Homo economicus

Pioneered by Adam Smith, one of the founders of capitalism, the idea of homo-economicus is used as a base to construct theories on consumption and investment. In his famous book The Wealth of Nations, Adam Smith emphasizes the importance of self interest in human behaviors and describes the self-interest as the key driver of social prosperity. An economic agent has been constructed as a representative one which typifies the economic behavior of a typical person in the society and it is assumed that this agent systematically behaves rationally when deciding on any issue, especially the economic issues. If we define rationality, from the economics standpoint, as an act that aims for the maximum possible degree of acquirements with given limited resources, this constructed agent will be rational by behaving in favor of his/her own self-interest, hence he/she will always be optimizing.

Are we really rational?

In fact, the core belief in the idea of homo-economicus that homo-sapiens, the wise man, acts selfishly is a realistic assumption as self-interest is an important part of the innate human nature and an important intrinsic motive. We always want the best for ourselves and this motive is not exactly greed, but an intrinsic motivation to behave on one’s interest. But, it is also true that not everyone is rational in the society and not all behaviors are considered rational in an economic sense. To test whether the individuals make rational choices or not, Nobel Laureate Daniel Kahneman and Amos Tversky conducted numerous experiments to test the human rationality and they reached this conclusion that human behaviors are not as rational as predicted by the homo-economicus assumption, instead they found that depending on how the question is framed or how things are measured people can make different choices. Also, they observed that not all behaviors are utility maximizing, sometimes people act altruistically, and sometimes people have the tendency to stay in the status quo. An interesting result of their experiment is that, when people make decisions, they emotionally value losses twice as much as they value an equivalent gain. In an experiment, they ask the subjects the following question:

Would you accept this gamble?
– 50% chance to win $150
– 50% chance to lose $100

They realized that, even though the expected value of gain in the above gamble (50% x $150= $75) is higher than the expected value of loss (50% x $100= $50), there are fewer takers of the gamble. Instead of showing their other experiment results, we can easily look at some of the marketing tricks to have an idea about the irrational choices we make in our daily life.
In a marketing strategy called Decoy marketing, marketers observe a boost in their sales of an expensive offer when they offer a similar item that is inferior in quality but about the same price of the expensive item. In his book Predictably Irrational Don Areily conducts an experiment using magazine subscription offers where subjects were offered two alternative subscription choices to The Economist magazine, one print only subscription (the inferior option which serves to make the combined offer look like a better value) and one internet and print subscription and they observe huge jump in sales due to the decoying effect.

In another experiment in Predictably Irrational, the author shows that people would walk 15 minutes to save $7 on an $18 item but wouldn’t take the same 15-minute trip to save the same amount on a $455 item. In fact, it is the same amount of savings, and a rational person is expected to behave consistently at each case.

The current financial turmoil is a typical example for how people can make irrational decisions. Currently, the world is experiencing a catastrophic financial and economic meltdown started at the subprime mortgage markets in United States and spread out to other financial markets. Some people claim that the irrational behavior of sophisticated investors was the root cause of the recent meltdown. To get a better understanding of the issue, we need to look at the balance of greed and fear in the investors’ behavior. While greed leads to overconfidence in the economy and excessive risk taking, the fear in the market leads to inactivity in the market and excessive aversion to risk. When investors make a decision about whether buying a stock, bond or any sophisticated security, they are expected to evaluate the expected reward versus the risk of possible expected loss. As predicted in Kahneman and Tversky study, the wisdom in the Wall Street is that “Fear always trumps greed.” Neuroscientists describe the situation when greed dominates the fear as a “moral meltdown,” and this is the situation where human brain loses control of reward and loss comparison and completely ignores risks. Take the trading in collateralized debt obligations (CDOs) which was perceived as one of major problems that leads to the recent financial crises. Since the security was rated excellent by the rating agencies and all losses were insured by AIG insurance company, the investors observed too much reward opportunities while no weight was given to the risk of a collapse in the market. That is the point when greed dominates fear in the market and fear fails to balance greed in the normal investor’s brain. In the aftermath of the financial collapse, what we see right now is just the opposite of what was the case in the buildup of the financial bubble. Now, both investors and bankers are in a mode of excessive fear where negative news significantly decrease the stock prices and instead of providing credit to the markets, investors sit on a huge pile of cash.

