How behavioral economics rescue economic man from the selfishness
Economic man is an imaginary perfect rational person who maximizes hisher economic welfare or being and achieves the consumer equilibrium by thinking marginally all the time. The importance of this concept is hinged in the theory of consumer behavior in which real people function such as this fictional entity. On the other hand, economics is a group of ideas and conventions put together by different economists which they accept and use to reason along with. It is mainly a culture of doing things mainly by the economists. Behavioral economics therefore represents the transformation of such culture and it is a field of economics that study how decision-making process influences reached decisions in any organization as well as in any individual.
The axioms of the consumer choices that underlie the economic man ensure that he, the economic man, is minimally rational and consistent in the choices that he makes because he always prefers more of a thing to less and he is able to efficiently allocate his low income among numerous things that he desires so as to enable him achieve a global utility maximum. In a standard welfare model, habits and culture are assumed to take a fixed position or at least change slowly during a given time period so that the cultural context of the Homo economicus economic man does not enter the analysis stage. The way tastes and preferences are formed is assumed to be outside the purview of economics because they are not matters of dispute (Stigler and Becker, 1977).
According to Veblens (1898), an Economic man is a homogeneous (Uniform) globule of desire full of self interest. Self-interest is defined by different economists as all things that are intangible and tangible to human beings (Solow, 1993) but in practice the real meaning of utility is radically narrowed down to mean the consumption of goods in the market. Any increase in the welfare is equated to the increase in the economic output. The Economists are aware of public goods, intransitivity, Veblen effects and interdependent utilities but all these real-world phenomena are very difficult to include in the general equilibrium framework that currently dominate the economic policy recommendations.
Different subjects explain the economic man in different terms pointing to the same meaning. For instance, biology explains the economic man as a selfish gene while regarding it as a concept that is used to explain the overall selfishness of any living thing especially man and for the direction of evolution. Richard Dawkins with his evolution theory coined this term in his book titled The Selfish Gene (Dawkins, 1976) as a notion of competition, struggle for survivalexistence, natural selection and survival of the fittest in his idea of genes as self replicators. In a teleological account, evolution of the biological life is explained as being driven by these replicators, genes. The conclusion drawn here is that the successful replicators are very selfish that otherwise they would not replicate successfully. In order to protect and preserve their replication process, these genes create avenues of self-preservation in form of living things, their bodies and minds. From this type of reasoning, Dawkins (1976, p. 2) concludes that human nature cannot be anything but selfish as its very essence is composed of very selfish units in the name of genes. Later, Dawkins expanded his biological research by considering these genes as self-contained wholes things.
But, as Maynard Smith states in Barlow (1991, p. 195), this Selfish Gene does not contain any new facts but rather offers a new world view. The basic to this view is the notion that competition and the virtuousness of the selfish behavior of biological units are rife in ever being. It is from this view that the biologist Ghiselin (1974, p. 247) writes concerning the species and nature that natural economy is competitive from start to the end .This can be seen in the impulses which lead an animal to sacrifice herself for another turn out to have their rationale in gaining more advantage over a third animal especially where it is in her own interest. Therefore, every organism can reasonably be expected to aid her fellow organisms yet if given full chance to act in her own interest, nothing but speed will restrain her from brutalizing, from murdering, from maiming her mate or child.
This perspective of the biological world replicates the economic perspective of human nature as being openly self-centered, rational in being consistent in choices they make and characterized by selfishness which is constrained by expediency. Strong intellectual thoughts in both economics and biology see the market economy as being full of utility-maximizing individuals without room for cooperation other than for a single individual to gain the immediate advantage over other individuals.
With the above explanation, there are three areas that tend to look at the economic man in a bid to get him out of his selfishness. These areas include the neoclassical economics, the human behavior and the behavioral economics. The criticism of these three areas against each other really explains the demerits of the economic man and the associated selfishness to each other.
In the neoclassical economics, economics is the study of the way resources are allocated to their uses. In this school of thinking, economics is said to be the study which considers human behavior as a relation between alternative ends and scarce means. Virtually every neoclassical economist is a positive economist though there are a number of positive economists that are not neoclassical in nature. Therefore, neoclassical economists consider the study of resource allocation as scientific and not a normative study. In addition, a neoclassical economist believes that free markets always bring about efficient resource allocation.
