----------------- HES POSTING ----------------- Ann Mayhew: >The limits of methodological individualism upon which the broad neoclassical synthesis rested, became apparent even as neoclassicism became dominant. Advertisers and business executives never fell for the notion that tastes were somehow individually inherent, and beyond examination and manipulation, and even in the more rarified reaches of Economics there were intrusions of the concept of historically-determined institutional patterns such as property rights and expectations. (This is where Coase came in.)> Ann, I picked out this statement from your post because I think it raises two crucial issues. Let me begin by recalling that Coase's theory of the firm (1937) was based on the idea that in order to reduce certain "costs" of making market exchanges involving work, individuals might agree to enter into what they expected to be long term employment compacts. In the simplest case, one person would become an employer and the other an employee. One of the "costs" that Coase mentioned was the costs of finding the relevant prices, which in layman's terms means finding out a prospective worker's willingness to do a particular type of work and a prospective employer's willingness to pay for the work. Correctly understood, Coase's approach to this simple exchange problem was methodologically individualistic. However, it did not take tastes as given. It assumed that traders had to discover the tastes. In other words, it assumed the people have tastes but not that these tastes are given or widely known. This, in my view, is also true of good neoclassical economists generally. They do not take given tastes as axiomatic either. Given tastes are often assumed in order to facilitate model-building. But only a poorly-trained neoclassical economist would neglect the problem of defining them in the first place and the fact of their changeability. This is the first issue. ( Incidentally, the assumption of given tastes was the subject of a Stigler-Becker article in the AER. -- Stigler, George J. and Gary S. Becker (1977) "De Gustibus Non Est Disputandum." American Economic Review 67(2): 76-90. I also recall that it stirred some debate. Perhaps someone on the list knows this debate.) The second issue is the relationship between an individual and an institution. I think that you treat this too lightly. An individual is a thinking human being who possesses the characteristics of inventiveness and creativity, among other things. An institution is either or both a creation of individuals or a legacy of pre-human existence. When you use the phrase "historically-determined institutional patterns," it confuses me. History cannot create or determine things. History refers to the past behavior of individuals. What you apparently mean is that the individuals for whom the patterns are significant did not themselves produce them. You do not mean that the patterns were not produced by individuals. (We should also recognize in this context that some institutions are deliberately produced while others appear to be "unintended" consequences of actions.) However, if this is all that you mean, your criticism of methodological individualism is not so convincing. Return to Coase. While he provided a model of the individualistic creation of the long term employment compact, he did not assert that all such compacts are formed according to this model. Once a precedent is set and a number of prospective employers recognize the "cost" savings of the employment compact, they will offer pay for long-term work. In this case, the prospective employee faces a pattern of price offers from "institutions" that already exist. Even a new employer may not think about transaction costs. She may merely identify the prospective profits of doing what others have done. But the fact that a person copies another does not make his behavior less individualistic. It does, however, imply that in interpreting historical events, one should account not only for today's individual behavior but also for the individual behavior of the past. Now one might argue that the tastes of individuals and even their abilities are mostly determined by the institutional patterns produced in the past. Fair enough. But why is this important? The fact that human beings have the capacity to look back and understand this very fact is evidence of their power to imagine institutional patterns that are not "historically determined." And under the right circumstances, they can produce such patterns themselves. The same type of argument applies to private property rights. In his 1960s paper on Social Cost. As one might recall, Coase described several ways in which individuals dealt with externalities, including the creation of private property rights. The private property rights thus created could become part of the institutional structure faced by actors later in history. I think that a great deal of the complaints that evolutionary economists and institutional economists express about methodological individualism are either (1) correct only for those methodological individualists who do not know how to properly use this approach to interpreting historical facts or (2) misconceived because they do not appreciate that history itself is about beings that we ordinarily attribute with having the capacity to choose individually and to be creative and inventive in doing so. I am referring here to a problem faced by all historians of economics. How do we select the best representative of this subject? Pat Gunning ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]