Curiously, Schumpeter’s actual definition of “methodological individualism” was different from that employed by Hayek and Mises, so Schumpeter should not be associated with modern post-1945 “methodological individualism” as defined as Austrian methodology and indeed as an alleged universal method for all social sciences (Hodgson 2007: 213–214). Neoclassical theory uses an atomistic form of the “methodological individualist” approach, and regards the economy as an aggregation of the action of individual and rational agents.
However, there is a confusion in how “methodological individualism” is defined: whether it is used in (1) an ontological or (2) a methodological or explanatory sense. Ontologically, “methodological individualism” could be a statement about what exists in reality, but this is different from a method for explaining social phenomena (a methodological definition).
In the ontological sense, “methodological individualism” is often defined as the idea that the only thing that exists in the social world is the individual, and the individual’s dispositions, beliefs, and resources.* The related methodological idea is that “the behaviour of any complex system can be entirely understood by considering the behavior of its constituents, and then summing their effects: ‘the whole is the sum of its parts.’” (Keen 2011: 206). This is an example of the strong reductionist fallacy, which can be committed by both scientists and social scientists.
But is the social world composed of (1) individuals only or (2) “individuals and interactive relations between them”? (Hodgson 2007: 215).
Any social world must have social interactions (Hodgson 2007: 215).
This is admitted by Hayek:
“The overall order of actions in a group is in two respects more than the totality of regularities observable in the actions of the individuals and cannot be wholly reduced to them. It is so not only in the trivial sense in which the whole is more than the mere sum of its parts but presupposes also that these elements are related to each other in a particular manner. It is more also because the existence of those relations which are essential for the existence of the whole cannot be accounted for wholly by the interaction of the parts but only by their interaction with an outside world both of the individual parts and the whole.” (Hayek 1967: 70–71).So, according to Hayek, the whole is “more than the mere sum of its parts” not just in a “trivial” way, but also as relations with the external world and individual parts are fundamentally important.
The crucial point here is that the Austrians do not even have a consistent definition of “methodological individualism”. Is it the idea that social reality is
(1) fully explained by only individuals (what can be called “narrow methodological individualism”), orFor Hodgson this is the crux:
(2) explained by individuals and “interactions between individuals” and an external world? (a “broad methodological individualism”).
“a great deal hinges on this issue: does methodological individualism simply point to the importance of individuals in explanations of social phenomena, or does it insist that explanations should be reduced to individuals alone?” (Hodgson 2007: 217; see also Udehn 2002: 498).It is obvious that the social world must involve complex relations of interaction between individuals: this is unavoidable.
Any basic economic exchange involves not just social interaction but nearly always a structured relation involving things such as social customs, conventions, law, and social institutions (Hodgson 2007: 218).
The attempt to define “methodological individualism” as a method for explaining “social phenomena ... entirely in terms of individuals alone” is unattainable (Hodgson 2007: 220).
When Austrians like Hayek admit that the complexity of social relations and interaction with nature make society more than just the sum of its parts, they have failed to see that the whole method of “methodological individualism” becomes untenable and unwarranted (Hodgson 2007: 220).
The Austrians are caught between the devil and the deep blue sea!
And now the most important point. What is it about complex social relations that invalidates both “methodological individualism” and the idea that macroeconomics must have strict microfoundations?
The answer is “emergent properties”:
“The philosophical literature on emergent properties establishes that novel properties may emerge when entities interact, properties that are not possessed by the entities taken in isolation. Hence water has properties that are not possessed by hydrogen and oxygen. Hence the admission of ‘interactive relations between individuals’ in the definition of methodological individualism opens the door to properties that are emergent, and not the properties of individuals, taken severally.” (Hodgson 2007: 220).It is obviously the case that the complex social world depends for its existence on individuals and their relations, but the fundamental point is brought out by Tony Lawson:
“A strata of reality can be said to be emergent, or as possessing emergent powers, if there is a sense in which it (1) has arisen out of a lower strata, being formed by principles operative at the lower level, and (2) remains dependent on the lower strata for its existence but (3) contains causal powers of its own which are both irreducible to those operating at the lower level and (perhaps) capable of acting back on the lower level.* Thus organic material emerged from inorganic material. And, according to the conception I am defending, the social realm is emergent from human (inter-) action, though with properties irreducible to, yet capable of causally affecting, the latter.” (Lawson 2007: 257–258).Hodgson expresses the same idea:
* This concept is called “downwards causation” – LK.
