In defense of methodological individualism

One of the underlying reasons why some economist's disagree with others is a central methodological premise. Austrian's (and "free-marketeers" more generally) believe in methodological individualism - i.e. that the unit of analysis should be the individual (see Foss on this here). Any Econ 101 course will explain that all economists operate this way, but this isn't true. Economist's often analyse "firms", "governments", and "countries" as if they're autonomous economic entitities capable of choice.

And this, I think, goes a long way to explain debate about development economics* - almost inevitably statistics are used at national level. This makes an Austrian uncomfortable for two reasons: It assumes away any Public Choice concerns (i.e. it assumes government's are omniscient and benevolent); and It encourages a nationalist view on economic policy. To speak of nations rather than individuals within nations is both theoretically flawed (economics that is bad) and fascist (Political economy that I personally judge as being bad).

Bryan Caplan points to some very interesting evidence that actually uncovers how national statistics can confuse things:

The bottom line is that if you care about the well-being of human beings rater than countries, average living standards have gone way up and inequality has decreased

The only issue then is why have some nations managed to grow whilst others haven't? Hmmm...

* Here, I mean "development economics" as a combination of infant-industry arguments with endogenous growth theory - two theories I don't agree with. As a field development economics stemmed from a colonial need to manage the economies of other nations. This explains my views on "exporting central planning" (although I should point out that Jim made some good points in the comments). Increasingly it's a field that takes into account geniune economic issues - entrepreneurship, institutions, Public Choice, market process - which is why I've said  "1990s: development economics doesn't work" - i.e. we're learning from mistakes made and it's getting better.

Comments

[Jim]

I half-agree with you. I've often criticised what I call 'methodological nationalism', ie treating the country as the only unit of interest, but in my experience this is *far* more common in econometric research of the kind beloved of the World Bank, IMF, many US economists and all those lovable think-tanks who like to make up indices of economic freedom.

By contrast, the field of development studies (as distinct from development *economics*) is pretty much defined by its focus on different social groups within the country, while as far as I can see the history of development *economics* is also fairly rich in work at the sub-national scale, for example focusing on different sectors within the economy. Where I think we would differ is that I certainly don't think the choice of scale is between nation and individual, as that leaves out the entire rich pagent of groups, classes, hierarchies, cultures etc that matter to people and to development. Any analysis that leaves out everything in between individual and state isn't worth much, IMHO.

[AJE]

Thanks for those thoughts, although there's a difference between "choice of scale" and "unit of analysis". I'm not trying to claim that we should only analyse individuals, just that when we analyse social groups/communities/nations we should retain methodological individualism.

[Tom Livingston]

Austrian's...believe !!!
Is this the really depressing greengrocer's apostrophe of the week?

[AJE]

Sorry about that... leave me your address so I can send out a refund.

[chris]

It's not just free marketeers and Austrians who subscribe to methodological individualism - so too do/did analytical Marxists like Elster and Roemer.
But does the obsession with national statistics really represent a terrible violation of this principle, or is it merely an example of the availability heuristic? We look at national statistics because they're easily available, like a drunk looks for his lost doorkey underneath a lamp-post.

[AJE]

But then the question is why are they available?

The answer (to me) is simple: the dominance of post WWII Scientism that led to the birth of Macroeconomics and ensured that the subject matter became lost to the methodology.