Methodological Individualism, (1909-2009), Part 1 Andy Denis
Mises and Hayek on Methodological Individualism
Andy Denis
City University London
Abstract
2009 marks the centenary of methodological individualism (MI). The phrase was first used in English in a 1909 paper by Joseph Schumpeter in the Quarterly Journal of Economics. Yet after 100 years there is considerable confusion as to what the phrase means. MI is often invoked as a fundamental description of the methodology both of neoclassical and Austrian economics, as well as of other approaches, from New Keynesianism to analytical Marxism. However, the methodologies of those to whom the theoretical practice of MI is ascribed differ profoundly on the status of the individual economic agent, some adopting a holistic and some a reductionist standpoint. My purpose is to uncover and evaluate some of the meanings of the phrase 'methodological individualism'. The paper considers the contributions of Mises and Hayek, concluding that they based their methodological stance on fundamentally different ontologies, with Mises building on the reductionism of previous writers such as Schumpeter and Menger, and Hayek, on the contrary, adopting a holistic ontology more in line with Adam Smith, Marx and Keynes. From an ontological perspective this seems to leave Hayek as something of an outlier in the Austrian tradition.
Mises and Hayek on Methodological Individualism
- Introduction
The purpose of the present paper is to investigate the notions of methodological individualism (MI) propounded by two giants of the Austrian tradition, namely, Hayek and Mises, in order to elucidate their conception of the status of the individual in economics. In particular, I am interested in the social ontology adopted by economists and the role this plays in their overall rhetorical strategy.
In the century since the term ‘methodological individualism’ was introduced into the English language, in a 1909 QJE paper by Joseph Schumpeter (Schumpeter, 1909), much confusion has reigned as to what exactly it means(Hodgson, 2007). The aim of the paper is to elucidate some of the meanings of MI. Is it possible to narrow it down by considering its use within the Austrian School? The focus of the paper is on the extent to which we can identify the writers considered here as expression either a reductionist or a holist standpoint in their writings on MI.
In a reductionist (or atomist) account, the qualities of an economic entity replicate the qualities of the micro-level substrate entities: the whole is just the sum of the parts. Economics, according to Friedman, involves the study of “a number of independent households, a collection of Robinson Crusoes” (1962: 13). In the holistic (or organicist) approach, the qualities of an economic entity diverge from the qualities of the micro-level substrate entities and depend instead on the interconnections between those substrate entities. The whole is something different from the sum of the parts. According to Hayek, “individuals are merely the foci in the network of relationships” (1979: 59). In the reductionist conception of the world, we attain the macro by aggregating micro elements, considered as isolated from each other; in the holistic approach, what is key is the web of inter-relationships between the substrate entities (Denis, 2004).
To the extent that macro level outcomes in the reductionist paradigm merely aggregate the micro-level substrate activities of agents, rational, self-seeking agent behaviour may be expected to issue in desirable social outcomes. This lays the basis for a defence of laissez-faire. To the extent that social outcomes in the holistic view are emergent, they may well be qualitatively different from the actions of the substrate entities. Individual, micro-level rational, self-seeking behaviour can no longer be counted on to underpin desirable social outcomes. Scope for dirigisme is opened up. To support a policy prescription of laissez-faire, an additional reason must be found for us to believe that spontaneous social outcomes will nevertheless be desirable. The invisible hand of a benign deity in Adam Smith (Denis, 2005) and a human-favourable process of the evolution of institutions in Hayek (Denis, 2002) are salient instances.
The paper first considers the presentation of the matter in Hayek, arguing that he adopts a holistic approach in the sense just defined. For Hayek it is the relations between individuals which are key, and while we ar recommended to ‘start’ from the individual, that individual is already social, embedded in a network of relationships. Moving on to Mises’s approach to MI, the paper argues that Mises articulates both reductionist and holistic ontologies, but that the two ontological standpoints have different statuses within his overall approach. In particular the rhetorical strategy he adopts to convince us of the necessity of capitalism and the impossibility of socialism is entirely reductionistic. The result is to leave Hayek, considered on the ontological plane, as something of an outlier within the Austrian tradition.
- Hayek on methodological individualism
The key text for Hayek’s views on MI (Heath, 2009) is his wartime series of articles in Economica on “Scientism and the Study of Man”, later published as the first part, “Scientism and the Study of Society”, of The Counter-Revolution of Science. Studies on the Abuse of Reason (Hayek, 1979).
At the beginning of the chapter on “The Subjective Character of the Data of the Social Sciences” (Chapter 3), Hayek reviews the object and method of the social sciences. The social sciences, he says,
deal not with the relations between things, but with the relations between men and things or the relations between man and man. They are concerned with man’s actions, and their aim is to explain the unintended or undesigned results of the actions of many men (Hayek, 1979: 41).
