Save The Republic

 

Save the Republic

By M. Northrup Buechner

[This article was originally published on line by Forbes.com on November 18, 2013, with the title “Obama’s Disdain For The Constitution Means We Risk Losing Our Republic.” This version is slightly revised.]

Since President Obama signed the Affordable Care Act into law, he has changed it six times. Most notably, he suspended the employer mandate last summer, and last week he changed the provision that cancelled individual insurance policies.

The New York Times (11/15/13) described this last change as “a sweeping assertion of presidential authority to delay enforcement of certain provisions of federal law.” That is the narrowest possible interpretation, but still, where did Mr. Obama get that authority? From the premise that he is not bound by the Constitution.

The Constitution authorizes the President to propose and veto legislation. It does not authorize him to change existing laws. The changes Mr. Obama has ordered in Obamacare, therefore, are unconstitutional.

Why is he doing this? For the worst possible reason. “[T]o avoid opening the measure to legislative attack in Congress,” The Times says. In other words, to keep it out of the hands of the people’s representatives because the Constitution gives them, and only them, the power to write laws.

By changing the law based solely on his wish, Mr. Obama has acted on the principle that the President can rewrite federal laws and—since this is a principle—not just this law, but any law. It is appalling that Mr. Obama has taken this power at the behest of Congressmen who, like Mr. Obama, have sworn to defend the Constitution—to whom their oath evidently meant, and means, nothing.

What is the effect of vitiating the Constitution, of establishing the principle that the President can change laws when he wants to?

The time will come when Congress passes a law and the President ignores it. Or he may choose to enforce some parts and ignore others (as Mr. Obama is doing now). Or he may not wait for Congress and issue a decree (something Mr. Obama has done and has threatened to do again).

Mr. Obama has not been shy about pointing out his path. He has repeatedly made clear that he intends to act on his own authority. “I have the power and I will use it in defense of the middle class,” he has said. “We’re going to do everything we can, wherever we can, with or without Congress.” There are a number of names for the system Mr. Obama envisions, but representative government is not one of them.

If the President can ignore the laws passed by Congress, of what use is Congress? The President can do whatever he chooses. Congress can stand by and observe. Perhaps they might applaud or jeer. But in terms of political power, Congress will be irrelevant. Probably, it will become a kind of rubber-stamp or debating society. There are many such faux congresses in tyrannies throughout history and around the globe.

Mr. Obama has equal contempt for the Supreme Court. In an act of overbearing hubris, he excoriated Supreme Court Justices sitting helplessly before him during the 2010 State of the Union address—Justices who had not expected to be denounced and who were prevented by the occasion from defending themselves. Mr. Obama condemned them for restoring freedom of speech to corporations and unions.

Again in defiance of the Constitution, President Obama made four recess appointments in January 2012, when the Senate was not in recess. Three courts have found that his appointments were unconstitutional, and the Supreme Court has agreed to take up the case. If the Supreme Court finds against him, what will Mr. Obama do?

We can get a hint by looking at how other parts of his Administration have dealt with Court decisions they did not like.

The Attorney General’s Office is the branch of government charged with enforcing federal laws. After the Supreme Court struck down the key provision of the Voting Rights Act of 1965, Attorney General Holder announced that he would use other provisions of the act to get around the Court’s decision.

The Supreme Court has defined the standard for sexual harassment as “severe, pervasive, and objectively offensive” behavior to a “reasonable person.” In open defiance of that ruling, the Obama Department of Education has declared a new definition of sexual harassment for colleges, that is, “any unwelcome conduct of a sexual nature,” including “verbal conduct,” even if it is not objectively offensive—thus reinforcing the reign of terror over sex on college campuses. If a young man’s request for a date turns out to be unwelcome, he is guilty of sexual harassment by definition.

The lack of respect for the Supreme Court by the Obama administration is manifest. They feel bound by the Court’s decisions only if they agree with them. If they disagree, it is deuces wild; they will embrace any fiction to nullify the Court’s decision.

The direction in which Mr. Obama is taking us would make possible the following scenario. A Republican Congress is elected and repeals Obamacare over a Democratic President’s veto. The President refuses to enforce the repeal. The Supreme Court rules that the President’s refusal is unconstitutional. The President denounces that ruling and refuses to be bound by it.

