Nurture Human Nature

Classical economists have relied on the model of physics to reach predictability, which led them to depict a “rational economic man.” Contemporary studies reveal a very different picture of our economic behavior.

Early in their search for rationality, classical economists have opted to reduce their quite versatile subject matter—man—to a predictable entity. A series of harsh simplifications were to be made. This is why Stuart Mill (1806-1873) wrote: “[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.”¹ But is there anything real to “Homo Economicus,” as Mill’s critics dubbed his theoretical creation? Answering this question requires retracing the whole story of our economic self-portrait.

The Story of Our Self-Portrait

Adam Smith (1723-1790), often referred to as the “Father of economics”, famously said in his 1776 book The Wealth of Nations that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”² Trade, therefore, was deemed by Adam Smith to be entirely rational. Although he saw self-interest as being “of all virtues that which is most helpful to the individual,” he nevertheless added that our “humanity, justice, generosity and public spirit… (are) the qualities most useful to others.” As a result of this balance in the human psyche between unassailable moral values and self-interested calculations, political economics was to be considered a mere art. At the difference of what appeared as real science, it did not evolve in a thoroughly measurable field.

John Stuart Mill cut this Gordian knot by taking a methodological stand, clearly stating that his depiction of man was “an arbitrary definition,” based on “premises which might be totally without foundation,” and that political economy was, thus, “only true… in the abstract.” Besides, John Stuart Mill was convinced that no “political economist was ever so absurd as to suppose that mankind are really thus constituted” since the reduction of reality to some conceptual construct is “the mode in which science must necessarily proceed.”³ To enhance Homo Economicus predictability and ensure a unified model of individual economic behavior, he added to his character two features: a deep dislike of work and a love of luxuries. Why not, after all? Further down the road, other economists would endow Homo Economicus with more arbitrary but rationally convenient traits.

In the meantime, considering that the mathematical description of reality can only be reality itself, William Stanley Jevons (1835-1882) defended in A General Mathematical Theory of Political Economy (1862) the idea that economic activity could be reduced to what he called the “single average individual, the unit of which population is made up.” Like Newton’s atom and under the assumption that all reality can be reduced to the sum of its quantitative parts, including with human exchanges, Homo Economicus supposedly became real. The essential difference between truth and validity—that John Stuart Mill had, for his part, duly pointed out—as well as the necessity to evaluate each specific methodology according to its field of research, were simply glossed over by William Stanley Jevons.

More respectful of methodological distinctions but still willing to complete the Homo Economicus template, “Chicago-school economist Frank Knight decided to endow economic man with two godlike traits—perfect knowledge and perfect foresight—enabling him to compare all goods and prices across all time,” says Kate Raworth. The creator himself of this godlike character was perfectly aware that it was a total fabrication, resulting in a creature that “treats other human beings as if they were slot machines.”⁴ But to him, as to John Stuart Mill in his own time, this forceful reduction of humanity to an unlikely caricature was the only way to actualize the full potential of mathematical modeling.

Aside from William Stanley Jevons, therefore, most other schools of thought in economics had maintained the essential distinction between a model’s validity and how mankind operates in real life. Completing the story of our economic self-portrait, Milton Friedman (1912-2006) and his pals from the Mont Pelerin Society recused this distinction. Their rationale, explains Kate Raworth, was that “since in real life people behaved ‘as if’ they were making the self-interested, all-knowing calculations ascribed to rational economic man, then the simplified assumptions—and the cartoon character they depicted—were legitimate.”⁵ (Id. pp. 85-86) Said otherwise, the reasoning was that since Homo Economicus sums up what rational behavior is supposed to be, actual people implicitly behave along the exact same line, only less neatly.⁶ Welcome to neoliberalism’s brave new world!

This is how classical economics went from arbitrarily assuming that what cannot be readily measured according to the law of physics cannot have economic significance,⁷ to the downright absurdity that the model is the whole of economic reality.

The irony cannot be missed, in this respect, that the last stage of the Homo Economicus caricature—neoliberalism—is built upon the same type of methodological blindspot the communist ideology suffers from. Even though neoliberalism historically set itself up to counter communism, both fall for the seduction of a single concept encapsulating the whole of economic life. To Karl Marx and Friedrich Engels, it was “Dialectic Materialism,” i.e., the unfolding of history through class opposition relative to means of production ownership. To neoliberals, Homo Economicus is the overarching concept and the last word about human exchanges. Hence their clamored certitude that “doing the math” sums up the validity of economic reasoning. Both theories symmetrically deduct how the economy works by relying on a single premise, thus ignoring scientific methodology and the crucial role of observation.

1. Essays on Some Unsettled Questions of Political Economy, essay 5, paragraphs 38 and 48.
2. Adam Smith, Wealth of Nations, Wordsworth Classics of World Literature English. Series edited by Tom Griffith, Introduction by Mark G. Spencer.
3. See note #1.
4. Knight, F. (1999) Selected Essays by Frank H. Knight, Volume 2. Chicago: University of Chicago Press, p. 18.
5. See Friedman, M. (1966) Essays in Positive Economics. Chicago: University of Chicago Press, p. 40.
6. For a better understanding of this methodological sleight of hand, see Morgan, M. (2012) The World in the Model.
7. More on that methodological shortsightedness and the relevance of Systems Thinking in the next chapter, Get Savvy with Systems.