Dominant Economic Views in Western Society, Part II

It would be (or maybe is?) an interesting and informative exercise to poll existing undergraduate economic students whether they consider themselves “Homo economicus.”

A second part of the study could be completed with graduate students, about to embark with a plethora of knowledge of economics, ready to face the “real world” of jobs in the workplace.

What better place than to conduct such a study than in the pages of Amateur Economists where we could entertain a question and answer debate?

As part of the exercise the students would, of course, have to discern for themselves the various definitions of the Latin phrase, consider the implications of answering in the negative or affirmative, and provide an honest self-inventory of their personal preferences and self-perceptions.

Do today’s economics students consider themselves “rational, self-centered, perfectly informed individuals who want wealth and avoid unnecessary labor?” as Adam Smith, John Stuart Mill, Vilfredo Pareto, and others discussed the model?

How do people, especially economists, see themselves?

How do they perceive their religious beliefs in light of the “Homo economics” model?

How does conventional European economics differ from its counterparts that espouse different philosophies, yet seek to answer the same questions of finite resources facing an infinite demand?

A discussion, if it occurs, would likely raise the very question of “maximization” as it is generally taught in economics classes and texts.

Moreover, it may be interesting and enlightening to read in a nutshell a synopsis of Islamic economic fundamentals as a start.

In a recent paper two Islamic scholars, Toseek Azid and Mehmet Asutay (Bahauddin Zakariya Universiy, Pakstan, and Durham University, U.K., respectively) point out that Maqasid al-Sharia (Koranic law, including economics and banking), or the objectives of the Shari’ah, aim to fulfill the objectives of human well-being. As a basic premise the authors suggest that “It, therefore, rejects the neo-classical postulate that human beings are in their intrinsic nature self-interest maximizers.”

This, of course, is diametrically opposed to current predominant economic thought. It is perhaps most closely approached by the late Nobel Prize winner, Herbert A. Simon.

Maximization of utility is also rejected by Sharia thought. The authors thus ask quite plausibly “if we suppose that all persons are egoists – they act for personal ends – what sense does it make to speak of ethics?”

While Islamic economics shares the belief that “the agents of the different sets of the economy are inherently selfish” the authors believe that “the attitude is changing towards the social and economic benefits through participation and cooperation.”

“A continuous process of … training of the society is required, which is only possible if we have an ideological system … that should not be biased towards any segment or set of the society and economy.” (Azid, Toseek, and Asutay, Mehmet, “Does ethico-moral coalition complement to economic coalition?” HUMANOMICS 23.3 (2007): 153-173)

Over the last quarter century, much of economics has been influenced by Herbert Simon’s ideas. He questioned the idea of economic behavior that intended to seek only the optimum result for each economic agent. Further, he suggested that individuals or even organizations could not obtain or process the massive information available to reach ultimate rational decisions. Instead, he suggested that decisions only need to be “good enough” to assure reasonable or acceptable results.

The question of “satisfycing,” rather than maximizing, has been a steadily growing trend, not only for philosophers, but for political adherents, as well. This has been especially true of Islamic adherents in Europe.

On September 22, 2007, the first Islamic political party in Europe was formed in Finland, the Finnish Islamic Party (FIP). Municipal elections will occur next month. The new party hopes to qualify to participate in national parliamentary elections in 2011. It currently has valid signatures for roughly a thousand of five thousand signatures required. The party was established by native Finns.

With the growing trend in Islamic populations throughout Europe, it is not inconceivable that Islamic economics and finance, as well as Herbert Simon’s ideas, may find greater acceptance. On the other hand, Islamic concepts may well be more and more co-opted into traditional European and American models.

Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.

16 comments to Dominant Economic Views in Western Society, Part II

  • mlb

    This was an interesting set of articles. Two questions-

    1. How much if any interdisciplinary discussion exists between sociology, psychology, and economics? It would seem these would have useful data applicable to the question of a relevant model for human economic behavior.

    2. Somewhere I think I probably read something like economists saying that human behavior in the aggregate is different from individual behavior and thus we can simplify to “Homo economicus” and still have a valid model. Is that a standard explanation given for acceptance of this model? Or did I just imagine it?

  • MLB – Thanks for your query.

    During the last twenty-five years, an increasing amount of economic literature has sprung up in interdisciplinary dicussions, including sociology, psychology and economics.

    Many of the “purists” among economists of course dismiss such blending of the various soft sciences as what is commonly referred to as “pop economics.”

    I, for one, look at such blending as the wave of the future, despite many of my colleagues scornfully pointing out that “no one reads Nobel recipients like Modiglian and Simon any more.”

    You might consider Googling “interdisciplinary economics” which will provide a plethora of both introductory to advanced papers and books on the subject.

    For past and current literature and reviews you might consider the “Journal of Interdisciplinary Economics” and others.

    Acceptance of the “Homo economicus” model is based on the two centuries of accepted standard economics. That model prevails, but is slowly moving to a more sophisticated discussion of the place of mankind in the world.

