Hayek and Methodological Individualism

Standford Encyclopedia of Philosophy:

One of the earliest iterations of this debate occurred during the so-called Methodenstreit between members of the Austrian School in Economics and the German Historical School. Most theorists of the Austrian School, however, like Carl Menger and Ludwig von Mises, were pure atomists. It was only Friedrich von Hayek who explicitly identified himself with the Weberian doctrine of methodological individualism, and defended it through reference to the demands of interpretive social science. The key text is his paper, “Scientism and the Study of Man,” serialized in Economica (1942-44), and later published as the first part of The Counter-Revolution of Science (1955).

In Hayek's view, the desire on the part of social scientists to emulate the physical sciences creates an exaggerated fear of teleological or “purposive” concepts. This leads many economists to eschew any reference to intentional states and to focus purely upon statistical correlations between economic variables. The problem with this focus is that it leaves the economic phenomena unintelligible. Take, for example, the movement of prices. One might notice a constant correlation between the date of the first frost and fluctuations in the price of wheat. But we do not really understand the phenomenon until it has been explained in terms of the rational actions of economic agents: an early frost reduces yields, leading to less intense price competition among suppliers, more among consumers, etc. Thus Hayek insists that, in effect, all macroeconomic analysis is incomplete in the absence of “micro” foundations.

It is important to note, however, that while Hayek has a model of rational action as the centerpiece of his view, his is most emphatically not a form of rationalism. On the contrary, he puts particular emphasis upon the way that various economic phenomena can emerge as the unintended consequences of rational action. Even though the outcomes that people achieve may bear no resemblance to the ones that they intended, it is still important to know what they thought they were doing when they chose to pursue to course of action that they chose – not least because it is important to know why they persist in pursuing that course of action, despite the fact that it is not producing the intended consequences.

Of course, part of Hayek's motivation for endorsing methodological individualism and demanding that social-scientific explanations specify a mechanism at the action-theoretic level is that he wants to emphasize the limitations of the individual's actor's perspective. It's fine to talk about macroeconomic variables like “the inflation rate,” but it is important to remember that individual actors (generally speaking) do not respond directly to such indicators. All that they can see are changes in the immediate prices that they must pay for production inputs or consumption goods, and this is what they respond to. The large-scale consequences of the choices they make in response to these changes are largely unintended, and so any regularity in these consequences constitutes a spontaneous order. This is a crucial element of Hayek's information-based argument for capitalism: economic actors do not have access to the same information as economic theorists, thus it is only when we see the operations of the economy through their eyes that we can begin to see the advantages of a decentralized system of coordination like the market.

To illustrate the importance of the individual's perspective, Hayek gives the example of the process that leads to the development of a path in the woods. One person works his way through, choosing the route that offers the least local resistance. His passage reduces, ever so slightly, the resistance offered along that route to the next person who walks though, who is therefore, in making the same set of decisions, likely to follow the same route. This increases the chances that the next person will do so, and so on. Thus the net of effect of all these people passing through is that they “make a path,” even though no one has the intention of doing so, and no one even plans out its trajectory. It is a product of spontaneous order: “Human movements through the district come to conform to a definite pattern which, although the result of deliberate decisions of many people, has yet not been consciously designed by anyone” (Hayek 1942, 289).

The problem with ignoring the agent's perspective, in Hayek's view, is that it can easily lead us to overestimate our powers of rational planning and control, and thus to fall into “rationalism.” By contrast, the central virtue of methodological individualism is that it helps us to see the limitations of our own reason (Hayek 1944, 33). Formulating theories that refer directly to the “interest rate,” or “inflationary pressures,” or “the unemployment rate” can mislead us into thinking that we can manipulate these variables, and thus intervene successfully in the economy. We forget that these concepts are abstractions, used not to guide individual action, but rather to describe the net effect of millions of individual decisions. The key characteristic of methodological individualism is that it “systematically starts from the concepts which guide individuals in their actions and not from the results of their theorizing about their actions” (1942, 286). It therefore encourages, in Hayek's view, greater modesty with respect to social planning.

 

 

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