Individualism and economic theory

by | Jun 19, 2024 | 0 comments

Blog by Huib Wursten          

Individualism and economic theory


It happened again! In a discussion in New York among members of an informal think tank, I was again confronted with the idea that while we were using the same word, Individualism, we did not at all share the same meaning.

I say again, because it happened so much in my life as an international consultant that I start my presentations usually with an anecdote. In North America, people frequently try to break the ice by discussing sports.  They use the words football and hockey. They assume then that we share the same meaning. But I know now that what they are talking about is American Football, which, in my humble opinion, is not football at all. And they are talking about ice hockey, which, for me, is irrelevant. For me, hockey is field hockey. 

Individualism is again such a concept. Below is an analysis of some frequent misunderstandings.

Individualism: A Comparative Analysis of Hayek, Rand, and Hofstede

Individualism has been pivotal in various philosophical, economic, and cultural discussions. Despite their diverse backgrounds and disciplines, Friedrich Hayek, Ayn Rand, and Geert Hofstede each provide unique perspectives on individualism. This essay seeks to compare and contrast their views, exploring how each thinker understands and promotes the idea of the individual within society.

1. Friedrich Hayek: The Economic and Political Dimensions

Friedrich Hayek, an Austrian-British economist and philosopher, is renowned for his defense of classical liberalism and free-market capitalism. Hayek’s individualism is deeply rooted in his economic theories, particularly his critique of central planning and socialism. He argues that individual freedom is essential for a functioning and prosperous society. In his seminal work, “The Road to Serfdom,” Hayek posits that any form of central planning inevitably leads to a loss of individual freedom and a slide towards totalitarianism. For Hayek, the spontaneous order arising from individuals acting in their own self-interest within a free market is the most efficient and moral way to organize society..

Hayek’s individualism is thus both a political and economic stance. He believes that individuals, given the freedom to make their own choices, contribute to the collective well-being through the market’s invisible hand. This process, according to Hayek, is far superior to any centrally planned economy, which he argues lacks the information necessary to make efficient decisions and ultimately undermines individual liberties

2. Ayn Rand: an Ethical and Philosophical ideology

Ayn Rand, a Russian-American writer and philosopher, offers a more philosophical and ethical perspective on individualism. Her philosophy, Objectivism, places the individual at the center of its moral universe. In her novels, such as Atlas Shrugged and The Fountainhead, Rand champions the idea of the individual as a heroic being whose happiness and creative potential are paramount. She argues that self-interest, rather than altruism, is the highest moral pursuit.

Rand’s individualism is uncompromising and radical. She contends that collectivism, in any form, is inherently oppressive and stifles human potential. Her ideal society is one where individuals are free to pursue their own goals and ambitions without interference from the state or collective demands. In Rand’s view, individual rights are sacrosanct, and the government’s role is merely to protect these rights and ensure that individuals can operate in a free and uncoerced environment.

The core of Rand’s philosophy — which also constitutes the overarching theme of her novels — is that unfettered self-interest is good and altruism is destructive. She believed this is the ultimate expression of human nature, the guiding principle by which one ought to live one’s life. In “Capitalism: The Unknown Ideal,” Rand put it this way:

Collectivism is the tribal premise of primordial savages who, unable to conceive of individual rights, believed that the tribe is a supreme, omnipotent ruler, that it owns the lives of its members and may sacrifice them whenever it pleases.

you” .

To many of Rand’s readers, a philosophy of supreme self-reliance devoted to the pursuit of supreme self-interest appears to be an idealized version of core American ideals: freedom from tyranny, hard work and individualism. It promises a better world if people are simply allowed to pursue their own self-interest without regard to the impact of their actions on others. After all, others are simply pursuing their own self-interest as well.

Comparing Hayek and Rand

Anglo-Saxon economic theory is mainly based on these principles. In the system of  “worldviews” I will analyze later in this article, this is labeled as the “Contest “ view. A rational agent in this system is defined as an individual who is self-interested. A market is a collection of such rational agents, each of whom is also self-interested. Equity/Fairness does not enter into it. David Blanchflower, a Dartmouth professor of economics and former member of the Central Bank of England, laughed out loud when somebody asked, “Is that fair?”

“Economics is not about fairness,” he said. “I’m not going there.”

Comparing the Hayek and Rand perspectives, we see distinct yet overlapping interpretations of individualism. Both advocate for individualism in the context of “Contest” cultures, which are defined by the combination of high Masculinity (see below for context),  small Power Distance, and low Uncertainty Avoidance. 

