Is the whole economic theory based on a false foundation, economist?

#05 – Present photography meets future economics

P: Hey, Homo economicus. 

E: Are you talking to me, photographer?

P: I do. 

E: Why do you call me that?

P: I did some research and read about your profession.

E: Oh dear.

P: The Homo economicus is a very fundamental concept in economics, where humans are described as rational and self-interested. Correct?

E: Correct. 

P: By this, critics say that economics is based on a completely wrong conception of human beings. Because men and women are neither always rational nor always selfish. Is the whole economic theory based on a false foundation, economist?

E: It isn't. "Self-interest" is not the same as “selfishness”, nor does economics claim that people always behave rationally.

P: Explain

E: Caring for others, like for your family, is self-interested. And donating money to those in need can also be in your interest, namely when you have sympathy for the well-being of others. So is caring for yourself in your own interest. Self-interest is just everything that is in your interest. Plus: It is a simple human trait that we are always closest to ourselves. But this is not to be compared with egoism or selfishness, which leads to the detriment of others. This difference is crucial. Also because in a market economy, self-interest always leads to the benefit of others. The founder of economics, Adam Smith, had that insight. In his most famous book, 'The Wealth of Nations', Smith wrote: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

P: Besides the self-interest part, what about this rational thing in the concept of Homo economics?

E: Economics starts from the assumption that people have objectives and tend to choose the correct way to achieve them. So people try to act rational. 

P: So you admit that people often don't behave rationally?

E: There is nothing to admit. This is obvious. The thing is, since economics is often about prediction, we can only predict the rational part. One of my favourite economists, David Friedman, describes this in the amazing book 'Hidden Order: The Economics of Everyday Life': "Economics is based on the assumption that people have reasonably simple objectives and choose means to achieve them. Both assumptions are false but useful. Suppose someone is rational only half the time. Since there is generally one right way of doing things and many wrong ways, the rational behavior can be predicted, but the irrational cannot. If we assume he is rational, we predict his behavior correctly about half of the time – far from perfect, but a lot better than nothing."

P: Long quote, but I like the humbleness.

{silence}

P: Can I still call you Homo economicus?

E: Call me whatever you want, lensman. But tell me, why didn't you bring a photo today?

P: I didn't have a suitable one. Have you ever seen Homo economicus in real life? It's like the Yeti. Everyone talks about him, but nobody has ever seen him. 

E: I see. 

P: Although, I could take a picture of you, Homo economicus.

E: Don't you dare!