A Case for “Flesh and Blood” Economics

A Case for “Flesh and Blood” Economics

Written by:
Karen ONeill Ocasio

It is hard to imagine how robots fit into economics shoptalk. Many would say that the goal of economics is to understand the trends embedded in capitalism and to make predictions about trade and profit accumulation. Seems like a straightforward way of analyzing human activity. In its glory days, economics is calculated: cool, calm and collected with a whole set of pie charts to prove it. Have uncertainty about the future? Don’t worry, an economist will find just the right linear regression to soothe those qualms. But what happens when all hell breaks loose? Will our trusted economic theories withstand the test of time?

What is often overlooked is that most economic models are not based on a profile of human decision making, but rather a modern day double: Homo Economicus. Homo Economicus refers to a depiction of individuals as self-interested decision makers and constant utility-maximizers. Economists have cast homo economicus as the protagonists of many of their most groundbreaking ideas. Analytical tools such as Adam Smith’s renowned invisible hand, Bentham’s hedonic calculator and the Marshallian Cross are all based on the assumption that humans will always choose to maximize benefit with each decision they make.

From when you press the snooze button in the morning to when you change into your footed pajamas, Adam Smith labels you a utility maximizer. This concept also tends to boil down reality into a set of scenarios that are more easily quantifiable. Many claim that without this distinction there would be never-ending moving parts to consider; too many variables at work. However, to what extent are these assumptions hindering our ability to apply economic theory to real life?

Thornstein Veblen was one of the first to flag this logistical hiccup. Critiquing Homo Economicus, the twentieth century economist noted, “The hedonistic conception of man is that of a lightning calculator of pleasures and pains... He is not the seat of a process of living.” By denying the “humanity” of a type of Homo Economicus, Veblen rejects the full applicability of the neoclassical and marginalist model of utility to real-life cases. With the exception of the hardcore Twilight fans, few would see lifelessness as a desirable or even accurate human trait. So why is it accepted as a given in mainstream economics?

As Homo Economicus systematizes human behavior, it neglects the lack of uniformity among decision-makers. A century later, Thaler extends Veblen’s argument highlighting the differences in access to information in economic markets. How are humans supposed to assume the characteristics of Homo Economicus as a collectivity if there isn’t a level playingfield? Thaler even jokes, “The aesthetics in the field became that if the agents in Model A are smarter than … in Model B, then Model A is better than Model B. The IQ of Homo Economicus became bounded only by the IQ of the smartest economic theorist!” Well, I must agree with Thaler on this. I am no Paul Krugman.

Even though Homo Economicus is not a very realistic model, economics is far from doomed. Many new fields of economics have begun embracing those variables that neoclassical economics has reluctantly overlooked. Before, a lack of tools to measure human decision-making led economists like Jevons to refer to the brain as “a black box”. According to Camerer, Lowenstein and Prelec, neuroeconomics may have been the method Jevons needed to link utilitarianism with precise measurements of human motivation. Diving into topics such as time discounting, limited strategic thinking and non-linear probability weighting, one can appreciate how neuroeconomics can contribute to microeconomic theory. Despite it being a budding branch of neuroscience, neuroeconomics offers clues into questions that some of the greatest academics were previously unable to answer.

A model that does not improve our comprehension of real-life phenomena is a weak model. Though the neoclassical and marginalist schools of thought contributed extensively to economics, Homo Economicus is repeatedly questioned, reviving Veblen’s critiques decades later. Thaler forecasts, “Homo Economicus will evolve into Homo Sapiens…[W]e hope that new scholars…do what cognitive psychologists…have already done: offer us useful findings…that are relatively easy to incorporate into economic models.” In the end, the robot will be rendered obsolete.

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