If the President persists in rejecting all authority other than his own, the denouement would depend on the side taken by the Armed Forces. Whatever side that was, our national self-esteem would be unlikely to recover from the blow of finding that we are living in a banana republic.

The shocking fact is that our whole system of representative government depends on it being led by an individual who believes in it; who thinks it is valuable; who believes that a government dedicated to the protection of individual rights is a noble ideal. What if he does not?

Mr. Obama is moving us away from our traditional system of checks and balances and toward the one-man-rule that dominates third world countries. He has said that he wants a fair country—implying that, as it stands, the United States is not a fair country—an unprecedented calumny committed against a country by its own leader.

What country does he think is more fair than the United States? He has three long years left in which to turn us into a fair country. Where does he intend to take us?

Mr. Obama got his conception of a fair country from his teachers. Their ideal was and is egalitarianism, the notion that no one should be any better, higher, or richer than anyone else. A fair country is an unfree country because it is regimented to prevent anyone from rising too high. Combined with a dollop of totalitarianism, egalitarianism has replaced communism as the dominant ideal in our most prestigious universities. Mr. Obama and his colleagues are the product of those universities, and they have their marching orders.

The most important point is that Mr. Obama does not consider himself bound by the Constitution. He could not have made that more clear. He has drawn a line in the sand and we cannot ignore it.

Those who currently hold political office, and who meant their oath to defend the Constitution, need to act now. Surely, violation of the Constitution is grounds for impeachment and charges should be filed. In addition, there are many other actions that Congressmen can and should take (Congressional hearings, for example)—actions that will tell Mr. Obama that we have seen where he is going and we will not let our country go without a fight.

At the close of the Constitutional Convention of 1787, Benjamin Franklin was asked what form of government had been created. “A republic,” he replied, “if you can keep it.”

We are losing it. If Mr. Obama’s reach for unprecedented power is not stopped, that will be the end. Everyone who values his life and liberty should find some way to say “No!” “Not now!” “Not yet!” “Not ever!”

M. Northrup Buechner is Associate Professor of Economics at St. John’s University, New York.

 

 

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Teleological Measurement

The Theory of Consumer Choice IV

TELEOLOGICAL MEASUREMENT

By M. Northrup Buechner

September 18, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

My last blog defined a hierarchy of values as the ranking in one’s mind of a series of items, ranked by reference to a goal one wants to reach. Ayn Rand called the procedure by which we rank values in a hierarchy “teleological measurement” (her emphasis) (ITOE, pp. 32-35, almost two and a half pages). This is perhaps her most important identification for the science of economics, so let us consider it closely. (If I could do it over, I would begin with this material.)

Teleological measurement is the type of measurement that applies to “the psychological process of evaluation” (ITOE, p. 32). Teleology means goal-directed or end-directed. Usually, the end is one’s life, explicitly or implicitly. Teleological measurement means measuring or evaluating or grading or ranking something by its relationship to an end. That relationship consists of the effect of the item on the end—by whether it helps to advance, support, enhance, or achieve the end, and by how much (in which case it is a value)—or by the extent to which it helps to negate, undermine, and destroy the end (in which case it is a disvalue).

Ayn Rand defined measurement as “the identification of a relationship—a quantitative relationship established by means of a standard that serves as a unit” (ITOE, p. 33). If the standard is an inch, we can determine that there are thirty-six of them in a yard. Thirty-six is a cardinal number; it answers the question “how many?”

Teleological measurement deals in ordinal numbers. It does not tell us the number of units there are in a total; instead, it measures things by the ranking or order of the units, such as first, second, third—or high, low, middle.

According to the OED, evaluation means “the action of appraising or valuing.” Putting aside issues of developmental psychology, evaluation is the origin of all the values of people’s lives. Evaluation transforms facts into values in our minds. If one evaluates something as crucial to one’s life, then that value is ranked high. If one evaluates something as unimportant and inconsequential, it is ranked low. The basis for both is teleological measurement, “a graded relationship of means to end,” with the end in this case being one’s life.

Most teleological measurements are relative measurements; that is, values do not stand alone like a tree on a plain. Rather, alternatives are ranked or “graded” relative to one another, and the ranking of any one derives its meaning from the values that are ranked higher and lower. For example, suppose a man looking for a car to drive to work ranks a used Lexus first, a new Hyundai second, and a new Ford third. The ranking of each car in the series is the teleological measurement of its value to him, and that measure is relative to the other cars he has ranked.

