June 2, 2006

Economic Thoughts, Part XIII: It is Individuals - Not the Society, Government or Market - Who Think and Act

Donald B. Hawthorne

This posting is Part XIII in a series of postings about economic thoughts.

Professor Don Boudreaux of George Mason University, who hails from New Orleans, recently published an article entitled Triumph of the Individual at Tech Central Station in which he discusses Nobel Laureate Friederich Hayek's contribution to our understanding about how it is individuals - not government or markets - that make things happen in any society:

...Hayek spent most of his career watching the worship of power supplant the love of liberty. Nazism and Stalinism were the two most grotesque forms of this power-worship, but as Hayek warned in his most famous book, The Road to Serfdom (1944), even milder forms are surprisingly dangerous.

...the source of Hayek's fundamental contributions to our understanding of society comes from the method of doing social theory that he learned from [Austrian economists Carl Menger and Ludwig von Mises].

This method is one of rigorous adherence to the tenets of "methodological individualism" -- a fancy name for recognizing that the only units in society who think and act are individual persons. Society doesn't think or act; the market doesn't think or act; the United States government doesn't think or act. Only individuals think and act...

Whatever the topic -- war, economic growth, government regulation -- the only way to achieve genuine understanding of what's going on is to trace all actions back to the individuals who take them. The fact that individuals often act in concert -- say, as voters -- still requires those of us seeking to understand the outcomes of elections to understand the incentives and the constraints that confront the individuals who make up these groups.

Failure to be a consistent methodological individualist leads to misunderstanding. Consider, for example, that politicians and pundits frequently go on about how "we as a nation" did this, or how "we as a nation" must not do that.

"We" who make up the American nation number 300 million people, each with our own preferences, beliefs, and expectations. It's only an illusion that "we" act -- or can act -- as one. It's no less an illusion that "we" act when government acts in our name.

Should "we as a nation" rebuild New Orleans? Asked this question unawares, the typical person says "Yes." But the student of Hayek responds that a city can be rebuilt only by individuals. Success at such efforts might require the concerted actions of many individuals. But understanding this fact, the Hayekian is instantly aware that successful rebuilding efforts must give each individual an incentive to rebuild -- must give each individual appropriate knowledge to perform his part of the rebuilding task effectively -- must give each individual the information and ability necessary to coordinate actions with those of countless other individuals.

The Hayekian also understands that the individuals who make up government are spending other people's money for yet other people's benefit. So these officials lack both the incentives and the knowledge to spend this money wisely.

...The Hayekian isn't misled by romantic talk of "we as a nation" rebuilding New Orleans (or doing any other task) because the Hayekian never forgets that only individuals choose and act -- and that the market is the only means of harnessing individual knowledge and effort for the greater good.

Part XIV to follow...

For previous postings on Economic Thoughts, refer to:

Part I: What is Economics?
Part II: Myths About Markets
Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics
Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations
Part V: The Relationship Between Economic Freedom and Political Freedom
Part VI: More on the Relationship Between Economic Freedom and Political Freedom
Part VII: The Role of Government in a Free Society
Part VIII: The Unspoken, But Very Real, Incentives That Drive Governmental Actions
Part IX: More on the Coercive Role of Government
Part X: The Power of the Market
Part XI: Prices
Part XII: I, Pencil - A Story about the Free Market at Work