By Arkadiusz Sieroń

Homo economicus is dead. Economics needs to develop more realistic psychological underpinnings and to become more mindful. This is at least what behavioral economists have declared after the successful emergence of its sub-discipline (e.g., Thaler 2000, 2015, 2016; Camerer 2008). But are they right?

The present and fully Open Access volume aims to answer this question. It argues that such reports of Homo economicus’ death have been greatly exaggerated, as they stem from misunderstanding the nature and purpose of the concept. It is not a psychologically descriptive model of human behavior, but a key methodological device, a foundational principle of economics, which enables us to conduct scientific inquiry about economic phenomena. Indeed, the rationality principle explains the success of economics as a science, because without it economists would not, for example, be able to maintain that individuals react to incentives or, more generally, to understand people with (unobservable) values and beliefs different from their own. Adopting the rationality principle enables economists to preserve the principle of subjectivity of value while fulfilling the requirement of scientific objectivity.

Hence, the book adds to the literature about Homo economicus, rationality in economics, and the role of psychology in economics. The problem with the debate about rationality in economics is that its participants conflate different notions of rationality. In particular, behavioral economists¹ oppose the concept of rationality (e.g., Jolls, Sunstein, and Thaler 1998; Mullainathan and Thaler 2000; Rabin 2002; Camerer and Loewenstein 2004; Ariely 2009; Thaler 2000, 2015, 2016), but they refer to rationality as a description of the behavior of individual agents, even though economists generally do not use rationality in this way. They refer either to empirical rationality, dealing with the aggregate effects of individuals’ actions within the markets, which most economists focus on in their empirical research and predictions, or to methodologicalp. Rationality, which provides an indispensable framework for economics as an scientific inquiry. Thus, this monograph defends the value of traditional economic framework against psychological reductionism.

Another key message of my work is that economics should not be more grounded in psychology, as some researchers seem to believe (e.g., Jolls, Sunstein, and Thaler 1998; Mullainathan and Thaler 2000; Rabin 2002; Camerer and Loewenstein 2004; Ariely 2009; Thaler 2000, 2015, 2016). Psychology is an important field of scientific inquiry, but it is just one science among others, not the basis of all social sciences. The fact that the subject of economics seems to be similar to that of psychology does not mean that economics should adopt a similar research methodology. Economics is not empty without psychology and it is not a mere generalization of psychological tendencies in the context of economizing of scarce resources. Hence, economists should not suppose that, without understanding human nature and psychological motives behind actions, they would not be able to conduct proper research in economics.

In fact, using some of the psychological theories of the business cycle as an example, this book demonstrates that psychological explanations of economic phenomena suffer from several important problems.

The book also shows that psychological factors can be used not only to argue against the free market (because people allegedly suffer from biases which deviate them from full rationality), but also to assert that the anti-market sentiment held by people may be the result of envy and (illusory) perception of control related to the strong role of the government in the economy, or of a tribal bias – i.e., the fact that people could be evolutionary adapted to function in small groups rather than in today’s global economy (Hayek 1973, 1988).

Last but not least, the book also engages in the debate about the impact of capitalism on mental health and explores whether societies should take happiness into account when assessing economies. It argues that the fact that some negative psychological and social problems exist in modern capitalist economies does not mean that they are caused by capitalism or are inherent to this economic system. They can result from living within civilizations, hierarchical societies, and/or specific cultures that may not adequately respond to the challenges of human existence. When one analyzes complex systems, such as modern market-based societies, the monocausal explanations are rarely true. It is, of course, important that people can pursue happiness and feel it. However, happiness would be a very problematic social goal. This is because it is not clear what is it, how to achieve it, and how to measure it, if it can be defined, achieved, and measured at all. The aim of the economic system, if it has any aim, is to organize how people produce, exchange, and consume. Capitalism, or the free-market economy, is the impersonal self-ordering process that does not strive for any particular objective, such as happiness or the highest possiblep. xipace of GDP growth. It just allows people to reach their own economic goals. And economic growth is the result – the positive externality – of the activities of households and companies in free markets. If anything, this is probably the only thing one should expect from the economic system – the improvement of objective living standards. Even if people are not happier once their living standards have improved, their opportunities are greater (Hayek 1973; Mises 1998 [1949]).

My work is primarily methodological in nature. The book should inspire readers interested in the methodology of economics, rationality in economics, Homo economicus, anti-market sentiment, the relationship between psychology and economics, and the discussion of the impact of capitalism on the people’s subjective well-being.

Dr. Arkadiusz Sieroń holds a postdoctoral degree in economics. He works as an assistant professor at the Institute of Economic Sciences at the Faculty of Law, Administration, and Economics of the University of Wrocław.

Rationality, Psychology and Capitalism is fully Open Access and available to read online for free here.

Learn more about the hardcopy here