"[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.
Later in the same work, Mill goes on to write that he is proposing “an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained.”
Although the term did not come into use until the 19th century, it is often associated with the ideas of 18th century thinkers like Adam Smith and David Ricardo. In The Wealth of Nations, Smith wrote:
"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.
This suggests the same sort of rational, self-interested, labor-averse individual that Mill proposes (although Smith did claim that individuals have sympathy for the well-being of others, in The Theory of Moral Sentiments). Aristotle's Politics discussed the nature of self interest in Book II, Part V
"Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser's love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property."
A wave of economists in the late 19th century—Francis Edgeworth, William Stanley Jevons, Leon Walras, and Vilfredo Pareto—built mathematical models on these assumptions. In the 20th century, Lionel Robbins’ rational choice theory came to dominate mainstream economics and the term Economic Man took on a more specific meaning of a person who acted rationally on complete knowledge out of self-interest and the desire for wealth.
Homo economicus is seen as "rational" in the sense that well-being as defined by the utility function is optimized given perceived opportunities. That is, the individual seeks to attain very specific and predetermined goals to the greatest extent with the least possible cost. Note that this kind of "rationality" does not say that the individual's actual goals are "rational" in some larger ethical, social, or human sense, only that he tries to attain them at minimal cost. Only naïve applications of the Homo economicus model assume that this hypothetical individual knows what is best for his long-term physical and mental health and can be relied upon to always make the right decision for himself. See rational choice theory and rational expectations for further discussion; the article on rationality widens the discussion.
As in social science in general, these assumptions are at best approximations. The term is often used derogatorily in academic literature, perhaps most commonly by sociologists, many of whom tend to prefer structural explanations to ones based on rational action by individuals.
The use of the Latin form Homo economicus is certainly long established; Persky traces it back to Pareto (1906) but notes that it may be older. The English term economic man can be found even earlier, in John Kells Ingram's A History of Political Economy (1888). The Oxford English Dictionary (O.E.D.) does not mention Homo economicus, but it is one of a number of phrases that imitate the scientific name for the human species. According to the O.E.D., the human genus name Homo is
Used with L. or mock-L. adjs. in names imitating Homo sapiens, etc., and intended to personify some aspect of human life or behaviour (indicated by the adj.). Homo faber ("feIb@(r)) [H. Bergson L'Evolution Créatrice (1907) ii. 151], a term used to designate man as a maker of tools.) Variants are often comic: Homo insipiens; Homo turisticus. (This is from the CD edition of 2002.)
Note that such forms should logically keep the capital for the "genus" name—i.e., Homo economicus rather than homo economicus. Actual usage is inconsistent.
Consequently, the "homo economicus" assumptions have been criticized not only by economists on the basis of logical arguments, but also on empirical grounds by cross-cultural comparison. Economic anthropologists such as Marshall Sahlins, Karl Polanyi, Marcel Mauss or Maurice Godelier have demonstrated that in traditional societies, choices people make regarding production and exchange of goods follow patterns of reciprocity which differ sharply from what the "homo economicus" model postulates. Such systems have been termed gift economy rather than market economy. Criticisms of the "homo economicus" model put forward from the standpoint of ethics usually refer to thís traditional ethic of kinship-based reciprocity that held together traditional societies. They typically tend to view the egoistic and amoral behavior of "homo economicus" as unethical conduct that may be functional within a competitive market economy but is not in line with, but fundamentally running against human nature and ethics.
Economists Thorstein Veblen, John Maynard Keynes, Herbert Simon, and many of the Austrian School criticise Homo economicus as an actor with too great of an understanding of macroeconomics and economic forecasting in his decision making. They stress uncertainty and bounded rationality in the making of economic decisions, rather than relying on the rational man who is fully informed of all circumstances impinging on his decisions. They argue that perfect knowledge never exists, which means that all economic activity implies risk.
Empirical studies by Amos Tversky questioned the assumption that investors are rational. In 1995, Tversky demonstrated the tendency of investors to make risk-averse choices in gains, and risk-seeking choices in losses. The investors appeared as very risk-averse for small losses but indifferent for a small chance of a very large loss. This violates economic rationality as usually understood. Further research on this subject, showing other deviations from conventionally-defined economic rationality, is being done in the growing field of experimental or behavioral economics. Some of the broader issues involved in this criticism are studied in Decision Theory of which Rational Choice Theory is only a subset.
Other critics of the Homo economicus model of humanity, such as Bruno Frey, point to the excessive emphasis on extrinsic motivation (rewards and punishments from the social environment) as opposed to intrinsic motivation. For example, it is difficult if not impossible to understand how Homo economicus would be a hero in war or would get inherent pleasure from craftsmanship. Frey and others argue that too much emphasis on rewards and punishments can "crowd out" (discourage) intrinsic motivation: paying a boy for doing household tasks may push him from doing those tasks "to help the family" to doing them simply for the reward.
