Economics of the individual: Unpacking homo economicus and islamicus

Essayem Amal

“Science is essentially a problem-solving activity.”

This is how Larry Lauden begins his well-known book Progress and Its Problems[1]. While this is not an article on epistemology, this quote is a good place to start thinking about how theories do not always reflect reality. Science ultimately aims to explain and control the natural world by the resolution or clarification of problems. Scientists, through knowledge, seek the truth. Theories simplify reality and show how processes are intelligible and predictable. 

Ideally, theories should be based on close approximation of the real world in order to deliver accurate results. Unfortunately, however, this is not always the case, particularly in the field of economics. Economic forecasts have frequently proven to be wildly wrong; in 1929, Irving Fisher, one of America’s greatest economists, predicted a stock market boom just days before the biggest crash in 25 years.[2] Similarly, the false predictions of the economic collapse of South Korea and the endurance of the Soviet Union, as well as the failure to anticipate the 2008 global recession, show how economic theories are fundamentally limited.

This is also evident in economists’ construction of the economic human and their fundamental assumptions about human societies. In classical economic theory, this is known as homo economicus. These assumptions are the basis of the models used to form economic policies, which impact all of our lives. But how accurate are economic understandings of human beings? 

The myth of perfect rationality  

Economic theories further seek to explain dynamics through models. A model is a reduction of reality and it represents a sort of prototype. In order to simplify the modeling process, certain hypotheses are developed. Among the several hypotheses of microeconomics, there is one of crucial importance which states that the economic agent has to be rational; behavioral biases are assumed to be rare or have no long term impact. This concept creates a framework to model how economic agents — namely businesses and consumers — will respond to different situations. Consequently, rationality is the basic building block of most economic models today. 

Homo economicus is additionally considered to be inherently selfish. First philosophized by Adam Smith and David Ricardo, this concept was further developed by John Stuart Mill in 1836, who defined homo economicus as a “being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end”[3]. This self-interested agent is also assumed to have one objective in life, which is to increase and preserve her welfare. As a result, she will always make rational decisions to maximize her utility function, in order to increase satisfaction and minimize loss. 

Finally, homo economicus is also conceived as an agent with perfect information; this means they have full knowledge of all relevant factors, and so would be able to predict their income in changing circumstances. 

However, homo economicus has largely failed the test of time. The burgeoning field of behavioral economics has highlighted how psychological influences and cognitive biases affect our behaviour on a daily basis. These biases can explain market anomalies and subsequent dysfunction. Perfect rationality — as the classical camp claims — does not exist. We can only be considered partially rational at best.

To make this clearer, we must first analyse it on the micro level. In the 1970s, the founders of the behavioural school — Kahneman and Tversky — explained that the idea that humans always act rationally is challenged by risk aversion. Their studies found that, if given a choice between certainly getting $1,000 or having a 50% chance of receiving $2,500, people were more likely to accept the $1,000. Other studies have also shown loss aversion — the fear of losing what we have — is stronger than the enjoyment we feel at gaining something else. Yet a misunderstanding of an individual’s willingness to take risks can result in vast differences when a policy based on this assumption is implemented at a national or international level.

In addition, definitions of rationality differ from one context to another; men and women do not behave the same way; people of different religions, cultures and nationalities have all been socialised into different ethical codes. Our societal and educational environments shape how we understand the world and react to different circumstances, so homo economicus cannot be universal. Some features of the economic human are common among people of different backgrounds, but not in totality. 

Michel Foucault in his critical investigation of neoliberalism puts the spotlight on these problematic characteristics of homo economicus. He highlights that economics defines humans solely as competitive creatures, and this reduces human beings to one dimension — namely, that of cost-benefit analysis[4].

In sum, the concept of homo economicus has been criticized from several perspectives, including psychology, institutional economics, and economic anthropology. The narrow vision of classical economics is full of contradictions. In order to make genuine progress toward a more sustainable economy, a multi-paradigmatic approach is required. 

In light of these problems with homo economicus, we must ask: how should a Muslim perceive this theoretical premise? Does the Islamic perspective shed a light on how we should view the individual? How should a Muslim act in the economic sphere? 

Enter homo islamicus

There is a growing awareness that the Western cultural roots of economics pose a problem when applied to non-Western societies. One of these critiques emanates from Islamic economics, which has attempted to construe the economic human as homo islamicus. This new concept is still under development; however, there are certain core principles that can be identified. 

