Hertje_-_Schumpeter_and_methodological_individualism.pdf

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DOI: 10.1007/s00191-004-0202-3J Evol Econ (2004) 14: 153156

c Springer-Verlag 2004

Schumpeter and methodological individualism

Arnold Heertje

University of Amsterdam, Faculty of Economics and Econometrics, Roetersstraat 11,

1018 WB Amsterdam, The Netherlands (e-mail: [email protected])

It is without doubt that Schumpeter wrote a masterpiece as a young man (Schum-

peter, 1908). In this book, only ten pages are devoted to methodological individ-

ualism. This is an interesting theme, which I would like to deal with in this short

note, written in honor of our precious and warm friend, Mark Perlman. Schumpeter

starts with a few remarks on the homo economicus, but he does not return to hisobservations on methodological individualism in the later chapters of this book.

Schumpeter does not consider the acting human being, but looks at the goods in

his possession (Schumpeter, 1908: p. 86). Still, he observes that the essence of this

distinction is the goods that belong to an individual. This individualistic approach

is called Atomismus, following in the footsteps of Carl Menger (Menger, 1883,

pp. 8289). Schumpeter considered it necessary to make a sharp distinction between

political and methodological individualism:

Both concepts have nothing in common. The first refers to general statements

like the freedom of people to develop themselves and to take part in well-being andto follow practical rules. The second does not include any proposition and does not

involve a specific starting point. It just means that one starts from the individual in

order to describe certain economic relationships (Schumpeter: 1908, pp. 9091).

Schumpeter restricts himself to a more or less vague description of the concept

of methodological individualism. Again and again, he emphasizes that the applica-

tion of this insight is part of pure theory or pure economics, which is restricted to

the analysis of goods that belong to individuals. In Schumpeters hands, method-

ological individualism restricts itself to the relationship of prices and the behavior

of individuals. With individualism, one cannot enter the fields of sociology and the

theory of organization.

Schumpeters interpretation of methodological individualism conceals a dou-

ble restriction. First, it is concerned with pure economics. Second, pure economics

only refers to the analysis of flows of goods. This fact explains why the concept

does not show up in other works by Schumpeter. One would expect the application


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154 A. Heertje

of methodological individualism to the theory of economic development, innova-

tion, bureaucracy and democracy, but these applications are outside the narrow

framework that Schumpeter has chosen for this interpretation of methodological

individualism. In hisHistory of Economic Analysis, Schumpeter calls this frame of

reference the logic of economic mechanisms (Schumpeter, 1954, p. 889). Schum-peters use of the adjective methodological can only be understood against the

background of his view on the character of economics. In the literature, the over-

whelming consensus is to look at methodological individualism as a general method

of explanation, according to which the individual is the starting point for the ex-

planation. In at least two respects, this interpretation differs from Schumpeter. The

economic aspect is not restricted to the possession of goods, but is related to the sat-

isfaction of wants, insofar as this is as dependent on the allocation of scarce means

of production, often analyzed in terms of the maximization of welfare under side

conditions. Furthermore, individuals are not only consumers and producers in themarket, but also politicians, civil servants, bureaucrats, criminals, or tax evaders,

and others whose behavior can be explained with the help of modern economic

analysis. While Schumpeters broad view of economic and social relationships has

contributed to insights into the role of entrepreneurs, innovators, bureaucrats, intel-

lectuals and politicians, his narrow interpretation of methodological individualism,

in fact, blocked the analysis of the rich pattern of individuals acting in real life.

In other words, Schumpeter remained far removed from the hypothesis that

relates the analysis of social phenomena to the optimizing behavior of individuals

in the public and private sector. The implication of this is that the specificationof the assumed behavior may differ according to the role that individuals, such as

entrepreneurs and civil servants, play in society. These specifications can all be

derived from methodological individualism.

This conclusion is surprising, as Schumpeter could have built upon Mengers

book of 1883. Using the term Atomismus, Menger presents a broad interpretation

of methodological individualism. He observes that social phenomena must be linked

to the infinite number of individual economic decisions by consumers, producers

and owners of the factors of production (Menger, 1883, p. 87). Later in his book, he

applies this reasoning to the emergence of money in a barter economy by referring tothe economic behavior of individuals who look for benefits (Menger, 1883, p. 177).

Schumpeter, in his book of 1908, does not mention Menger at all. Do we have

to explain this by the fact that Mengers approach, and the school that formed

around it, remained excluded from the university curriculum well into the 20th

century (Vaughn, 1987, p. 442)? Or, must we assume that Schumpeter, without

further discussion, intentionally deviated from Mengers point of view? Looking

at Schumpeters obituary of Menger in 1921, it is notable that Schumpeter had a

very high regard for his contribution to the methodology of the social sciences. I

am, therefore, inclined to answer the first question in the negative and the second

in the positive. Whatever may be the answers to these questions, under the flag

of Schumpeters terminology methodological individualism, modern economic

theory follows the broad interpretation of Menger, and disregards the narrow and

very peculiar view of Schumpeter. In other words, Machlup bestows too much

praise on Schumpeter in writing, with respect to methodological individualism, of


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Schumpeter and methodological individualism 155

a Schumpeterian innovation which was fully successful in the sense that it has been

explicitly accepted by some and implicitly by practically all modern economists

(Machlup, 1978, p. 47).

If Schumpeter himself had followed the footsteps of Menger from the beginning,

his theories on economic development and democracy would have been phrasedin terms of methodological individualism in the modern sense of the terminology.

His colorful description of the entrepreneur as an innovator of new markets, new

methods of production, new products and new methods of organization would

then have been enriched with a characteristic analytical dimension. Further, his

description of democracy as . . . that institutional arrangement for arriving at

political decisions in which individuals acquire the power to decide by means of

a competitive struggle for the peoples vote, could be conceived as an excellent

starting point for a thorough and broad view on methodological individualism.

(Schumpeter, 1942, p. 269). Downs refers to Schumpeter as a major source for hisnew theory of democracy (Downs, 1957, p. 89). Although Downs applies the basic

idea behind methodological individualism, he does not use the concept at all.

The founders of modern public-choice theory, the Americans James Buchanan

and Gordon Tullock, choose explicitly methodological individualism as the point of

departure for their analysis, without ever mentioning Schumpeter. Their treatment

of the logical foundations of constitutional democracy . . . begins with the acting

or decision-making individual as he participates in the processes through which

group choices are organized (Buchanan and Tullock, 1962, p. 1). For this reason,

their theory is methodologically individualistic. Buchanan (1975) did enlarge anddeepen the analysis in his work on the limits of liberty, in which methodological

individualism is a cornerstone. He introduced this basic starting point not only

in economics on a broad scale, but also in political science. He did not dare to

develop a theory of human behavior, but instead restricted himself to the revealed

preferences of individuals, which he registers as an independent observer (Reisman,

1990, p. 154).

Buchanan and Tullock made clear that the field of application of methodolog-

ical individualism is much broader than significant action in a market economy

(Lachman, 1969, p. 92). Schumpeter himself did not realize the scope of method-ological individualism, but nevertheless scholars still talk about the Schumpeter

Research Programme (Boland, 1982, p. 28).

Our conclusion has to be that, with methodological individualism, Schumpeter

did introduce a new terminology, as Mark Blaug has written: The expression

methodological individualism was apparently invented by Schumpeter as early as

1908 (Blaug, 1980, p. 49). However, in no way did Schumpeter contribute to the

development of its contents and the diffusion of its application within and outside

economics.


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156 A. Heertje

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