Economists like to simplify the world; in particular they like to simplify people. Most of twentieth-century economics makes a number of standard assumptions about how people behave, which comprise our view of homo economicus or ‘economic man’. Homo economicus is self-interested: he only cares about himself. He has unlimited computational ability: he knows — at least in expectation — the consequences of anything he chooses to do. He is rational: he knows what he wants and always acts on these preferences. Given this view of man, it is perhaps not surprising that economics has been labelled the dismal science.
Nonetheless, this simple model has proved to be exceptionally useful in gaining insights into economic behaviour, especially when consumers and firms interact in large-scale, anonymous markets. Furthermore, the first welfare theorem of economics tells us that, under the right circumstances (in particular, when everybody takes market prices as given), the interaction of many such economic men leads to market efficiency. As Adam Smith states in The Wealth of Nations, ‘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.’ Or as Gordon Gekko puts it in the 1980s film, Wall Street: ‘The point is, ladies and gentleman, that greed, for lack of a better word, is good.’
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