The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:
A closely related Austrian philosophy is methodological individualism.
This means that all economic phenomena can be traced back
to, and explained by, the actions of individuals. Even when individuals
act on behalf of a group, or as part of a group, they are acting
as individuals. Thus, "group behavior" is a false concept.
As political scientist Jon Elster argues: "A family may,
after some discussion, decide on a way of spending its income,
but the decision is not based on 'its' goals and 'its' beliefs,
since there are no such things." (1) Even if the final budget
is a compromise that does not correspond to the wish of any single
family member, then members have nonetheless agreed to the compromise,
since compromising is somehow more rewarding than not compromising.
The opposite of this is methodological holism, which holds
that groups have traits, behaviors and outcomes that cannot be
understood by reducing them to their individual parts. That is,
groups consist not only of individuals, but also relationships
between individuals. It is not enough to say that "the functions
and traits of my car can be reduced to, and explained by, the
atoms that make it." This overlooks an equally important
point -- that these atoms need to be shaped into a car. The fact
that atoms are fundamental units that exhibit certain properties
actually explains very little.
The economic equivalent here would be a factory. A car factory
may have thousands of employees, but none of them possess the
complete knowledge to build an entire car. Each worker's knowledge
and responsibility are specialized and limited, and can only build
part of a car. Only the interdependent efforts of the entire
group can roll a car off the assembly line.
An individualist might object that human beings are unlike atoms,
in that people have the ability to create their own relationships
and therefore such interdependent groups as company workforces.
But this occurs neither spontaneously nor at an individual level.
Suppose a car factory has no central organization, and workers
just began building a car, communicating with no one except the
workers whose parts were immediately connected to their own. It
could turn out that the engine workers thought they were building
a Mercedes Benz, while the trunk workers thought they were building
a Yugo. Obviously, there needs to be centralized organization.
Austrians seek to get around this problem by establishing the
entrepreneur -- the firm's central organizer -- as the "isolated
actor" of their analysis. Here are some Austrian assertions to
is the driving force of the market
These quotes evoke the delightful image of entrepreneurs running
their companies all by themselves. Indeed, Gunning asserts without
"Thus the role of the entrepreneur emerged as the agency
that causes the (prospective) means of production to be used to
produce goods for the consumer role." (3)
"In economics, the distinctly human element involved in causing,
by means of choice, the economic functions to be performed is
assigned to a particular role, that of the entrepreneur." (4)
"To help us identify the characteristics of entrepreneurship, we
begin by showing how an isolated actor would come to perform the
functions of producing, consuming, saving, and supplying factors." (5)
We should not, of course, interpret this to mean that Austrians are so
gullible as to believe that
entrepreneurs run their companies single-handedly.
But these are the conceptual games they must play to protect the
fiction that "isolated actors" and "primary agents"
exist in an economy that is overwhelmingly interdependent. Even
in their primary role as organizers, entrepreneurs depend on the
group. A company president can only issue general guidelines to
his managers, who must inevitably organize and direct much of
their departments on their own. The larger a company gets, the
less personal and direct control an entrepreneur has over it.
He must delegate out an increasing share of authority and responsibility,
and is more dependent than ever on others to help him run things,
investigate conditions, inform policy, and make recommendations.
Furthermore, individual employees who are acting on delegated
authority are attempting to act in the interest
of their employer (usually a corporation, not an entrepreneur), which
depends on their model of that abstract entity.
The firm's lack of individualism can be seen from the other direction as well.
Individual firms are rarely the basic unit of the economy; almost
all products run through several firms before completion. Information
brokers, for example, often do not know where their information
comes from or how it was derived, or where it goes or for what
purposes. Stores like Sears do not produce all their own goods;
they merely serve as part of a larger network of firms cooperating
to sell their products.
Ultimately, there is a continual network of interdependence running
from the individual worker to the global economy. Picking out
the "entrepreneur" as the primary level of analysis
is like singling out the quarterback as the "isolated actor"
of a football team.
Another objection to methodological individualism is that it fails
to adequately account for culture, tradition, rules and other
social habits. (6) Much of human behavior is to be explained on these
grounds, not individual knowledge or choice. Hayek attempted to
explain habits and other rules of social behavior on the grounds
that they promoted order and efficiency within the group. Over
time, they promoted group success. (7) But what Hayek failed to
do was describe how these rules and customs were passed on, and
why they weren't replaced by other rules. The answer is group
selection. Imagine two farms, one more efficiently organized than
the other. Over time, the less efficient farm and its methods
may disappear, and the more efficient farm will pass on its customs
and rules to future generations (of both farms and people). Individuals
who join these farms will learn by teaching or imitation. Much
of their future activity will be based on these social norms,
not their own individual choices. To the extent that individual
choice is present, it is to follow these social norms, or attempt
to create new ones.
In debates between methodological individualism and holism, the
winner that usually emerges is a compromise position: we are both
individuals and members of the group. Those who seek to
explain everything on a purely individual level are just as doomed
to fail as those who seek to explain everything on a purely
group level. Different branches of science actually seek to explain human behavior at
many different levels: the gene, the individual, the group, and
the specie. Being open to different types of methodologies is
characteristic of mainstream science. Insisting on only one methodology
at all times is a feature of crank science.
The problem with insisting on only one level of analysis is that
counter-examples crop up which are nearly impossible to explain.
Methodological individualists claim that individuals seek to maximize
their personal rewards. But if this were true, then soldiers would
become conscientious objectors instead of risking death in war.
Charity, favors, volunteer work, loans and other forms of altruism
would never happen. Parents would not sacrifice for their children.
True believers would not sacrifice their resources or their lives
for a cause. Yet these things happen.
One of the most famous failures of methodological individualism
is why people vote. According to public choice theorists, who
base their science on this method, there is no logical reason
for individuals to vote. The costs and inconvenience of voting
(getting off work, driving to the polling site, getting picked
for jury duty) far outweigh its rewards (which would only occur
on the extremely rare occasion that someone cast the deciding
vote). A rational actor would simply take a "free ride"
and allow others to decide the election for him. "Unfortunately
for theory," laments political scientist Carole Uhlaner,
"people do vote." (8) Voting strongly suggests that
people are not pure individualists, but are endowed with a degree
The following wry comment from economist Laurence Moss sums it all up
"American institutionalists have long benefitted from the existence of
the Austrian school of economics... The Austrian writers have served
as whipping boys for the institutionalist critique against atomistic
individualism and extreme rational calculation." (9)
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1. Jon Elster, introduction, Rational Choice, Jon Elster,
ed., (New York: New York University Press, 1986), p. 3. Elster is a
Marxian, not an Austrian economist, but his support
for methodological individualism is the same.
2. Ken Gaillot, Jr., "The Theory of Market Process,"
3. J. Patrick Gunning, "New Subjectivist Economic Theory
and Public Finance,"
4. Gunning, "The Goal and Methods of Economic Theory,"
6. This paragraph is based on Laurence S. Moss, "Geoffrey M. Hodgson,
Economics and Evolution:
A Review Article" Marshall Studies Bulletin 4, 1994: pp. 33-49.
7. Friedrich A. Hayek, "Fatal Conceit: The Errors of
Socialism," in idem., The Collected Works of F. A. Hayek,
27 vols. (Chicago: U. of Chicago, l988), I, p. 25; see also criticism
of Hayek in Geoffrey M. Hodgson, Economics and Evolution
(Polity Press, 1993), p. 171.
8. Carole Uhlaner, "Rational Turnout: The Neglected Role
of Groups," American Journal of Political Science
33, 1989, p. 390.