Friday, October 28, 2011

Homo Economicus and Conflationism

Perusing satellite-radio this morning I stumbled across an interview of sorts with Harvard psychologist Steven Pinker. Most of the conversation centered around psychological phenomena bordering on the mystical (which I gather relates to a good deal of his professional work). While discussing "herd mentality" a caller asked for the Dr.'s thoughts on the seemingly unconscious but unified push that highlights the protests as of late, peppering the general inquiry with observations about how humans have been "conditioned" to be consumers and workers and how they seem to be "waking up."

The Dr. seemed sympathetic to the idea and began to parlay his musings into a general criticism of economics. Specifically he seemed to take issue with the idea that everything is determined by money or wealth more generally and contended that economics can't explain, for instance, someone leaving a tip for a waiter in a town he'd never visit again. He said that some economists are so misguided that they've even come up with a term for the general concept of a strictly self-interested man; Homo Economicus.

Immediately I felt an urge to defend a subject that I've found quite enlightening over the years. It seemed like such a grave misunderstanding regarding the nature of economics. Even without a deep grasp of various economic minutia, this didn't seem to fit with my own understanding at the very least. Of course, I'm aware of Homo Economicus (what I would consider a caricature) , but I couldn't imagine many modern economists really pushing it as a realistic model for rational agents. So I researched a little bit regarding the origins and usage of the term. It revealed an underlying problem with the popular conception of economics; a problem that seemed to mimic a more general political issue which isn't completely unrelated.

It looks like John Stuart Mill was the first to use any version of the phrase. And, indeed, the classicals seemed to use it (perhaps, and hopefully) at an explanatory level as a model for rational actors; generally "self-interested" and, more narrowly, self-interested in the sense of pushing to acquire the most wealth or services for the least amount of effort. Given other economic concepts that prevailed at the time (the Labor Theory of Value, for instance) I can't say it's that shocking to hear such an oversimplification. Large players in the marginal revolution would cement the idea of marginal utility and lay waste to many of the classical assumptions regarding empirical derivations of preference and value. However, the (academically) successful endeavors of several notable macro-economists in the 20th century brought econometric methodologies back to the table and more generally revived the prospect of positivism as a definitive benchmark in social-scientific analysis.

When I originally began digging into economics I found the empirical approach of the Monetarists enticing. But the further inward I pushed I began to gain an appreciation for the Austrian school - specifically for the controversial methodological stances therein. It didn't immediately occur to me this morning, as I balked at the concept of Homo Economicus, that it was largely my more Austrian understanding of economics that made the criticism seem silly.

The whole of economic theory, in the Austrian tradition, is built from simple a priori truth(s) about human action - that they are the convergence of preference (ends) and capability (means). This is what constitutes "rational action" (a term Mises sees as redundant) in this framework. An action which aims at particular end(s) is "rational" in the strictest sense that the actor, subjectively, is attempting to utilize available means to achieve a certain end. In this way, it doesn't matter if the actor is correct in his thinking that said action will achieve his preferred goal or even whether such a goal is sensible to anyone else. An actor's preferences are purely subjective (in an explanatory sense) and only revealed or constituted through action itself. Thus, while we can observe the past actions of agents to see their revealed preference in specific instances in the past, we can never really know the preferences of these actors in the future or real-time without action.

It's this basic foundation of understanding which met the musings of a Harvard psychologist with dismissal this morning. All action, aside from reflexes of sorts, is both "rational" and "self-interested" in that you, by definition, are acting in a means-ends framework towards a subjectively valued preference. It doesn't matter whether you decide to steal a multi-million dollar diamond today or give all your savings away to the homeless - both are rational and self-interested actions. It's certainly not the job of the economist to explain why a person might have the subjective evaluations that they do. While an economist might assume specific means and ends to illustrate important economic foundations, his general specialty is the framework through which said means and ends interact (action) and the trade-offs actors make at the margin to act upon or amend their ordinal preferences.

So, in a basic sense, economists have no particular insight into the subjective evaluations of actors. They might apply, hypothetically, economic concepts to actors based on assumptions about the preferences of those actors. But whether an actor's desires are aimed at the material or the ethereal it does not change basic economic precepts and our understanding of human action. The framework applies regardless of preference, stated or otherwise. Understanding this, it's silly to think that any serious talk of economics includes assumptions about incredibly "selfish" (in the moral sense) desires. It doesn't - or rather it shouldn't.

The insights I've gained, explicitly, from the Austrian tradition pushed me in the direction of such a reaction to the concept of Homo Economicus. "What about someone choosing to be 'selfish' or 'charitable' dismisses the basic tenants of economics!?", I thought. I wondered if any serious conversation of the concept had survived the marginal revolution. Then I thought that if it had, Mises surely would have commented on it at some point. A quick search and there it was - on page 62 of Human Action, Mises speaks on the idea of Homo Economicus:

"According to this doctrine traditional or orthodox economics does not deal with the behavior of man as he really is and acts, but with a fictitious or hypothetical image. It pictures a being driven exclusively by "economic" motives, i.e., solely by the intention of making the greatest possible material or monetary profit. Such a being does not have and never did have a counterpart in reality; it is a phantom of a spurious arm-chair philosophy."

I also read that Mises had, I suppose mockingly to some degree, described the ideal hypothetical model of man as Homo Agens (Acting Man) instead, to drive home the point about economics being, ultimately, the study of human action.

The more I thought about all of this, the more I thought about the general methodological rivalry between the Austrians and the Neo-Classicals (including Keynesians) of the 20th century. Austrians have a contentious view of their empirical approach and feel, generally, that many of the models that lead to particular policy prescriptions assume too much about the world, and often to dismal ends. In that way, maybe, loosely speaking, the contentions of the psychologist weren't completely incorrect. Even though most Neo-Classicals would say that, while empirical analysis is scientifically sufficient, it isn't perfectly accurate - it still seems as though they are all-too-often oversimplifying if not completely looking over some things that are very important, analytically.

Looking at things this way, maybe the criticism rubbed me the wrong way because it was misdirected. Maybe, much in the same way that people conflate massively regulated markets with free markets, the doctor simply conflated Neo-Classicial economics (clearly the dominant view today) with the whole study of economics in general. In fact, maybe a lot of the arguments I get into with people who are generally disinterested with regards to economics revolve around similar contentions. Have I been roping myself into defending people and views that have little to do with me or my own views? This is why ambiguity and generalizations are so confounding and dangerous. More on this at a future date.

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