Yves here. Your humble blogger believes that the bogosities of mainstream economics, which is nearly all of it, need to be ridiculed early and often. This Richard Murphy post takes apart one economic canard, that of individuals as primarily being rational economic actors.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future
Neoclassical economics is built on myths — and none is more absurd than the idea of homo Economicus: the perfectly rational, fully informed, self-interested human who supposedly drives all economic decision-making.
But does such a person exist? Of course not. We are emotional, social, biased, and uncertain beings. We act from compassion, habit, and fear as much as calculation. And yet, this fantasy of rationality still shapes policy, markets, and even how governments think about human behaviour.
In this video, I dismantle this myth, which is at the heart of mainstream economics, showing how its assumptions about utility, perfect knowledge, and profit maximisation bear no resemblance to reality and why that matters for everything from financial crises to everyday life.
If we are to build an economics that serves people, not theory, we must bury homo Economicus once and for all and accept that uncertainty, cooperation, and care define real human behaviour.
This is the transcript:
The world of neoclassical economics is built on myths, all of them assumptions that supposedly make that system of thought work, but which are in fact total and utter rubbish.
And none is more important than the idea of ‘ homo economicus’. This is the supposedly rational, totally informed, completely self-interested person who lives in our society and drives all economic action.
Does ‘homo economicus’ exist? Are you that person? Are you always rational? Always completely informed about every decision you have to make? And always self-interested to the exclusion of all others? If not, then neoclassical economics has failed because you’ve not complied with the norm that it thinks that humans literally comply with.
The claim by neoclassical economics is that you seek to maximise your personal utility. But nobody knows what utility is. Economic utility is the amount, supposedly, of satisfaction, happiness, or benefit that you receive from consuming a good or service. But there is no way for certain of measuring this because it makes quite clear that this is not about money. But the tool which all of economics uses to approximate utility is money, creating a total conflict in itself.
And this idea of utility is totally subjective and abstract, and yet it is what supposedly makes neoclassical economics work because we, apparently, try to maximise our happiness, just as neoclassical economics supposes that businesses try to maximise their profit, even though there is no accepted definition of what profit is, and even if there was, maximising profit requires certain knowledge of the future, and none of us are possessed of it.
However, neoclassical economics overcomes that problem because it assumes that knowledge of the future is perfect and free, as a result of which all decisions can be, supposedly, coldly calculated to maximise our well-being.
This is the total and utter gibberish nonsense on which neoclassical economics is built.
Homo-economicus is real, they claim, even though you’ve never met anybody who’s vaguely like the person so described.
In reality, of course, we humans do not have perfect knowledge.
We are driven by emotions, bias and habit.
We are not rational.
We’re caring, compassionate and emotional.
And we most definitely do not know the future. Nor do we always even know what is best for our own well-being, and yet we still somehow make decisions largely on the basis of heuristics and rules of thumb, because most of the time we simply haven’t got the opportunity to sit down and do the cold hard calculations to work out what would maximise our well-being, even if we knew what that looked like.
So the consequence is that far from us being individual, atomised, separate entities, all of us making our own rational decisions, in practice, herd behaviour drives a lot of what we do, and we see the consequences all around us. Booms and crashes are one of the obvious consequences that have a particular cost.
So why do we pretend that homo-economicus is present in the world?
Why do we assume motives that don’t exist?
Why does neoclassical economics ignore the risks that bubbles and instability arising from human and computer behaviour create?
Economics simply does all this to make its own rather small, petty world work. And in the meantime, it actually totally misreads how real people act and live.
The consequence is all around us. The foundations of neoclassical economics, which have gone on to inform neoliberal economics, result in a continuing crisis because the policy descriptions that are created by this way of thinking do not match with reality.
If you advise on a world that doesn’t exist, and tell the world that does exist to try to become a world that is not only not in existence, but which can never exist, then you are bound to deliver a prescription for failure. And that’s what we have.
Homo-economicus, this supposedly rational person, who is at the epicentre of economic thinking – this absolutely standard single person, from whom nobody ever deviates in behaviour – has to be put down. Painlessly, but nonetheless, put down. And we must presume they never existed because, of course, they haven’t.
If the world is to become a really strong, functioning place in which economics can play a valuable role by embracing the uncertainty of life itself, then we have to abandon this assumption, which underpins neoclassical economics.
The Haber-Bosch process & pure fiat monetary system happen within 20 years of one another, promising unlimited food, people & money.
Its’ been a great ride, being one of the beneficiaries of the baby boom therein. The world only hit a billion of us in 1800. and by 1925 it was 2 billion. We’ve quadrupled that in a century~
…the hangover of ‘Money Tree Economics’ is gonna be quite something
Seems like energy dense, portable oil was the enabler- in- chief.
Add in a little ‘gamed capitalism’ , et voila!
