by Kate Raworth
Homo economicus may be the smallest unit of analysis in economic theory – equivalent to the atom in Newton’s physics – but, just like an atom, his composition has profound consequences. There are, most likely, going to be more than ten billion of us by 2100. If we head towards that future continuing to imagine, conduct and justify ourselves as Homo economicus – solitary, calculating, competing and insatiable – then we stand little chance of meeting the human rights of all within the means of our living planet. And so it is time to meet ourselves all over again by taking his cartoon depiction out of the economic gallery and painting, in its place, a new portrait of humanity. It will turn out to be the most important portrait commissioned in the twenty-first century, mattering not just to economists but to us all. Its preparatory sketches are under way and, just as in Leonardo’s workshop, many artists are collaborating in piecing them together, from psychologists, behavioural scientists and neurologists to sociologists, political scientists and, yes, economists.
This chapter traces the evolving portrayal of rational economic man that has come to define our economic selves, and reveals the profound impact that it has had upon us. But it also looks ahead to our emerging new portrait, exploring five broad shifts in the depiction of who we are. Each one of those shifts illuminates a critical aspect of human nature which, once better understood, can be nurtured in ways that help us move into the safe and just space for humanity.
The story of our self-portrait
Rational economic man stands at the heart of mainstream economic theory but the history of where he came from has been airbrushed from the textbooks. His portrait is painted in words and equations, not in pictures. If it were to be drawn, however, he would have to look something like this: standing alone, money in hand, calculator in head, and ego in heart.
Rational Economic Man: the human character at the heart of mainstream economic theory.
Where did this infamous character come from? His most intimate early portrait was created by Adam Smith in two major works, his 1759 Theory of Moral Sentiments and his 1776 book known as The Wealth of Nations. Today Smith is best remembered for having noted the human propensity to ‘truck, barter and exchange’ and the role of self-interest in making markets work.2 But although he believed self-interest was, ‘of all virtues that which is most helpful to the individual’, Smith also believed it was far from the most admirable of our traits, knocked off that top spot by our ‘humanity, justice, generosity and public spirit … the qualities most useful to others’. Did he consider humankind to be motivated by self-interest alone? Not at all. ‘How selfish soever man may be supposed,’ he wrote, ‘there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.’3 Furthermore, Smith believed that an individual’s self-interest and concern for others combined with their diverse talents, motivations and preferences to produce a complex moral character whose behaviour could not easily be predicted.
Lacking a simplified, predictable character at its heart, political economy looked destined to remain mere art, not science. That frustration prompted John Stuart Mill to pare down the description and become – in the footsteps of Leonardo – the first economic caricaturist. Political economy ‘does not treat the whole of man’s nature … nor the whole conduct of man in society’, he argued in 1844. ‘It is concerned with him solely as a being who desires to possess wealth.’ To this desire for wealth, Mill added two other exaggerated features: a deep dislike of work and a love of luxuries. He admitted that the resulting depiction was ‘an arbitrary definition of man’, based on ‘premises which might be totally without foundation’, making the conclusions of political economy ‘only true … in the abstract’. But he justified his caricature, confident that no ‘political economist was ever so absurd as to suppose that mankind are really thus constituted’, while adding that ‘this is the mode in which science must necessarily proceed’.4
Not everyone agreed: in the 1880s the political economist Charles Stanton Devas coined a now infamous nickname when he derided Mill for ‘dressing up a ridiculous homo oeconomicus’ and examining only the ‘dollar-hunting animal’.5 But by presenting a simplified and predictable character, Mill’s caricature opened up the scope for economic theory and apparent scientific method, and so it stuck.
The economist most eager to further Mill’s efforts at caricature was William Stanley Jevons. He was inspired by Newton’s success in reducing the physical world to atoms and then constructing its laws of motion from a single atom up. So he attempted to model a nation’s economy along the same lines, reducing economic activity to what he called the ‘single average individual, the unit of which population is made up’.6 To achieve this, he had to make the caricature even more exaggerated so that human behaviour could be described mathematically, which for Jevons was the ultimate in scientific credibility. He noted that the philosopher Jeremy Bentham had been busy expounding the idea of utility – a ‘felicific calculus’ based on an ambitious classification of 14 kinds of human pleasure and 12 kinds of pain – in order to provide the quantifiable basis for creating a universal moral and legal code. Seizing upon the mathematical potential of this concept, Jevons drew up ‘calculating man’, whose fixation on maximising his utility had him constantly weighing up the consumption satisfaction that he might derive from every possible combination of his options.7
With this move, Jevons placed utility at the heart of economic theory – a spot it occupies to this day – and from it he derived the law of diminishing returns: the more of a thing that you consume (be it bananas or shampoo), the less you will desire still more of it. But, despite each one of his desires following such a law of satiation, this economic man knew of no satiation overall. Alfred Marshall put it most vividly in his influential 1890 text Principles of Economics. ‘Human wants and desires are countless in number and very various in kind,’ he wrote. ‘The uncivilized man indeed has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs … he desires a greater choice of things, and things that will satisfy new wants growing up in him.’8 Thus, by the end of the nineteenth century, the caricature clearly depicted a solitary man, ever calculating his utility, and insatiable in his wants.