“Essentially, in stratified ontologies, what separates one layer from another is the existence of emergent properties at the higher level. Units exist at higher levels that are not mere epiphenomena of lower-level units. A viable and irreducible hierarchical ontology depends upon the notion of emergent properties. ... A property may be said to be emergent if its existence and nature depend upon entities at a lower level, but the property is neither reducible to, nor predictable from, properties of entities found at the lower level.” (Hodgson 2004: 32).Perhaps Austrians may try and deny that “emergent properties” exist as a response to this? Not only would that be further evidence of their inability to accept what the modern sciences (broadly defined) have demonstrated about the world, but it has another interesting consequence.
Hayek’s very idea of a “spontaneous order” (and incidentally his theory of the conscious human mind) is a perfect example of an “emergent property” (see Lewis 2012 and Caldwell 2004: 309). Any Austrian who denies the existence of emergent properties must deny the Hayekian idea of a “spontaneous order.” In fact, certain Misesians and Rothbardians do exactly that: Rothbard, for example, rejected and derided Hayek’s “spontaneous order” theory as irrational (Rothbard 1992: 7, 25, 29).
As an aside, Hayek never seriously considered deleterious or negative emergent properties in market economies, but that is a different issue.
To sum up, “methodological individualism” as a method is untenable: it is defined in inconsistent ways (that conflict), and attempts to explain all the social world only in terms of individuals are not possible.
The “broad” version of methodological individualism simply reduces to the “proposition that explanations of social phenomena should be in terms of both individuals and social structures” (Hodgson 2007: 223). Such an approach does not even deserve the label “methodological individualism,” since it has obviously abandoned the very essence of such a method.
And it is most curious indeed to read in the Handbook on Contemporary Austrian Economics (2010) that (supposedly) Austrian economics can now have a clarified version of methodological individualism that “allows for the causal role of social customs” (Evans 2010: 9) and that recognises that “social phenomena are not strictly reducible to [sc. individuals]” (Evans 2010: 11). At one point this method seems to get the name “institutional individualism” (Evans 2010: 11). If so, this is just an admission that the strict “methodological individualist” approach is now so broad that the question is raised why it should have that name at all.
In short, what we are really seeing here is the Austrian waving of the white flag of defeat with respect to their untenable, older approach of “methodological individualism.”
* Whether Mises defined “methodological individualism” in this sense is unclear (Mises 1998: 41–43; Udehn 2002: 107–113). Evans thinks Mises fails to clarify his “methodological individualism” from a “purely methodological position” (Evans 2010: 7).
In Human Action, Mises seems to endorse the ontological form of “methodological individualism”:
“Individual man is born into a socially organized environment. In this sense alone we may accept the saying that society is - logically or historically - antecedent to the individual. In every other sense this dictum is either empty or nonsensical. The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.” (Mises 1998: 143).As noted by Udehn (2002: 110), the first two sentences are a remarkable admission that leave the door open to the idea that social organisation can determine individual behaviour. The solution Mises adopts to try and close the door is the ontological form of “methodological individualism.”
But Mises can also declare that nations, states and other aggregates of humans are “real factors determining the course of human events” (Mises 1998: 42), although they exist only in the minds of humans.
Udehn argues that Mises views subjective reality as the only reality, and that social reality is the product of human action, but that action is in turn the outcome of individual human ideas (Udehn 2002: 113).
Udehn also concludes that Mises’s “methodological individualism” really turns out to be a type of “subjective idealism” (Udehn 2002: 112).
Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek. University of Chicago Press, Chicago and London.
Evans, A. J. 2010. “Only Individuals Choose,” in Peter R. Boettke (ed.), Handbook on Contemporary Austrian Economics. Edward Elgar, Cheltenham and Northampton, Mass. 3–13.
Hayek, F. A. 1967. Studies in Philosophy, Politics and Economics. Routledge and Kegan Paul, London.
Hodgson, Geoffrey Martin. 2004. The Evolution of Institutional Economics. Routledge, London.
Hodgson, Geoffrey Martin. 2007. “Meanings of Methodological Individualism,” Journal of Economic Methodology 14.2: 57–68.
Keen, S. 2011. Debunking Economics: The Naked Emperor of the Social Sciences (rev edn.). Zed Books, New York and London.
Lawson, Tony. 1997. Economics and Reality. Routledge, London and New York.
Lawson, Tony. 2007. “An Orientation for a Green Economics?,” International Journal of Green Economics 1.3–4: 250–267.
Lewis, Paul. 2012. “Emergent Properties in the Work of Friedrich Hayek,” Journal of Economic Behavior and Organization 82.2–3: 368–378.
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.
Rothbard, Murray N. 1992. “The Present State of Austrian Economics,” Working Paper from the Ludwig von Mises Institute, November.
Udehn, L. 2002. “The Changing Face of Methodological Individualism,” Annual Review of Sociology 28: 479–507.