Hayek focuses on economic and political freedom as essential for a prosperous society, whereas Rand emphasizes the ethical and philosophical justification for individual rights and self-interest. Both view collectivism as a threat to personal liberty and human flourishing.

A good example of the consequences of this thinking is Margaret Thatcher, who was Prime Minister of the United Kingdom from 1979 to 1990. During those years, she presided over a social revolution in which nationally owned industries were privatized and the welfare state was drastically reduced in size. Here, she speaks of her understanding of the individual’s responsibility.

She is known to have said: “I think we have gone through a period when too many children and people have been given to understand ‘I have a problem, it is the Government’s job to cope with it!’ or ‘I have a problem, I will go and get a grant to cope with it!’ ‘I am homeless; the Government must house me!’ and so they are casting their problems on society, and who is society? There is no such thing! There are individual men and women, and there are families, and no government can do anything except through people, and people look to themselves first.

Ronald Reagan, President of the United States from 1981 to 1989, was even more radical: 
”The most terrifying words in the English language are: I’m from the government and I’m here to help.”

3. Geert Hofstede: The Cultural Perspective

Geert Hofstede, a Dutch social psychologist, approaches individualism from a cultural dimension. Hofstede’s research in cultural dimensions theory identifies individualism versus collectivism as one of the key dimensions of national cultures. Unlike Hayek and Rand, Hofstede does not advocate for individualism as an ideology but rather analyzes its presence and impact across different societies.

Hofstede’s work reveals significant cultural variations in the degree of individualism. In highly individualist cultures, such as the United States and Western Europe, people are more likely to prioritize personal goals over group objectives and value independence and self-reliance. Conversely, in collectivist cultures, like in Asia, Africa and Latin America, individuals see themselves as part of a larger group and prioritize group harmony and collective well-being.

Hofstede’s findings suggest that individualism is not universally applicable but rather context-dependent. The level of individualism in a society affects various aspects of life, including workplace dynamics, family structures, and educational systems. His work underscores that individualism and collectivism each have their own strengths and weaknesses, influencing how societies function and individuals perceive their roles within them.

The Hofstede dimensions of culture represent a well-validated operationalization of differences between the cultures of present-day nation-states as manifested in dominant value systems.

Four confirmed elements are of utmost importance for understanding that culture has a gravitational influence on behavior:

  • The definition of culture is about the collective “programming” of the mind that distinguishes one group or category of people from another.” This definition stresses that culture is (1) a collective, not an individual attribute; (2) is not directly visible but manifested in behaviors; and (3) common to some, but not all people. We are talking about the preferences of most people most of the time; (4) – it is about subconscious preferences. Most people are unaware of their programming.-
  • The cultural dimensions are the outcome of factor analysis. They represent the fundamental issues all human beings everywhere must cope with. Country culture is about how nations differ in their coping approach.

So, the dimensions are not a random collection of factors that emerged from haphazard situations;instead, they reflect the basic value dimensions.

  • The dimensions are evidence-based by repeated research, validated over 50 years, with regular repeats trying to falsify the outcomes.
  • Cultural differences are determined by how the dominant majority in different countries address those issues. So, we are talking about the central tendency in a bell curve.
  • Each country has a ‘score’ on each of the fundamental dimensions, reflecting the central tendency. The scores go, in principle, from 0 to 100. These scores, in turn, provide a ‘picture of a country’s majority culture. Hofstede’s approach is clear, simple, and statistically valid.

This set of 4 value dimensions allows us to describe how culture decisively defines diversity. But please remember, we are talking about central tendencies, not individuals.

Hofstede and Individualism

Individualism versus Collectivism is one of the four confirmed value dimensions Hofstede found.

In Individualistic cultures, Individual rights and obligations are the center of value preferences. People believe in Universalistic values. Rights and obligations are (or should be) valid everywhere. The rule of law guarantees human rights.

In collectivistic cultures, people belong to in-groups who look after them in exchange for loyalty. The value orientation is particularistic and applicable to people of the in-group. Identity in Collectivist cultures is based on the social network to which one belongs. Collectivism is a value system that emphasizes the importance of group identity and the collective good over the rights and interests of individual members. In collectivist societies, the needs and goals of the group are prioritized over the needs and goals of the individual, and the group is expected to work together for the common good as formulated by the top people. In Individualistic cultures, people identify more as members of voluntary social groups than members of clans.” For collectivistic societies, it is difficult to accept that individuals have the right to decide about moral issues. Religious institutions and their officials represent the traditional values, and they are the only ones in the position to “weigh” new developments like freedom of sexual preference and equal rights for women.

