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A Century of Methodological Individualism

Andy DenisCity University London

[email protected]

Version 2: August 2010

Paper for the 42nd annual UK History of Economic Thought conference, Kingston University

September 2010

Please do not disseminate further

Proposal

2009 marks the centenary of methodological individualism (MI). The phrase was first usedin 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 ofteninvoked 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 first part considers the contributions ofJoseph Schumpeter, who was the first to use the term, and of Carl Menger, considered by

many to be the founder of MI. I find evidence that both writers recommend a highly

reductive, atomistic methodology. I then consider the contributions of von Mises and Hayek,

concluding that Mises and Hayek based their methodological stance on fundamentally

different ontologies, with von 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. The final part concludes,touching on some of the more recent literature, and suggesting that the analytical Marxism of

Jon Elster and others has more in common, methodologically, with reductionist writers suchas Bentham, Malthus after 1800, Ricardo, Menger, Schumpeter, Mises, Friedman and Lucas,

than with more holistic writers such as Adam Smith, Dugald Stewart, Malthus before 1800,Marx, Keynes and Hayek.


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Methodological Individualism, (1909-2009), Part 1 Andy Denis

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Part One: Schumpeter and Menger

1. IntroductionFebruary 2009 marked the centenary of the term methodological individualism (MI). The

phrase was first used in English in a 1909 QJE paper by Joseph Schumpeter. MI is often

invoked as a fundamental description of the methodology both of neoclassical and Austrian

economics, as well as other approaches, from New Keynesianism to analytical Marxism.However, the methodologies of those to whom the theoretical practice of MI is ascribed vary

widely and, indeed, differ profoundly on the status of the individual economic agent, someadopting a holistic and some a reductionist standpoint. Even after 100 years there is

considerable confusion as to what the phrase means: Denis (2006b) shows with reference to acase study, a debate on the subject of MI between members of the History of Economics

Societies email list, the hazard of mutual misunderstanding caused by lack of a sharedunderstanding of the meaning of MI.

The purpose of the research of which this paper is part is therefore to uncover, clarify andevaluate some of the meanings of the phrase methodological individualism (MI). This first

paper considers the contributions of Joseph Schumpeter, who was the first to use the term,

and of Carl Menger, considered by many to be the founder of MI. The approach adopted is to

apply the intellectual apparatus developed in Denis (2004) to the arguments of these writers.

This constitutes a test of that apparatus: is it able to clarify the standpoints to which it is

applied?

My interest in the topic is thus quite specific. In JEM 2004 I published a paper,Two

rhetorical strategies oflaissez-faire, setting out a new approach to economic methodology,

an approach which emerged in my study of Smith, Hayek and Keynes (Denis, 2004). My

2006 paper on Malthus in History of Economic Ideas(Denis, 2006a) was an attempt to testthis approach was the two-rhetorical-strategies approach able to enlighten us, to tell us

more about Malthus? The answer, I felt, was encouraging. Application of the new approachrevealed a fundamental shift in Malthuss methodology around the turn of the 19th century,

between theFirstand Second Essays, a shift which had not previously been noticed in theliterature. My interest here is the same: can this new approach enlighten us can it help us to

understand the meanings of MI?

This part of the paper briefly recapitulates the two-rhetorical-strategies approach, then applies

this approach to the founding fathers of the literature on MI, Schumpeter and Menger. The

conclusion reached is that both Schumpeter and Menger adopt a reductionist ontology in the

sense of Denis (2004). Subsequent parts examine the contributions of Mises andHayek, and

of the analytical Marxists.

2. Two rhetorical strategies oflaissez-faire and interventionism1This section sketches the view developed in Denis (2004), that proponents of conservative

policy prescriptions, such as laissez-faire, are compelled, to the extent that they are

confronted with ontological issues, to make a choice between reductionism and holism, and,

if they choose the latter, have to attach to it an invisible hand mechanism to underpin the


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reductionist policy prescription oflaissez-faire. In the research project summarised in Denis(2004) I have tried to show two things: Firstly, that in a world of partially overlapping and

partially conflicting interests there is good reason to doubt that self-seeking agent behaviourat the micro-level will spontaneously lead to desirable social outcomes at the macro-level.

The presence in such a world of externalities, such as the prisoners dilemma, implies that

Nash equilibria cannot be assumed to generate socially desirable outcomes, even in the

minimal sense of Pareto efficiency. And, secondly, that we can usefully distinguish betweentwo kinds of argument for laissez-faire. Reductionist laissez-faire writers argue or assume

that important aspects of the society we live in can straightforwardly be reduced to the

behaviour of individuals: individual utility maximisation leads to social welfare maximisation

by a process of aggregation. Apparent macro-level irrationality, such as unemployment, can

thus be reduced to micro-level decisions on the trade off between leisure and labour. This is

the well-known stance of Friedman and Lucas.

There are, however, more holistic economic proponents of laissez-faire, writers who also

would like us to rely on the spontaneous interaction of self-seeking agents, but who recognise

that social or collective rationality, or irrationality, may be emergent at the macro-level, andnot reducible to the rationality, or otherwise, of substrate-level behaviour giving rise to it. In

order then to present the macro-level outcomes as desirable, they have proposed variousinvisible hand mechanisms which can, in their view, be relied upon to educe good from ill.

Smith, I argued, defended the simple system of natural liberty as giving the greatest scope tothe unfolding of Gods will and the working out of natural, providential processes, free of

interference by artificial state intervention the expression not of divine order but of falliblehuman reason. Hayek, adopting a similar policy stance, based it in an evolutionary process in

which those institutional forms best adapted to reconciling individual agents interests would,

he believed, spontaneously be selected for in the inter-group struggle for survival.

Reductionism (often referred to in the literature as atomism) can be defined as the view that

an entity at one level can be understood as a congeries, an aggregate of entities at a lower,

substrate level, and that the properties and behaviour of higher level entities can be

understood in terms of the properties and behaviour of its constituent lower level parts, taken

in isolation. Holism (often referred to as organicism) is the opposite view, namely that

phenomena at one level can be understood as emergent at that level, that a higher level entity

can be understood as a product of the interrelationships between its component parts. The

opposition between the two is often expressed in the literature by means of the formula that

the whole is (reductionism), or is not (holism), equal to the sum of the parts. The contrast

between the reductionist and holistic approaches can be illustrated by comparing the status ofthe individual in Friedman and in Hayek. Economics, Friedman says, is based in the study of

a number of independent households, a collection of Robinson Crusoes (1962: 13). ForHayek, however, individuals are merely thefoci in the network of relationships (1979: 59).

So for one we arrive at the macro by aggregating large numbers ofisolated micro elements,

whereas for the other, it is the interconnections between the micro elements which are key.