If the excessive greed and overconfidence in the economy results in catastrophic events, should we ask investors to be less greedy? According to the Adam Smith, all humans have sympathy for the rich and famous. We can even find this in Holy Scriptures as well. There is always a sympathy for, and envy of, the rich. Hence, asking people to act against their innate nature may not be a wise decision but we should also keep in mind that this inherent human tendency can lead to moral corruption in the society. What we need is the balance of fear and greed in our behaviors and if one dominates the other, there will be misery for the whole.

Devrim Bulut holds a PhD degree in economics. Having taught at several universities in the United States for the last 5 years, he conducts research on market irrationality.

On the basis of the omnipotence puzzle, one can reject the existence of God as an absolutely perfect, omnipotent and eternal being because the notion of such a being seems to be incoherent, thus it has no real referent. However, there are various theistic views that try to make sense of this puzzle by preserving omnipotence as an essential property of God. Let’s examine Aquinas’s and al-Ghazali’s views regarding omnipotence and see how an answer to such questions can be produced.

Aquinas

Aquinas was one of the most prominent figures of Christianity in the Middle Ages. He attempted to systematize the Christian faith within the framework of Aristotelian philosophy. His philosophy is known as Thomism and accepted as the official doctrine of the Catholic Church to this day. One of the central issues Aquinas dealt with was God’s nature and His omnipotence. Let us examine his ideas on this.

According to Aquinas, hypothetical cases such as God killing Himself or lying, imply contradictions in relation to God’s nature. God is eternal and truthful by nature. And in his terms, “anything that implies a contradiction does not fall within the power of God” (Aquinas, 1963, Q. 25, art. 3, p. 165). Contradictory cases are impossible; they could never happen. Since they are not genuine cases, divine power is not applicable to them. However, Aquinas did not carefully formulate the idea he proposed here. In expressing this intuition he used the modal verb “cannot” with the subject term “God” in most cases. Take into account the following of his remarks:

God cannot make yes and no true at the same time, not because of His lack of power, but because of the lack of possibility, such things are intrinsically impossible (Aquinas, 1952, I-18, 19).

Even though he did not think that the term “cannot” in the sentence above does not pose a limitation on divine power because the case in question is not a genuine case, the linguistic meaning of “cannot” implies that God’s power is applicable to such a case, and therefore He is unable to do it. Let’s continue with al-Ghazali’s view on omnipotence.

Al-Ghazali

Al-Ghazali can be regarded as one of the most influential Medieval theologians in the Islamic world. His criticisms directed to Avicenna’s or al-Farabi’s attempts to interpret Islam in terms of Aristotelian philosophy had a major influence on the formation of the Islamic world. He is usually considered to be a dogmatic theologian who attacked philosophy and prevented free thinking and intellectual progress in the Islamic world. However, if his criticisms are examined carefully, we see that his target was not the activity of philosophy but the false beliefs produced by certain philosophers. Avicenna and al-Farabi were critized by him on the grounds that their philosophies included some elements coming from Aristotelian philosophy, which is not accepted by Islam. It should be noted that his way of critizing them is not any less philosophical than his opponent’s way of arguing. He was certainly not dogmatic in rejecting them and engaged in philosophical activity in doing so. One of the most recurrent topics in his work was the omnipotence of God.

Like Aquinas, al-Ghazali excludes contradictions or impossibilities from the scope of divine power. That is to say, impossibilities are not objects of power. Let’s examine what he says exactly in his masterwork, Tahafut al-Falasifa (The Incoherence of the Philosophers):

The impossible is not within the power [of being enacted]. The impossible consists in affirming a thing conjointly with denying it, affirming the more specific while denying the more general, or affirming two things while negating one [of them]. What does not reduce to this is not impossible, and what is not impossible is within [divine] power (al-Ghazali, 1997, 17th Discussion, 29th paragraph, 179).

However, al-Ghazali is more sensitive than Aquinas in expressing this idea. In his main works where he analyzes omnipotence, the Tahafut and al-Iqtisad, he never uses “cannot” as a modal verb in a sentence whose subject is God. I think this was a conscious decision, because the semantics or meaning of the term “can” or “cannot” includes the idea of ability or inability to do something, which is closely linked to the notion of power. The sentence “God cannot do x” presupposes that x is included in the extension to which divine power is applicable but God is unable to do it. To avoid this, al-Ghazali simply says “the impossible is not within divine power.” The idea assumed here by al-Ghazali is expressed by the notion of category mistakes in contemporary philosophy of language.

