Human Foundations of Management

Understanding the Homo Humanus

D. Melé, C. Cantón, Kenneth A. Loparo, César González Cantón

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9780230368934
• eBook ISBN:
  9781137462619
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Human Foundations of Management explores the human foundation of management and economic activity in a way that is accessible to readers. The structure and contents of this book examines those aspects of the human being which are relevant to management and economic activities.

Part I

The Idea of the Human Being

1

The Homo Economicus Model

Overview

Economics, management and organizational theories assume, at least implicitly, a certain model of the human being, and this has significant consequences for the subsequent development of such theories and the practice of management. So far the dominant model has been, and continues to be, that of the homo economicus, although with certain variants. Homo economicus, in simple terms, is an individual with interests and preferences and a rational capacity oriented to maximizing those preferences, which are usually considered as self-regarding.

This model has its immediate source in John Stuart Mill, with antecedents in certain nineteenth-century economists, ultimately traceable to Adam Smith, who had a broader view of the human being. Originally, homo economicus was conceived of not as an accurate description of human nature but as a model of economic behavior; however, in time, it became a crucial element of the neoclassical scheme of price equilibrium, and even the “only way” of understanding economic and organizational behavior.

In recent decades, the homo economicus model has been the object of severe criticism from many sides, since it is highly reductionist and manifests important shortcomings as a concept of the human being.

1 Origin of the homo economicus model

1.1 Adam Smith and his anthropological view

The idea of the human being in modern economic theory, and in many organizational and management theories as well, has been strongly influenced by John Stuart Mill (1806–1873) and his model of homo economicus (or œconomicus). Yet, to gain an understanding of the genesis of Mill’s ideas on the human being it is necessary to go back to leading economists who preceded him in the nineteenth century, and ultimately to Adam Smith (1723–1790), often cited as the father of modern economics (e.g., Hoaas and Madigan 1999).

Adam Smith is known mainly for his work An Inquiry into the Nature and Causes of the Wealth of Nations (1981), first published in 1776, and usually abbreviated as The Wealth of Nations (WN hereafter). What is not so well known is that he held the chair of moral philosophy at the University of Glasgow, Scotland, from 1752 to 1763, an academic position previously filled by his master Francis Hutcheson (1694–1746), who exerted a remarkable intellectual influence on Smith. He was also influenced by his classmate and friend, the well-known philosopher David Hume (1711–1776), and by the Neo-Stoic tradition (Henderson 2005). Hutcheson, Hume and Smith are genuine representatives of Scottish Enlightenment, a stream of thought which gave great importance to emotions and interests to the detriment of the reason and will (Hirschman 1977).

It may seem surprising for a professor of moral philosophy to focus on economics, perhaps because of the assumption of a radical separation between economics and ethics in the minds of many. The Wealth of Nations was present in embryo in the fourth part of Smith’s moral philosophy lessons. Thus, economics was born as a part of moral philosophy, continuing the previous Aristotelian tradition of observed economic activity as an aspect of human activity in general – although in other matters Smith is quite different from Aristotle. Only in the nineteenth century did economics branch off and become a stand-alone discipline.

Smith presented his conception of moral philosophy in The Theory of Moral Sentiments (1982) (TMS), first published in 1759. A long debate has been taking place about whether the idea of man in WN is different from the one in TMS. In the former, Smith depicts a subject driven by the relentless pursuit of wealth, while in the latter he seems to allow greater play to the feeling of benevolence. However, the conclusion currently gaining ground is that the anthropology underlying these two works is the same; they just highlight different but complementary aspects (Raphael and Macfie 1984). Smith refers to “original principles in human nature,” such as the propensity to truck, barter, and exchange one thing for another (1981: I, i, 2) or the interest of one in the fortune of others (1982: I, i, 1, 1). He argued that self-love is fundamental to human behavior. In his own words: “The self-love of man embraced, if I may say so, his body and all its different members, his mind and his faculties and powers, and desired the preservation and maintenance of them all in their best and most perfect condition” (1982: VII, ii, 1, 16). In one oft-quoted passage in the Wealth of Nations, Smith highlights how self-interest moves economic activity:

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. We address ourselves, not to their humanity but their self-love, and never talk to them of our own necessities but of their advantages. (1981: I, ii, 2)