If one is willing to look, the universality of teleological measurement in human life is transparent. Every man alive makes such measurements all the time, every hour of every day. An individual’s success in life varies in part with the accuracy of his teleological measurements. If we consider that human values are the final cause (in Aristotle’s sense) of everything we are and do, teleological measurement is the most widespread and most important measurement in the world. Consequently, it is crucial to understand that this is a real measure, involving real measurements and real numbers, numbers that are absolutes in their context—but ordinal numbers, not cardinal numbers.

Teleological measurement is also the foundation of human emotions. Whereas values vary with ranking in a hierarchy, emotions vary in “intensity or dimension” (ITOE, p. 35). Emotions proceed from the relation of the external world to our values and are defined by the particular relation involved. For example, fear is the emotion caused by a threat to one’s values. Teleological measurement determines the ranking of the value that is threatened. The higher the value, the more intense the fear. Happiness proceeds from the achievement of a value. The greater the value one achieves, the greater is one’s happiness (other things equal).

Modern economists take the emotion they call utility as the starting point for the theory of consumer choice. We will take up later the meaning of utility, where it comes from, and what its role is in economics. For the time being, let us note, in opposition to this starting point, that emotions are not a first cause in human beings but derive from their hierarchies of values. Consequently, even a theory of emotions could not be erected on an emotion. Modern economists disagree; they are committed to utility as the foundation of economic thought.

Teleological measurement is true; it exists. As the cause of hierarchies of values, and particularly hierarchies of economic values, it is one of, if not the foundation of a rational economics. Persuading economists of the value of this idea may be the biggest hurdle that a rational economics has to get over.

The next installment of this blog will elaborate further the idea of a hierarchy of values.

 

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The Theory of Consumer Choice III

The Theory of Consumer Choice III

By M. Northrup Buechner

July 31, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

I concluded my last blog by saying that a valid theory of consumer choice requires the concept of “a hierarchy of values.” I should also have said that consumer choice is not unique, that all human choices reflect an individual’s hierarchy of values to some extent. Since consumer choice is a subdivision of human choice, it is easier to understand the former if we first understand the latter.

The meaning of a hierarchy of values depends on grasping the two concepts of which it is composed. Let us begin with the concept of “hierarchy.” There are other definitions of hierarchy, but the one I prefer is “a graded or ranked series, one thing above another.” (I have been using this definition for so long that I have forgotten its origin.)

Hierarchies are everywhere in the world that one choses to look for them. There are the ranks of authority in the Catholic Church (priests, bishops, cardinals, archbishops, patriarchs, etc.). All the military services have hierarchies of command (in the army: private, corporal, sergeant, sergeant major, 2nd lieutenant, lieutenant, captain, etc.). Universities have hierarchies of (presumed) knowledge (instructor, assistant professor, associate professor, full professor). The students in a college or university are ranked in a hierarchy according to their grade-point average. Investors exist in a hierarchy defined by their wealth. The list is endless.

Having grasped the meaning of hierarchy, we need to grasp the concept of values. Let us begin with Ayn Rand’s definition of value: “that which one acts to gain and/or keep.” A value, in this sense, is a goal, end, or purpose that one acts to reach or attain. Usually it is a fact of external existence, such as a house, a car, or an ice cream cone, but it can also be an aspect of consciousness that one strives to achieve, for example, happiness, or virtues such as pride and integrity.

A value presupposes an evaluation, that is, an act of consciousness that gives the object a positive ranking. An evaluation in turn presupposes a standard or end to which the value is a means. Evaluation is the process of ranking things by whether they cohere with a standard or contradict it, and to what extent.

When several items are ranked by reference to the same standard, we get a hierarchy. If the standard is “getting ahead at work,” then the hierarchy might be (1) volunteer for jobs; (2) work long hours; (3) an MBA. If the standard is rational, if the standard is, in the words of Ayn Rand, “derived from the facts of reality and validated by a process of reason” (CUI, p. 14), then the values are objective. If one also ranks objectively the values in the hierarchy, then action based on that hierarchy will serve one’s life.

