Welcome to a critical exploration of the myths surrounding mainstream economics. Today, we unravel a key fallacy—the notion that individuals operate primarily as rational economic agents. This insightful post by Richard Murphy delves into a flawed concept that has long influenced economic thought.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future
At the core of neoclassical economics lies a host of myths, topped by the far-fetched idea of homo economicus: the perfectly rational, fully informed, and self-interested individual presumed to orchestrate all economic activity.
But does such a being exist? The simple answer is no. We are emotional, social, biased, and inherently uncertain creatures. Our actions are driven as much by compassion, routine, and fear as by logic. Nonetheless, this myth of rationality continues to inform policies, shape markets, and even dictate governmental perspectives on human behavior.
In the accompanying video, I challenge this entrenched myth that sits at the heart of mainstream economics. I illustrate how its erroneous assumptions about utility, complete knowledge, and profit maximization bear no resemblance to reality, and why that disconnect is significant—from financial crises to our daily lives.
To cultivate an economics that genuinely serves humanity rather than abstract theory, we must lay to rest homo economicus and embrace the concepts of uncertainty, collaboration, and compassion that truly define human behavior.
This is the transcript:
Neoclassical economics is constructed on the flimsy foundation of myths—unsupported assumptions that purportedly underpin this system of thought, yet which are utterly nonsensical.
Among these myths, the idea of homo economicus stands out. This is the characterization of an entirely rational, well-informed, and self-interested individual driving all economic behavior.
But does this homo economicus really exist? Are you that person? Are you ever solely rational? Are you completely informed about every decision you make? Do you always act in your self-interest without regard for others? If you can’t answer ‘yes’ to all these, then the framework of neoclassical economics is fundamentally flawed, as it posits that this is the norm for human behavior.
The premise of neoclassical economics is that we seek to maximize our personal utility. Yet, what does that truly mean? Economic utility is described as the satisfaction, happiness, or benefit derived from consuming goods or services. However, it is impossible to measure utility with certainty as it is not simply about money. Ironically, money is used as the primary tool in economics to approximate this utility, which introduces inherent contradictions.
The definition of utility is entirely subjective and abstract. Despite this, neoclassical economics hinges on the assumption that we strive to maximize our happiness, much like businesses aim to maximize profits. Yet even the definition of profit is not universally agreed upon, and maximizing it presupposes knowledge of the future—knowledge that no one possesses.
Neoclassical economics sidesteps this limitation by assuming that future knowledge is perfect and readily available, which leads to the absurd notion that all decisions can be calculated to optimize our well-being.
This foundational doctrine of neoclassical economics is sheer nonsense.
They insist that homo economicus exists, despite the fact that you’ve likely never encountered anyone resembling this ideal individual.
In truth, we lack perfect knowledge.
We are influenced by emotions, biases, and habits.
We are not rational.
We exhibit care, compassion, and emotion.
Most importantly, we do not possess foresight, nor do we always understand what is best for our own happiness. Our decisions are often guided by heuristics and general rules because we typically lack the time to engage in rigorous calculations to determine what maximizes our well-being, even if we somehow knew what that would be.
The reality is that we are not solitary, independent beings making rational choices. Instead, much of our behavior is shaped by herd mentality, leading to noticeable consequences such as economic booms and crashes.
So why do we cling to the notion of homo economicus?
Why do we ascribe motives to individuals that do not exist?
Why does neoclassical economics overlook the instability and risks stemming from both human actions and algorithmic behaviors?
This approach simplifies economics to make its limited scope appear viable, yet in doing so, it fails to accurately represent how real people behave and live.
These flawed foundations of neoclassical economics, which inform neoliberal policies, perpetuate ongoing crises. The advice generated through this narrow lens fails to align with reality.
If one prescribes strategies for a non-existent world and tells the real world to conform to that unattainable vision, one is destined to propose a formula for failure. That’s the scenario we currently face.
The concept of homo economicus, this supposedly rational archetype central to economic theory—this standardized figure from whom no deviations in behavior occur—must be decisively abandoned. We must acknowledge that such a being never existed.
For economics to fulfill a beneficial role in a world rich with uncertainty, we must discard the assumptions that form the backbone of neoclassical economics.