However, this does not mean that in Adam Smith thought human behavior is always governed by self-interest, or that self-interest is suitable for achieving a good society. In fact, as pointed out by Amartya Sen (1987), he maintains exactly the opposite. The human being is also able to rise above the demands of self-interest to compassion for others. This ability is innate in humans, and not the result of education. The first lines of TMS are eloquent in this respect:

How selfish soever may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. (1982: I, i, I, 1)

In TMS self-love is described as a morally neutral category (Force 2006: 324) or even as a term with positive consequences: “By pursuing his own interest [every individual] frequently promotes that of the society more effectually than when he really intends to promote it” (1981: IV, ii, 9). Probably influenced by the Stoic philosophy of the harmony of the cosmos and Newtonian mechanics, very relevant in the cultural context of Adam Smith, he saw the economic system as a mechanism moved by self-interest. An “invisible hand,” which was not part of its agent’s intention, will bring about excellent economic results for the whole society. Probably the best-known quotation regarding the role of the “invisible hand” is the following:

he [the individual] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (1981: IV, ii, 9) (Emphasis added)

However, the “invisible hand” is not, according to Smith, the whole social order. He believed there were positive and negative emotions in the human being and stressed the importance of these emotions in human action, including justice and benevolence, in the constitution of social order (1982: I, ii, 3; Rodríguez Lluesma 1997: 80).

1.2 The introduction of homo economicus

There is a widespread belief that Adam Smith limited his view of the human being to the self-interested individual and restricted the pursuit of society’s public interest to the “invisible hand” of the market, powered by the individual’s self-interest. But this is not true. Both “self-interest” and the “invisible hand” are certainly in Adam Smith, as noted, but limiting his view of the human to these elements does not do justice to his thinking.

This misunderstanding of Smith’s thought was probably caused by the reception of WN by a number of economists, including Jean-Baptiste Say (1767–1832), Thomas R. Malthus (1766–1834), and David Ricardo (1772–1823). Malthus is mainly known for his arguments regarding population and economic growth, and for his controversial alarmism on the former. Ricardo worked on the relationship between the three “factors of production” (land, labor and capital) and international trade. These authors generally only gave consideration to self-interest and the invisible hand without further reflection on the human being and society. Since then, one of the most oft-cited fragments from Smith in economic textbooks has been the WN passage about the butcher noted above. This vision was inherited by John Stuart Mill (1806–1873). According to Mill,

[Political economy] does not treat the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end. (1874: V, 38) (Emphasis added)

Mill, in addition to accepting self-interest as a driver for economic behavior, introduced “utilitarianism” based on the idea of utility understood as the object of human desires. Utility boils down to well-being or, more generally, “happiness,” understood as pleasure or satisfaction (Mill 1985: 209) (see pp. 00–00). According to Mill, utility is what economic behavior attempts to maximize; it was first considered as a mental event. Thus, the focus of economic activities changed from the traditional objective determinants of economics in Adam Smith (the social division of labor, the subsistence goal, the labor theory of value and so on) to the subjective side of desires: preferences, choice and individual satisfaction.

As noted, Mill saw the human being as an agent with an interest in economic gain and a rational capacity to evaluate means to this end. Mill’s economic agent is driven by two passions, “aversion to labour” and the “desire of the present enjoyment of costly indulgences.” From these bases and from the self-interest motivation taken from Adam Smith emerged the notion of homo economicus or œconomicus (economic man). This Latin term was not introduced by Mill, but by his critics who attributed this concept to him in the late nineteenth century. In 1906, Pareto affirmed that this term was then an established notion (Persky 1995: 222, note 3).

The homo economicus is an incomplete abstraction of reality, and Mill was fully aware of this. He just needed a simple assumption in order to develop his political economy in a simple way. In his own words,

[Political economy] makes entire abstraction of every other human passion or motive; except those which may be regarded as perpetually antagonizing to the desire of wealth, namely, aversion to labour, and desire of the present enjoyment of costly indulgences. (1874: V, 38) (Emphasis added)

John Kells Ingram (1823–1907), a historian of political economy almost contemporaneous with John Stuart Mill, interprets, in a derogatory sense, the man proposed by this latter description as a “money-making animal” (1888: ch. 6). Even though Mill made clear that his reduction was only for pragmatic purposes, it is true that Mill introduced a model with a narrow view of the human being. This model has been widely accepted among economists, albeit with some refinements, with mathematical models built on the homo economicus assumption.