An alternative to both of these approaches is to combine Smiths and Hayeks recognition of

the holistic nature of the world we live in with rejection of their postulate of an invisible

hand. In this view, rational self-seeking behaviour on the part of individual agents is by no

means either the necessary or the sufficient micro substrate for the desirability of social

outcomes. According to Keynes, for example, uncoordinated egotistical activity in

unregulated markets may lead to inefficient outcomes. The price system aggregates rational

individual actions but the aggregate is an unintended outcome as far as those individuals are


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concerned. There is no particular reason why unintended outcomes should necessarily bedesirable and often they are not. Individuals take responsibility for maximising their own

welfare, given what everyone else is doing, but society as a whole has to take responsibilityfor organising the aggregate outcome, if undesirable aggregate outcomes are to be avoided:

there is no design but our own ... the invisible hand is merely our own bleeding feet moving

through pain and loss to an uncertain destination (Keynes, 1981: 474).

The purpose of the present paper is to apply this structure of ideas to the case of

methodological individualism.

3. The meanings of MI: the founding fathers(i) Schumpeter

It seems appropriate to start with the originator of the term MI. The term methodologischer

Individualismus was introduced in Joseph Schumpeters 1908 Das Wesen und der Hauptinhalt der theoretischen Nationalkonomie. Chapter 6, Methodological

Individualism, was translated into English and published as a pamphlet in 1980, with aPreface by Hayek (Schumpeter, 1980). A year after publishing his book in German,

Schumpeter published a paper in English in the Quarterly Journal of Economics, On theconcept of social value, and the first appearance of the term methodological individualism in

English occurs at the end of this paper (Schumpeter, 1909: 231). The first sentence of thefinal section, Summary, is

First of all, it is here claimed that the term methodological individualism describes

a mode of scientific procedure which naturally leads to no misconception of economic

phenomena.

This is the first and only reference to MI in the paper. A footnote states that the claim made

here is more fully elaborated in Schumpeters 1908 book in German, just mentioned.

The main purpose of Schumpeters paper is to investigate the meaning of the term social

value. Section I, Methods of pure theory are individualistic, sets the scene

methodologically, and the rest of the paper Section II, Meaning of the concept of social

value; Section III, Concept of social value opens up an optimistic view of society and its

activities, and Section IV, Relation of the theory of prices to the concept of social value applies this methodology to the specific question in hand. Our interest is in the method, and

its application to the concept of social value is only of interest in so far as it illuminatesthatmethodological approach. However, methodology is in Schumpeters paper in the

foreground throughout, as the question of the meaning of social value is a purely

methodologicalone (Schumpeter, 1909: 213)

2

.

Schumpeters analysis is presented as empirical and positive: this is what economists do, he

says: the point is not to comment on their methodology, not, that is, to make value

judgements about it, but merely to show some of its implications:

At the outset it is useful to emphasize the individualistic character of the methods of

pure theory. Almost every modern writer starts with wants and their satisfaction, and

takes utility more or less exclusively as the basis of his analysis. Without expressing


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any opinion about this modus procedendi, I wish to point out that it unavoidablyimplies considering individuals as independent units or agencies. For only individuals

can feel wants. (Schumpeter, 1909: 214).

Since standard assumptions about those wants give us utility curves3, the latter therefore,

have a clear meaning only for individuals. We should note that though Schumpeter says

here that he expresses no opinion about the procedure, he does say elsewhere that it is freefrom inherent faults, and, as far as it goes, fairly represents facts and that it naturally leads

to no misconception of economic phenomena (Schumpeter, 1909: 215, 231). We may take

it, therefore, that in fact MI is to be endorsed, and this is much more explicit in the book

(Schumpeter, 1980).

So the argument is: (i) most economists start with wants and analyse utility via utility curves;

(ii) only individuals can feel wants; and therefore (iii) utility curves are only meaningful for

independent individuals, individuals as independent units. Further, utility curves and the

quantities of goods together determine marginal utilities for each individual, which are

the basis and the chief instruments of theoretical reasoning; and they seem, so far, to

relate to individuals only Marginal utilities do not depend on what society as suchhas, but on what individual members have ... we have to start from the individual:

first, because we must know individual wants; and, secondly, because we must knowindividual wealth. (Schumpeter, 1909: 214-5).

Schumpeter summarises how economics starts from individualist assumptions and, via

individualist reasoning, builds up to social phenomena as follows:

Marginal utilities determine prices and the demand and the supply of each

commodity; and prices, finally, tell us much else, and, above all, how the social

process of distribution will turn out. We gather from the theory of prices certain laws

concerning the interaction of the several kinds of income and the general

interdependence between the prices and the quantities of all commodities. This, in

nuce, is the whole of pure theory in its narrowest sense; and it seems to be derived

from individualistic assumptions by means of an individualistic reasoning. We could

easily show that this holds true not only for modern theories, but also for the classical

system. It is submitted that this treatment of economic problems is free from inherent

faults, and, as far as it goes, fairly represents facts (Schumpeter, 1909: 215).

By contrast, we cannot start from Society:

It now becomes clear that the same reasoning cannot be directly applied to society as

a whole. Society as such, having no brain or nerves in a physical sense, cannot feel

wants and has not, therefore, utility curves like those of individuals ...

Two points are worthy of note here. Firstly, Hodgson (2007: 212-3) suggests that

for Schumpeter, methodological individualism was no universal injunction or

methodological principle from which we depart at our peril. Instead for him it was an

attempt to demarcate the pure theory of economics from other approaches and

methods of scientific inquiry Schumpeter upheld methodological individualism as


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neither a universal principle of social scientific research nor an obligatory rule for allsocial scientists.

Well, this is sort of true, but only sort of4. As Hodgson points out, we need also to look at

Schumpeter (1986) to clarify his stance. There Schumpeter identifies a Sociological

Individualism, by which

we mean the view, widely held in the seventeenth and eighteenth centuries, that the

self-governing individual constitutes the ultimate unit of the social sciences and that

all social phenomena resolve themselves into decisions and actions of individuals that

need not or cannot be further analyzed in terms of superindividual factors

(Schumpeter, 1986: 888).

Before proceeding, the reader is invited to pause and consider: is this description consistent

with what Schumpeter wrote in 1909? And is it consistent with the methodology of

neoclassical economists such as Friedman and Lucas?

On the first question, it is difficult to discern a difference here, from what Schumpeter was

saying in 1909. It is surprising and instructive to see what Schumpeter says next inHistory ofEconomic Analysis: This view is, of course, untenable so far as it implies a theory of the

social process (Schumpeter, 1986: 888-9). Nevertheless, it remains permissible for thespecial purposes of a particular set of investigations to start from the given behaviour of

individuals without going into the factors that formed this behaviour In this case we speakof Methodological Individualism (Schumpeter, 1986: 889).