It was a powerfully simple depiction which opened the way to new kinds of economic reasoning. But still it was not enough: the nineteenth-century model of economic man may have been ever-calculating but he was not all-knowing, and his inherent uncertainty (which forced him to act upon opinion rather than knowledge) barred the way to complete mathematical modelling. Hence in the 1920s, 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. This was a decisive break with the old portrait: no longer merely exaggerating recognisably human features, Knight embellished his Homo economicus with superhuman powers. And with that, he had turned the caricature into a cartoon. He knew it, too: he admitted that his depiction of humanity was loaded with ‘a formidable array’ of artificial abstractions, resulting in a creature who ‘treats other human beings as if they were slot machines’.9 But economic science needed just such an idealised man to inhabit its idealised economic world, he reasoned, in order to unleash the potential of mathematical modelling, and so he became the world’s first economic cartoonist.
Milton Friedman reinforced Knight’s justifications in the 1960s, when he defended the cartoon character. He argued 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.10 Crucially, around the same time, that cartoon began to be seen by many leading economists of the day as an exemplar, a model for how real man should behave. Rational economic man came to define
rationality, recounts the economic historian Mary Morgan, and turned into ‘a normative model of behaviour for real economic actors to follow’.11
Life imitates art
Over the course of two centuries – from the 1770s to the 1970s, as economic man’s depiction morphed from a nuanced portrait to a crude cartoon – what had started as a model of man had turned into a model for man. This matters, argues economist Robert Frank, because ‘our beliefs about human nature help shape human nature itself’. Research by Frank and others has revealed, first, that the discipline of economics tends to attract self-interested people. Experimental research in Germany, for example, found that economics students were more likely than other students to be corruptible – willing to give a biased answer – if it led to a personal payout.12 Research in the US likewise found that economics majors were more approving of their own and others’ self-serving behaviour, while economics professors gave significantly less money to charity than their worse-paid colleagues in many other disciplines.13
Beyond attracting self-interested people, however, studying Homo economicus can alter us too, reshaping who we think we are and how we should behave. In Israel, third-year economics majors rated altruistic values – such as helpfulness, honesty and loyalty – as far less important in life than did their freshman equivalents. After taking a course in economic game theory (a study of strategy which assumes individual self-interest in its models), US college students behaved more selfishly, and expected others to do so as well.14 ‘The pernicious effects of the self-interest theory have been most disturbing,’ concludes Frank. ‘By encouraging us to expect the worst in others, it brings out the worst in us: dreading the role of the chump, we are often loath to heed our nobler instincts.’15
That’s a clear caution to all students of economics. But rational economic man’s influence on our behaviour goes far beyond the classroom. A striking example was uncovered at the Chicago Board Options Exchange (CBOE) which opened in 1973 and became one of the most important financial derivatives exchanges in the world. In the same year that the Exchange opened for trading, two influential economists, Fischer Black and Myron Scholes, published what came to be known as the Black–Scholes model, which used publicly available market data to calculate the expected price of options traded in the market. At first the formula’s predictions deviated widely – by 30% to 40% – from actual market prices at the CBOE. But within a few years – and with no alterations to the model – its predicted prices differed by a mere 2% on average from actual market prices. The Black–Scholes model was soon heralded as ‘the most successful theory not only in finance, but in all of economics’ and its creators were awarded Nobel-Memorial prizes.
Two economic sociologists, Donald MacKenzie and Yuval Millo, decided to delve deeper into the matter, however, by interviewing some of the derivatives traders themselves. What did they discover? That the theory’s increasing accuracy over time was because the traders had started to behave as if the theory were true, and so were using the model’s predicted prices as a benchmark for setting their own bids. ‘Financial economics,’ they concluded, ‘helped create in reality the kind of markets it posited in theory.’16 And as financial markets later learned, when those theories turn out to be flawed, the consequences can be dire.
