Methodological Individualism and the Austrian School of Economics

This essay was originally written for Palgrave's Handbook on Methodological Individualism. The concept of methodological individualism finds its origins in the writings of Joseph Schumpeter. (1908) But the practice of tracing economic phenomena back to intelligible human action can be found in economists since at least the time of Adam Smith. (see Smith 1776, 15; 18) The dinner we enjoy comes from the individual behavior of the baker, brewer and butcher, and the common woolen coat that ends up on our backs in Smith’s analysis despite the incalculable number of exchange relations required to produce it nevertheless emerges from the purposive behavior of those actors at each nod in the process. The object of our study may well be the “invisible hand” of the market, but how we explain its emergence is through rigorous study of the processes of interactions among various individuals striving to do the best that they can given their circumstances, and weighing their decisions on multiple margins as they cope with their ignorance and wrestle with time.