In his 1992 article “Congress is a ‘They,’ not an ‘It’: Legislative Intent as Oxymoron” (International Review of Law and Economics 12 (2)), Harvard University political scientist Kenneth Shepsle opens:
An oxymoron is a two-word contradiction. The claim of this brief paper is that legislative intent, along with military intelligence, jumbo shrimp, and student athlete, belongs in this category.
I agree and add that any sort of group behavior (legislative intent, market intent, Supreme Court intent, etc) belong on this list. In this post, I will focus primarily on economic reasons for methodological individualism, but as the title states, the analysis can (and should) be broadly applied.
Methodological individualism is the idea that the dynamics of a group can best be analyzed by looking at the actions of the individuals that make up the group. Methodological individualism does not deny the existence of groups—of course groups exist. Indeed, there are times when it makes sense to refer to the group as something that accomplished a goal given the inherent complexities of life. For example, we might say “the firm produced the pencil.” Yes, many individuals toiling away at various stages worked to make a pencil, but the firm is the framework, or the coordinating mechanism, that brought the pencil into existence. Applying methodological individualism means that individual behavior is the focus of our analysis. The constitution of the group emerges out of the behavior of the individuals who make up the group.
Furthermore, the relationship is bidirectional. Individual behavior reflects the constitution of the group, and the constitution of the group influences the behavior of the individual. As Adam Smith discusses in The Theory of Moral Sentiments, our interactions with one another teach us what behaviours are appropriate and which are not. We learn conventions, customs, and self-control through our interactions with our peers.
Understanding group behavior as the result of interactions among individuals is key to understanding the nature of market behavior. Some time ago, I discussed the difference between economic theories and accounting identities. The discussion was mainly focused on technical differences, but methodological individualism, properly understood, leads us to another important distinction: markets do not force people to do anything. The relationship between economic variables does not represent compulsion. Behaviors and results are observed and explained, not imposed, by economic theory. There is no pre-existing equilibrium price, or optimal level of output, that the market desires or moves toward. Rather, those outcomes emerge from the actions of individuals. People are not profit-maximizing (which implies that a pre-existing level of profit is known and that individuals act to maximize it), but rather profit-seeking (which indicates people act in pursuit of profit). In the former description, people are passive. In the latter, they are active.
This is a long way of saying that those who treat economics, markets, or any group behavior as mechanistic fundamentally misunderstand the necessary method of analysis.[1] Rather, group behavior is organic and emergent. Methodological individualism helps us see this emergent nature.
—[1] At least in economics, there are other problems with a non-individualist approach to group behavior. I’d posit that the entire argument relies on an observed contradiction: groups are modeled as rational, but are observed as irrational. But that is a conversation for another time.
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