Methodological individualism and all that jazz

Tyler Cowen at Marginal Revolution has an interesting post discussing methodological individualism.  As a fan boy for methodological individualism, I felt that his criticism of it as a method went a bit far.  Here I just want to describe why.

Methodological individualism and economics

When it comes to economics, how is methodological individualism applied?  The first step in such an endeavor is to try and create models that are incredibly general – avoiding assumptions regarding individual preferences as much as possible.  As a result, when describing a phenomenon, economic models can use a myriad of assumptions to reach a result from this general model – such as changes in expectations through time, changes in preferences through time, and choice with respect to fixed preferences and expectations given a behavioural rule.

The important assumption to start with is that individuals make choices.  The fact that economists widely study state-dependence and multiple equilibrium shows that economics accepts that expectations (and even to a degree preferences) can be influenced by the current set of social actions – however, the equilibrium we are at is still the result of a set of individual actions.

I like to stress this point strongly – individuals are the ones making the choices.  Yes, these choices are subject to the environment around them, the social situations they find themselves in, and the information they have available – but it is individual action that drives choice, and it is these choices that lead to the aggregate outcomes we observe.

This point in itself implies that we should be able to reduce social action to the choices of individuals – and I have always seen the goal of reducing social action to the sum of individual action as the primary justification for claiming that a subject is implementing methodological individualism.

Why is the individual the important actor, why shouldn’t we go further?

This is a good question, and one that is raised in the MR post when Neuroeconomics is discussed.

I think Neuroeconomics is exciting – it provides a more objective base for discussing preferences and choice – which makes it a different (but complementary) discipline to “positive the initial objective step of economics analysis”.

But, even so does this change the fact that it is still the individual making choices?  As we have discussed, this debate is between determinism and free will (here and here) – and economists tend to fall on the side of free will.  Given this, Neuroeconomics gives us information on how people make choices and how preferences are formed – which can in turn be incorporated into theories of choice.  However, it is still individual choice that is the driver of individual action – and thereby social action.

This seems sort of tautological, and pointless, why do you/we care?

In order to understand why this is so important lets think about the idea of complex systems, chaos theory, and societal collapse.

These ways of viewing social action are interesting, important, and useful.  However, one hole I see people fall in when they describe “social systems” is that they fill a complicated relationship to describe “ex-post” (observed) outcomes – and then state that this implies things about the future without describing why.

Building a complex system without a clear description of action – namely without an underlying and testable theory – makes it easy to accidentally make implicit assumptions that are unsatisfactory.  As a result, even if your model “fits” ex-post data it is not clear if it is true, or whether it will be able to describe anything in the future.  This is especially important for complex systems – given their incredible sensitivity to initial assumptions.

In truth, an increasing push towards complex systems without appropriate development of theory should be subject to the Lucas critique.

Conclusion

The use of methodological individualism as a frame to model potential “explanations” of phenomenon has real value – and in many ways this is what economists try to do.

Picking between equilibrium, either for descriptive or predictive, is not an area economists are really trained in – and is more a matter of personal value judgments than anything else.

As a result, I still believe methodological individualism is the appropriate frame for economics, and in fact all social sciences.  However, with models of individual choice able to offer up a whole range of potential explanations (backed by sensible and justifiable theory) for observed phenomenon we require A LOT more before we can reach any sort of conclusion about how to describe observations – let alone predict future ones.  This “lot more” is of course “value judgments” 😀