In these blogs, sometimes I have referred to “the value placed on an object.” When I have used that phrase, I thought the context made the meaning clear, or at least clear enough that my audience would not be troubled. (I would like to hear from anyone who cares to confirm or deny my judgment on that.) But until now, I have not defined value in the sense of value placed on something—which certainly is not the meaning Ayn Rand defined.

Now I can say exactly what that value is: It is the ranking of the object in a hierarchy of values. A hierarchy of values is a phenomenon of consciousness. The values ranked in the hierarchy are phenomena of existence, in exactly the meaning Ayn Rand defined: goals of action, things one wants to gain and/or keep (including things like happiness, integrity, and pride). The value placed on values is their ranking in one’s mind.

Clearly, there are two concepts of value here. First, there are the things one acts to gain and/or keep—objects of action in reality; for example, “Water is a value to a thirsty man.” Second, there is the ranking of those values in consciousness—in a hierarchy of values; for example, “Water has a high value to a thirsty man.”

Metaphysically, values as ends of action come first; a hierarchy of values cannot be grasped without the concept of values as goals of action in reality. The “values” in a hierarchy of “values” are the values Ayn Rand defined. Existence comes before consciousness.

Causally, values presuppose evaluation by a human mind. To create a value, someone evaluates an item as valuable according to some standard, and gives that goal positive ranking in a hierarchy. Simultaneously with that evaluation, the item becomes a value to that person.

Next time we will elaborate further the idea of a hierarchy of values, and begin the process of understanding human choice.

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The Theory of Consumer Choice II

The Theory of Consumer Choice II

By M. Northrup Buechner

July 23, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

Summing up from last time: Modern economists view the consumer as the primary force of the economy for two related and mistaken reasons. First, they hold that the consumer is the first cause in the economy, that the economy is driven by the desires of consumers. Second, they think that all prices can be traced back to the prices of consumer goods. Neither of these things is true, but the economists who believe them have their reasons.

The primary goal of an economic system is to support the lives of the people living under the system. If some people want things that are bad for them, some producer probably will provide it. A producer who did not contribute in some way to what people want could not exist. All this is true, and such considerations underlie the modern view of the consumer as first cause. But, consumption is the end of the production process, not the beginning.

My theory of consumer choice does not make the consumer the cause of anything. Rather, it is the basis for deriving the law of demand and the principle of gains from trade. In addition, it is part of the answer to the advocates of unreason.

This is the third reason we need to understand consumer choice. We need to know what it means to be rational in this realm. Reason is the leitmotiv of a free economy. For a long time, economists have sniped at businessmen for their alleged irrationality, but in the modern era, those attacks have focused on consumers and have become influential.

A free economy is an economy governed by reason as a matter of metaphysical necessity—that is, without reason, there is no economy. In the words of Dr. Binswanger, a free economy represents “the reign of reason.” Because property rights are protected and forcible interference is legally outlawed, a free economy is the only economy in which it is guaranteed that men can act on their best rational judgment. Such a system does not guarantee that people will be rational, but any other system guarantees that they cannot.

This is an issue of polemics.  We need to know what it means for consumer choice to be rational, in order to answer the charge that consumers are systematically irrational. If the latter were true, the reign of reason would be an illusion and human beings would be unsuited for free markets. Of course, they would not be suited for any other kind of market either.

The real meaning of the charge of irrationality directed at the human race is that men are not fit to live on earth. The theocracy that Dr. Peikoff predicts in The DIM Hypothesis would create such a race of men. Should that occur, we will have nothing to say to them, just as we have nothing to say to them today. But while we can still speak and be heard by thinking minds somewhere, let us say what it means for consumer choice to be rational.

A valid theory of consumer choice requires the introduction and integration of a new concept into economics: “a hierarchy of values.” This concept in turn requires an understanding of the two concepts of which it is composed: hierarchy and values. We will pick up here next time.

 

 

 

 

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The Theory of Consumer Choice I

The Theory of Consumer Choice I

By M. Northrup Buechner

July 17, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

The theory of consumer choice is the theory of how consumers decide what to buy and what not to buy. In advanced undergraduate textbooks, this is the first topic that receives the full treatment. The “full treatment” consists of graphical and mathematical analysis, defining what the consumer does, or should do, in terms of lines on a graph and mathematical equations. The consumer’s goal is assumed to be to maximize the satisfaction he derives from the goods and services he buys.