2 Homo economicus in modern economics

2.1 Neoclassical economics

The idea of homo economicus became dominant in the twentieth century. Neoclassical economics is a prevailing approach nowadays, particularly in microeconomics, but it also influences macroeconomics, either alone or in combination with Keynesian economics, which focuses on macroeconomics. The integration of this latter economic school into neoclassical economics has produced what is called the neoclassical synthesis (Clark 1998; Hausman 2008).

Although various schools of economic thought fall under the term, according to Campus (1987: 323), neoclassical economics “refers to a general approach in economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand. These are mediated through a hypothesized maximization of income-constrained utility by individuals and of cost-constrained profits of firms employing available information and factors of production.”

The origin of neoclassical economics can be found in the 1860s with the Marginalist economists Léon Walras (1834–1910), Carl Menger (1840–1921) and W. Stanley Jevons (1835–1882). They abandoned the idea, developed by classical economists such as Adam Smith and David Ricardo, that the price of a good or service reflects the labor invested in its production (cost-of-production theories of value). Instead, they held that price reflects the marginal utility of substitution in consumption (that is, the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility) and marginal rates of transformation in production, which are equal in economic equilibrium. They focused, therefore, on conditions of equilibrium, determined by prices (indirectly including the price of labor) and, ultimately, by people’s preferences.

Vilfredo Pareto (1848–1923), Alfred Marshall (1842–1924) and others added mathematical analyses, which have become more and more sophisticated in neoclassical economics. Pareto (1971) focused on maximizing the utility level of each individual, given the feasible utility level of others from production and exchange (Pareto Optimal or Pareto Efficient) while Marshall (1920) concentrated on reconciling the classical labor theory of value, focused on the supply side of the market, with the new marginalist theory that concentrated on the consumer demand side.

The “invisible hand” underlies the common assumption of Marginalists that the economic system tends to the overall equilibrium of the price system (Sen 1982: 5; Hollander 1977: 138), and the idea of assimilating economics with mechanics and its mathematician formulations still persists as well. Jevons speaks of the analogy of the mechanical static economy (Jevons 1888: vii); for Walras a pure theory of economics is a science that looks in every way to the physical and mathematical sciences (Walras 1952: 29), and Pareto theory says that “economic theory acquires the rigor of rational mechanics” (Pareto 1971: 36).

According to Weintraub (2007), these pioneers in neoclassical economics share three assumptions:

1.People have rational preferences among outcomes. It does not matter what preferences they may be, but they always respond to a conscious self-interest which evaluates outcomes with a certain sense of value.

2.Individuals maximize utility and firms maximize profits. Looking at the demand side, buyers attempts to maximize the satisfaction of obtaining goods or services (utility) until the point where their satisfaction gained from an extra unit is just balanced by what they have to give up to obtain it. Likewise, considering the supply of productive factors, individuals provide labor to firms that wish to employ them, by balancing the wage they would receive from offering the marginal unit of their services against the loss of leisure (disutility of labor itself). Similarly, firms attempt to maximize profits by hiring employees up to the point that the cost of the additional hire is just balanced by the value of output that the additional employee would produce.

3.People act independently on the basis of full and relevant information. This is a condition for making rational calculations: it permits the assessing of which choice would maximize utility.

These premises, like Campus’ definition of neoclassical economics mentioned above (p. 14), are based on the assumption that people act in accordance with the homo economics model. In addition, as noted, neoclassical economics, under the hypotheses of the maximization of income-constrained utility by individuals and of cost-constrained profits by firms employing available information and factors of production leads us back to the “invisible hand” of Adam Smith.

The homo economicus model was also applied by Francis Edgeworth (1845–1926), another influential economist in the development of neoclassical economics, by using formal mathematical techniques to consider individual economic choices (1881).

In the twentieth century, the Rational Choice Theory of Lionel Robbins (1898–1984) came to dominate economic theory. In this theory (Robbins 1945), used to understand and formally model social and economic behavior, the idea of homo economicus is central, and it assumes that such a man acts rationally having complete knowledge of what is relevant for his own interest and desire of weal...

Table of contents

• Cover
• Title
• Introduction
• Part I  The Idea of the Human Being
• Part II  Fundamentals of a Philosophy of the Person
• Bibliography
• Index