Methodological individualism is an epistemological position from which it is argued that all social phenomena and structures are explained by the decisions of individuals.
According to methodological individualism, the theoretical categories of "class", "ethnicity", "gender" are not needed to understand the functioning of society. It is enough to know the determinants of individual behavior to understand the aggregates. That is, the phenomena that involve an entire population.
Methodological individualism is used not only in economics, but in many social sciences, such as anthropology, sociology, and political science. In economic theory it is usually associated with the concept of rational choice. However, individualism does not presuppose egoism or rationality, it is only a methodological position that bases all macro phenomena on micro phenomena.
It could be summarized as "the whole is equal to the sum of the parts."
Methodological individualism in economics
The theoretical exponents of methodological individualism in economics are Carl Menger, Max Weber, Joseph Schumpeter, Friedrich von Hayek, and Jon Elster.Most economists accept and use this theoretical assumption (with the exception of Marxists and old institutionalists).
The use of this assumption is implicit in the partial equilibrium, general equilibrium, and Nash equilibrium models.
In these models, what matters most is knowing the type of agent (for example, consumer or producer), the objective of the decision (for example, maximize utility or minimize costs), the decision itself (for example, buy or sell) and the consequences of your decision (what you have to pay or receive for what you decide).
Rational choice theory
Going deeper into the objective of the decision, economists add the rational choice assumption. The individual rationally chooses if he chooses the alternative that provides him with a higher utility, that is, a higher payment.
For example, if the possibility of going to the cinema or a museum arises, the rational agent makes an estimate of what he would get for going to each place and would choose to go to the place where he gets the highest payments.
The difficulties of the theory of rational choice are three:
1. The agent does not have enough information to estimate the different possible scenarios.
2. Even if you have complete information, the agent does not make the necessary estimates.
3. Even though the estimate has been made, the agent does not choose the option that gives him the highest payment.
Microfoundation of macroeconomics
According to Hal Varian, microeconomics studies how households and companies make decisions under the principle of rational choice and optimization. Since the events that occur throughout the economy are the result of the interplay of many households and many firms, the microeconomics and the macroeconomics are intrinsically linked.
So, the microfoundations of macroeconomics is the concept used to refer to one of the applications of methodological individualism, in the sense that macroeconomic phenomena (such as unemployment, inflation, business cycles) can be understood as the simple sum of many individual decisions .
For example, to understand the behavior of consumption in an entire country, you have to think of a family that must say how much to consume and how much to save. On the other hand, to understand investment behavior, you need to think about a company that has to decide whether to invest in a new factory or a distribution center.
However, some economists such as Alan Kirman, Samuel Bowles, Jan Kregel and Steve Keen, emphasize that the micro-foundation of macroeconomics is inconvenient because the whole is not equal to the simple sum of the parts. In particular, the presence of the State, institutions and other emerging factors require a different understanding of Macroeconomics, as well as the theory of economic growth.
The opposite position to methodological individualism is methodological holism, according to which, it is necessary to start from the aggregates and have the vision of the whole. In economics, methodological holism is assumed by Marxists (who place great emphasis on the notion of "social class") and institutionalists (who, as their name indicates, study institutions, their importance and their evolution).
An intermediate position between methodological individualism and methodological holism is one that understands the importance of individual behavior. In turn, it is influenced by the environment (institutions and other agents), which is dynamic and complex.
Varian, H. Intermediate Microeconomics. Barcelona: Antoni Bosch.