The contrast which Schumpeter draws here between MI and Sociological individualism (SI)

is as follows. MI means starting with the behaviour of individuals and treating that

behaviour as primitive and given. As he has already explained Schumpeter (1909), this is a

requirement for economic science: it is a procedure which is free from inherent faults,

fairly represents facts and naturally leads to no misconception; and we have to start

from the individual the same reasoning cannot be applied directly to society

(Schumpeter, 1909: 215, 231). SI is untenable, however, according to Schumpeter, not

because there is anything wrong with the methodological approach it describes, so far as

economics is concerned that methodological approach simply is MI but because it makes

MI a requirement for other disciplines, disciplines which may wish to further analyze the

decisions and actions of individuals. So Hodgson is correct that Schumpeter is proposing a

division of labour between different social disciplines (Schumpeter 1986: 889), but this isnot be taken as endorsement of methods other than MI for the understanding of social

phenomena. In other words, it is a demarcation criterion combined with a very clearinjunction as to what methods are applicable in social science. The violation of SI which his

standpoint admits is a very precise one, namely the further analysis, by disciplines other than

economics, of the decisions and actions of individuals in terms of superindividual factors.Preferences may be themselves socially determined. He has already said this in the QJEpaper:

it is only as long as an individual is isolated that the total as well as the marginal

utilities of all commodities he may possess depend exclusively on him. All utilities

are changed when he lives in society, because of the possibility of barter which then

arises Our individual will now put a new value on his goods because of what he

can get for them in the market This fact may be said to show the direct social


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influence on each individuals utility curves. Secondly Everyone living in acommunity will more or less look for guidance to what other people do The

phenomenon of fashion affords us an obvious verification of this We must look atindividual demand curves and marginal utilities as the data of purely economic

problems Social influencesform them, but for us they are data, at once necessary

and sufficient, from which to deduce our theorems.

So a clear methodological approach emerges, and one which is reductionist in the sense

discussed above in Section 2 of this paper, one which is entirely consistent with that of

Friedman and Lucas. Indeed, individuals are not isolated and their utilities depend upon

social influences including the value they place on commodities due to the psychological

forces of fashion and herd behaviour, and because the fact of a market places a new value on

items which individuals could conceivably sell. These influences on individual decisions and

behaviour are the domain of other sciences, such as psychology. But in economics, we are

able to put aside questions as to the reason for this or that individual preference, and ask

instead only about the consequences of such preferences:

For theory it is irrelevant why people demand certain goods: the only important point

is that all things are demanded, produced, and paid for because individuals want them.Every demand on the market is therefore an individualistic one (Schumpeter, 1909:

216).

To study the social consequences of these individual preferences, by using the individualisticmethods which Schumpeter describes, we assume that the isolated individual is indeed the

atom of society. Hence Schumpeter s verdict on the neoclassical writers of the marginal

revolution:

it may be shown that, within the range of problems that primarily interested them,

that is within the range of the problems that come within the logic of economic

mechanisms, the procedure of the theorists of that period [sc 1870-1914] may be

defended as methodological individualism, and that their results, so far as they went,

were not substantially impaired by the limitations that are inherent in this approach

(Schumpeter 1986: 889).

This subsection has tried to show the true and the false in Hodgsons reading of Schumpeter

as proposing MI as a (sub)disciplinary demarcation device, but not a methodological

imperative. A footnote to this account considers the relation between Schumpeter and histeacher, Max Weber. Joseph Heath, in the online Stanford Encyclopedia of Philosophy,

writes that the theoretical elaboration of this doctrine [sc the doctrine of methodologicalindividualism] is due to Weber, and Schumpeter uses the term as a way of referring to the

Weberian view ( Heath, 2009: 2). Webers point of departure and the ultimate unit of

his analysis is the individual person (Gerth & Wright Mills, 1970: 55). In Webers ownwords:

Interpretative sociology considers the individual [Einzelindividuum] and his actions

as the basic unit, as its atom In this approach, the individual is the sole carrier

of meaningful conduct (Weber, 1922: 132).

In general, for sociology, such concepts as state, association, feudalism, and the

like, designate certain categories of human interaction. Hence it is the task of


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sociology to reduce these concepts to understandable actions, that is, withoutexception, to the actions of participating individual men. (Weber, 1922: 142).

Given the close connection between Schumpeter and Weber, it seems highly likely that what

Weber here describes is exactly the Sociological Individualism that Schumpeter rejects in

History of Economic Analysis. His criticism of it being that, while the mode of procedure

Weber describes is unexceptionable and indeed necessary in economics, it should leave openthe possibility of other disciplines exploring the social influences on the preferences and

hence on the decisions and understandable actions of participating individual men.

Turning now to Schumpeter (1980), the first point to note is that Schumpeter appears to take

a stronger line here than he does in the QJE paper the following year, and an instance of this

is his use of the term atomism throughout as a synonym for MI: in this day and age, the

validity of the individualistic concept is strongly queried; indeed atomism is most frequently

disputed by the opponents of the theory (1980: 2). He speaks of the hatred of atomism in

political economy which, he says, stems from opposition topolitical individualism (1980:

3). MI, Schumpeter says,

has no specific propositions and no prerequisites, it just means that i[t] bases certaineconomic processes on the actions of individuals. Therefore the question really is: is

it practical to use the individual as a basis or would it be better to use society asa basis. This question is purely methodological and involves no important principle

(1980: 3).

When he says that MI lacks specific propositions, prerequisites and important principles,

the contrast he has in mind is withpoliticalindividualism, which starts from the proposition

or principle that freedom contributes to the well-being of individuals and society (1980: 3).

Schumpeter is explicit here that the underlying issue concerns the adoption of a holistic or

reductionist ontology:

If we wanted to study the nature of economics we would have to comment on the

two concepts which represent two completely opposite points of view in this field.

One the one hand there is the concept of the national economy as an organism and,

on the other hand, there is the concept of economy as a result of economic actions

and the existence of individuals. (1980: 4)

This is a critical distinction although, as we will see it does not cut the way Schumpeter

expects it to, nor as subsequent readers have understood it to do. In brief, my thesis is that theholistic, or organicist approach, seeing macro level entities as an organism or a system,

characterises Smith, Dugald Stewart and the early Malthus, as well as Marx, Keynes and

Hayek, while the reductionistic approach, the standpoint which reduces social entities to theeconomic actions and existence of individuals, is characteristic of Malthus from the SecondEssay of 1803 onwards, of Bentham and Ricardo, of Schumpeter, Weber, and Mises, of

Friedman and Lucas, and of the analytical Marxists such as Elster and Roemer.

Schumpeter identifies this fundamental division in the methodology of economics, but

immediately spoils things a little by denying that this ontological question is of any

relevance; rather the real question is an epistemological one, and for practical purposes the

two can be separated, and ontology discarded:


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What counts is not how these things really are, but how we put them into a model or

pattern to serve our purpose as best as possible This proposition is as paradoxicalas it is fundamental: is the nature of a political economy supposed to be of no

significance to the political economist? We not only believe that this is a valid

question but we can go further by saying that even the nature of economics is not

important to us (1980: 5).

As we will see later, Mises adopts the same line, that ontology is a waste of time and

ontological questions both unanswerable and unimportant. It is a theme of my approach that

one cannot so easily dispense with ontological questions. On the contrary, everything

Schumpeter says here is laden with ontological implications, and indeed relies upon and

expresses what I have called a reductionist ontological orientation. How we know the world

is not to be divorced so easily from how the world is.

Continuing the theme that ontology is irrelevant, Schumpeter claims that MI is desirable

because it is what computer scientists would call a quick and dirty way to obtain desirableresults:

All we are saying is that the individualistic concept leads to quick, expedient and

fairly acceptable results, and we believe that any social-orientated concept within the pure theory would not give us any greater advantages and is therefore unnecessary.