    Consider doing a deeper level of research to determine whether a new model of individual versus collective mankind has been developed (or develop and publish your own?)

    Do you conssider yourself a “Homo economicus?”

  • Stephan: Great discussion(s)! A few thoughts–

    I would not entirely dismiss “homo economicus.” Making the most of the available resources is a fundamental driver inherent to all living things, and this seems to be one of the concept’s basic elements. Consequently, I strongly believe that homo-economicus-or-not is a false choice.

    Speaking of new models, I think that you and your readers will find my article “A Business-Relevant View of Human Nature” (http://www.RedefiningStrategy.com/HumanNature.pdf) interesting. While partially overlapping “homo economicus” and Simon’s views, the new theory provides a model of human behavior that transcends cultures, religions, time, and circumstances. Here is a short excerpt, relevant for the maximization-vs-satisfycing discussion:

    <>

    …of course, I would love to hear your thoughts on this new theory.

  • Oops. Something went wrong… Here’s the complete comment:

    Stephan: Great discussion(s)! A few thoughts–

    I would not entirely dismiss “homo economicus.” Making the most of the available resources is a fundamental driver inherent to all living things, and this seems to be one of the concept’s basic elements. Consequently, I strongly believe that homo-economicus-or-not is a false choice.

    Speaking of new models, I think that you and your readers will find my article “A Business-Relevant View of Human Nature” (http://www.RedefiningStrategy.com/HumanNature.pdf) interesting. While partially overlapping “homo economicus” and Simon’s views, the new theory provides a model of human behavior that transcends cultures, religions, time, and circumstances. Here is a short excerpt, relevant for the maximization-vs-satisfycing discussion:

    “As a direct consequence of the fundamental drive according to which every living thing is striving to make the most of its current situation, at any given time, every individual is governed by an overall direction or purpose. Generically labeled “successful existence,” this issue is interpreted subjectively, each individual developing a unique description of it. Moreover, even for the same individual, the description tends to be different from one moment to another. So, although continuously changing, the content of the dominant issue is always a personal, subjective interpretation of the term “successful existence.”

    …of course, I would love to hear your thoughts on this new theory.

  • mlb

    Do I consider myself “Homo Economicus”? Not really, at least not in intent. But it may be hard to argue against it to someone who insists I am. For example, if I make a choice to give someone else a benefit at my own expense, it might be argued that I maximized benefit to myself in terms of increasing my self-esteem. If I make a choice by tossing a coin- something I might consider to be a random, rather than rational, choice, it might be argued that I saved the time and energy from making an unimportant choice and thus acted rationally.

    I think, however, that it is really impossible for any individual to be “Homo Economicus”. One reason is that in this age of the internet, information is constantly increasing to the point that it is impossible for any individual to be perfectly informed regarding most things- there is too much information to be able to see it all, let alone process and remember it and make perfect use of it.

    Another reason is that I think it is impossible for anyone to consistently act rationally- in terms of maximizing benefits and minimizing costs- unless you go to the extreme of defining every choice as rational because it is what the person wanted the most at that particular instant. In reality, our choices are made in the context of a whirl of influences, internal and external, that severely limit our ability to consider the information we have and analyze the choices we have, so that many of our decisions seem quite arbitrary.

    Think about it, if “Homo Economicus” described normal human behavior, we wouldn’t have the term ‘impulse buy’. Advertising would look a lot different too.

    I think the important thing to consider is not whether “Homo Economicus” is an accurate description of the way we really are- I think it is quite obviously a simplification- rather, I think the important question is ‘when is it a useful model and when is it not?’ If there are situations where it fails to give us useful insight into what we are studying then we need to find a better model to work with.

  • Chris

    Thanks for your posts, Stephan. So, “homo economicus” is the dominant economic view in western societies…

    Is the austrian view somewhat closer to the “satisfycing” view?

  • Thank you all for contribuing!

    Cristian -your article should be a “must read” for all of our “Amateur Economists” readers. Obviously I agree with your concept of “successful existence,” which really cannot (or should not) be reduced to a pat formula, economic or otherwise. This might even, as you suggest, include maximizing, as long as the inherent dangers of such maximization are considered. It would seem that at this stage of our world, the goal of maximization in a physical sense is bound to have many undesirable effects. If man is “rational” perhaps maximization is not a desirable alternative for which to strive, even if deemed to be “inherent to all living things.”

    MLB – I think the appropriate model for “Homo economicus” would be from econometrics, showing reasonable maximized alternatives as measurable potentials, but not as simple, yet iron-clad facts of life showing it as a goal.

    For example, how much do we need to eat as a minimum? We could even use a quantifiable measure like “caloric intake” as a guide, rather than a purely American vle (and not run the risk of an overweight population?? Then we might consider how we could distribute more effectively using “satisfycing” rather than “maximizing.” Agree?

    Chris – The Austrian School is closer to the “satisfycing” view in that it is more subjective and encompasses more indivudal choices, rather than simply aggregating those choices.

    You might find Cristian’s article of interest!

  • Stephan: I’m glad you like the article. Thanks much for recommending it!

