analysis of supposedly noneconomic behaviors and institutions; it’s the extension of neoclassical economics to those domains. Economics imperialism is, in this sense, the highest stage of neoclassical economics.

There are lots of different ways of making sense of the economic dimensions of our individual and social lives. What Becker and his followers set out to do was to analyze various aspects of individual decisionmaking and social institutions through the lens of neoclassical theory. This has meant reducing those decisions and institutions to individual, rational, self-interested calculations of costs and benefits, under conditions of scarcity, such as to arrive at efficient, equilibrium solutions.

Occasional Links & Commentary
Imperialism, the highest stage of neoclassical economics
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

This relates directly to C. P. Snow's critique of modernism in The Two Cultures, the two cultures being numerate and literate, the former emphasizing quantity and the later quality. Snow's point was that Western education had over-incentivized literacy over numeracy to the degree that educated people, many considered learned, had little grasp of science. On the other hand, a similar argument can be mounted from the other side, arguing for many of the issues of the day resulting from an overemphasis of quantity over quality.

This is the a fundamental area of contention between economic liberalism and social liberalism. neoclassical economics is based on economics liberalism. Conversely, much heterodox economics is based on social liberalism. The political theory associated with neoclassical economics is neoliberalism. (Austrian economics can be considered a subset of neoclassical economics and neoliberalism.) The aim is a market society in which outcomes are assumed to be the result of the play of natural forces, hence, most efficient.

The political theory underlying heterodox economics is participatory democracy whose aim is social liberalism and distributed prosperity. The aim is a welfare society oriented to the common good, hence, most effective socially.

The real challenge to economics imperialism—inside and outside the discipline of economics—is, as Louis Althusser put it, the idea of a process without a subject.

Merijn Knibbe — Gary Becker, a one trick pony?

One of the weak underbellies of neoclassical theory is of course the fact that, despite all efforts to estimate ‘revealed preference’, neoclassical economists have never succeeded in consistently estimating their core variables like ‘utility’, ‘the natural rate of interest’, ‘natural unemployment’ and the like. There is nothing neoclassical even close, or far, to the CRC handbook of chemistry and physics, the Diagnostic and statistical manual of mental disorders or, when it comes to macro-economics, the System of National Accounts. And no, that’s not a neoclassical manual. Economic statistics are chartalist to the bone (it’s about flows and stocks of state-defined money, not about utility), have a totally different concept of unemployment than the one embedded in neoclassical macro DSGE models, are estimated following a bottom up approach, i.e. based upon agent based data and do not assume rationality or ergodicity (the economic phrase for predestination). Gary Becker did not succeed in improving this situation. This does not directly disqualify him as an economist but the fact that he, despite this fact, continued to push and glorify his method is weird. He tried to use the concept of ‘utility’ to explain all kinds of behaviour but as he could not estimate ‘utility’ – he failed. Neoclassicals do use data – but have to take recourse to results of other branches of science and economics to be able to do this. There is no independent body of neoclassical empirics.

Real-World Economics Review Blog
Gary Becker, a one trick pony?
Merijn Knibbe

Kevin Quinn — Becker and Marx

On Andrew Sullivan's Daily Dish, Justin Wolfers is quoted comparing Becker to Marx: 

"no economist since Marx has had such a profound impact across the social sciences, transforming not just economics, but also sociology, political science, criminology, demography and legal scholarship"....

Marx's economism was holist, Becker's individualist, but both forms are equally reductionist and equally imbecilic. Marx's materialism reduces the cultural, the political, the ethical to super-structural epiphenomena: all were just distorted reflections of the underlying reality of class struggle. Becker thinks all human agency simply consists of maximizing utility....

For both, in other words, the concept of disinterested action - including the disinterested pursuit of truth - is a snare and a delusion. Finally, in this latter respect, both systems of thought are self-undermining: neither can make sense of itself as a disinterested attempt to understand the human condition. 

Econospeak
Becker and Marx
Kevin Quinn | Associate Professor, College of Business, Bowling Green State University

As also Barkley Rosser on Becker at Econospeak:  Gary Becker: Able To Disagree Without Being Disagreeable

Corey Robin — The Calculus of Their Consent

Remembering Gary Becker (et al)

Kathy also mentions this article that Becker wrote in 1997 about the Chicago Boys who worked in or with the Pinochet regime. Becker’s conclusion about that episode?

In retrospect, their willingness to work for a cruel dictator and start a different economic approach was one of the best things that happened to Chile.

No real surprise there. Many free-marketeers, including Hayek, either defended the Pinochet regime or defended those who worked with it.

Oh, what the heck, the Allies forgave all the capitalists and scientists that worked with Hitler on the Nazi war machine.

Crooked Timber
The Calculus of Their Consent
Corey Robin

William K. Black — Nobel Schizophrenia over the Georges: Stigler and Akerlof

This is a strong contender for Bill's most powerful post to date. ID's two of the main culprits of the neoliberal fiasco — George Stigler and Gary Becker — and shows how their (ersatz) Nobel prizes are a travesty.

It's an indictment of the entire orthodox economics profession. Let's see who responds, or if Bill is just ignored.

New Economic Perspectives
Nobel Schizophrenia over the Georges: Stigler and Akerlof
William K. Black | Associate Professor of Economics and Law, UMKC

See also Three Passages From Akerlof & Romer’s 1993 Article That Should Have Prevented The Crisis.

Dirk Ehnts — Neuroscientific foundations of microeconomics?

Cognitive science + economics = cognitive economics.

The classical (18 and 19th c.), Austrian (Mises), and neoclassical (Becker) views of rationality are contradicted by contemporary cognitive and behavioral science.

econoblog 101

Neuroscientific foundations of microeconomics?

Dirk Ehnts | Berlin School for Economics and Law