However, if we go beyond pure theory, things are different. For instance inorganisation and even more in sociology, atomism would not get us very far, but in

view of its methodological character this is not of any consequence

Principal5objections against atomism as we represent it, therefore, do not exist

(1980: 6).

The apparent concession that atomism would not get us far in other disciplines, such as

sociology, is to be understood in the sense already discussed that other disciplines may wish

to investigate the social origins of the preferences of individuals, but for pure economic

theory this is unnecessary. This does not therefore in any way indicate any deviation from a

reductionist ontology of economics.

I conclude therefore that the version of MI which we find at the beginning of the twentieth

century in the work of Schumpeter and Weber, consists of the reductionist claim that we can

start out with individuals conceived of in isolation, and by considering the behaviours whichsuch isolated individual atoms will engage in, in pursuit of their own interests, we may arrive

at the social phenomena we wish to explain. There only remains the footnote, thatSchumpeter feels a need for space for other disciplines to explain individual preferences,

including the social influences thereon.

(ii) MengerFrom a consideration of Schumpeter, the originator of the term methodological individualism,

we turn to Menger, seen by many as the founder of the approach designated MI, even if he

did not himself use the term. Menger is certainly extremely important for the debate on MI;

opinions vary, however, on what exactly Mengers role was. For Udehn,


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according to Menger The ultimate explanation of all economic phenomena isin terms of the behaviour of economising individuals. The starting-point of Mengers

analysis is the isolated individual, represented by Robinson Crusoe alone on his island This is Mengers atomistic method which would later become known as

methodological individualism (Udehn, 2001: 88).

To conclude: Carl Menger may be considered the founder of methodologicalindividualism, but he did not use this term himself he called it atomism which

means that complex phenomena should be explained in terms of their simplest

elements, or parts (Udehn, 2001: 94)

For Heath, however,

It is worth emphasising the difference between methodological individualism, in

Webers sense, and the older traditions of atomism (or unqualified individualism) in

the social sciences. Many writers claim to find the origins of methodological

individualism amongst the economists of the Austrian School (especially CarlMenger) The atomistic view is based upon the suggestion that it is possible to

develop a complete characterisation of individual psychology that is fully pre-social,then deduce what will happen when a group of individuals, so characterized, enter

into interaction with one another. Methodological individualism, on the other hand,does not involve a commitment to any particular claim about the content of the

intentional states that motivate individuals, and thus remains open to the possibilitythat human psychology may have an irreducibly social dimension Most theorists of

the Austrian School, however, like Carl Menger and Ludwig von Mises, were pure

atomists. (Heath, 2009: 3-4).

It is clear from Heaths account that what is here designated atomism is a close parallel of

sociological individualism in Schumpeters account. That is, it is Schumpeterian MI plus

the claim that individual tastes and preferences may themselves be analysed on the basis of

the isolated individual. We should note that this atomism is thus more demanding, more

strongly reductionist, than the atomism that Schumpeter defends in his 1908 book, and which

he identifies with MI. So is Menger fairly to be associated with either of these reductionist

versions of MI?

Setting out the case against this reading, Chris Matthew Sciabarra, in his 2000 book Total

Freedom: toward a dialectical libertarianism, discusses Menger in a section of Chapter 3,After Hegel, entitled Beyond the atom: The organic legacy of classical liberalism

(Sciabarra, 2000: 111-121). After quoting Barry Smiths claim that Marx and Menger sharean Aristotelian antipathy to atomism (Sciabarra, 2000: 117), Sciabarra writes:

In praising the organic orientation of social research, Menger seeks an integrationof micro and macro approaches. The former, disparagingly called atomistic, cannever deny the unity of organisms His micro-level analysis is not opposed to the

organic orientation (Sciabarra, 2000: 121).

Finally, Sciabarra quotes Menger on the organic metaphor in social science:

The normal function of organisms is conditioned by the functions of their parts

(organs), and these in turn are conditioned by the combination of the parts to form a


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higher unit, or by the normal function of the other organs Organisms exhibit a purposefulness of their parts in respect to the function of the whole unit, a

purposefulness which is not the result of human calculation, however There existsa certain similarity between natural organisms and a series of structures of social life,

both in respect to their function and to their origin (Menger, cited in Sciabarra, 2000:

120).

It seems clear from this that Menger cannot be regarded as an atomist in Heaths meaning of

the term. To evaluate Sciabarras reading, however, we need to turn to what Menger himself

wrote. Menger deals explicitly with this question in his 1883 workInvestigations Into the

Method of the Social Sciences(Untersuchungenber die MethodederSocialwissenschaften und

derPolitischenOekonomieinsbesondere), in particular Book Three, The Organic

Understanding of Social Phenomena (Menger, 1985: 129-159). Indeed, the fundamental

opposition between the atomic and the organic standpoints is set out early in the Preface:

in the postclassical period, Menger writes,

The conception of the national economyas an organism and of its laws as analogousto those of anatomy andphysiology confronted the physical conception; the biological

point ofview in research confronted the atomistic (Menger, 1985: 24).

We should start, however, by noting that the passage Sciabarra cites is a list of contents ofBook 3 Chapter 1 not a list of statements that Menger endorses, but a list of arguments that

he proposes to address. It is therefore invalid to cite this passage in support of Mengers useof organic analogies or to underpin the contention that Menger relies heavily on the organic

metaphor, as Sciabarra does (2000: 120).

Menger starts his discussion of organicism with the statement that There exists a certain

similarity between natural organismsand a series of structures of social life, both in respect to

their functionand to their origin. After some discussion of this statement he moves on to

society: We can make an observation similar in many respects in reference to aseries of

social phenomena in general and human economy in particular (Menger, 1985: 129-30).

Natural organisms almost without exception exhibit, when closelyobserved, a really

admirable functionality of all parts with respect to thewhole, a functionality which is

not, however, the result of human calculation,but of a natural process. Similarly we

can observe in numerous socialinstitutions a strikingly apparent functionality with

respect to the whole They, too, present themselves tous rather as natural products(in a certain sense), as unintended resultsof historical development. One needs, e.g.,

only to think of the phenomenonof money, an institution which is the unintendedproduct of historical development (Menger, 1985: 130).

If this analogy holds, then it has far-reaching consequences for the methodology ofeconomics:

Now if social phenomena and natural organisms exhibit analogies withrespect to

their nature, their origin, and their function, it is at once clearthat this fact cannot

remain without influence on the method of researchin the field of the social sciences

in general and economics in particular if state, society, economy, etc., areconceived

of as organisms, or as structures analogous to them, the notionof following directions

of research in the realm of social phenomenasimilar to those followed in the realm of


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organic nature readily suggestsitself. The above analogy leads to the idea oftheoretical social sciencesanalogous to those which are the result of theoretical

research in the realmof the physico-organic world, to the conception of an anatomyand physiology of social organismsof state, society, economy, etc (Menger, 1985:

130-131).

