12 Individualism

It was a phrase Karl Marx first used with disgust: “The cult of the individual.” But by the late 20th century the idea that individual choices are of primary importance in economic policymaking had become dominant. This philosophy was the seed of Thatcherism and Reaganism, and it all stemmed from one small European nation: Austria.

Although economics is the study of why people take certain decisions, classical economics tended, for the sake of ease, to emphasize that people typically act in unison. For example, when a new type of potato chip hits the shelves and proves popular, it is because consumers are attracted to it. The Austrian School, however—which was born in the later 19th century and gained force in the 20th century—focused on the specific reasons each individual has for deciding to buy a particular product.

There is no such thing as society: there are individual men and women, and there are families.

Margaret Thatcher

Mainstream economics was—and still is—very much a top-down subject, examining the economic performance of a nation as a whole, or a sub-set of that country, by using aggregate measures (in other words, adding up the different parts to come to a grand total) such as gross domestic product and inflation. The Austrian School instead emphasizes that individual decision-making should be at the forefront. After all, only individuals can act; countries, companies and institutions do not have minds of their own—they are a collective entity, but one that comprises many different individuals.

Economic phenomena—a country’s wealth or levels of inequality for instance—are a product of choices made by thousands of individuals, rather than a consequence of the concerted policies of politicians or big business. The consequence is that there may not be any way of, for instance, reducing inequality to a certain level, since it is not the product of human design but a manifestation of human action.

Art or science? Fundamental to the Austrian theory of the primacy of the individual, is the idea that economics is more art than science. Such an idea may come as a surprise to those familiar with conventional academic economics, with its charts and equations. Using economic models, they would argue, it is possible to put a percentage chance on almost anything, from a change in interest rates or a period of recession to something apparently outside the economic field such as teenage pregnancy rates or even the likelihood of war.

However, despite the confidence of its practitioners, such scientific forecasts all too often get it wrong. As Bank of England Governor Mervyn King warns people when he presents his forecasts, the only thing he is 100 percent sure about is that they will be proven wrong—there is no way of precisely predicting the future.

Although the father of the Austrian School, Carl Menger—whose Principles of Economics was published in 1871—maintained that economics is still a social science, aiming to classify people’s actions into a logical framework and set of patterns, his prime thrust was to stress the chaotic nature of economics. With this in mind, the Austrian economists avoid as far as possible inserting numbers and equations into their studies—a fact that has led to many of their papers being rejected by professional journals on the grounds that they contain insufficient facts, figures or equations.


A Martian in Grand Central Station

Imagine you’re a Martian who has touched down on earth to find yourself in Grand Central Station in New York City. Every morning at around 8 a.m. you see the arrival of big rectangular boxes on wheels that spew people out into the concourse and off into the street. Then in the evening you see thousands of people herd themselves back into the boxes. By watching this behavior each day you could devise some fairly reliable “scientific” rules about human behavior, and even predict precisely what people would do each day, without understanding why on earth they take part in this daily mass migration. You’d come up with a pretty blinkered view of humankind. This is precisely the criticism the Austrian School makes about orthodox economics, which devises complex models that take little account of individual human decision-making. The risk is that economists put so much faith in the models that they fail to see the ulterior motives behind people’s decisions.


The generalization trap As Menger’s successor, Nobel Prizewinning Austrian Friedrich Hayek, observed, everyone is different, and as such—although they might be treated in precisely the same way—the way they react to that treatment may differ greatly. The only way to ensure they are equal, he maintained, “would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time.”

A society that does not recognize that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom.

Friedrich Hayek, Austrian economist

Take, for instance, a shopkeeper. Orthodox economics takes as one of its first assumptions the fact that he intends during the course of the day to maximize his profits—after all, this element of self-interest is one of the most important rules laid down by Adam Smith (see The invisible hand). However, an Austrian economist would point out that the amount he sells could just as easily be determined by whether he decides to open up late, or whether he refuses to sell to a particular individual since he has a grudge against him. Personal factors such as these determine his behavior, and, en masse, determine the behavior of shopkeepers across the land.

Supply and demand, in the eyes of the Austrian economist, is an abstracted description of what causes prices to rise and fall—not itself a cause. Conventional economists counter that all social sciences need such abstractions and generalizations, but the chief achievement of Austrian economics is to force the science to consider that someone’s values, plans, expectations, and understanding of reality are all subjective.

Once it has been perceived that the division of labor is the essence of society, nothing remains of the antithesis between individual and society. The contradiction between individual principle and social principle disappears.

Ludwig von Mises, Austrian economist

Individualism vindicated? But why is this so important? A school of thought that warns against making broad assumptions concerning human behavior may seem less useful than orthodox economics, which attempts to forecast outcomes and provide solutions for policymakers through making just such assumptions. However, the skepticism of the Austrian School has been vindicated, not least because Hayek and his fellow-Austrian Ludwig von Mises were among the earliest to predict the demise of communism, arguing that a centrally planned state would fail since government planners would never have enough information about what drives their citizens to take individual decisions.

Austrian economists emphasize the importance of freeing up the individual to take his or her own choices. This laissez-faire ideal ultimately inspired some of the biggest reforms in 20th-century economics, for it was, at least in part, the ideas of the Austrian School that inspired both Ronald Reagan and Margaret Thatcher to push forward their free-market reforms, and that informed their supply-side reforms (see Supply-side economics). They recognized that the focus should not be on top-down economics, but on individuals’ wants and desires.

the condensed idea

Individual human choices are paramount

timeline
1871 Principles of Economics by Carl Menger is published
1944 A key Austrian economics text, The Road to Serfdom by Friedrich Hayek, is published
1955 The Institute of Economic Affairs—a think-tank that provided much of the intellectual backing for Thatcher—is founded
1974 Friedrich Hayek wins the Nobel Prize