The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:


A closely related Austrian philosophy is methodological individualism. This means that all economic phenomena can be traced back to, and explained by, the actions of individuals. Even when individuals act on behalf of a group, or as part of a group, they are acting as individuals. Thus, "group behavior" is a false concept. As political scientist Jon Elster argues: "A family may, after some discussion, decide on a way of spending its income, but the decision is not based on 'its' goals and 'its' beliefs, since there are no such things." (1) Even if the final budget is a compromise that does not correspond to the wish of any single family member, then members have nonetheless agreed to the compromise, since compromising is somehow more rewarding than not compromising.

The opposite of this is methodological holism, which holds that groups have traits, behaviors and outcomes that cannot be understood by reducing them to their individual parts. That is, groups consist not only of individuals, but also relationships between individuals. It is not enough to say that "the functions and traits of my car can be reduced to, and explained by, the atoms that make it." This overlooks an equally important point -- that these atoms need to be shaped into a car. The fact that atoms are fundamental units that exhibit certain properties actually explains very little.

The economic equivalent here would be a factory. A car factory may have thousands of employees, but none of them possess the complete knowledge to build an entire car. Each worker's knowledge and responsibility are specialized and limited, and can only build part of a car. Only the interdependent efforts of the entire group can roll a car off the assembly line.

An individualist might object that human beings are unlike atoms, in that people have the ability to create their own relationships and therefore such interdependent groups as company workforces. But this occurs neither spontaneously nor at an individual level. Suppose a car factory has no central organization, and workers just began building a car, communicating with no one except the workers whose parts were immediately connected to their own. It could turn out that the engine workers thought they were building a Mercedes Benz, while the trunk workers thought they were building a Yugo. Obviously, there needs to be centralized organization.

Austrians seek to get around this problem by establishing the entrepreneur -- the firm's central organizer -- as the "isolated actor" of their analysis. Here are some Austrian assertions to this effect: These quotes evoke the delightful image of entrepreneurs running their companies all by themselves. Indeed, Gunning asserts without irony: We should not, of course, interpret this to mean that Austrians are so gullible as to believe that entrepreneurs run their companies single-handedly. But these are the conceptual games they must play to protect the fiction that "isolated actors" and "primary agents" exist in an economy that is overwhelmingly interdependent. Even in their primary role as organizers, entrepreneurs depend on the group. A company president can only issue general guidelines to his managers, who must inevitably organize and direct much of their departments on their own. The larger a company gets, the less personal and direct control an entrepreneur has over it. He must delegate out an increasing share of authority and responsibility, and is more dependent than ever on others to help him run things, investigate conditions, inform policy, and make recommendations.

Furthermore, individual employees who are acting on delegated authority are attempting to act in the interest of their employer (usually a corporation, not an entrepreneur), which depends on their model of that abstract entity.

The firm's lack of individualism can be seen from the other direction as well. Individual firms are rarely the basic unit of the economy; almost all products run through several firms before completion. Information brokers, for example, often do not know where their information comes from or how it was derived, or where it goes or for what purposes. Stores like Sears do not produce all their own goods; they merely serve as part of a larger network of firms cooperating to sell their products.

Ultimately, there is a continual network of interdependence running from the individual worker to the global economy. Picking out the "entrepreneur" as the primary level of analysis is like singling out the quarterback as the "isolated actor" of a football team.

Another objection to methodological individualism is that it fails to adequately account for culture, tradition, rules and other social habits. (6) Much of human behavior is to be explained on these grounds, not individual knowledge or choice. Hayek attempted to explain habits and other rules of social behavior on the grounds that they promoted order and efficiency within the group. Over time, they promoted group success. (7) But what Hayek failed to do was describe how these rules and customs were passed on, and why they weren't replaced by other rules. The answer is group selection. Imagine two farms, one more efficiently organized than the other. Over time, the less efficient farm and its methods may disappear, and the more efficient farm will pass on its customs and rules to future generations (of both farms and people). Individuals who join these farms will learn by teaching or imitation. Much of their future activity will be based on these social norms, not their own individual choices. To the extent that individual choice is present, it is to follow these social norms, or attempt to create new ones.

In debates between methodological individualism and holism, the winner that usually emerges is a compromise position: we are both individuals and members of the group. Those who seek to explain everything on a purely individual level are just as doomed to fail as those who seek to explain everything on a purely group level. Different branches of science actually seek to explain human behavior at many different levels: the gene, the individual, the group, and the specie. Being open to different types of methodologies is characteristic of mainstream science. Insisting on only one methodology at all times is a feature of crank science.

The problem with insisting on only one level of analysis is that counter-examples crop up which are nearly impossible to explain. Methodological individualists claim that individuals seek to maximize their personal rewards. But if this were true, then soldiers would become conscientious objectors instead of risking death in war. Charity, favors, volunteer work, loans and other forms of altruism would never happen. Parents would not sacrifice for their children. True believers would not sacrifice their resources or their lives for a cause. Yet these things happen.

One of the most famous failures of methodological individualism is why people vote. According to public choice theorists, who base their science on this method, there is no logical reason for individuals to vote. The costs and inconvenience of voting (getting off work, driving to the polling site, getting picked for jury duty) far outweigh its rewards (which would only occur on the extremely rare occasion that someone cast the deciding vote). A rational actor would simply take a "free ride" and allow others to decide the election for him. "Unfortunately for theory," laments political scientist Carole Uhlaner, "people do vote." (8) Voting strongly suggests that people are not pure individualists, but are endowed with a degree of civic-mindedness.

The following wry comment from economist Laurence Moss sums it all up nicely: Next Section: Starting Assumptions
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1. Jon Elster, introduction, Rational Choice, Jon Elster, ed., (New York: New York University Press, 1986), p. 3. Elster is a Marxian, not an Austrian economist, but his support for methodological individualism is the same.

2. Ken Gaillot, Jr., "The Theory of Market Process,"

3. J. Patrick Gunning, "New Subjectivist Economic Theory and Public Finance,"

4. Gunning, "The Goal and Methods of Economic Theory,"

5. Ibid.

6. This paragraph is based on Laurence S. Moss, "Geoffrey M. Hodgson, Economics and Evolution: A Review Article" Marshall Studies Bulletin 4, 1994: pp. 33-49.

7. Friedrich A. Hayek, "Fatal Conceit: The Errors of Socialism," in idem., The Collected Works of F. A. Hayek, 27 vols. (Chicago: U. of Chicago, l988), I, p. 25; see also criticism of Hayek in Geoffrey M. Hodgson, Economics and Evolution (Polity Press, 1993), p. 171.

8. Carole Uhlaner, "Rational Turnout: The Neglected Role of Groups," American Journal of Political Science 33, 1989, p. 390.

9. Moss.