Thus far, it would seem, Sciabarras reading holds up. However, the very next lines tell usthat Mengers purpose is quite otherwise:

In the preceding discussion we have presented the basic ideas of thetheory of the

analogy of social phenomena and natural organisms we do, indeed, believe that

inthe foregoing we have presented the nucleus of the above theory in theform and in

the sense in which it is expounded by the most careful andmost reflective writers on

this subject (Menger, 1985: 131).

All along, Menger is not articulating his own standpoint, but setting out the ideas he is going

to criticise. Against this view he makes two points, firstly, that the analogy between societyand natural organisms is only very partial, and, secondly, that it is superficial. The analogy

between social and biological entities is partial because

A large number of social structures are not the result of a naturalprocess They arethe result ofa purposeful activity of humans Social phenomena of this type, too,

usually exhibita purposefulness of their parts with respect to the whole. But this isnotthe consequence of a natural organic process, but the result of humancalculation

Thus wecannot properly speak of an organic nature or origin of these

socialphenomena (Menger, 1985: 132).

The analogy is superficial because it

is by no meansone which is based upon a full insight into the nature of the

phenomenaunder discussion here, but upon the vague feeling of a certain similarityof

the function of natural organisms and that of a part of social structures.It is clear that

an analogy of this kind cannot be a satisfactory basis foran orientation of research

striving for the deepest understanding of socialphenomena Naturalorganisms are

composed of elements which serve the functionof the unit in a thoroughly mechanical

way. They are the result of purelycausal processes, of the mechanical play of natural

forces. The so-calledsocial organisms, on the contrary, simply cannot be viewed andinterpretedas the product of purely mechanical force effects. They are, rather,the result

of human efforts, the efforts of thinking, feeling, acting humanbeings (Menger, 1985:133).

So for Menger organic notions offer an explanation of only some but not other socialphenomena, and even here only offer an incomplete explanation:

that part of the social structures in reference to which the analogywith natural

organisms comes in question at all exhibits this analogy,therefore, only in certain

respects. Even in these respects it only exhibitsan analogy which must be designated

in part as vague, in part really asextremely superficial and inexact (Menger, 1985:

134).


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Because organic notions are so limited, superficial and inexact in social science, scientificresearch simply cannot be based on them, though they may have purely presentational

advantages:

there seems to be no doubt that play with analogies between natural organisms and

social phenomena is a methodological procedure which scarcely deserves a serious

refutation. Yet I should still not like in any way to denythe value of certain analogiesbetween natural organisms and social phenomenafor certain purposes of presentation.

Analogy in the above sense,as method of research, is an unscientific aberration. As

means for presentationit still may prove useful for certain purposes (Menger, 1985:

137)

So the presentation of social entities as organic may conceivably be a useful figure of speech,

an analogy or metaphor, but should never be taken literally.

This leaves open the question, how we are to understand those social phenomena which arise

behind mens backs, as the unintended consequences of the behaviour of many humans. Tosee how Menger addresses this, we have to understand his view that there are two basic

orientations of theoretical research, the realistic-empirical orientation, and the exact oratomistic orientation. The former sets out to investigate the types and typical relationships

of phenomena as thesepresent themselves to us in their full empirical reality,that is, inthetotality and the whole complexity of their nature (Menger, 1985: 56). In contrast,

The function of the exact orientation oftheoretical research is to apprise us of the

laws by which not real life inits totality but the more complicated phenomena of

human economy aredeveloped from these most elementaryfactors in human

economy, in their isolation from other factors (Menger, 1985: 63).

The phrase in their isolation suggests a reductionistic approach, and this is no accident:

The nature of this exact orientation oftheoretical research in the realmof ethical

phenomena consists in the fact that we reduce humanphenomena to their most

original and simplest constitutive factors and try to investigate the laws by

which more complicatedhuman phenomenaare formed from those simplest elements,

thought of in their isolation (Menger, 1985: 62).

Without being diverted into a potentially lengthy discussion of the adequacy of this dualisticaccount of scientific knowledge, it is very clear that the exact orientation which Menger

describes, is wholly consistent with reductionism, as I have defined it: the reduction ofentities at one level to an aggregate of lower level entities taken in isolation.

The relation between the two orientations is that

exact economics by nature has to make us aware of the laws holding for an

analytically or abstractly conceived economic world, whereas empirical-realistic

economics has to make us aware of the regularities in the succession and coexistence

of the realphenomena of human economy (Menger, 1985: 72-73).

Thus, for all Mengers assertions that the two are complementary in theoretical science, it is

nevertheless clear that for Menger only the atomistic method can generate theoretical


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knowledge, while the empirical-realist method is little more than description, stylizeddescription perhaps, but description nonetheless.

We are now in a position to understand Mengers approach to the understanding of social

entities embodying the unintended consequences of individual actions, such as money,

markets, language, religion and the state (Menger, 1985: 146). His response is the same for

natural as for social science: to attempt to understand entities as organic is to remain at thedescriptive level and to fail to provide true theoretical insight:

From the circumstance that organisms present themselves to us in eachcase as units

and their functions as vital manifestations of them in theirtotality, it by no means

follows that the exact orientation of research isin general inadequate for the realm of

phenomena discussed here The actual consequenceof the above circumstance for

theoretical research in the realm of organismsis that it establishes a number of

problems for exact research, andthe solution of these cannot be avoided by exact

research. These problemsare the exact interpretation of the nature and origin of

organisms (thoughtof as units) and the exact interpretation of their functions Thisproblem is undertaken by the exact orientation of research in the realm of social

phenomena also, and especially in the realm of those which are presented to us as theunintended product of historical development. (Menger, 1985: 143).

So the scientific response to the existence of apparently organic entities is exact or

atomistic analysis, that is, a reconstruction on the basis of the simplest elements, thoughtof in their isolation. This is a clear statement of reductionism in the sense set out in Denis

(2004).

In Denis (2004) I drew attention to the Panglossian consequences of the adoption of a

reductionistic ontology. If the macro is just the aggregate of isolated micro behaviours, then

individual rationality implies a socially rational outcome. Any apparent macro pathology,

such as employment, can be ascribed to micro level decisions which are either rational, in

which case the apparent unemployment can be safely regarded as voluntary, a species of

leisure, or they are the consequence of micro-level errors pricing oneself out of a job

which cannot be rectified by collective action. A reductionist ontology creates a strong

default policy prescription oflaissez-faire.

Just so in the case of Menger. The exact or atomistic analysis of the unintended social

consequences of individual actions money, markets, language, and so on shows that theyresult from deliberate self-seeking behaviour of individuals. These social phenomena come

about as the unintended result of individual human efforts (pursuing individual interests)without a common will directed toward their establishment (Menger, 1985: 133). An

analysis drawing on a different ontology might ask in which case to what extent the

institution in question served society, and what, if anything, could be done to improve it. Butfor Menger, can therefore simply be assumed to be socially desirable. With respect tolanguage, religion, law, markets and money,

We are confronted here with the appearance of social institutions which to a high

degree serve the welfareof society. Indeed, they are not infrequently of vital

significance for the latter and yet are not the result of communal social activity. It is

here that we meet a noteworthy, perhaps the most noteworthy, problem of the social

sciences:


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How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common willdirected

toward establishing them? (Menger, 1985: 146)

In conclusion to this sub-section, therefore, we can see that Sciabarras attempt to present

Menger as holding an organic view of social institutions seems not to work. Udehns reading

that The starting-point of Mengers analysis is the isolated individual, represented byRobinson Crusoe alone on his island does seem to be supported by the passages from

Menger that I have cited above.