It takes about 4 gallons of gas, or about 25 pounds worth to propel the mighty Tacoma on its appointed rounds for food & sundries some 40 miles away to & fro. Driving time is an hour and a half altogether.
I think I could probably load the full bed with bags of cement and i’d have to drive slower, but still get home from Home Depot with no bother, oh, and the whole backseat is full of food.
No go-juice or horse to propel me there, and it’d be 3 days walk in to Visalia on foot, and I’d be limited as to what I can bring back, as I would have a tent, sleeping bag, pad, fuel, stove, pots & clothes for the week out on the ‘old dusty trail’ or what they now call Hwy 198.
Oh, and if there is no gasoline, why would the supermarkets in Visalia have food?
To a neoclassical economist, “rational” means acting socially or downright anti-socially. Imagine if Milton Friedman and Margaret thatcher had got into a time machine and gone back to try and set up civilization, advocating “free markets” with no checks on wealth, no debt cancellation, just letting the rich people get rich — by exploiting others. Civilization never would have taken off.
That “pre-civilized” condition is what is being advocated today.
aye. from 02 til around 08-ish, i undertook to understand the american right…what i came away with was exactly that: Hobbsean State of Nature(for us serfs), and fully automated luxury feudalism(for them)=> the actual Goal of everything since the Powell Memo and/or the Business Coup.
1100ad, but with flying cars and smart devices for the lords.
Homo Economicus, effectively a precursor type of efficient human market hypothesis, with appropriate opprobrium.
In biology the left wall is bacteria. Higher forms evolve to the right. The building blocks for higher forms reside on the left. Extinction events take out higher forms and new higher forms build from the left.
Economically the left wall is a subsistence society. In the absence of “money” cooperation is the operable currency. Probably as close as we can come to real anarchy. Respect for the environment will sustain this community until there is an environmental outlier or other exogenous event. The first such event is most likely competition for basic resources. In the extreme it would be competition for food. This requires grouping up. It all goes downhill from there. That is, we build civilizations.
I think this is why game theory problems like the prisoner dilemma are presented as hard/paradoxical. They are only that way if you assume ‘rational actors’ in the sense of totally selfish, context-free utility maximization – which is not how any of us actually approach our lives.
A local radio station recently structured a prize giveaway in prisoner dilemma terms, and around 80-90% of callers chose to cooperate. That makes them irrational in homo economicus terms, but once you add even a rudimentary model of social capital to the mix, it makes perfect sense.
“We are emotional, social, biased, and uncertain beings”.
Kind of true, but primarily we (that is us homo sapiens) are uninformed, or rather misinformed by powers that be who like it that way.
And, as he points out, even when information is available somewhere, the time investment to ferret out all the things “you should have known” can be very expensive. That’s why for many people it’s economically efficient to click “I Agree” rather than reading the pages of fine print the web page or software EULA makes you consent to. Time is money. But this weakens the incentive for the companies generating the fine print to not abuse us.
I am going to expand somewhat, given this important observation: “The world of neoclassical economics is built on myths, all of them assumptions that supposedly make that system of thought work, but which are in fact total and utter rubbish.”
This is why so much hinges on U.S. universities (in particular) raking in those SwedishBank Pseudo-Nobels for Economic Theorizing. This is why my alma mater, University of Chicago, invested in the Holy Becker-Friedman Institute and Shrine of Economic Delusion.
The desperation of economists to have “theory” is palpable, and foolish, even though Prof Murphy keeps pointing out that human beings are variable, not-quite-rational, emotional, impulsive, which makes constructing a theory impossible. More widely, the social sciences and humanities have become desperate for theory. Yet these theories are held together by academic papers, Elmer’s glue, duck tape, and wishes. So you also have queer theory and gender theory, which are as valid as shareholder value theory.
The hard sciences are much more rigorous about these bodies of knowledge. Theory requires testing. This is why the theory of evolution isn’t just Grandmama’s opinions of apes, Genesis, and genetics. The theory of evolution is tested repeatedly, along with color theory, number theory, the theory of probability, the theory of gravity, and so on.
A true theory is falsifiable. The opinions of economists, not so weirdly, aren’t falsifiable. They just come up with a new empty excuse to cover up the vacuum that is their academic discipline.
Homo economicus “theory” is probably falsifiable, and perhaps falsified already. Marketing manipulates information and emotions to drive people to decisions profitable to companies that do marketing but not too consumers.
Consumerism and commodification of nearly everything also has created many people who are fetish driven.
I’ve gone so far as to refer to the neoliberal economic order as the BDSM economy.
Perhaps they keep going on about rational in the same way Trump keeps touting himself as a stable genius. In opposite world a love for green pieces of paper must be painted as more virtuous than a concern for social harmony, the planet, the future.