Why should we care about this? Why would we want to define in complex graphs and mathematics, that only economists can understand, exactly what consumers should do in order to maximize their satisfaction? Ninety-nine percent of consumers could not grasp the instructions.

We can look at it another way: The ultimate units of existence are individual things or entities. The units of a society are individual human beings. The units of an economy are the millions of business firms who produce in order to buy from and sell to one another (and also from and to consumers).

The primary goal of economics is to understand how an economy works. We need to know the principles governing the choices of businessmen, because their choices determine the functioning of the economy. In an economy free of government controls, all the businesses act together like a giant machine, integrated by the price system into another unit—an enormous unit, embracing every market participant.

This is why we need a theory for understanding the choices of businessmen. But why on earth do we need a theory for understanding the choices of consumers. Consumption is the “dead end” of an economy. After we get there, there is nothing left for economists to explain.

The answer of modern economics lies in the diamond/water paradox and in its solution by the law of diminishing marginal utility (LDMU) [Marginalism II, 4/23/13]. The LDMU proposed that the value people place on things depends on the quantity they possess—that water is valued low because it is abundant and diamonds are valued high because they are scarce. This means that there is a parallelism between price and value; things valued low have low prices and things valued high have high prices. It seems hard to believe now, but before the LDMU, that parallelism went unrecognized. Indeed, it was explicitly denied.

Based on that parallelism, modern economics holds that the evaluation of consumers is the starting point for the economy, that the prices of consumer goods are first and foremost a measure of what consumers want and how much they want it. The value of the tools, machines, buildings, and people used in production (the factors of production) depends on the value to consumers of what the factors produce.

I have shown in previous posts (Marginalism V & VII, 6/1 & 6/24/13) that the LDMU applies to money, but that it is largely irrelevant to the goods and services of the economy. Further, it is not true that the economy begins with consumption and flows out of what consumers want. You cannot consume what has not been produced. You cannot want what is yet to be discovered. Production comes before consumption. Consumption depends on and is created by production. The modern economic view has it precisely backward. Modern economists emphasize the theory of consumer choice because they believe consumption comes first.

Nevertheless, economics does need a theory of consumer choice. We need it because two great economic principles depend on and originate in that theory. One is the Law of Demand, the most fundamental law in economics, without which an economic system cannot be understood. The Law of Demand says that people want to buy more at low prices than at high prices.

The second is the Principle of Gains from Trade, the most general and widespread principle of a free economy, underlying every single trade and exchange. The principle of gains from trade says both parties gain from trade. This principle is the basis for holding that there is a harmony of interests in a free economy, which is one of its main pillars of support.

These are the two positive reasons that we need to examine the theory of consumer choice. There is a third reason that comes under the heading of polemics. We will take that up next time.

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MARGINALISM VIII

MARGINALISM VIII

By M. Northrup Buechner

June 30, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

The standard interpretation of the diminishing marginal value of money (DMVM) is that, as we get additional money, we work our way down our hierarchy of economic values, buying things of less and less value, and that is why the value of additional dollars declines. This represents an enormous misunderstanding.

We do not spend our economic lives buying things of less and less value—working for an increase in salary so we can buy things of less value than what we bought with the last increase. This conception represents an attack on economic progress as such. It says that for human beings, a rising standard of living is nothing more than acquiring items of continually diminishing importance—so that if we make it big and hit the jackpot, we can buy things of no importance at all.

The flaw in this argument is that it focuses on adding first one dollar and then another dollar, that is, on adding almost nothing. In today’s economy, neither a dollar nor a penny can raise one’s standard of living. If you won at bingo, one dollar on Friday and then another dollar on Saturday, each successive item you bought with each additional dollar would indeed be ranked lower and lower, but nothing you bought would matter to you.

To grasp the truth about the value of additional amounts of money, we need to think in terms of larger amounts, amounts that could conceivably make a difference to someone’s standard of living. Suppose a young man has a part-time job making a hundred dollars a week; with that income, he has to live with his parents and take the subway or walk to his job. Now suppose he finds a real full-time job making a thousand dollars a week; with that income, he can buy a used car, stop taking the subway, and move into a little place of his own. If and when he advances to making ten thousand dollars a week, he can buy a house in the suburbs with a swimming pool, join the local country club, take tennis lessons, and go to the theater.