4. ConclusionThis part of the paper constitutes the first part of an examination of the topic of

methodological individualism. The study has consisted of an application of the ideas set out

in Denis (2004), in particular, the concepts ofholism the standpoint that phenomena may

be understood as emergent and based in the interrelationships between substrate entities, and

reductionism the standpoint that phenomena are to be understood as congeries of substrate

entities taken in isolation. An examination of the writings of two foundational figures in MI,Schumpeter and Menger, suggests that both clearly operated within the reductionist

paradigm. If correct, this implies that there is a fundamental methodological commonality between both writers and others adopting a reductionist standpoint, such as Bentham and

Ricardo, and Friedman and Lucas. On the other hand it does imply a surprising and profounddifference in methodology between them and those writers, such as Smith and Hayek, with

whom they might have been expected to share an approach. The sequel will examine the

contributions of Mises and Hayek, and of the analytical Marxists.

Part Two: Mises and Hayek

1 IntroductionThe second part of the present paper considers the contributions of von Mises and Hayek.The conclusion drawn is that Mises and Hayek based their methodological stance on

fundamentally different ontologies, with von Mises building on the reductionism of previouswriters 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 leaves Hayek as something of an outlier in the Austrian tradition.

2 Hayek on methodological individualismThe key text for Hayeks 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, ofThe Counter-Revolution of Science. Studies on the Abuse ofReason (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:


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They [sc social sciences] deal not with the relations between things, but with therelations between men and things or the relations between man and man. They are

concerned with mans actions, and their aim is to explain the unintended orundesigned 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, forexample, 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 irrelevant, epiphenomena. In this paradigm the focus on

unintended consequences is lost: on the contrary, if social outcomes are merely the aggregate

of many presumably intended individual actions, then they too are intended. In Lucas, for

example, unemployment is treated as an individual problem and as therefore necessarily

voluntary, a choice (Denis, 2004: 344-346). 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 object of social science is to explain different social structures in terms of therecurrent 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 samealthough 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 thenetwork of relationships (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 Hayeks

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 regularitiesobservable 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 theseelements are related to each other in a particular manner (1967: 70).

Returning to Chapter 3 of The Counter-Revolution of Science, having just said thatindividuals are focuses in networks of relationships, Hayek goes on to say that it is thevarious 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,


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entertain certain attitudes toward his fellow man, while himself being the object of certainattitudes of his fellow men which are relavant to his function as policeman (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 socialrelations: 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 rle 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 thisVerstehen, is to identify and

understand the unintended and often uncomprehended results of the separate yetinterrelated actions of men in society to reconstruct these different patterns of social

relations (59). In this reconstruction we start with the separate yet interrelated decisionsmade 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 individualbelieves will be the consequence of his actions depends on his place and rle 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, 2979: 61-76), is as one might expect key for our understanding of Hayeks 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

(61). We need to distinguish between the views held by the people which are our object of

study and those peoples ideas about the undesigned results of their actions popular ideasabout 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 socialscience: 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, andHayek 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 (62-63) turns out to

be essential for Hayeks definition of MI:


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that he [sc the social scientist] systematically starts from the concepts which guideindividuals in their actions and not from the results of their theorizing about their

actions, is the characteristic feature of methodological individualism (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 unintendedsocial structures, that is, about social wholes, these popular generalisations are collectives

and scientism is to be identified with collectivist prejudice (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 is it which is individualistabout 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 arecomposed the method of the natural sciences is in this sense, analytic (65-67). The

phenomenon is complex: the given whole has to be traced back to its more simple parts. Insociety the opposite is true: what is given to us, by ourVerstehen of the knowledge and

motives of individuals, are the simple parts: what we have to do is to combine them inthought 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. WhatHayek 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 dont 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 therelevant 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 empiricalobservation, in a word, by work. Moreover, it is obscure in Hayeks 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 dont know what thoseprinciples of coherence are in the first place: knowledge of the principles of coherence is aprerequisite 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 rle as synthesis. So this model of science as analytical in the natural and synthetic in

the social domains doesnt seem to work. The point here, however, is to note the rle of the

model in Hayeks 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


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networks of social relations, the aptness of the designation seems questionable.Methodologically what Hayek describes is entirely holist.

It may be useful in conclusion to this account, to examine Chapter 6 The Collectivism of the

Scientistic Approach (Hayek, 1979: 93-110), where Hayek again attempts to bring out what

he believes is individualist about his methodology by contrast with the collectivism of the

approach he is arguing against. Collectivism, he says, is the tendency to treat wholes likesociety or the economy, capitalism (as a given historical phase) or a particular industry or

class or country as definitely given objects about which we can discover laws by observing

their behavior as wholes (93). This, for Hayek, is impossible since these social wholes are

not given or observable: what of social complexes are directly known to us are only the

parts the whole is never directly perceived but always reconstructed by an effort of our

imagination (93, n 1). It is worth dwelling on this. In particular, it is worth underlining that

Hayek is absolutely not denying the existence of social wholes, or our ability to say anything

sensible about them. On the contrary, reconstructing social wholes in thought forms the very

raison dtre of social science: The social sciences, thus, do not deal with given wholes

but their task is to constitute these wholes by constructing models from the familiar elements models which reproduce the structure of relationships between some of the many

phenomena which we always simultaneously observe in real life (98) . What is collectivistabout scientism for Hayek is thinking that social wholes are given to observation instead of

having to be reconstructed by the compositive method. Whatever the virtues and vices of thisdistinction between methodological individualism and collectivism in Hayeks account, it is

clear that both are species of holism.

3 Misessnotion of methodological individualisma Misess rhetorical strategy

I will confess at the outset that Mises is one of the more difficult writers I have read on the

subject of MI. I have argued in Part One, above, that Schumpeter and Menger adopted a

reductionist stance comparable to Friedman and Lucas, as well as to Bentham, Ricardo and

the later Malthus, while in the earlier part of the present paper I have argued that Hayeks

standpoint is holistic in the tradition of Adam Smith, Dugald Stewart and the earlier Malthus,

as well as of Marx and Keynes. We are now in a position to examine Misess contribution to

the discussion on MI. The source of the difficulty is that in some ways Mises adopts

elements of both standpoints. It will be necessary to set out his rhetorical strategy with care,

to see how he combines these disparate and contradictory elements. Once that is in place itwill be possible to turn to what he has to say explicitly on the topic of MI.

We start with Misess rhetorical goals: what does he want to convince us of? We can then

move on to the means he adopts to attain that goal. It is abundantly clear that Mises, like

Adam Smith, Dugald Stewart, Malthus, Hayek, Friedman and Lucas, is a pro-capitalist, pro-market forces writer:

The market economy or capitalism, as it is usually called, and the socialist economy

preclude one another. There is no mixture of the two systems possible or thinkable;

there is no such thing as a mixed economy, a system that would be in part capitalist

and in part socialist (Mises, 1996: 258).


