A couple of weeks ago, we tried posting a couple of videos on YouTube on what we described as neoclassical myths. They were put out in the afternoon, but to be honest, they did not set the world alight, and we are now wondering whether there is a real benefit from publishing material of this sort in this way, and whether we should publish it instead as blog posts, with the deliberate intention of the post in question being transferred straight into our glossary, which some people have asked that we do.
Quite deliberately, the post that follows, which will also be posted to the glossary, repeats the theme of one of those previous videos, referring to the myth within neoliberal economics of the existence of the wholly rational human being, commonly called homo economicus.
This post is, we think, about the length that this subject requires, and the format is one that we could use for about thirty subjects that we have identified as being suitable for this treatment. However, before putting the effort into doing that, I would be interested to know what people think. Is this worthwhile? Then, once the series is complete, would people be interested in having it made available as a PDF download? There is a poll below, and on this occasion, you can answer as many questions as you like, as I am looking for opinions on a range of issues. And if you have other suggestions to make, please leave a comment.
Rational Economic Agents (Homo Economicus)
Neoclassical economics begins with a myth that sounds scientific but isn't, which is that people behave as perfectly rational decision-makers.
According to this story, each of us calculates costs and benefits like a computer, acts only in our own self-interest, and never lets emotion, the influence of others, or habit intervene. Economists even gave this imaginary species a name. This person is called Homo Economicus. He or she has become the invisible protagonist of most economic models, despite never having been observed in nature.
Assumption
The theory assumes people maximise their “utility”, which is a technical word for satisfaction or well-being, while firms always maximise their profits and have no other objectives.
Everyone is assumed to have perfect information so that they understand all options available to them, and that they then act solely on the basis of the logical calculation of the best possible outcomes for them alone.
Emotion, uncertainty and power are excluded. Economic life is reduced to a series of tidy equations describing how idealised agents interact in markets that always balance.
Reality
Real humans are not calculating machines. Behavioural economics and psychology have shown again and again that we act through shortcuts, hunches and habit, or heuristics as they are called. We are influenced by peers, advertising, culture and fear. Far from possessing perfect information, we are often misled or overwhelmed by too much of it. Biases, such as overconfidence, herd instinct, and loss aversion, all shape decisions far more than rational analysis ever could. Financial markets, which are supposedly driven by reason, repeatedly fall prey to collective euphoria and panic. The 2008 crisis, crypto bubbles since then, and housing manias are all examples of herd behaviour dressed up as rational choice.
Why It Matters
Building economic policy on this false psychology has serious consequences. It leads governments and central banks to believe, or at least pretend, that markets will always allocate resources efficiently because everyone acts logically. This then blinds policymakers to instability, exploitation and crisis. Meanwhile, social security systems are designed as if people respond only to incentives without consideration for need or dignity, whilst tax systems assume compliance depends purely on self-interest, in the process ignoring morality and social trust. It is only when we accept that humans are social, emotional and cooperative that a different economics becomes possible; one that values care, community and fairness as much as calculation.
Summary
Economics must start from the realisation that human beings are fallible, relational, and creative, and not from the assumption that we are the robots that economists wish us to be.
Poll
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I have found the myths and also the questions (like the Schumpeter Question) excellent
Thanks
Me too.
This sort of thing is valuable content that will last; indeed, I think it is more valuable that some of your other material. But it is a slow burn not a quick endorphin hit. More in the nature of educational material than political commentary or reaction to the news. It is exactly the sort of thing I would hope to see a serious social-political-economic commentator and educator putting out. But you should not expect to draw the same number of clicks and views as other more polemical material.
It is your time to spend as you wish, of course, but is it only worth the buck if it goes with an immediate bang?
To put it another way, is anyone else doing it in the way you are, with the reach and cut-through that you have? Might that be enough reason to continue?
It might justify both approaches
I voted for ‘posts’, but I’m biased because I almost never watch any videos – I’m generally in a busy and very social household, unsuited to either loudspeakers or headphones (family are in the room now – the television is on) but I’ve long been able to concentrate on reading and writing whatever’s going on around me (it comes, I believe, from childhood, having to do homework in the family living room – the only heated, comfortable room in my childhood home).
But I would guess that a more political. less economic presentation would boost video viewing numbers – eg. ‘conservative myths’ rather than ‘economic myths’.
Noted
Thanks
You need to phone James O’brian this morning. He’s talking about taxation and wealth distribution.
I am filming
Regarding homo economicus: simply stepping into the real world shows this to be utter and complete nonsense, thus real world examples – e.g. demand for 4x4s driven totally by marketing – , used to destory theories that should never have seen the light of day. “people maximise their “utility”” – utter nonesense in lots of areas.
The economics profession and its neoclassical adherents remind me of “Being There” & Chancy Gardener – seemingly sensible statements grounded on nothing (I regard the film as a masterpiece and a timeless commentary on the imbecility within politics – & a predictor on the election of another village idiot – Ronnie Raygun).
Noted
The word NOT seems to be missing in your summary:
” ….. and NOT from the assumption that we are the robots economists wish us to be.”
Thanks
Added
I looked through your list of neoliberal myths. A good list. I agree with all. You asked for opinions and these are mine.
I was surprised that “Government is like a household” was half way down the list. To me this is THE key myth. Ever since it was introduced, or at least emphasised, by Mrs Thatcher, it has been a key, but false part of the political dialogue. I hear it multiple times every day in the media.
This first myth leads to the second pernicious myth. The argument goes: “Well, it may be technically true that the government can create money, but in practice that is the same thing as treating the government as a household. That’s because, if you actually do create money you inevitably cause inflation, then hyperinflation, and the economy collapses”. So, it seems to me, that the second myth is that money creation causes inflation (and secondarily, that if we borrow or tax there is no inflation risk, which is also untrue).
Further myths flow from these two. The deficit myth is one corrollory, but it is a derivative myth.
Whilst I agree with your analysis of rational economic agents, that these false assumptions are the basis for current neoliberal economics, I wouldn’t start from there. The idea of all knowing rational economic agents is an academic argument. It leads, falsely, to the primacy of markets, which is tosh. It doesn’t lead to the government is a household myth, which is simply, factually, proveably, false. I think people are hard to convince with academic arguments. If we want to change the change the system, to change the narrative, we need to target the falsity of the household analogy head on. To me academic analysis, whilst interesting and desirable, won’t change the economic narrative and won’t move the Overton window.
I think the primary focus should be on the household analogy and its derivatives. Hope that opinion is helpful.
Thanks
But we will do them all