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Robert Schiller writes about the problems facing the G-20 summit:

The countries represented must show a generous spirit and make the world economy work for all people. Seemingly peripheral issues, like aid to the developing world and the poor … will be part of the primary story of the renewal of confidence, just as the Marshall Plan was part of that story after World War II.

It is a good thought, but Schiller’s advocacy of it is curiously anaemic. Perhaps one reason lies in the tendency of economists, even ones like Schiller, towards methodological individualism.

Whether or not they acknowledge it, economists’ basic assumption is that social phenomena are the sum of individual actions. Unfortunately, when it comes to confidence, this is entirely the wrong approach. Confidence is irreducibly social. You can’t explain it by reference to individuals only: you have to allow for the influence people have on each other.

Rejecting methodological individualism has a paradoxical effect. It leads you to think about social entities almost as if they were people. This is what Schiller is reaching towards, but he draws back before the brink.

We can think about personal confidence in exactly the way Schiller thinks about the economy, as J. S. Mill pointed out in his Autobiography. Mill was talking about happiness, but his thought applies equally to confidence:

Those only are happy (I thought) who have their minds fixed on some object other than their own happiness … Aiming thus at something else, they find happiness along the way.

Looking at the economy as a person would help us think more accurately about our present crisis of confidence. It would also help Schiller and his ilk explain their principles to ordinary voters.

Mill believed that generosity could help people escape the paradox of hedonism. Could the solution to the paradox of thrift be found in the same way?

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