Hayek on Schumpeter on Methodological Individualism
| Peter Klein |
Our QOTD comes from the 2002 version of Hayek’s “Competition as a Discovery Procedure.” (Thanks to REW for the inspiration.) Hayek delivered two versions of the lecture, both in 1968, one in English and one in German. The former appeared in Hayek’s 1978 collection New Studies in Philosophy, Politics, Economics, and the History of Ideas, and is the version most familiar to English-speaking scholars. In 2002 the QJAE published a new English translation of the German version which includes two sections (II and VII) omitted from the earlier English version. In this passage from section II Hayek distinguishes macroeconomics (“macrotheory”) from microeconomics (“microtheory”):
About many important conditions we have only statistical information rather than data regarding changes in the fine structure. Macrotheory then often affords approximate values or, probably, predictions that we are unable to obtain in any other way. It might often be worthwhile, for example, to base our reasoning on the assumption that an increase of aggregate demand will in general lead to a greater increase in investment, although we know that under certain circumstances the opposite will be the case. These theorems of macrotheory are certainly valuable as rules of thumb for generating predictions in the presence of insufficient information. But they are not only not more scientific than is microtheory; in a strict sense they do not have the character of scientific theories at all.
In this regard I must confess that I still sympathize more with the views of the young Schumpeter than with those of the elder, the latter being responsible to so great an extent for the rise of macrotheory. Exactly 60 years ago, in his brilliant first publication, a few pages after having introduced the concept of “methodological individualism” to designate the method of economic theory, he wrote:
If one erects the edifice of our theory uninfluenced by prejudices and outside demands, one does not encounter these concepts [namely “national income,” “national wealth,” “social capital”] at all. Thus we will not be further concerned with them. If we wanted to do so, however, we would see how greatly they are afflicted with obscurities and difficulties, and how closely they are associated with numerous false notions, without yielding a single truly valuable theorem.
The reference is to Schumpeter’s 1908 book, Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie which, to my knowledge, has never been translated (though an excerpt, and some commentary, are here). For more on the different versions of Hayek’s essay see here and here.
NB: Krugman blogged over the weekend about microfoundations, offering a remarkably (sic) shallow and misguided critique based on what Hayek would call the scientistic fallacy. E.g.: “meteorologists were using concepts like cold and warm fronts long before they had computational weather models, because those concepts seemed to make sense and to work. Why, then, do some economists think that concepts like the IS curve or the multiplier are illegitimate because they aren’t necessarily grounded in optimization from the ground up?” Ugh.