Of course the powerful don’t necessarily buy their own bs and must find other justifications–often religious–for their predatory nature. Trump probably thinks that bullet missing him by inches was a sign of divine favor. In this too, as in his belief in his own genius, he is likely to be disappointed.
I first encountered the shibboleths of ‘homo economicus’ and the ‘invisible hand’ as an undergraduate.
Having a science background, the sheer risibility of economic theory – given the absolute lack of any prospect for hypothesis testing – deterred any further academic study of economics (beyond the absolute course unit minimum required) until it became necessary to ‘know your enemy’ and that was mostly trying to make sense of the laissez fairies, but they are all merely muggles.
Much economic theory is truly dismal but it is definitely not a science.
File under fantasy fiction.
alrighty then, call ’em ‘dismal scientologists’
I was a Psych undergrad when my Economics undergrad girlfriend explained “utility theory” to me. I was laughing so hard I nearly fell out out of bed.
To masquerade as a legitimate science, economics relies on many absurd assumptions. Consequently, studying economics does not help one understand the real world. Even worse, applying economic principles to real-world situations can have disastrous consequences.
An economist to a physicist:
“Sure, this equation works in practice. But does it work in theory?”
Augusto Simões
I was “mis-educated” by academic neoclassical/neoliberal nonsense like many. Reading Steve Keen, Michael Hudson, Yves Smith, Jamie Galbraith, Richard Wolff and others “opened my eyes”.
Having been exposed to “mainstream” economic ideology is essential however, in order to understand what the prevailing ideology preaches, and then how to debunk it. So those years of formal education were not a total waste. (tuition and other expenses aside, lol)
Uppity Homo Sapiens (at least in western culture) fancy themselves as immortal gods or something, but we are just a species of primate who are clever enough to invent a means to destroy ourselves. It remains to be seen if humans will not self-destruct. Time to watch Dr. Strangelove again
I think the Econ depts of unis need to be merged with social psychology, sociology and anthropology. Having an econ dept. that ignores all other research from other disciplines is just ridiculous
The thought of “watching Dr. Strangelove” again nauseates me. It’s too accurate a picture of the world as it really is.
Certainly economics uses simplifying assumptions. That means that you can’t naively interpret the output of models. But in many contexts the assumption of rationality works well, for example quantities and prices show the expected interactions, and so on. Maybe the correct analogy is that the baby is in a swimming pool, not a bath, so the ratio of water to baby is high. There’s still a baby there. But few intellectual disciplines are self-reflective, and economists are no exception. They get lost in methodological details, critiquing any work that doesn’t employ state-of-the-art statistical techniques. That’s the critical step for publication, not putting in pages on the limitations of your work and data – if you’re a good economist, you know that for your own field. But even good economists can get sloppy when they read papers outside their narrow specialization, and they aren’t good at communicating the limits of their work, or at least don’t get rewarded for that.
My latest substack post – if you want details, read it – notes that economic ideology can overcome common sense, a reflection of this methdological bias. The dominant story for China is that the devolution of socialist farming to households quickly doubled output, kickstarting growth. Duh, of course it was markets.
But I’ve been around farms, and there are plenty of detailed village studies for the Chinese countryside in the 1960s-1980s. Grain output doesn’t increase because peasants work harder or smarter, when there are plenty of workers to go around. Early reforms allowed fewer people to work in agriculture, which had far too many people working the fields. What reforms did was to loosen the rules that tied people to farming.
Slackers? – well, you don’t want to work too hard when you have more than enough people to get the work done in time. But if you read the literature, the managers of communes in the bad old days spent a lot of time on incentives, setting up complex compensation systems far beyond anything in an MBA curriculum. Chinese socialists believed in the rational peasant, but they also knew that good management mattered, and interpersonal relationships in the workplace. And that getting incentives right was less important than getting water control right and getting enough fertilizer. And getting good weather. Even Mao didn’t have pretensions to that!
i think this is a working link for what you were pointing to, Mike:
https://smitka.substack.com/p/ideology-and-economic-analysis
looks innerestin…but, then, i’m a fool for all things peasant studies,lol…including village political economy.
also, a weird aside: it’s strange being the only person on the planet with yer name.
i’m the same way…which is why i am Amfortas on-line.
we should form a club, or something.
Homo economicus has a tragic fault. Impatience. Which creates a diseased sense of time and haste. We are a bunch of terrified,greedy, sloppy, filthy, lazy critters. Why else were we compelled to come up with our good scientific protocols? Homo antidotus? Homo economicus is like a Christmas story. It leaves you feeling sad all over again. Probably because it has turned us all into Homo monkey monkey confusion. There is a way back to sanity, fortunately. We can start to respect all the other life forms on our planet. Even our starry eyed astrophysicists are now telling us that consciousness is not a mystery – it is ubiquitous. The universe is conscious. So that explains why Nature is not extractive. Makes sense to me.