Homo Economicus, AIs, Humans and Rats: Decision-Making and Economic Welfare

Critics of economics often highlight two issues: the empirical falsehood of the ‘homo economicus’ assumption of rational, self-interested maximization; and the ethical consequences of models based on this assumption. Yet many experiments in biology show non-human creatures often behaving as if they were rational maximisers. It would be odd to assume humans are less rational than rats. As economists are also embracing the experimental literature in other fields to improve the empirical basis for assumptions about decision-making in economic models, the critique of rational choice poses less of a methodological challenge to economics than is sometimes thought. However, economists do need to respond to the critique concerning the ethical implications of their subject. This generally argues that decisions based on the assumption of rational self-interested maximisation change norms of individual behaviour for the worse, ethically speaking. This paper argues instead that economics has become separated from ethics because for a century economists have dealt only with ordinal, not cardinal, welfare rankings and have thus ruled out interpersonal comparisons. While enabling them to separate normative from positive analysis, this separation protocol has left welfare economics both internally contradictory and unable to address major ethical decisions. Welfare economics is used constantly but only in limited ways, such as cost-benefit analysis, by the profession. This divorce between economics and profoundly important social choices reflects empirically inaccurate assumptions concerning preference formation and the conditions of supply and demand (but not the rational choice assumption) in the foundational welfare economic theorems. Economics must urgently revisit welfare economics, particularly in the context of modern economies in which individuals are increasingly interdependent, and the assumptions required for the fundamental welfare theorems therefore increasingly invalid.