In a Mises Daily Article entitled “How to Use Methodological Individualism,” Guido Huelsmann makes a provocative claim regarding this fundamental principle of social analysis. According to Huelsmann, “while methodological individualism is properly applied in history, it is not a method that we use in [economic] theory.” His argument is that methodological individualism, although indispensable for explaining the contingent and complex events of history, e.g., the causes and consequences of the Iraq War or of the bailout of the U.S. financial system, is unable to aid us in demonstrating the time-invariant and necessary propositions that constitute economic theory.
To support his categorical claim that methodological individualism is not a method of economic theory, Huelsmann focuses on the following propositions, which in his words “are genuinely theoretical propositions in the Misesian sense.”
1. More-roundabout production is more productive (in physical terms) than less-roundabout production.
2. When X persons divide labor among themselves, their work is more productive (in physical terms) than when it would have been if these same X persons had produced the same type of products in isolation from one another.
3. Under indirect exchange the market (and thus the division of labor) is greater than under direct exchange.
4. Any quantity of money can serve as an intermediary for any volume of trade, except for technological constraints (e.g., coin size).
But, contra Huelsmann, the first two propositions are not economic theorems at all. In fact they are statements about the ontological structure of the physical world. As such they have nothing to do with praxeology and can be stated with only incidental reference to human action. Thus it is a fact of the natural world learned from experience that there are (almost always) available some longer processes of production that are capable of yielding a greater quantity of a particular product for a given amount of original factors than the most productive of the currently available shorter processes. This fact is taken account of by the economist in formulating praxeological laws but is not itself such a law.
Similarly, the second proposition regarding the higher productivity of the social division of labor depends on what Mises (Human Action, 4th ed., p. 158) calls “natural facts” about our world: 1. the unequal endowments of abilities, skills, aptitudes, etc. among members of the human species; and 2. the uneven distribution of resources over and beneath the earth’s surface. Once again, formulation of this proposition does not require a praxeological analysis that invokes the categories like scarcity, choice or the law of marginal utility. It is a truth derived from simple observation.
Nor, by the way, are these two propositions necessarily time invariant, let alone, necessary. For it may be the (highly improbable) case that there are now operating geological and genetic forces that will lead in the distant future to the eradication of environmental and human differentiation that will nullify the greater productivity of more time-consuming production processes and of the social division of labor.
Huelsmann seems to recognize the non-praxeological nature of these first two propositions. Thus he writes:
We come to know about the effects of roundabout production in two steps: first we analyze the conditions of production in general, and then we study how a more- or less-roundabout production process affects these conditions. In the first step, we realize that the physical productivity of labor is subject to the law of returns. In the second step we learn that more-roundabout production means to take time off from the production of consumers’ goods in order to increase the supplies of the other factors, so that human labor becomes more productive. Notice that here we do not take our departure from any concrete choice.
Unfortunately Huelsmann then brings in choice and scarcity by the back door when he states: “These two hypothetical courses of action [i.e., more and less roundabout processes of production] are a priori causally related to one another by the fact that they are choice alternatives. Their causal nexus is scarcity — the fact that the choice of one course of action prevents the realization of all other actions that could also have been chosen. The choice of the one alternative necessarily causes the renunciation of the others.” While this is undoubtedly true, it is completely irrelevant to the truth of the proposition as originally stated: More roundabout production is more productive (in physical terms) than less roundabout production
In order to transform the proposition into an economic theorem we must resort to an analysis that relies on methodological individualism. Thus we may assert that, for example, if an individual’s time preferences fall, ceteris paribus, then he will adopt more roundabout processes of production in order to increase his productivity. This proposition is deduced from an analysis of the value scales of an individual situated in a world in which the greater productivity of longer production processes is assumed to exist. It is indeed time-invariant and specifies an exact and necessary relationship between a change in preferences and individual capital accumulation in theory and history. Furthermore the analysis of the necessary relationship between individual intertemporal value scales and the period of production is logically anterior to a theoretical explanation of capital accumulation or capital consumption on a social level because there is no collective value scale.
Now let us analyze Huelsmann’s other two propositions, which are indeed are immutable economic theorems. His fourth states that any quantity of money suffices to serve as a medium of exchange for any volume of trade, abstracting from technical consideration of minimum physical size of the monetary unit. Huelsmann’s error here is supposing that because he does not present the theorem itself in terms of individual values and actions, the argument necessary to arrive at the theoretical conclusion does not require reference to these terms. But how do we know that the theorem is true? We of course begin with a situation in which the money supply is expanded and the new money proportionally increases the cash balances of all agents, all other things equal. We then proceed to analyze how the individual cash holder reacts when endowed with this additional money. This requires a methodological individualist analysis involving the effect of the extra money in reducing the marginal utility of money vis-Ã -vis non-monetary goods on the individual value scale and therefore in increasing his demands for these goods. This analysis leads us to the conclusion that the increased quantity of money does not affect the volume of trade but merely reduces the purchasing power of the monetary unit. Thus we are justified in stating that any quantity of money will suffice as a medium of exchange because the market will adjust the value of money accordingly. The framing of the conclusion in terms of monetary and trade aggregates counts nothing against the individualist method of analysis we employed in discovering its truth.
The third proposition put forth by Huelsmann, properly interpreted and qualified, is also an undeniably economic theorem. Under indirect exchange the market is broader (encompassing more varieties of goods and services) and the division of labor more intensive than under direct exchange. However, yet again this theorem can only be elaborated by engaging in an analysis of individual action in which individual agents emulate one another in selling their products for the most generally marketable good, which gives each additional incentive to specialize and produce for the market and brings into being, uno acto, a general medium of exchange
So to sum up, I believe Huelsmann is unsuccessful in his attempt to prove that “methodological individualism is not . . . a basic foundation on which we erect the edifice of economic theory economic theory.” His examples do not support this contention. The propositions he cites are either not economic theorems (1 and 2) or are economic theorems whose deduction necessitate an analysis that focuses on individual agents (3 and 4).