Academic journal article The Journal of Philosophical Economics

The Economic Consequences of Homo Economicus: Neoclassical Economic Theory and the Fallacy of Market Optimality

Academic journal article The Journal of Philosophical Economics

The Economic Consequences of Homo Economicus: Neoclassical Economic Theory and the Fallacy of Market Optimality

Article excerpt

Abstract: This essay presents a critique of the standard ascension from the rational agent to the optimal market in economic theory. Critiques of homo economicusare found unsatisfactory on grounds that its employment allows for the prediction of essential features of actual markets. Using this same criterion we introduce Gary Becker's essay, 'Irrational Behavior and Economic Theory,' which demonstrated that the same features of markets could be derived from non-rational behaviour. Thus, non-rationality is equally predictive but is less restrictive than rationality. Once the assumption of rationality is relaxed, the concept of market optimality (though not market order) must also be sacrificed.

Keywords: neoclassical economics, rationality, philosophy of social science

Introduction

The critiques of the market commonly referred to in the worlds of economics and economic sociology tend to be some variant on the following: externalities, public goods, information failures, and concentrations of economic power (Wright & rogers 2010). once these problems are detailed, sociologists and other social scientists often follow neoclassical economists in an advocacy of markets that is rooted in economic efficiency. neoclassical economists however employ the economic concept of efficiency in a fairly idiosyncratic manner. here economic efficiency refers to the market transaction as a utilitarian good, which 'optimizes,' inadvertently extracting all latent surpluses out of the system. it was an italian economist named Vilfredo Pareto (1909) who most famously expounded the theory behind the claim, arguing that voluntary market exchange allows for the optimization of any initial endowment of goods and income between economic actors.[1] Thus the market works ceaselessly to make some actors better off without making any worse off until an optimal allocation is reached and no more societal gains are realizable. of course, inequalities may still result, but it is claimed that they can be compensated for retroactively given the surplus that has been achieved. so, once externalities, information asymmetries and power asymmetries are abstracted away, the high theory of microeconomics, and more broadly neoclassical economics, provides scholars and pundits alike with a formidable ideological weapon against any disruption of the ostensibly optimal operation of the market.

however, below the surface sits a peculiar creature upon which the house of neoclassical economics rests: homo economicus. The behaviour of this much- maligned hypothetical subject underlies the aggregate result of the optimal market. in fact, neoclassical economics posits that the macro-level reality of the market is no more than a scale model of the actions of this 'representative agent.' But not just any agent will do. The important result of the optimalmarket depends in the last instance on the ability of the representative agent to consistently make gain- maximizing choices. for if the choices of the individual actor are not uniformly rational, and hence do not maximize his personal utility, then the exploded version of himself, the market, cannot be said to be efficient.[2] Beyond the initial set of qualifications, economic sociologists and other social science analysts of economic life also tend to reject the concept of homo economicus as a false description of reality (Dimaggio 1994; hirsch, michaels & friedman 1990). While we do not disagree, we believe that faulting the assumptions of a model is unsatisfactory. instead, herein we try to introduce a fundamental and internal critique of the market to an broad inter-disciplinary audience that is neither a mere qualification of the neoclassical economic model, nor a facile rejection of its underlying assumptions.

The aim of this essay is to submit an immanent critique of the standard ascension from the individual agent to the optimal market. in our view, a successful critique of this ascension-particularly one that employs the methodological criterion of appraisal internal to the discipline rather than directly critiquing its 'hard-core' philosophical principles [3]-serves to weaken the basic ideological conclusion of neoclassical microeconomics stated above. …

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