This is how increases in income work. With every increase, you are able to buy goods and services of greater and greater value. We can observe that, when people’s income rises, a significant proportion of their additional expenditures go for better versions of things they were already consuming: a TV with a bigger screen, a new Lexus instead of a used Ford, better food at home and eating-out more often, etc. We can also observe that in the advanced exchange economies of the modern world, there is virtually no limit to how high the values can be. But if that is so, why does the marginal value of money decrease? If with more and more money, we can buy things that are worth more and more, it seems that the marginal value of money should rise, not fall.

Let us remind ourselves of what the issue is here. As I said last time, of course more money is worth more than less money. We did not need economists to  point that out to us. That is not what the DMVM is about. The DMVM is about the value of a specific sum of money (such as a thousand dollars) to people who have alternative total amounts of money (or income levels or wealth). The DVMV says that if your total income is ten thousand dollars a year, a thousand dollars will be worth more to you than if your income is one hundred thousand dollars a year and much more than if your income is a million dollars a year. If we look at it in terms of adding money, an additional thousand dollars is worth more to the man with ten thousand dollars than to the man with a hundred thousand dollars.

This explanation strongly suggests that the DMVM is true. But why? Because, as we acquire more and more money, any specific sum (such as a thousand dollars) represents a smaller and smaller proportion of the total. Thus, a thousand dollars is ten percent (10%) of ten thousand dollars, one percent (1%) of one hundred thousand dollars, and one tenth of one percent (0.1%) of a million dollars. This is why one thousand dollars is much more important to a man with an income of ten thousand dollars a year than to a man with an income of one million dollars a year. The man with ten thousand dollars only has ten such sums while the man with a million dollars has a thousand such sums.

(The preceding words are my own, but I learned this explanation of the DMVM from Harry Binswanger (“Philosophic Issues in Economics” OCON, June 2008). Possibly, some other economist in the history of economics also has offered this explanation, but until I read Dr. Binswanger’s lectures, the only explanation I had ever heard was the one given in the first paragraph of this blog.)

Now we can take up the issue of consumer choice and why people buy what they buy and why an understanding of that is important.

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MARGINALISM VII

MARGINALISM VII

By M. Northrup Buechner

June 24, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

I concluded my last post with: “next time we will take up what I think is the truth about why and how people decide what to buy.” That subject is still on my agenda, but I have thought of some other issues that should be covered first.

In previous posts, I have identified a small number of products that satisfy the necessary condition to validly apply the law of utility. That condition can be called the uniformity requirement. It means that the additional units of each product that consumers choose to buy, use, and consume are identical—that they are uniform in nature, structure, composition, performance, and any other attribute that consumers want to possess. If this is not true, then the second unit acquired may be better than the first, and the consumer would get more utility from the second unit than from the first unit.

Products meeting the uniformity requirement are gasoline, electricity, water, heating oil, natural gas, and perhaps some food staples such as butter, eggs, and milk. (If there are others, I am unable to think of them.) The point is that only a very tiny fraction of the millions of consumer goods individuals buy in a free economy are uniform and therefore governed by the law of diminishing marginal utility. In addition, people value those goods that are uniform at their price. If this were the whole story, the status of the law of utility in economics would be as the solution to the diamond/water paradox, and otherwise, as an irrelevant, historical curiosity (which is the way I treated it in my book, with the following exception).

However, that is not the whole story. There is a huge, enormous, towering exception to the preceding view of the law of utility. That exception is money. Money is uniform. Each dollar or hundred dollars is identical to every other dollar or hundred dollars. Consequently, money satisfies the uniformity requirement for the law of utility. But what exactly does the law of utility mean in relation to money?

First, let us dispense with the word “utility.” In economics, utility has no definite meaning. Sometimes it is interpreted as a synonym for “usefulness,” such as the utility of a hammer to pound nails. Sometimes it is used to mean a feeling or emotion, such as the enjoyment derived from buying a new TV set. In the first case, economists have found it impossible to explain the utility of all those activities that have no physical product (which includes the whole entertainment industry). In the second case, it is impossible to identify a unit of psychic utility (a util), and therefore economists view the feeling of utility as nonobjective.