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Socialism is not a realizable system of societys economic organization because itlacks any method of economic calculation Socialism is not an alternative to

capitalism; it is an alternative to any system under which men can live as humanbeings. To stress this point is the task of economics (679-680).

The purpose of economics, for Mises, is to convince us of the virtues of capitalism and the

impossibility of socialism or any kind of mixed economy. How does he propose sell us thisagenda? What is the central argument that he deploys?

Mises argues that under capitalism, agents do not have conflicting, but only common

interests, a postulate he refers to as the orthodox ideology of the harmony of the rightly

understood, i.e., long-run, interests of all individuals, social groups, and nations (176). So

for Mises there is a natural harmony between the interests of individuals. Any supposed

conflict of interest is only apparent:

For what the individual must sacrifice for the sake of society he is amply compensated

by greater advantages. His sacrifice is only apparent and temporary; he foregoes asmaller gain in order to reap a greater one later. No reasonable being can fail to see

this obvious fact In striving after his ownrightly understoodinterests theindividual works toward an intensification of social cooperation and peaceful

intercourse The utilitarian economist does not ask a man to renounce his well- being for the benefit of society. He advises him to recognize what his rightly

understood interests are (146-147).

The source of this harmony of interest is the division of labour:

What makes friendly relations between human beings possible is the higher

productivity of the division of labor. It removes the natural conflict of interests A

pre-eminent common interest, the preservation and further intensification of social

cooperation, becomes paramount and obliterates all essential collisions (673).

Mises is very specific about the circumstances in which this natural harmony of interests

would be violated. Harmony will arise, he argues, just as long as population is below its

optimum level:

The natural scarcity of the means of sustenance forces every living being to look upon

all other living beings as deadly foes in the struggle for survival, and generates pitiless biological competition. But with man these irreconcilable conflicts of interests

disappear when, and as far as, the division of labor is substituted for economic autarkyof individuals, families, tribes, and nations. Within the system of society there is no

conflict of interests as long as the optimum size of population has not been reached.

As long as the employment of additional hands results in a more than proportionateincrease in the returns, harmony of interests is substituted for conflict. People are nolonger rivals in the struggle for the allocation of portions out of a strictly limited

supply. They become cooperators in striving after ends common to all of them. An

increase in population figures does not curtail, but rather augments, the average shares

of the individuals (667).

So, for Mises, as long as population is below the point at which declining returns to

additional labour set in, people cannot have essentially conflicting interests. The significance


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of the level of population is this: if there are increasing returns to labour, people have theincentive to cooperate, to divide their labour and share the benefits of doing so. If there were

no unexploited benefits from cooperation, there could be no cooperation, and hence nosociety. We would have a merely animal existence. If population exceeded its optimum

level, additional labour would reduce the productivity of all. At the margin, there would be

an incentive not to cooperate. But everyone can be thought of as marginal, so everyone

would have an incentive not to cooperate: we would live in an asocial, even antisocial, worldof conflicting not harmonising interests.

In Misess account, then, men may seem to have an interest to lie, cheat and steal, but to do

so would damage private property, the market and division of labour. In the long run, we all

benefit from these features of capitalism, so we have an incentive not to engage in behaviours

which disturb them. The incentive to lie, cheat and steal is a short-term or apparent interest,

the incentive not to is the real, rightly-understood, long-run interest of individuals. But this

depends on population not exceeding its optimum level.

Mises believed that it was, at the time of writing, not the case that the optimum level ofpopulation had been reached, and indeed not likely ever to be the case. The reason is relevant

to our enquiry, as we will see shortly. For Mises, humans will not reproduce in excess of thenumbers which can be supported at the level of overall satisfaction which people aim for.

Differently from animals,

Man integrates the satisfaction of the purely zoological impulses, common to allanimals, into a scale of values, in which a place is also assigned to specifically human

ends. Acting man also rationalizes the satisfaction of his sexual appetites. Their

satisfaction is the outcome of a weighing of pros and cons. Man does not blindly

submit to a sexual stimulation like a bull; he refrains from copulation if he deems the

coststhe anticipated disadvantagestoo high. In this sense we may, without any

valuation or ethical connotation, apply the term moral restraintemployed by Malthus

(668).

Individual behaviour led by rational self-interest moral restraint will thus automatically

lead to the desirable social outcome that the level of population will not exceed its optimum

level.

Given that individual people in society have no conflicting interests, one might ask, why then

do we need a state? Misess response is revealing. A typical defence of the rle of the stateis to say that, because individuals have divergent interests, and if not prevented from acting

on them, will do so, to each others detriment. But for Mises, on the contrary, the state isonly necessary to protect us from those who are not fully rational the old, the young, the

mentally ill, and the people too stupid to be able to see their own interests properly, or too

morally weak to be able to control themselves:

The anarchists overlook the undeniable fact that some people are either too narrow-

minded or too weak to adjust themselves spontaneously to the conditions of social

life. Even if we admit that every sane adult is endowed with the faculty of realizing

the good of social cooperation and of acting accordingly, there still remains the

problem of the infants, the aged, and the insane. We may agree that he who acts

antisocially should be considered mentally sick and in need of care. But as long as not

all are cured, and as long as there are infants and the senile, some provision must be


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taken lest they jeopardize society. An anarchistic society would be exposed to themercy of every individual. Society cannot exist if the majority is not ready to hinder,

by the application or threat of violent action, minorities from destroying the socialorder. This power is vested in the state or government (149).

This argument that the individual and society have interests which aligned so that what the

individual does in his own interest is exactly would society would have wanted him to do calls for careful examination. One might thing that the essence of the human condition is that

we have partially overlapping and partially conflicting interests: we all want a bigger cake,

which we can get by cooperating, and we all want a bigger slice, which we can get by

competing. This is the structure of the prisoners dilemma: overlapping interests on the main

diagonal, and conflicting interests in off-diagonal outcomes. But for Mises, we only have the

overlapping interest of the larger cake. It is worth dwelling on this point.

Given that we have a society in which population does not exceed its optimum level, there

are, at the margin and for all intra-marginal units, unexploited opportunities to gain from

cooperation and division of labour. Hence it is in the interest of any individual to cooperateand he has no interest in any action which would damage that cooperation. However, this

makes a big assumption. It assumes that there are no (significant) externalities. If there areexternalities, then it might very well be in the interest of the individual to engage in socially

undesirable behaviour. For this conclusion to be avoided we would have to be able todemonstrate that the adverse consequences to society would be felt by the individual actor

himself. But this may not be the so. A case in point is the argument about moralrestraint(Denis, 2006a). Malthus wrote that the improvement to society due to the practice of

moral restraint

is to be effected by a direct application to the interest and happiness of each

individual. It is not required of us to act from motives to which we are unaccustomed;

to pursue a general good which we may not distinctly comprehend, or the effect of

which may be weakened by distance and diffusion. The happiness of the whole is to

be the result of the happiness of individuals, and to begin first with them. No co-

operation is required. Every step tells. He who performs his duty faithfully will reap

the full fruits of it, whatever may be the number of others who fail. This duty is

intelligible to the humblest capacity. It is merely that he is not to bring beings into the

world for whom he cannot find the means of support It is clearly his interest and

will tend greatly to promote his happiness, to defer marrying till by industry and

economy he is in a capacity to support the children that he may reasonably expectfrom his marriage; and considerations of his own interest and happiness will

dictate to him the strong obligation to a moral conduct while he remains unmarried(Malthus, 1958, II: 169).