With this understanding, neoclassical economists have made a number of assumptions. Depending on the definition that one can prefer, it can be said that economists are more interested in the resource allocation in nature and causes wealth of nations or perhaps something different. Irrespective of all these, all such things depend on the actions and decisions of people. Therefore, so as to get started, economists made or make some assumptions about people and about how individuals act and how they decide how to act. However, the economists have not as a rule based these assumptions on the psychological views of human minds. Rather, most of them have started from an assumption that few modern psychologists might support. This assumption is that human beings individuals are highly rational and self-interested selfish. Many neoclassical economists assume that human beings make their choices in a way that gives them the best possible advantage(s) especially given the circumstances that they face. Such circumstances includes such things as the prices of the resources, goods and services available, scarce income, limited and localized technology for transforming such resources into finished goods and services, taxes imposed on them by their organizations, regulations by their governments and other objective limitations on the choices that they make.
In Strict terms, neoclassical economics does not just assume that real and concrete people are rational and self-interested as it may seem. Rather, many economists assume that the economic systems work as if they consist of the rational and self-interested persons. People exists in all sorts ranging from sneaky and altruistic to smart and dumb but if the average is an individual that is rational and self-interested, then the system most definitely will act as if human beings in general were self-interested and rational. The basis of neoclassical economics assumes that deviations from the rational self-interests are random and therefore will cancel out making the system to act as if every person is rational and self-interested. As a consequence, neoclassical economics studies the economic system that consists of rational, self-interested persons.
However, it is known that there are some examples of non-self-interested behavior of human beings who for instance give to the church and who sacrifice themselves in other ways -- and common sense suggests that human beings are often irrational chumps.
There are two very issues here to closely scrutinize. The first one is that human beings are at times altruistic. One can not avoid concluding that people sometimes act on ethical values making it hard to see how the selfishness of this majority can cancel out this self-sacrifice of many others. Therefore, people often act on non self interested values but whenever they do so they act on their own values and not of the government or some philosopher(s) or the economist that is observing. This might be called a rational individualism rather than a rational self interest.
What is left then is the rationality if human beings are not always self-interested. A broader neoclassical economics presumes that human beings choose things in a way that best advances their own values, altruistic or self-interested. The critics of the neoclassical economics sometimes argue that economics is an apology for self-interest.
We can therefore note the behavioral approachs criticism to the neoclassical economics that man is always selfish and self centered. The behavioral approach indicates that not all people are self centered since many individuals act on behalf of other people. This indicated that it is not true that all people are selfish. Rather, some are and it should not be generalized that all human beings are selfish to conform to the economic man.
However, human behavior is not always selfish and behavioral economics rescues economic man from the selfish gene. In other words, the behavioral economics criticizes the neoclassical economics whether people are always rational or not. The neoclassical economics is at times criticized for its normative bias against human beings especially on their assumption. In this perspective, it does not lay more focus on explaining the actual economies instead of describing a utopia in which Pareto optimality applies.
The assumption that human beings act rationally can be seen as ignoring very important aspects of the human behavior. Many people see the economic man to be very different from real people. Majority of the economists, even contemporary economists, have criticized the model of economic man. Neoclassical economics assumes people to be the lightning calculators of pleasures and pains, who oscillate like the homogeneous globule of desires of happiness under impulses of stimuli which shifts about an area but leaves then intact. Large organizations might come closer to the neoclassical ideal of maximizing profits but this is not necessarily seen as desirable whenever it arises at the expense of negligence of the wider social issues. The response to this argument is that neoclassical economics is more of a descriptive statement rather than a normative one. It therefore addresses such problems with the concepts of private against those of social utility.
Many critics of behavioral economics typically insist on the rationality of the economic agents. They contend that the experimentally observed behavior is not applicable to the market situations as the learning opportunities and competition ensures at a close approximation of the rational behavior. Equally, many others note that the cognitive theories like the prospect theory are models of decision making and not generalized economic behavior hence are only applicable to the sort of once-off decision problems that are presented to experiment the survey respondents.
Traditional economists are also very skeptical of the survey based techniques which are put to use extensively in the behavioral economics. Economists typically emphasize on the revealed preferences over the stated preferences from the survey in determining the economic value. Experiments and surveys should be designed very carefully so as to avoid systemic biases and lack of incentive compatibility.
Some economists on the other hand dismiss these criticisms claiming that the results are reproduced in various situations and nations which can lead to good theoretical insight. Behavioral economists on the other hand have incorporated these criticisms by focusing more on the field studies as compared to the than lab experiments. Some economists therefore look at this split as the fundamental schism between the experimental economics and the behavioral economics. However, prominent experimental and behavioral economists overlap some techniques and approaches in giving answers to common questions.
In addition, many other proponents of the behavioral economics have taken note that neoclassical models many times fail to predict the outcomes in the real world context. Behavioral insights can therefore be used to update the neoclassical equations and the economists have noted that these revised models do not only reach similar correct predictions as the traditional models but predicts correctly some outcomes where the traditional models fail.