Altruistic economics rejects the model as unrealistically selfish, arguing that real people have friends to whom they are to a greater or lesser degree altruistic, so it relaxes the restriction that people's utility functions must be independent.
Other critics argue that the purely self-interested behavior of the Homo economicus reflects the behavior of the psychopath and not that of the average participant in the economy. As such the Homo economicus can be considered to be a purely theoretical construct.
Another weakness is highlighted by sociologists, who argue that Homo economicus ignores an extremely important question, i.e., the origins of tastes and the parameters of the utility function by social influences, training, education, and the like. The exogeneity of tastes (preferences) in this model is the major distinction from Homo sociologicus, in which tastes are taken as partially or even totally determined by the societal environment (see below).
Further critics, learning from the broadly-defined psychoanalytic tradition, criticize the Homo economicus model as ignoring the inner conflicts that real-world individuals suffer, as between short-term and long-term goals (e.g., eating chocolate cake and losing weight) or between individual goals and societal values. Such conflicts may lead to "irrational" behavior involving inconsistency, psychological paralysis, neurosis, and/or psychic pain.
One criticism contends that the Homo economicus model works as a self-fulfilling prophecy if a group of people (a company, a society) accepts its premises, particularly the idea that individuals only ever consider their personal utility function and that—as is often claimed—the "Invisible Hand" works to make these purely self-interested decisions promote the interest of society. Governance structures and social norms of such a group will effectively reward selfishness and discourage or ridicule deviant behavior like altruism, fairness, or teamwork; its idols will be those who most ruthlessly maximize their own utility function. This aspect has risen to wider attention in disciplines like organization science where extrinsic motivation has been found to be not nearly as effective with knowledge workers as it had been for traditional industries, creating a renewed interest in forms of motivation that do not fit into the Homo economicus model. This view however does not account for the fact that acting selfishly is not necessarily the same as acting in a self-interested manner, especially in social units in which altruistic and unselfish behavior is expected.
The clearest case of a self-fulfilling prophecy concerning Homo economicus has been in the teaching of economics. Several research studies have indicated that those students who take economics courses end up being more self-centered than before they took the courses. For example, they are less willing to co-operate with the other player in a "prisoner's-dilemma"-type game.
Some critics conclude from this that the "homo oeconomicus" construct is not so much a result of empirical research into human nature (which would have to take into account results of comparative, cross-cultural and historical research such as provided by economic anthropologists), but rather an implicitly prescriptive construct in line with the amoral rationality of modern monetary economies, in other words: not a result of empirical scientific inquiry but rather part of the ideology of liberalism. According to this view, traditionally held by many Marxists, "homo oeceonomicus" functions as a complement of the idea of liberal natural law for life, liberty, and property, sharing the same ideological pattern of attributing social and individual features that are products of history and belong into a specific social structure (civil society) to human nature, thus making them look inborn, natural and ahistorical, thus unchangeable. Some Marxists consider this false generalization as an ideological form necessary for maintaining the basic social structure of civil society, just as other forms of social organizations have their own form of ideology that places taboos on certain basic features of social organization in order to stabilize overall social structure.
It is also worth taking note of the fact that the economists believing in "homo oeconomicus" have been remarkably unsuccessful in creating "homo oeconomicus" in many so called developing countries, where people just do not seem to be ready to behave as the economists would like them to and would have expect them to according to their model.
Yet others argue that Homo economicus is a reasonable approximation for behavior within market institutions, since the individualized nature of human action in such social settings encourages individualistic behavior. Not only do market settings encourage the application of a simple cost/benefit calculus by individuals, but they reward and thus attract the more individualistic people. It can be difficult to apply social values (as opposed to following self-interest) in an extremely competitive market; a company that refuses to pollute (for example) may find itself bankrupt.
Defenders of the Homo economicus model see many critics of the dominant school as using a straw-man technique. For example, it is common for critics to argue that real people do not have cost-less access to infinite information and an innate ability to instantly process it. However, in advanced-level theoretical economics, scholars have found ways of addressing these problems, modifying models enough to more realistically depict real-life decision-making. For example, models of individual behavior under bounded rationality and of people suffering from envy can be found in the literature. It is primarily when targeting the limiting assumptions made in constructing undergraduate models that the criticisms listed above are valid. These criticisms are especially valid to the extent that the professor asserts that the simplifying assumptions are true and/or uses them in a propagandistic way.
The more sophisticated economists are quite conscious of the empirical limitations of the Homo economicus model. In theory, the views of the critics can be combined with the Homo economicus model to attain a more accurate model.
One problem with making the Homo economicus model more sophisticated is that sometimes the model becomes tautologically true, i.e., true by definition. If someone has a "taste" for variety, for example, it becomes difficult if not impossible to distinguish economic rationality from irrationality. In this case, the Homo economicus model may not add any new information at all to our economic understanding.