ABSTRACT
All individualist theories rely on some version of the rationality principle to develop social scientific theories. But the use of the rationality principle falls back into functionalism to explain institutions. It does this either as Weber did, by finding some system to be a product of a set of beliefs, or as Hayek and neoclassical economists do, by deducing the existence of a well-functioning system as a product of the individual pursuit of ends. But institutions cannot be portrayed as Weber did, that is, as stable, functioning systems typical of some society and based on some world-view. Nor can there be, as Hayek and very influential contemporary economists have sought, a theory of equilibrium, which will enable them to treat economic systems either as stable or as self-correcting, as individuals pursue their various aims within them. The constant creation of new ideas and the institutional changes which result from them as well as impact from other, noneconomic institutions make this ideal unrealizable. Historical studies such as those of North and Landes make this clear. Popper realized that there was a problem here and emphasized it in The Poverty of Historicism, especially in the appendix. But he never fully resolved his attitude about it. Popper used his knowledge of this fact to criticize historicist views, that is, those views which see one aim of social science to be the discovery of historical laws, but he retained Hayek’s theory of method in economics as his model and sought to explain institutions as a product of individuals pursuing aims in accord with their beliefs. He never explained how an adequate theory of institutions could be constructed on this basis. He praised economists highly but never in detail, aside from a few references to economic theories, which do not say anything about their program. He thus remained ambivalent about social scientific laws. He conceded that there could be such, but was unclear about whether they were all trivial or whether interesting laws could be achieved. Such laws would, I presume he thought, have been along the lines of those sought by economists, that is, they would explain how rational individual behavior would have certain institutional consequences. Laws about how institutions could produce specific results would be much more problematical, because they would not take into account how individuals creatively, and therefore unpredictably, respond to situations. Ironically he stumbled on the same problem Schumpeter did. Schumpeter wanted both a Walrasian system and an historical account. At the end of his life he worked on his mathematics, which only makes sense if one is describing stable systems, but wrote a history of economics, as his wife reports in the foreward to the history. He could
not unite the two. His theory of rationality places such high demands on social systems that the existence of such a system could not be reconciled with entrepreneurial activity. The same theory of rationality places such high demands on rational action that entrepreneurial activity could not be deemed rational. Popper weakened his view of rationality, but he still tried to meet the standards of contemporary economic theory tied to old theories of rationality, that is, he sought to explain systems in terms of the actions of individuals following coherent plans. As knowledge grows, as it does in open, progressive societies, institutional reform and unplanned institutional change takes place. Social scientific theories need to take this into account. Popper wanted to do this, but his use of the rationality principle for the sole framework for social scientific explanation led him to follow neoclassical economists and to set the aim of social science as the discovery of models of specific situations. He was led to do this because, on his view as well as on theirs, institutions only have impact insofar as they are products of the actions of individuals who are pursuing their aims in accord with coherent plans. The major tasks of individualist social science turn out to be problems of explaining how systems function or how they do not, that is, how they deviate from the ideal. In order to explain how systems function, individualist views have either narrowed the interests of individuals to material advantage in order to render them clear-cut or have became quite vague and loose by finding some interest which is satisfied regardless of what individuals do. These difficulties become more evident in economics than in other disciplines, just because the use of the rationality principle seems so much more successful there. One presumes that some wellfunctioning system exists, even when one knows it does not, just as one presumes the perfect rationality of individuals when one knows that no person is rational in this sense. This leads to problems of explaining deviance from the ideal, of systems neither in nor on the way to equilibrium. As a consequence of the difficulties in explaining how systems work or do not work, the use of the rationality principle leads to the construction of narrow models, which presume the existence of some system, but which try to relate specific variables within it in some mathematically describable way. These theories fail to account for the openness of any situation in any open society and are at best tools for prediction of events which cannot be generally trusted, not only because unexpected changes regularly occur due to the unanticipated influence of factors which are not part of the model being used, including the growth of knowledge, but also due to internal changes such as those brought about by entrepreneurs. The application of these narrow models leads to moral advice to try harder, to approach the equilibrium by removing all constraints to its realization. This forces one to simply ignore real problems, which lead to these constraints. Attempts to account for their role while maintaining the individualist approach are then reduced to claims that all such constraints are mere ad hoc concessions to political necessity created by those who do not understand the true path to the best of all possible worlds-the creation of the truly unregulated economy. Let us look at these difficulties in more detail.