Homo islamicus has a two-dimensional utility function that considers both this world and the hereafter. As a social creature, she does not only have individual concerns, but also an investment in the community. Additionally, homo islamicus is God-conscious and ensures that her economic activity is in accordance with Islamic restrictions. This includes avoiding any interest-based transactions, all kind of transactions with gharar (contractual uncertainty), maisir (gambling), and investing in any business that violates the sharia, such as alcohol or pornography.  

The individual is also assumed to be paying zakat and be involved in charity work. Furthermore, they ought to be conscious of the toxic culture of consumerism and avoid tabzir (waste and excess consumption). She tries to maximise her own personal benefit in this world and the hereafter, while being conscious of social welfare. 

Most importantly, homo islamicus is indeed rational, but not according to the narrow confines of Cartesian rationality. Her decision-making is based on rushd (common sense) as opposed to the concept of rationality in secular economics. Rushd implies that an economic man thinks logically based on “needs”, and not on mere “utility”, as utility may reflect excessive and unlimited desires. In short, homo islamicus is expected to make a balanced decision; if a person has $100, this money is allocated for personal needs and if possible for charity. 

Does homo islamicus exist?

With the expansion of Muslim businesses and sharia-compliant financial products, scholars hope that engagement with this Islamic economy would see the emergence of homo islamicus in reality. Yet, scholars have noticed that empirically, there is not much evidence of Muslims’ behaviour diverging from the assumptions of homo economicus. Studies have shown that Islamic norms have not significantly shaped Muslims’ choices and preferences, making homo islamicus practically indistinguishable from its secular counterpart[5]. The aim of the Islamic economy in transforming homo economicus into homo islamicus has failed, since people still prefer profit to social efficiency. 

Muslims remain shaped by the utility maximization framework – which creates selfishness and greed – not by religion and moral conduct. 

This is because the Muslim morality has been constantly hybridised. Muslims are consumers in a hegemonic capitalist market system, living in secular nation-states where Islamic law has almost no power of enforcement. Religion has become a matter of personal belief reserved for the private sphere, and so efficiency is still cast as the ultimate objective in a transaction[6].

Homo islamicus is still a new concept and remains underdeveloped. Islamic economics and finance are broad and complicated fields of research. If Muslim scholars are willing to develop these fields, a holistic approach is needed, one that can bring together fiqh, economics, politics, econometrics, psychology and economic sociology. Additionally, empirical work is needed. Using techniques in line with the concepts of Islamic moral economy will lead to evidenced answers as to how Muslims can come closer to the homo islamicus ideal.

Toward a comprehensive understanding of economics

It is important that Muslims understand the philosophical foundations of modern economic policies. Built upon theories that conflict with our religious understanding, these policies ultimately shape our behaviour as consumers and producers. However, this cannot be achieved if we do not bother conducting research ourselves in order to make sound decisions. 

To do so, we must first understand that we are currently living in an era of many competing concepts, but also a crisis of understanding. Only after understanding why economic models work in one context and fail in another can we articulate an alternative. The capitalist system is not a perfect system; it is just a well-tailored system, theoretically and empirically, such that people fear believing in a possible alternative, let alone one guided by Islam. 

The main problem with the capitalist system is its hegemony, which is hard to beat. But we must be prepared to ask: how will it be possible to overcome its dominance and implement alternative systems? How can another system exist without compromising its core values and sinking in the ocean of instrumental reasoning, in the face of capitalism advocating efficiency over everything? Until we are willing to look for these solutions, we will not find them. 

Amal Essayem is a PhD Candidate at ISEFAM (Sakarya University, Turkey). Amal’s research focus is Islamic capital markets, and her broader interests include history and sociology. She is also a culinary culture enthusiast who loves cooking, eating and discussing culinary dynamics. Amal is currently living between Tunisia and Turkey.

[1]L. Laudan, Progress and Its Problems: Towards a Theory of Scientific Growth. Berkeley: University of California Press, 1978

[2] M. Bird, 12 of the worst economic predictions ever made by highly intelligent people, Business Insider, 2015 

[3]D. M. Hausman, The Philosophy of Economics: An Anthology, 3rd ed. Cambridge University Press, 2007.

[4]G. Burchell, A. Davidson, and M. Foucault, The Birth of Biopolitics, 1st ed. PalgraveMacmillan UK, 2008.

[5]M. Asutay, “Conceptualisation of the Second Best Solution in Overcoming the Social Failure of Islamic Finance: Examining the Overpowering of Homoislamicus by Homoeconomicus,” IIUM Journal in Economics and Management, Vol. 15, No. 2, pp. 167-195, 2007

[6]H. Sencal and M. Asutay, “The emergence of new Islamic economic and business moralities,” Thunderbird Int. Bus. Rev., vol. 61, no. 5, pp. 765–775, 2019.

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