Why I have opinions on economics without a phd

An explanation of methodological individualism

You don’t need a phd in economics to have an opinion on methodological approaches in the social sciences. This is similar to how you don’t need a phd in philosophy to have opinions on epistemology or metaphysics.

When it comes to the social sciences, I hold a high regard for methodological individualism. Let me explain what that is and why I believe it’s important.

What is Methodological Individualism?

I’ll give a definition first and then expand on it from there. The wikipedia definition works well enough:

Methodological individualism is a framework that describes social phenomena as a consequence of subjective personal motivations by individual actors.

There are two important phrases in this definition: “subjective personal motivations” and “individual actors.”

What does it mean for someone to act? In this context, action can be defined as purposeful behavior.

Individuals use available means to achieve desired ends. The ultimate end, or the meta-goal, is to improve one’s situation. The actions (and ends) that will improve one’s situation are subjective and not the same for everyone, hence the ‘subjective personal motivations’ part of the definition.¹

Only individuals act. Groups don’t act, though it might seem like it if you aren’t looking close enough.

Methodological individualism was first developed by the German sociologist Max Weber. The Stanford Encyclopedia of Philosophy paraphrases/quotes Weber’s explanation in his 1922 book Economy and Society:

When discussing social phenomena, we often talk about various “social collectivities, such as states, associations, business corporations, foundations, as if they were individual persons.” Thus we talk about them having plans, performing actions, suffering losses, and so forth.

The doctrine of methodological individualism does not take issue with these ordinary ways of speaking, it merely stipulates that “in sociological work these collectivities must be treated as solely the resultants and modes of organization of the particular acts of individual persons, since these alone can be treated as agents in a course of subjectively understandable action.”² ³

Now that you know what methodological individualism is, I’ll explain why it’s so important.

Why Methodological Individualism?

If you don’t factor in the actions and motivations of individuals, you won’t get a full understanding of economics. This is true for the study of all social phenomena.

For example, let’s say you’re analyzing an event that occurred in May 2014. A guy named John painted his house vomit green, his HOA took issue with his decision and fined him for it.

This is a decent explanation of what happened, but it doesn’t give us as deep an understanding as we could have. The HOA isn’t an individual, therefore it does not act. By saying “the HOA took issue with his decision”, we are obscuring the reality of this social phenomenon.

Let’s take a deeper look using methodological individualism.

One day, John decided to paint his house vomit green. He went out and bought some paint and painted the entire exterior himself over the course of a few days.

Not long after this, John’s neighbor, Sally, was going for a jog when she found that John had painted his house a new color. Sally thought to herself, “That color is disgusting. It must be against the HOA’s rules.”

So Sally went ahead and reported John to the HOA. At the HOA’s next meeting, the individuals that make up the board discussed John’s case. One board member named Jane spoke up, “We have a rule against obscene colors, but the rule makes no mention of vomit green specifically. We need to discuss this matter and decide if a vomit green house counts as obscene.”

One member named Ted voiced his opinion that it isn’t obscene. Mark said it is. The other members voiced their own opinions and after this deliberation period, they took a vote. Most of the board members agreed that the vomit green paint went against the rules. The punishment for breaking the rule is a fine, which John was altered to and ended up paying.

With this case, we see that if you want a better understanding of what happened, analyzing the actions of the individuals involved is the way to go.

Just to be clear, I’m not saying that statistics and math are never useful. What I am saying is that if you don’t factor in the actions and motivations of individuals, you won’t get a full understanding of economic phenomena.

I’ll end with an excerpt from the Stanford Encyclopedia of Philosophy that illustrates F.A. Hayek’s reason for employing methodological individualism:

In Hayek’s view, the desire on the part of social scientists to emulate the physical sciences creates an exaggerated fear of teleological or “purposive” concepts.

This leads many economists to eschew any reference to intentional states and to focus purely upon statistical correlations between economic variables. The problem with this focus is that it leaves the economic phenomena unintelligible.

Take, for example, the movement of prices. One might notice a constant correlation between the date of the first frost and fluctuations in the price of wheat. But we do not really understand the phenomenon until it has been explained in terms of the rational actions of economic agents: an early frost reduces yields, leading to less intense price competition among suppliers, more among consumers, etc.

Thus Hayek insists that, in effect, all macroeconomic analysis is incomplete in the absence of “micro” foundations.⁴