The institutional preconditions of homo economicus

ABSTRACT Most economists are aware that homo economicus is not a ‘conception of man,’ but only a useful assumption. Still, homo economicus is usually interpreted as an assumption about individual agents. It is individuals who are assumed to be perfectly informed and rational. Homo economicus, however, should not be understood as an assumption about individuals as such. The assumption is only applicable where human action takes place under certain institutional preconditions. It can be applied usefully when we are dealing with legally separate individuals who interact in a monetized market economy where the production process is guided by capital-based enterprises. In short, the institutions characterizing capitalism are also those that allow for the application of the homo economicus assumption. It is necessary to make these institutional preconditions explicit because they are not natural constants and, depending on their design, some of them have ambiguous effects on the market process.