Methodological Individualism and Rational Choice in Neoclassical Economics: A Review of Institutionalist Critique

Abstract

This review article is an attempt to take a critical look at methodological individualism and rational choice that form the hard core of neoclassical economics, from an institutionalist perspective. Methodological individualism is discussed as a project of reductionism, by reviewing reductionism in the context of social sciences, and by analysing methodological individualism in the context of neoclassical economics. Philosophical and institutionalist critiques are then employed to elucidate that methodological individualism as practised in neoclassical economics is not capable of explaining real world phenomena, especially that of the predominantly traditional societies of the developing countries. The rational choice theory as espoused in neoclassical economics is also discussed and an attempt is made to build an institutionalist critique from the perspectives of various strands of institutionalisms in economics. The new institutionlist economics, though some relaxation of the axioms has been attempted, still upholds the neoclassical maxims of methodological individualism and rational choice, thereby treating the institutional as external to the ‘rational’ realm. The approach of the alternative institutionalist school which attempts to explain individual agency as influenced by the social as well as institutional contexts seems more suitable to explain real world phenomena.