Theory, models, and the issue of realisticness

“Economists are in the process, it seems, of refashioning their central economic character,” wrote Morgan (2006). Morgan hypothesizes that the economic man periodically undergoes radical changes in character, particularly in light of advancements in behavioural economics and neurological research. He envisions this new economic man as a “well-rounded and more interesting character—one who can learn, bargain, act strategically, has memory, and may even be happy.” This new economic man will be more ‘real’ than all previous versions.

However, in this paper, I argue that a more realistic economic man offers no clear benefit. Instead, economic models function more effectively when economic man remains a simplified construct. It doesn’t matter if the economic man accurately represents real people—what matters is that he helps make the theory work.

First, a theory, by its very nature, is a simplification of the real world and is never intended to be an exact representation of reality. The core function of economic theory is to model complex phenomena, rather than to replicate them in their entirety. Posner (1993A, p. 77) wrote that “we should be pragmatic about theory. It is a tool, rather than a glimpse of ultimate truth”. Theories are important in enhancing our understanding of how the real world operates and often pave the way for new discoveries. It serves as a foundation for thinking. Thus, a more realistic economic man persona may potentially overcomplicate the theory.

Second, human character and traits are highly diverse. With an estimated 117 billion people^[i] having lived on Earth so far, creating a universally applicable persona would be extremely challenging. Just as Morgan critiques Adam Smith’s economic man for his reductive focus on propensities “to truck, barter, and exchange”—or Mill’s homo economicus as a “lazy, miserly, but entirely effective Scrooge”—one could similarly critique Morgan’s own conception of a more “well-rounded and interesting” economic agent. Moreover, it is unclear how an ‘interesting’ persona is defined, as there is no common agreement on what makes a person interesting. Another key issue is that while Morgan argues that “motivation and preferences are equally important” for the economic man, he does not describe these traits in detail in his own version of the new economic man.”

Finally, a highly realistic economic man is rarely necessary for building economic theory. After all, economic theory is concerned with the mechanics of the economy, not the complexities of individual behavior. Knight (1915) argued that “this ideal figure of economic science does not help to describe actual economic behavior,”. Knight emphasize that “the point was not to establish what real people do, but to establish what this model man would do inside an economic theory”. Rather than striving for realism, the strength of economic man lies in his ability to simplify complex phenomena, making theories more precise and applicable.

In conclusion, as Maki (1994) sharply observed, “any theory is bound to isolate a small slice of the world from the rest of reality.” Therefore, it is imperative to prioritize realisticness assumptions, particularly the role of isolation, over the pursuit of an idealized version of the future economic man. By emphasizing realism, economic theories can ultimately serve as more robust tools for understanding the complexities of the real world.

Reference

1. Morgan, M. S. (2006). Economic man as model man: ideal types, idealization and caricatures. Journal of the History of Economic Thought, 28(1), 1-27.
2. Mäki, U. (1998). Against Posner against Coase against theory. Cambridge Journal of Economics, 22(5), 587-595.
3. Mäki, U. (2001). Models: Philosophical Aspects. International Encyclopedia of the Social & Behavioral Sciences, 9931–9937.
4. Mäki, U. (1994). Isolation, idealization and truth in economics. Poznan Studies in the Philosophy of the Sciences and the Humanities, 38, 147-168.
5. Musgrave, A. (1981). ‘Unreal assumptions’ in economic theory: the f‐twist untwisted. Kyklos, 34(3), 377-387.
6. Mäki, U. (2000). Kinds of assumptions and their truth: shaking an untwisted F‐twist. Kyklos, 53(3), 317-335.
7. Sugden, R. (2000). Credible worlds: the status of theoretical models in economics. Journal of economic methodology, 7(1), 1-31

^[i] https://www.prb.org/articles/how-many-people-have-ever-lived-on-earth/