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The first axiom of neoclassical economics: methodological individualism

from Christian Arnsperger and Yanis Varoufakis

Unsophisticated critics often identify economic neoclassicism with models in which all agents are perfectly informed. Or fully instrumentally rational. Or excruciatingly selfish. Defining neoclassicism in this manner would perhaps be apt in the 1950s but, nowadays, it leaves almost all of modern neoclassical theory out of the definition, therefore strengthening the mainstream’s rejoinders. Indeed, the last thirty years of neoclassical economics have been marked by an explosion of models in which economic actors are imperfectly informed, some times other-regarding, frequently irrational (or boundedly rational, as the current jargon would have it) etc. In short, Homo Economicus has evolved to resemble us more.

None of these brilliant theoretical advances have, however, dislodged the neoclassical vessel from its methodological anchorage. Neoclassical theory retains its roots firmly within liberal individualist social science. The method is still unbendingly of the analytic-synthetic type: the socio-economic phenomenon under scrutiny is to be analysed by focusing on the individuals whose actions brought it about; understanding fully their ‘workings’ at the individual level; and, finally, synthesising the knowledge derived at the individual level in order to understand the complex social phenomenon at hand. In short, neoclassical theory follows the watchmaker’s method who, faced with a strange watch, studies its function by focusing on understanding, initially, the function of each of its cogs and wheels. To the neoclassical economist, the latter are the individual agents who are to be studied, like the watchmaker’ cogs and  wheels, independently of the social whole their actions help bring about. 

So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent. Note two things: First, this was not the method of classical economists like Adam Smith and David Ricardo. Or, indeed, of Keynes. Or Hayek. Secondly, this proclivity is fully in tune with the mid-19th Century angloceltic liberal individualism (though the opposite does not hold) as it imposes axiomatically a strict separation of structure from agency, insisting that socio-economic explanation, at any point in time, must move from agency to structure, with the latter being understood as the crystallisation of agents’ past acts.  We shall argue later that this strict separation is central in not only defining but also undermining the most recent claims of neoclassicism.

It is, we think, indisputable that all the new manifestations of what we term neoclassicism still subscribe to methodological individualism. While it is true that mainstream economists have, during the last few decades, acknowledged that the agent is a creature of her social context, and thus that social structure and individual agency are messily intertwined, their models retain the distinction and place the burden of explanation on the individual. Individual worker effort is nowadays often modelled as a function of sectoral unemployment (e.g. efficiency wage models), and the firms’ micro-strategies reflect the macroeconomic environment. Nevertheless, and despite these interesting linkages between the micro-agent and the macro-phenomenon, the explanatory trajectory remains one that begins from the agent and maps, unidirectionally, onto the social structure.

Christian Arnsperger and Yanis Varoufakis

Tomorrow read “The second axiom of neoclassical economics: methodological instrumentalism”

  1. February 17, 2018 at 6:07 am

    “So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent.”

    This is not just wrong scientifically; it’s wrong anthropologically. Anthropology is of two minds on these issues. On the one hand, individuality of consciousness and agency may exist whatever the currency of individualism as a cultural norm. But for individualism to exist as a cultural norm there must be a culture. And culture arises in human collective life. In families first, then villages, cities, states, nations, etc. Culture precedes individualism. But the society or culture to which the individual belongs is not looked upon as the ultimate origination of action and its interpretation, the source of agency. Hence, individuality and agency can come to be depicted as as much prone to the niceties of sociocultural fashion as individualism. Or the two can be considered as two different ways for humans to be “in the world.”

    But clearly the two are linked. Christopher Boehm has been studying the interplay between the desires of an individual and that of the larger group for more than 40 years. In his newest book, “Moral Origins: The Evolution of Virtue, Altruism, and Shame,” Boehm synthesizes this research to address the question of why, out of all the social primates, are humans so altruistic? “There are two ways of trying to create a good life,” Boehm states. “One is by punishing evil, and the other is by actively promoting virtue.” Boehm’s theory of social selection does both. The term altruism can be defined as extra-familial generosity (as opposed to nepotism among relatives). Boehm thinks the evolution of human altruism can be understood by studying the moral rules of hunter-gatherer societies. What he has found is in direct opposition to Ayn Rand’s selfish ideal—generosity or altruism is always favored toward relatives and nonrelatives alike, with sharing and cooperation being the most cited moral values. Both individuality and individualism must be understood in this context. Humans tend to act altruistically toward all other humans. Which can be blocked and redirected by human cultural adaptations. But only for a time.

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