Decision making
Adam Smith (1723–90)
c.350 BCE Greek philosopher Aristotle claims that innate self-interest is the primary economic motivator.
1750s French economist François Quesnay claims that self-interest is the motivation behind all economic activity.
1957 US economist Herbert Simon argues that people are not able to acquire and digest all available information about every topic, so their rationality is “bounded” (limited).
1992 US economist Gary Becker receives the Nobel Prize for his work on rational choice in the fields of discrimination, crime, and human capital.
Most economic models are underpinned by the assumption that humans are essentially rational, self-interested beings. This is Homo Economicus, or “economic man.” The idea—which applies equally to men and women—assumes that every individual makes decisions designed to maximize their personal well-being, based on a level-headed evaluation of all the facts. They choose the option that offers the greatest utility (satisfaction) with the least effort. This idea was first expounded by Adam Smith in his 1776 work, The Wealth of Nations.
Smith’s central belief was that human economic interaction is governed mainly by self-interest. He argued that “it is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their own interest.” In making rational decisions suppliers seek to maximize their own profit; the fact that this supplies us with our dinner matters little to them.
Smith’s ideas were developed in the 19th century by the British philosopher John Stuart Mill. Mill believed people were beings who desire to possess wealth, by which he meant not just money, but a wealth of all things good. He saw individuals as motivated by the will to achieve the greatest well-being possible, while at the same time expending the least possible effort to achieve these goals.
Today, the idea of Homo Economicus is referred to as rational choice theory. This says that people make all kinds of economic and social decisions based on costs and benefits. For example a criminal thinking of robbing a bank will weigh the benefits (increased wealth, greater respect from other criminals) against the costs (the chances of getting caught and the effort involved in planning the heist) before deciding whether to commit the crime.
Economists consider actions to be rational when they are taken as a result of a sober calculation of costs and benefits in relation to reaching a goal. Economics may have little to say about the goal itself, and some goals may appear to be quite irrational to most people. For example, while to most of us it may seem a dangerous decision to inject the human body with unverified performance-enhancing drugs, for numerous athletes—in the context of the desire to be the best—the decision may be a rational one.
Some people have questioned whether the idea of Homo Economicus is realistic. They argue that it does not allow for the fact that we cannot weigh every relevant factor in a decision—the world is too complex to collect and evaluate all the relevant facts needed to calculate costs and benefits for every action. In practice we often make quick decisions based on past experience, habit, and rules of thumb.
The theory also falters when there are conflicting long- and short-term goals. For instance someone might buy an unhealthy burger to stave off immediate hunger, despite knowing that this is an unhealthy choice. Behavioral economists have begun to explore the ways in which humans act differently from Homo Economicus when making choices. The idea of “economic man” may not be entirely accurate for explaining individual behavior, but many economists argue that it remains useful in analyzing the actions of profit-maximizing firms.
Monks who lead a life of fasting and prayer, denying worldly goods in the expectation of an afterlife, act rationally within their beliefs, regardless of what others may think of their goal.
Parents’ investments in children, especially through education, are an important source of an economy’s capital stock, according to Becker.
US economist Gary Becker (1930–) was one of the first to apply economics to areas usually thought of as sociology. He argues that decisions relating to family life are made by weighing costs and benefits. For example he views marriage as a market and has analyzed how economic characteristics influence the matching of partners. Becker also concluded that family members will help each other, not out of love, but out of self-interest in the hope of a financial reward. He believes that investment in a child is motivated by the fact that it often produces a better rate of return than traditional retirement savings. However, children cannot be legally forced to take care of their parents, so they are brought up with a sense of guilt, obligation, duty, and love, which effectively commits them to helping their parents. For this reason it can be argued that the welfare state damages families by reducing their need for interdependence.