The other 3 value dimensions found by Hofstede are:

Masculinity versus Femininity. This dimension is about motivation. 

In masculine cultures, the dominant emphasis is on competition, career, status, “making it”, achievement, and success. The dominant motivation in feminine cultures is cooperation, consensus-seeking, and a focus on equity, solidarity, and quality of life. 

Power distance is the extent to which less powerful members of a society accept that power is distributed unequally. People in countries scoring low, like the US, Canada, the UK, Scandinavia, and the Netherlands, are likely to accept ideas like autonomy, empowerment, decentralization, participative decision making and flat organizations. Business schools worldwide tend to base their teachings on low power-distance values. Yet, most countries in the world have a large power distance. In Large power-distance cultures, people accept existential hierarchy and centralized decision-making.

 Uncertainty Avoidance (UAI) the way people deal with unfamiliar risks. This concerns the need for predictability. The continuum goes from a strong need for predictability to a weak need for predictability.

Because of his repeated research with matched samples, most countries’ scores are now charted.

The awareness is, however, rising that the scores on the four dimensions influence each other.Together, they lead to a “Gestalt “; the whole is more than the sum of the parts. In other words, the whole has ” properties” that cannot be reduced to properties of the parts; in the case of culture, the Gestalt takes the shape of a mental picture of what the world looks like, a worldview. Seven of these worldviews can be identified. For an overview of these worldviews, see: Wursten H.

Downward causation

The single dimensions get their real significance from the worldview. In systems theory, Donald T. Campbell (1974) formulated the principle of downward causation: processes at the lower level of a hierarchy are restrained by and act in conformity to the laws of the higher level.

Applying this to the Hofstede dimensions: The way the single dimensions work out is determined by the worldview of “Gestalt”.

Four of the seven 7 worldviews are Individualistic but have totally different interpretations of Individualism.

Contest”the combination of (cultural) Masculinity, Low Uncertainty Avoidance and Small Power distance.

  1. Emphasis on Personal Freedom:  individualism is often associated with personal liberty and the right to pursue one’s own goals without undue interference.
  2. Entrepreneurial Spirit: There is a strong belief in the self-made individual and the opportunity for upward social mobility through hard work and innovation.
  3. Decentralization: There is a preference for decentralized decision-making and limited government intervention in personal affairs.
  4. Focus on Achievement: Success is often defined in terms of individual achievement and accomplishment, with less emphasis on collective goals.

Network” :  The combination of Femininity, small power distance and low to middle Uncertainty Avoidance.

      1. Consensus-Based Politics: Dutch society emphasizes consensus and cooperation, balancing individual rights with collective decision-making.

      2. Social Welfare: Strong social safety nets ensure that individualism does not undermine social cohesion and support for all citizens.

      3. Equity and social fairness is strongly emphasized 

      4. Secularism and Pragmatism: Dutch individualism is often pragmatic and secular, focusing on practical solutions and social harmony.

Well-Oiled Machine: the influence of small Power distance and High Uncertainty Avoidance

  1. Balance Between Individual and Collective:  The emphasis is on balancing individual rights and responsibilities towards the community or society.
  2. Emphasis on Order and Structure: There is a preference for structured systems and adherence to rules and regulations, which can sometimes constrain individual actions.
  3. Value of Expertise and Qualification: the WOM values specialized knowledge, education, and professional competence, contributing to the collective good.

The Solar System: The influence of Large Power Distance. High Uncertainty Avoidance and Femininity

  1. Intellectual and Cultural Individualism: The system often emphasizes intellectual and cultural pursuits, valuing creativity, originality, quality of life and personal expression.
  2. Emphasis on Equality:  individualism is often tempered by a strong emphasis on egalitarian principles, striving for equality and social justice.
  3. State Intervention: There is a historical tradition of state intervention to ensure social welfare and equality, which can sometimes limit individual freedoms in the interest of the common good.
  4. Artistic and Philosophical Influence: French individualism has been historically influenced by the Enlightenment ideals of liberty and reason, as well as existentialist philosophy emphasizing individual freedom and responsibility.

These differences reflect how each culture interprets and prioritizes individualism within its broader societal norms


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