    I agree, “the goal of maximization in a physical sense is bound to have many undesirable effects” — “homo economicus,” as the sum of the following traits: “rational, self-centered, perfectly informed individuals who want wealth and avoid unnecessary labor,” is a no-go.

  • Raymond

    We should also poll the group who actually produce things economic students eat and use daily—— business owners.

  • Raymond – Good idea, yet a bit too broadly based to be an effective measure of the next crop of economists who have to set the stage for this century.

    The current financial crisis is sure to have an impact on shewing the curves …especially on self-perception!

  • Raymond

    It is dangerous for all future economists to be drinking from the same punchbowl. Take the current financial crisis for example and listen to economists explanations, but let’s also examine what they have done in the past.

    Bankers helped shaped banking laws and the monetary system of today— which is fractional reserve banking. Keynes was a British economist and his views
    had great influence on policymakers of the day.

    Fractional reserve banking?

    You know, where a banker takes One dollar in deposit then turn around and loan out Eight dollars. Banking law allows them to do this, so it is legal, for them. So the bank is actually collecting interest income from the phantom Eight dollars created by bank laws. Read that again.

    The fragile nature of this system is exposed when all depositors want to withdraw all their money. How dare them.

    Of course the bank cannot possibly honor all the withdrawals since they do not have all the money.

    These bank runs used to turn into panics. Banks call their loans early and cause businesses to collapse and the economy falls into recessions. In fact this caused the depression in the 1920s if I’m not mistaken.

    My point is that even then, no one seem to place the blame
    on the leveraged nature of the banking system itself.
    Except maybe a foreigner named Ludwig von Mises.
    But he was dismissed as some irritating heretic who didn’t understand the new economics.

    The fragile system was left intact and has since spawned
    numerous economic displacements.

    Now which economist of today has the “perception ” to actually point out what the cause of the problem is?

    Not a lot.
    Perhaps they were drinking from the same punchbowl served at American universities today.

    You can poll the same amount of business owners as economic students.

    Withdrawals anyone?

  • Raymond – You’re right that bankers helped (and still do) shape banking laws. But you have to go back much further than Keynes to understand the basic structure of banking.

    It’s often called the “Goldsmith Principle” and goes back to the times of St. Thomas Aquinas. (thirteenth century) It is the foundation of modern banking, now referred to as “fractional reserve” system.

    The goldsmiths of the time knew that people were unlikely to withdraw all their gold at the same time.

    Thus, they could lend out a certain quantity on that premise, isue promissory notes in exchange for the gold, and essentially modern banking developed beyond its ancient roots. Over the centuries since, the practices became highly sophisticated.

    That principle of fractional reserve lending became widely accepted, athough Aquinas decried the practice of usury (the charging of interest for lending).

    Strict Islamic banking still follows that premise of usury.

    In today’s world, there are, of course, many differences in the interpretation of fractional banking, such as the Austrian school of thought. Whether actual gold is held against a currency in a country or whether the Fed “creates” money through a modern system and the currency has nothing to back it except “faith” is an ongoing controversy.

    Today’s financial panic is a good example of that faith being severely tested, since there is no “hard” backing of the U.S. currency.

    At the bottom of the problem is not the fractional reserve system itself, but the wide level of speculation fueled by greed.

    There … there’s one economist who said it!

  • Raymond

    And I thought the housing boom was created by wide speculation from both borrowers and greedy lenders,

    but

    fueled by bank credit originating from Greenspan’s pumping of bank reserves during his tenure.

    I doubt if the carnage would be so bad if you just had a bunch of greedy speculators with their own money.

    I look back at the the dot-com bubble and the stock speculation that led to the 1929 stock market crash.

    The fuse was easy bank credit .

    I

  • Raymond – I think you might enjoy reading Stephen S. Roach’s article on Alan Greenspan in the Jan/Feb issue of Foreign Policy, 2005. (www.foreignpolicy.com).

    More than most, Roach’s article provides an objective assessment of Greenspan’s tenure at the Fed under four Presidents.

    An interesting view you might consider is that Greenspan came out of the Reagan years, that Milton Friedman’s influence of monetary policies in economics at both the macro and micro levels started to predominate, that inflation was recognized as the chief impediment to stable economic policy, and that an ebulient mood for growth and expansion on the part of the public combined to achieve the largest continuous success of economic policies in recent world history.

    If we look at the lastquarter century, much of which was under the guidance of Alan Greenspan, we can see the positive influence of long-term stability, rather than erratic fiscal adjustment.

    The various “bubbles” or crises throughout that time cannot be laid squarely at the feet of either one man, or one institution, but on the outlook of human nature itself.

  • Raymond

    In my post above I blame the leveraged nature of the monetary system in place as the root cause of the economic displacements we endure. Greenspan simply functions within this framework, and it just so happens that
    his efforts to avoid a recession after 9/11 by forcing rates down paved the way for the housing bubble that came about years later.

    I really think that regardless of best intentions and current management
    personnel, the leveraged nature of the banking system will be prone to blow ups taking the economy (us) with it.

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