If rational economic man can reshape our behaviour in financial markets, he is very likely to be reshaping our behaviour in other parts of life too, especially when his priorities permeate our language. One experiment in the US found that after corporate executives were asked to solve simple riddles involving words like ‘profits’, ‘costs’ and ‘growth’, they tended to respond to their colleagues’ needs with less empathy, and even worried that expressing concern for others at work would not seem professional.17 Another experimental survey found that university students who were invited to take part in a ‘Consumer Reaction Study’ identified more strongly with notions of wealth, status and success than did their fellow students who were merely told instead that they were participating in a ‘Citizen Reaction Study’.18 Change one word and you can subtly but deeply change attitudes and behaviour. Throughout the twentieth century, widespread use of the word ‘consumer’ grew steadily in public life, policymaking and the media until it far outstripped the word ‘citizen’: in English-language books and newspapers, that happened in the mid 1970s.19 Why does it matter? Because, explains the media and cultural analyst Justin Lewis, ‘Unlike the citizen, the consumer’s means of expression is limited: while citizens can address every aspect of cultural, social and economic life … consumers find expression only in the market place.’20
The Chicago Board Options Exchange, where markets came to mimic market theory.
The twenty-first-century portrait
The portrait we paint of ourselves clearly shapes who we become. That is why it is essential for economics to portray humankind anew. By better understanding our own complexity, we can nurture human nature and give ourselves a far greater chance of creating economies that enable us to thrive within the Doughnut’s safe and just space. The preliminary sketches for this updated self-portrait are under way, revealing five broad shifts in how we can best depict our economic selves. First, rather than narrowly self-interested we are social and reciprocating. Second, in place of fixed preferences, we have fluid values. Third, instead of isolated we are interdependent. Fourth, rather than calculate, we usually approximate. And fifth, far from having dominion over nature, we are deeply embedded in the web of life.
These five shifts in the emerging portrait are fascinating, but there’s just one catch: the choice of the artist’s model. Over the past forty years, behavioural psychology experiments have revealed a great deal about how people actually behave – but which people? Out of sheer convenience, the vast majority of experimental studies, which have been conducted by academic researchers in North America, Europe, Israel and Australia, have used their own universities’ undergraduate students as their subjects. As a result, between 2003 and 2007, 96% of people studied in such behavioural experiments came from countries that were home to only 12% of the world’s population. That would be no concern if those subjects’ behaviour was representative of people everywhere. But it turns out that it is not. The few cases of research carried out in other countries and cultures reveal that those convenient-to-study university undergraduates actually behave quite differently from most people. That may well be because – unlike the vast majority of humanity – they live in WEIRD societies: ones that are Western, educated, industrialised, rich and democratic.21
What does that sampling bias mean for making sense of the emerging portrait? Understanding the range of behavioural differences between cultures and societies – and the reasons behind them – is clearly a subject for much-needed research, but for now we can count on two givens. First, although human behaviour may vary between societies, one important thing unites humanity: none of us resemble that narrow old model of rational economic man. Second, until a more nuanced and diverse image of humanity has been sketched out, the emerging portrait described in the five shifts below most closely resembles people in WEIRD societies.
From self-interested to socially reciprocating
Adam Smith spotted that self-interest is an effective human trait for making markets work, but he knew it was far from the only one required to make society and the wider economy work well too. Yet in The Wealth of Nations his sharp focus on the role of self-interest in markets overshadowed the rest of his rich observations about morals and motivation, and that trait alone was plucked out by his successors to provide the DNA for economic man. Over the following two centuries, economic theory came to be founded upon the fundamental assumption that competitive self-interest is not only man’s natural state but also his optimal strategy for economic success.
Stand back and take a look at how people actually behave, however, and that assumption starts to look flimsy. Along with being self-regarding we are also other-regarding. We help strangers with heavy luggage, hold d
oors open for each other, share food and drink, give money to charity and donate blood – even body parts – to people we will never meet. Toddlers just 14 months old will help others by handing them out-of-reach objects, and children as young as three will share their treats with others. Of course children and adults alike often struggle to share – we certainly have the capacity to snatch and hoard too – but the striking fact is that we share at all.22 Homo sapiens, it turns out, is the most cooperative species on the planet, outperforming ants, hyenas, and even the naked mole-rat when it comes to living alongside those who are beyond our next of kin.
In short, along with our propensity to trade, we are also drawn to give, share, and reciprocate. That may be because cooperation enhances our own group’s chances of survival. In the simplest of terms, we send a clear message to each other: if you want to get by then learn to get along. And we have learned to get along in very particular ways. According to economists Sam Bowles and Herb Gintis, we WEIRD ones typically practise what is known as ‘strong reciprocity’: we are conditional cooperators (tending to cooperate so long as others do too) but also altruistic punishers (ready to punish defectors and free riders even if it costs us personally). And it is the combination of these two traits that leads to the success of large-scale cooperation in society.23 No wonder rating and review systems are so popular in the otherwise anonymous online marketplace. From eBay to Etsy, they turn each participant’s track record into their trading reputation, revealing who can be trusted, so allowing conditional cooperators to find each other and thrive even in the presence of free riders.24
