OECD Observer

Homo Economicus: an uncertain guide

 

As humans, we face a constant internal conflict between immediate ‌gratification and more prudent living. This conflict is also apparent in society. How can we ensure that the homo economicus within us takes the decisions that best affect our lives, and economies?


‌Epicurus, who has many disciples among those aspiring to happiness, concurs with the idea which Jeremy Bentham in particular was to expound in the 18th century: one should seek pleasure and avoid pain. And yet Epicurus is at pains to distinguish between “moving” pleasures, relating to the satisfaction of a need and therefore intermixed with pain, and “static”, pure pleasures predicated on satisfied desires. Plato, in the Gorgias, is more radical. In his eyes, the search for happiness suffers from the fundamental contradiction that happiness needs desire, whereas desire excludes happiness. For Plato, happiness, if that is what we want to call it, is the reward for a “good life”, not its goal. A good life, or eudaimonia, consists in finding one’s place in the world of humans, like one star orbiting harmoniously around another. Aristotle wisely concluded that because reason and virtue were the distinctive characteristics of man, “the lovers of what is noble find pleasant the things that are by nature pleasant. And virtuous actions are thus pleasant for such people and inherent in their own nature. Their life, therefore, has no further need for pleasure as a sort of adventitious charm, but has its pleasure in itself.”

Economists have long challenged the distinction drawn between vulgar pleasures and those which elevate the soul. Admittedly, those who understand the beauty of a work of art are happier than those who don’t. The effort that needs to be expended to understand the artistic power of an opera is repaid by a more intense happiness, as with an investment. But this does not create a qualitative difference between opera and television, simply a difference in degree. Variables such as one’s purpose in life or positive relations both with others and with oneself, count for much in the happiness of individuals. But why should these be opposed to the search for other, more trivial satisfactions such as a nice car or an attractive apartment? It’s all a matter of proportion.

Like a king who has all the levers of power, homo economicus would be able to choose freely, according to this model, between good and evil, between spending time at work and having a lie-in. Can you believe that? Far from marshalling his concerns like a lawyer, every man is a composite of diverse personalities cohabiting more or less harmoniously. You can have an appointment that is vital for your career and still dive into a river to save a passer-by from drowning. There is no premeditation at work here. In response to an emotion, you switch from one state of mind to another.

In his book Is capitalism moral?, André Comte-Sponville proposed a very useful classification inspired by Pascal’s three powers. While the latter distinguished between flesh, reason and the heart (which “has its reasons which reason does not know”), Comte-Sponville proposed four categories: the economy, politics, morality and love. Each has its own logic. A mother who looks after her children out of duty would be a bad mother. A male or female politician who relied upon morality to guide his or her actions would doubtless make a pitiful manager. Likewise, the economy has its own rules, those of calculation and a quest for profit, which are distinct from those of morality or politics.

‌Even within choices held to be economic and rational, conflicting beings still live inside us, real Dr Jekylls and Mr Hydes, the inseparable twins who hate each other. I may wish to save for my retirement, or for the future of my children, and yet can’t seem to do so as, “in spite of myself”, I spend the household savings. The desire to live in accordance with an idea conflicts with the desire for immediate gratification which moves in the opposite direction. How can they be taught to live together?‌

©Charlotte MoreauThe famous example of Ulysses and the sirens illustrates some possible methods. Jon Elster, who famously commented on this passage from Odyssey felt that Ulysses must “rationally manage his irrationality”. I know what my temptations are, namely to succumb to the song of the sirens, I manage them by chaining the person I don’t want to become to the mast. If I go on a diet to lose weight, I will avoid walking in front of a cake shop. If I need to save for my old age, I will make a non-liquid investment to avoid spending it. I fight against the person I might turn into. The homo economicus living inside me is having a hard time, he maximises a utility but doesn’t know whose utility it is.

The conflict between the search for immediate gratification and concern to provide for the long term bears witness to the difficulty of being “reasonable”. For many years economists thought that the problem was simply a trade-off between a reward today and one tomorrow. If you were to ask me whether I would like to have €100 tomorrow or €200 in a year and a day, I would say €200 in a year and a day. The return is good, so I’m quite happy to wait for my reward. But if you offered me a choice between €100 right this minute and €200 in a year’s time, I would say €100 now, even though the interval in time between the two options remains the same (a year in both cases). This is because the present moment wakens a different individual to the one I wanted to be yesterday–somebody who wants everything “immediately”! If I understand my own temptations I will arrange things “in advance” to make sure that I don’t have a choice, that way I will be obliged to accept €200 in a year’s time without having the €100 option. Like Ulysses, I shall try to tie myself to a mast in order to rise above my status of alcoholic, pervert, glutton, etc.

Fortunately I’m not alone. Society helps me manage the most weighty decisions. Old age or sickness insurance is compulsory, as is education for children. The US, which allows greater personal choice in this area than Europe, is also the country where we can see the direst forms of poverty, and for this very same reason. The great US bankruptcy of 2008 is largely a result of the absurd way in which the most vulnerable members of the population were driven into over-indebtedness. Financial deregulation in the US did everything it could to push households into using their credit cards or taking out mortgages they couldn’t afford. It untied Ulysses, and America drowned.

 

References and recommended sources

Paris School of Economics

OECD work on Economy

OECD Forum 2013 Issues

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©Women’s Forum

 

By Daniel Cohen, Professor of Economics at the École normale supérieure and Vice President and founding member of the Paris School of Economics.

©OECD Yearbook 2013

 

 

 

 

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