This emphasis on social relationships and unintended consequences already expresses a holism very different from the reductionism of the neoclassical school. For Friedman, for example, economics is based in the study of “a number of independent households, a collection of Robinson Crusoes” (1962: 13). In this view we understand the economy by aggregating the isolated actions of the many Robinsons on their islands. Any interrelationships between them are of secondary interest, mere epiphenomena. In this paradigm the focus on unintended consequences is lost: on the contrary, if social outcomes are merely the aggregate of many – rationally intended – individual actions, then they too are intended. In Lucas, for example, unemployment is treated as a choice – ‘an individual problem’, and as therefore necessarily ‘voluntary’(Lucas, 1987: 67). The notion of unintended consequences is typically reserved for the discussion of market imperfections and state interventions in the economy which generate perverse incentive structures.
For Hayek, the goal of social science is to explain different social structures in terms of the recurrent elements of which they are built up (Hayek, 1979: 58), and these recurrent elements are said to be the social relations between agents: “If the social structure can remain the same although different individuals succeed each other at particular points, this is… because they succeed each other in particular relations … The individuals are merely the foci in the network of relationships” (Hayek, 1979: 58-59).
This notion of a social structure emerging from the interrelationships of the substrate level entities is what I have defined as holism. This standpoint is echoed throughout Hayek’s work, as we can see when Hayek addresses the question of the relationship between wholes and parts:
That a particular order of events or objects is something different from all the individual events taken separately is the significant fact behind the [phrase of] … ‘the whole being greater than the mere sum of its parts’ … [I]t is only when we understand how the elements are related to each other that the talk about the whole being more than the parts becomes more than an empty phrase (1952: 47).
The overall order of actions in a group is … more than the totality of regularities observable in the actions of the individuals and cannot be wholly reduced to them … a 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 (1967: 70).
Returning to Chapter 3 of The Counter-Revolution of Science: having just said that individuals are focuses in networks of relationships, Hayek goes on to say that “it is the various attitudes of the individuals towards each other … which form the recurrent, recognizable and familiar elements of the structure” (Hayek, 1979: 59). It is these “attitudes of the individuals towards each other” that constitute “a constant structural element which can be separated and studied in isolation”. So Hayek identifies the ‘network of relationships’ with the ‘attitudes of the individuals towards each other’. This does not mean how two (or more) people feel about each other, but the beliefs about each other that they entertain and which drive their behaviour. For example, if a man is a policeman, he will, qua policeman, entertain “certain attitudes toward his fellow man”, while himself being “the object of certain attitudes of his fellow men which are relevant to his function as policeman” (Hayek, 1979: 59) – because that is what it means to be a policeman.
We should note here the contrast between the essentially asocial notion of the individual as Robinson Crusoe, characterising such neoclassical writers as Friedman and Lucas, and the essentially social notion of the individual in Hayek. The individual here is a vehicle of social relations: what is of interest about an individual is not that he is Fred or Susan, or prefers jam or peanut butter, but that he plays a rôle dictated by the totality of social relations focused in him. Substituting another person at this nodal point in the social network will “preserve a constant structural element”, and it is this structural element which is the proper object of study of social science.
Identifying these ‘constant structural elements’ is possible, according to Hayek, because we can empathise with the agents’ beliefs, motivations and actions. We can intuit the meaning these actions have for the participants. We do not simply observe and obtain rules of social behaviour via induction, but are able to infer motivation on the basis of the humanity shared by agent and observer. The objective, on the basis of this Verstehen, is to identify and “understand … the unintended and often uncomprehended results of the separate yet interrelated actions of men in society … to reconstruct these different patterns of social relations” (Hayek, 1979: 59). In this ‘reconstruction’ we start with the ‘separate yet interrelated’ decisions made by individuals – decisions which are made separately by each person on the basis of his own beliefs and his own goals, but which are interrelated because what the individual believes will be the consequence of his actions depends on his place and rôle in the network of social relations. The latter, therefore, the unintended pattern of social relations, thus enters into the account in two ways – as a determinant of the individual actions, and as a result of the actions taken by the many. It is both what we start with, and what we reconstruct by “the following up of the implications” of those individual decisions.