This is very much Misess argument: Every step by whichan individual substitutes concertedaction for isolated action results in animmediate and recognizable improvement in hisconditions (Mises, 1996: 146). In adopting this reductionist standpoint, Misess argument,

like Malthuss,must depend on assuming that there are no significant externalities,prisoners

dilemmas or free riders. Misess view that individual and social goals are perfectly aligned

parallels Malthuss argument that the full fruits of individual restraint are enjoyed by

theindividual practicing it, whatever anyone else is doing. As soon as thequestion is posed,

the answer presents itself: such externalities simplycannot be assumed away. Why individual


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choices on reproduction should lead to socially desirable population levels, without anymechanism to ensure this, remains mysterious.

Now it is clear that Mises is perfectly well aware of the possibility of externalities, and

indeed he uses the argument against socialism:

under socialism [the socialist authors say] every worker will know that he works forthe benefit of society, of which he himself is a part. This knowledge will provide him

with the most powerful incentive to do his best However, While the sacrifices

an individual worker makes in intensifying his own exertion burden him alone, only

an infinitesimal fraction of the produce of his additional exertion benefits himself and

improves his own well-being (Mises, 1996: 677).

Why the externality or public-good argument that Mises cites in his critique of socialism does

not apply to the issue of conflicting or harmonic interests is not addressed.

This kind of argument I have previously, in particular in relation to Lucas and Malthus (of theSecond Essay onwards), characterised as reductionist. In a reductionist ontology the whole is

held to be just the sum of the parts: the whole may be understood as the parts taken inisolation writ large. So in Lucas unemployment is understood as the sum of all the

household decisions regarding the trade-off between leisure and wage income; it is thereforenecessarily voluntary. Mises thinks the same:

What causes unemployment is the fact that those eager to earn wages can and do

wait. A job-seeker who does not want to wait will always get a job in the unhampered

market economy It is only necessary for him either to reduce the amount of pay he

is asking for or to alter his occupation or his place of work (598).

If the whole is just the sum of the parts, apparent macro-level pathologies such as

unemployment can be reduced to rational, micro-level, individual decisions. The ground for

a laissez-faire policy prescription is prepared. It is if one adopts a holistic ontology, where

the whole is not the sum of the parts, and macro level entities emerge from the

interrelationships between the micro-level substrate entities, that a mechanism is needed to

explain how social outcomes are desirable, if a policy prescription of laissez-faire is to be

sustained. Examples of such mechanisms are the invisible hand of a benevolent deity in

Adam Smith and a human-favourable group-selectionist process of social evolution in Hayek

(Denis, 2005; Denis, 2002). Mises posits no such black-box mechanism: his approach isreductionist.

b Mises on MI

Having established the outlines of Misess rhetorical strategy, we can now turn to what he hasto say explicitly about MI. I will focus on Section 4, The Principle of MethodologicalIndividualism, part of Chapter II, The Epistemological Problems of the Sciences of Human

Action, of MisessHuman Action:A treatise on economics (Mises, 1996: 41-44).

At the beginning of the section, Mises defines MI as follows:

Praxeology[ie the general theory of human action] deals with the actions of

individual men. It is only in the further course of its inquiries that cognition of human


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cooperation is attained and social action is treated as a special case of the moreuniversal category of human action as such (41).

Now we have seen that both reductionists such as Menger and Schumpeter, and holists such

as Hayek, can claim to start with the individual, and from the individual to move on to the

social wholes of which the individual is a part. The question is, whether such individuals are

the isolated atoms of Mangers atomism, or thefoci of networks of social relations that Hayekposits. In the latter case, it could be argued that we are not really starting with individuals,

since the individual as focus of a network of relationships already presupposes society.

As I have argued elsewhere (Denis, 2006) this question of starting point is not very

interesting. That top-down and bottom-up approaches may be considered to be equally valid

is exemplified by Milton Friedmans (1976: 316) statement that while both Keynes and he

used a top-down methodology, most Keynesians and monetarists used a bottom-up approach.

Similarly, Trotsky (1973: 233-234) illustrates a discussion of Marxist notions of science by

means of equally approving references to the top-down approach of Freud and the bottom-up

research strategy of Pavlov. My own view here is that the choice of top-down or bottom-upheuristic is a wholly pragmatic matter: there is no issue of principle here, no golden key to

knowledge of the world. The methodologically pluralistic statements of Trotsky andFriedman are therefore to be endorsed. There is no proper starting point for science: we start

from wherever we happen to be. The choice of a top-down or bottom-up heuristic will dependon our interests, our goals, what we think we already know, and our hunches about what we

might be about to find out.

What is of great interest, however, is whether the individuals with which one starts, if one

chooses to start with individuals, are conceived of as essentially social entities or, on the

contrary, modelled as isolated atoms. If we are to take literally Misess statement about

starting with individuals, only later moving on to the cognition of human cooperation then

the clear implication is that for Mises, these individuals are atomic. The absence of any

statements corresponding to Hayeks careful description of individuals as nodes in networks

of social relations is also evidence for this interpretation.

Immediately after this introductory statement defining MI, Mises presents a summary of the

case against MI, as he has defined it:

Real man is necessarily always a member of a social whole. It is even impossible to

imagine the existence of a man separated from the rest of mankind and not connectedwith society. Man as man is the product of a social evolution. His most eminent

feature, reason, could only emerge within the framework of social mutuality. There isno thinking which does not depend on the concepts and notions of language. But

speech is manifestly a social phenomenon. Man is always the member of a collective.

As the whole is both logically and temporally prior to its parts or members, the studyof the individual is posterior to the study of society. The only adequate method for thescientific treatment of human problems is the method of universalism or collectivism.

(41-42)

Some discussion of this case against MI, as Mises imagines it, is warranted. The first half

dozen lines appear to be a correct statement of that case, though rather vague. The point is

not simply that the individual is a member of a collective, but that his behaviour is dictated by

the network of relations within which he operates, that is, by the interaction and


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interdependence between the individual and myriad other individuals. The whole is notlogically and temporally prior to its parts. The relation between whole and parts cannot be

dismissed so lightly. The whole is indeed logically prior: in an organic unity each part onlyexists, and has the meaning it has, conditional on forming a part of the whole. This is the

difference between an organic unity and a congeries. The whole, it is true, in turn depends on

the parts, but in general not on any particular part: the relationship is not symmetric. The

whole cannot be temporally prior to its parts, even though it may well chronologically pre-date many, even all of its extant parts, as my body is older than any of its cells. The parts

must have existed prior to the emergence of the whole, though, of course, not qua parts of

this whole, which did not yet exist. Finally, Mises last statement about the necessity of

universalism or collectivism needs elaboration: what exactly does

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