Schumpeter on Methodological Individualism

3 January 2009 at 10:28 am 5 comments

| Peter Klein |

Via Lani Elliott, here’s a PDF excerpt from Joseph Schumpeter’s first book, Das Wesen und Hauptinhalt der theoretischen Nationalokonomie (The Nature and Essence of Theoretical Economics), published in 1908. The book made quite a splash in the German-speaking world and Schumpeter received many requests for an English translation, but he wouldn’t allow it, or to have the book reprinted in German. In 1980 a single chapter, “Methodological Individualism,” was translated and published in pamphlet form, with a short introduction by Hayek (which I included here). The pamphlet has been very difficult to get until now. Thanks to Lani for tracking it down and Jeff Tucker for hosting a copy.

Hayek remarked:

Many of [Schumpeter’s] students will be surprised to learn that the enthusiast for macroeconomics and co-founder of the econometrics movement had once given one of the most explicit expositions of the Austrian school’s “methodological individualism.” He even appears to have named the principle and condemned the use of statistical aggregates as not belonging to economic theory.

That this first book of his was never translated is, I believe, due to his understandable reluctance to see a work distributed which, in part, expounded views in which he no longer believed.

On Schumpeter’s changing views see also Thorbjørn Knudsen and Markus C. Becker’s “The Entrepreneur at a Crucial Juncture in Schumpeter’s Work: Schumpeter’s 1928 Handbook Entry Entrepreneur,” Advances in Austrian Economics 6 (2003): 199–234.

Entry filed under: - Klein -, Austrian Economics, Methods/Methodology/Theory of Science, People.

Sentences to Ponder Interview with Richard Rumelt

5 Comments Add your own

  • 1. Joseph Mahoney  |  3 January 2009 at 5:34 pm

    Methodological individualism asserts that explanations of social, political, or economic phenomena can only be regarded as adequate if they run in terms of the beliefs of individuals.

    I give two cheers to this idea (but not three cheers) for the following reason: Methodological individualism, strictly interpreted, would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones. While methodological individualism may be regarded as a useful heuristic, when it is not currently possible, I do NOT believe that social scientists should lapse into silence on the grounds that we never defy the principle of methodological individualism.

  • 2. Rafe Champion  |  3 January 2009 at 5:54 pm

    Joseph, a friendly question – when is MI not currently possible? Ganted that the situations where humans act contain elements other than individuals, but how does that undermine METHODOLOGICAL individualism?
    MI is concerned with the Situational Analysis of human action. The situation includes geography and physical infrastructure, institutions and traditions, the lawlike constraints (studied by the natural sciences and praxeology) and macro elements like interest rates, inflation and unemployment (especially expectations regarding the trends of those factors). But the point of MI is that the decisons that drive human action are made by individuals (and groups of individuals on boards and committees) and they are not driven in a mechanical or deterministic way by the situation.

  • 3. Joseph Mahoney  |  3 January 2009 at 8:45 pm

    In the mid-1970s, a substantial number of economists were converted to the methodological individualism view that macroeconomic analysis would be regarded as well-founded or reliable only to the extent that it could be explicitly connected to its microfoundations. For example, the Phillips curve positing a tradeoff between inflation and unemployment could be discarded on the grounds that it lacks microfoundations.

    I hasten to add here that for folks who do not support the Phillips curve theory — and I would be included — one can substitute their own favored macroeconomic theory.

    Rafe, the point that I maintain is that we do not currently have –nor, do I think we ever will have — a fully satisfactory microfoundations of macroeconomics. And, if a theory “works” (i.e. predicts well), the fact that the theory does not have a fully-developed microfoundations, should not be discarded for defying the principle of methodological individualism (until something better comes along).

    Finally, given Arrow’s Impossibility Theorem, I am wondering if a fully consistent microfoundations of macroeconomics is even possible.

  • 4. Noel  |  4 January 2009 at 7:41 am

    “Finally, given Arrow’s Impossibility Theorem, I am wondering if a fully consistent microfoundations of macroeconomics is even possible.”

    Is that somehow an argument against microeconomics? I think it is against macroeconomics.

    “. And, if a theory “works” (i.e. predicts well), the fact that the theory does not have a fully-developed microfoundations, should not be discarded for defying the principle of methodological individualism (until something better comes along).”

    It is senseless to assert that theory “works” or “not works” outside the context of methodological individualism. The monetary theory is the best example. Microeconomics teach us that growing productivity, i.e. supply of goods and services, ceteris paribus leads to lower prices of goods and services. But, macroeconomics teach us that we need eg. stable general price level. How diminishing individual prices can lead to stable general price level? One of those two propositions must be wrong. I think the macroeconomic one is wrong. But, I am open to argumentation which would prove that micro theorem is wrong. The bottom line is that no macroeconomic theory of business cycle by definition cannot be true, if it is in conflict with basic macroeconomic propositions.

  • 5. Brian Pitt  |  4 January 2009 at 9:47 am

    Thanks for the link. A little book entitled “Between Marxism and Marginalism” also touches on the issues that the commenters are discussing.

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