Chapter 4, entitled “The Individualistic and ‘Compositive’ Method of Social Science” (Hayek, 1979: 61-76), is as one might expect key for our understanding of Hayek’s version of MI. Hayek starts by noting that “in the social sciences our data or ‘facts’ are themselves ideas or concepts”. He has already in the previous chapter identified these facts, these data, with the network of social relations. It is therefore the case that ideas enter into social sciences “in two capacities, as it were, as part of their object, and as ideas about that object” (Hayek, 1979: 61). We need to distinguish between “the views held by the people which are our object of study” and those people’s “ideas about the undesigned results of their actions – popular ideas about the various social structures or formations”. Only the former, the ideas which people hold which motivate them to behave in certain ways are the object of study of the social science: the latter are the views which social science attempts to refine or replace with scientific views of the unintended social structures. This is not to say that that the second class of ideas cannot itself motivate behaviour and constitute the data for a science, and Hayek argues that this is perfectly possible.
This contrast – “between ideas which being held by the people become the causes of a social phenomenon and the ideas which people form about that phenomenon” (Hayek, 1979: 62-63) – turns out to be essential for Hayek’s definition of MI: that the social scientist
systematically starts from the concepts which guide individuals in their actions and not from the results of their theorizing about their actions, is the characteristic feature of … methodological individualism (Hayek, 1979: 64).
MI, for Hayek, is to be contrasted with ‘scientism’, which starts with ‘popular generalizations’, ‘the speculative concepts of popular usage’, ‘naively accepting’ them as facts. Since this is popular speculation about patterns of social relations, about unintended social structures, that is, about social wholes, these popular generalisations are ‘collectives’ and scientism is to be identified with ‘collectivist prejudice’ (Hayek, 1979: 65).
Since, as I have indicated, Hayek uses the social to explain the social: the network of relations determines the attitudes and motivating beliefs of each nodal individual, and the unintended consequences of the resulting individual actions constitute the social structure, the pattern of social relations, then the question arises, what it is which is individualist about this method? To answer this, Hayek changes tack. He represents science as a passage from the part to the whole or the whole to the part. “The physical sciences necessarily begin with the complex phenomena of nature and work backward to infer the elements from which they are composed … the method of the natural sciences is in this sense, analytic” (Hayek, 1979: 65-67). The phenomenon is complex: the given whole has to be traced back to its more simple parts. In society the opposite is true: what is given to us in intuition, by our Verstehen of the knowledge and motives of individuals, are the simple parts: what we have to do is to combine them in thought to discover the ‘principles of coherence’ of the ‘wholes’ which we cannot observe. This path of the mind from the simple to the complex is ‘compositive’ or synthetic. What Hayek does not say explicitly here is that if we follow this logic faithfully, and it is this that makes social science methodologically individualist, then natural scientists must necessarily be methodological holists.
I am not at this point primarily interested in the adequacy of this characterisation of social and natural science. We only need to note here, firstly, that natural scientists don’t just analyse the given into its simplest categories, but they then also retrace their steps, working those simple elements up into mental models of the given. Our understanding of an amoeba is not complete when we can say how much carbon, nitrogen, etc, one contains. Natural science is as synthetic as analytic and generally analysis and synthesis are inseparably bound together. And, secondly, that the simple elements of social science are, as Hayek himself has shown in the previous chapter, not individual persons, but the beliefs which motivate them. And the latter are a product of the constellation of social relations within which the individual person is embedded. Since social relations are intangible, it is not given to anyone what the relevant relations are, what beliefs and what incentive structure they present to the individual. These can only be discovered by analysis, by thought, by comparison with empirical observation, in a word, by work. Moreover, it is obscure in Hayek’s account how we are to ‘reconstruct’ social wholes, starting with the simplest elements, in order to ‘discover’ ‘the principles of structural coherence’ of those social wholes, if we don’t know what those principles of coherence are in the first place: knowledge of the principles of coherence is a prerequisite of this reconstruction, not a consequence of it. These principles can, again, only be found by abstraction, by analysis. In the study of social activity analysis thus plays as great a rôle as synthesis. In my view, therefore, this model of science as analytical in the natural and synthetic in the social domains doesn’t seem to work. The point here, however, is to note the rôle of the model in Hayek’s argument. The method of the social sciences is said to be ‘individualist’ because it ‘starts’ with individuals. But when we recall that these individuals are not considered qua individuals, but as vehicles of specific socially inculcated beliefs, as nodes in networks of social relations, the aptness of the designation seems questionable. Methodologically, the activity of thought that Hayek describes is entirely holist.
Identifying Hayek’s approach as based in a holistic ontology leads us to see links with the work of others which in some cases are surprising. It is unsurprising perhaps that he shares an ontology with the 18-century providentialist writers such as Adam Smith, Dugald Stewart and Robert Malthus; more so that methodologically this places him in the same camp with Marx and Keynes. We are unable to follow up that thread here – but what we must address is the question as to whether this is a feature of the Austrian school per se, or whether, on the contrary, Hayek is in this respect on his own within the Austrian tradition. The next section therefore investigates whether Mises’s approach is founded in a reductionist or holistic ontology.