Category mistakes

When an expression systematically misleads us because of category confusion in representing a certain fact, then it is a “category mistake” (Ryle, 1949, 16). For example, referring to faculties, libraries, museums and scientific departments as being in the same category with universities is a category mistake. The university is not a member of the class of which the listed units are members of, but it is rather the way in which all of them are organized (Ryle, 1949, 16). We can give more examples. Predicating colors of numbers is another category mistake. For example, “Number 2 is yellow” is a sentence asserted as a result of category confusion. Numbers are not the things to which the color predicates apply. In other words, color-predicates have a certain range or extension of applicability, which excludes numbers. On the other hand, the properties of “being odd” or “being even” apply to numbers but not to material objects. To say that this chair is even is another category mistake.

So each predicate has a certain extension to which this predicate legitimately applies. Things or expressions that are not in the scope (extension) of a certain predicate lead to a category mistake if they are associated with this predicate. So the sentence “God cannot do x” includes a category mistake if x is a contradiction because contradictions are not within the scope of divine power.

As a result, the question of whether or not God can kill Himself can be answered in the following way by supporting al-Ghazali’s unnamed intuition of category mistakes: this question presupposes that divine power is applicable to such a case, but this is a category mistake. Because of that, this is an illegitimate question that can be answered neither by “yes” nor by “no.” It is like the following question: How many times did you kick your dog? Assume that you don’t have a dog. If you do not have a dog, then there is no point in asking the number of times you kicked the dog that you do not even have. Considering the reality, it is an absurd question.

The notion of Omnipotence

An answer formulated in this way, in response to the puzzle, treats the notion of power as a crucial element in understanding the relation between God and the universe. It also allows us to understand the meaning of omnipotence clearly. An omnipotent agent is an agent who can perform everything that falls under the scope of the notion of divine power. An omnipotent agent cannot be characterized as a being that is able to do anything unqualifiedly. Cases that do not fall under the scope of power are not legitimate cases to which divine power is applicable. The classical criticism of this view is that God is limited by proposing such a scope of limitation. However, what is limited is not an agent, namely God, but a notion, which is divine power. Contradictions are used in determining the notion of divine power. So they put a limitation on the definition or meaning of “divine power,” rather than on the agent who is powerful. By excluding these contradictions from the scope of power and including things that are within this scope, the notion is defined. In this sense, defining is putting limitations on the notion of power. God conceptualized in this way has infinite power, i.e. He can create everything that falls under the scope of power. Otherwise, allowing such contradictions within the scope of divine power will undermine of the very concept of God. Then, for instance, we should have said that God can kill Himself. If God can kill Himself, then He could not be accepted as God anymore because God is essentially eternal by definition. In order to have an intelligible idea of God, the scope of divine power must exclude such absurdities.

Conclusion

As it is shown in the sample case of omnipotence, the apparently theological problem has logical and linguistic aspects. This puzzle can be handled by some clarification of the meanings of crucial terms regarding this puzzle. Both Aquinas and al-Ghazali were aware of this aspect of the problem even though they did not clearly express the intuition, which we call “category mistakes,” in contemporary philosophy of language. Much confusion is encountered in daily life, especially in the topic of religion, that stems from the misuse of language. If we want to get rid of such confusion and be clear in our thinking, then we should seriously ponder on the use of language.

Bibliography

• Al-Ghazali, Abu Hamid. Tahafut al-Falasifa (The Incoherence of the Philosophers). Michael E. Marmura (tr.), Utah: Brigham Young University Press, 1997.
• Al-Iqtisad fi al-Itiqad. Ibrahim Agah Cubukcu and Huseyin Atay (ed.s), Ankara: Ankara Universitesi Ilahiyat Fakultesi Yayinlari, 1962.
• Aquinas, Thomas. On the Power of God (Quaestiones disputatae de potentia Dei). Lawrence Shapcote. Trans. Westminster, Md.: The Newman Press, 1952.
• Summa Theologiae. Latin text and English Translation. T. Gilby. (ed). 60 vols. London, 1963.
• Ryle, Gilbert. The Concept of Mind. London: Taylor and Francis Books. 1949.