Methodological Individualism

246 Economics: the individualist sciencethe alleged individualism of economics, or, at least, upon one particular versionof methodological individualism.A first crack in the wall of general equilibrium theory was detected by Arrowalready in the 1959 article quoted above. In this article, it is argued that ‘thereexists a logical gap in the usual formulations of the theory of the perfectlycompetitive economy, namely that there is no place for a rational decision withrespect to prices as there is with respect to quantities’ (p. 41). The reason is thatindividuals are assumed to be price takers. Arrow’s first inclination, naturally,was trying to fill the gap. But thirty-five years later, the problem remains andnow it is seen as a devastating blow to the prevailing assumption that standardeconomic analysis conforms to the strictures of methodological individualism.It is a touchstone of accepted economics that all explanations must run interms of the actions and reactions of individuals. Our behavior in judgingeconomic research, in peer review of papers and research, and in promotions,includes the criterion that in principle the behavior we explain and thepolicies we propose are explicable in terms of individuals, not of othersocial categories. I want to argue today that a close examination of even themost standard economic analysis shows that social categories are in fact usedall the time and that they appear to be absolute necessities of the analysis.(Arrow, 1994: 1)Arrows first example of a social category in economics is the prices faced byeconomic agents in the theory of competitive equilibrium. ‘What individual haschosen prices?’ The answer is none. There is no explanation of the formation ofprices in terms of individuals. But, according to Arrow (1994: 4): ‘They aredetermined on (not by) social institutions known as markets, which equate supplyand demand’. Prices thus presuppose the social institution of the market. It is notclear whether Arrow conceives of prices, themselves, as making up a social institution.To do so is not unusual, however (Schumpeter, 1909: 217; cf. Boland,1982: 50f), as evidenced by the following statement in a well-known textbook: ‘Inthe traditional models of microeconomics, prices in an impersonal marketplace constitutethe institutional framework’ (Kreps, 1990a: 5). 19But there are other social institutions that cannot be entirely ignored ineconomic theory. The most obvious, perhaps, is money. In general equilibriumtheory, money plays no role, but in real economies, prices are money prices, andeconomic theory cannot afford to neglect this simple fact, as, of course, it doesnot. But, then, the problem arises of how to give an individualistic explanation ofthe social institution of money. This problem was faced already by the firstconsistent methodological individualist among economists; Carl Menger, whoattempted exactly this: to explain the origin of money in terms of individualsalone (see pp. 90f ).Other social institutions, hard to ignore in economics, are households andfirms. Economic theory is often stated in terms of ‘individual agents’, which aremainly of two sorts: buyers and sellers (Walras [1874] 1984), or consumers and