Where did “economic man” come from, and what’s with him now?
Homo economicus (lat.) — economic human. This concept originated during the development of economic science that began in the late 18th — early 19th centuries.
Maksym Prokhorov Founder and IT manager of PM Partners
Up to that point, economic discourse existed only within the framework of philosophy. How much the image of «economic human» has changed now?
Adam Smith and the Beginnings of Economic Science
The question of who is to be called the founder of a particular science is often controversial among modern scientists. Some say, that to attribute the advent of economics to Adam Smith is a somewhat simplistic version of history, others believe in its full credit. One thing is certain that this man has made a significant contribution to the development of economic science.
Smith was a Scottish economist, philosopher, one of the founders of modern economic theory, and was also a member of the Royal Society of London.
In describing the human being from an economic point of view, the scientist found that human nature is complex, with different aspects, because people are simultaneously driven by reason, emotions, traditions, habits and instincts. Consequently, for economics human being needed to be simplified. Thus, Adam Smith described a model of «economic human» (this name was later given to it by the British economist John Stuart Miley).
In his model, Adam Smith gave people four characteristics on the basis of which they were perceived by economists until recently. These parameters describe people as:
• rational;
• selfish;
• have complete information (and can analyse it);
• honestly fulfilling their duties.
Accordingly, the main idea is that humankind aspires to wealth.
And it was until the 20th century, until behavioral economics emerged. It was at that time when two of Adam Smith’s four characteristics of economists were questioned and corrected. In particular, «completeness of information» and «honesty» were called implausible.
Why was Smith’s theory amended?
Economists who were interested in behavioural economics, in the 20th century, decided to look more closely at how people make economic decisions. Scientists did experiments, surveys, field studies, and concluded that people make decisions in a completely different way than Adam Smith described.
It turns out that a person is not so inclined to maximize benefits. It is more likely to act out of habit or emotion, and sometimes has no time to think about a rational solution. And this is not only about everyday things, but also about areas where rationality should be at the forefront, let’s say, in finance.
In addition, with the advent of behavioural economics came the theory of «push» («nudge»). It was Richard Thaler, the American economist and Nobel laureate, who dedicated the book with the same name to this theory, in which the cover depicts an elephant who pushes the calf into the right direction.
The essence of «push» is to «help» the consumer to make the necessary choice for the seller (it works from the private entrepreneur to the state). This can be achieved by offering a person several options where the desired one is presented as a simpler and the other as a rather complicated procedure. People choose a product or service that means they don’t have to do anything.
The conclusion is self-evident: it is not necessary to promise the client the moon, because you can get the customer if you show that when working with you he will need a minimum effort on his part.
