Further there is no doubt that defining self-interest narrowly as (expected) utility or wealth maximisation makes many of the examples to be found in economics texts ‘work’ easily and seamlessly. Altruism and malevolence, for example, can be incorporated via interdependent utility functions, but these would be seen as exceptions for the representative individual whose default mode is self-interest in all contexts.
This approach can accommodate a broader description of a ‘representative’ individual. If preferences are assumed exogenous and constant, predictions are premised on the response individuals make to changes in constraints (Stigler and Becker, 1977). Predictions can be made when homo and femina economicus face new constraints (relative prices, income). ‘Rational’ behaviour is consistent behaviour. What can be said about these very strong facilitating characteristics that were once viewed as harmless and obvious? A vital consideration is the meaning of ‘rational’ behaviour. Armed with this caricature, public sector economics has undoubtedly made great strides in understanding ‘market failure’ (in the case of traditional public sector economics) and ‘government failure’ (in what is called the public choice approach).
Following Brennan and Lomasky (1993), this actor is described as (i) ‘rational’ (ii) and egoistic (iii) with egoism predicated on self-interest narrowly defined in terms of income or wealth.
Both traditional public finance and public choice schools have focused on this ‘representative’ individual. Key to this foundation are the preferences and capabilities of the caricature homo and femina economicus. Neoclassical welfare economics is the foundation on which the positive and normative prescriptions of public sector economics are premised.
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