In economics, application of the law of utility to money is called “the diminishing marginal utility of income.” Since we are dispensing with “utility,” and one can acquire money in forms other than income, we will call this principle “the diminishing marginal value of money (DMVM).” The marginal value is the additional value. Thus, this principle means that as you acquire more and more money, you value any given sum less and less. Obviously, more money is always worth more. The issue here is the value you place on a given sum (say one hundred dollars), now and after you win the lottery.

Because the DMVM is defined in terms of the margin (marginal utility in the original version), and the marginal unit is almost always interpreted as one more or one less, economists typically take the relevant sum of money as one dollar. Thus, the meaning of the DMVM is that as one acquires additional dollars, one values each additional dollar less and less. Why? The standard answer is that as we acquire additional dollars, we use them to buy things that we value less and less.

Thus, whatever the amount of money you have at your disposal, you spend it on the goods and services that you value most. Suppose there is a lamp in a store window that you walk by every day. You love the lamp, but the price is a hundred dollars, and you have decided that you cannot afford it. You estimate that you would have to eat spaghetti every meal for two months in order to save an extra hundred dollars and variety in your diet is worth more to you than the lamp.

Then suppose that you win a hundred dollars at the racetrack. The additional hundred dollars is worth less to you than the lamp, and you buy the lamp. But before you won the hundred dollars, the lamp had less value to you than any of the other things that you were buying. If that were not true, you would not have needed to win one hundred dollars in order to buy the lamp. That is the argument, and in the context created here, it is unanswerable.

The implication of this interpretation of the DMVM is that, as we get more and more money, we work our way down our hierarchy of economic values, buying things of less and less value, of lower and lower importance, until, if we have a lot of money, we buy things which have no value to us at all and without which we would be no worse off. (One may observe that this is exactly the view held by the Left of consumption spending by the “one percent”—that is, the one percent of the population with the most wealth.)

The preceding paragraph pushes the argument a little further than it is usually pushed in order to make a point—that there is something horribly wrong with this thinking. This interpretation of the DMVM obliterates the value to people of more money. It is impossible to reconcile with the scramble to buy lottery tickets for one chance in twenty-six million to win a lot of money. Next time, we will see in detail where it goes wrong.

 

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Marginalism VI

Marginalism VI

By M. Northrup Buechner

June 8, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

Last time we saw that the law of utility is limited by the fact that most of the things that people acquire are not identical. We went through a standard explanation, seeing how a farmer would value his buckets if one were lost or another was added. But we ignored how the farmer acquired his buckets, which also is standard in explaining the law of utility.

Goods do not magically appear and disappear. They do not fall like manna from heaven only to be snatched away by the devil. In an economy governed by a price system, such as the one in which we live, when people want to possess goods, they BUY them at a PRICE. When they want to dispose of goods, they SELL them at a PRICE. This fact, that prices are almost always involved in both the acquisition and the disposal of goods, is the second fact about the economy that nullifies the law of utility.

In the normal course of events, people value goods at the prices they have to pay for them. This is normal, natural, and unavoidable. The extent to which price automatically affects our evaluations is quite remarkable. For example:

“Girls, girls, look at this ring. I got engaged last night. Billy asked me to marry him and gave me this ring. He paid $20,000 for it.”

“Oh my Gawd! Look at that rock!”

“It is so big. And the sparkle is almost blinding!”

“That is the most beautiful thing I have ever seen.”

“Where did Billy get $20,000?”

“$20,000? Billy? Oh, I was just kidding. He paid $20 for it. It’s just a piece of glass. But he promised to buy me a real ring as soon as he can.”

In the blink of an eye, the ring is transformed from a big, blinding diamond into an uninteresting piece of glass.

What is the point? In an exchange economy, price is value—price measures the value—not to everybody, not all the time, not if you keep your wits about you (as did the girlfriend who asked where Billy got the money)—but as a first impression, and for the things one routinely buys every week or month, people take price as the value.

Price as a measure of value is a variation on, and perhaps an extension of, the principle identified by Böhm-Bawerk, that people value goods that are easily replaced at the price it costs to replace them. This principle applies to all consumer goods that are for sale in the market. It excludes items like photographs, family heirlooms, keepsakes, and other such items, perhaps of enormous value to an individual, which cannot be replaced.

Consider, for example, a standard 26 ounce container of table salt or a five-pound bag of sugar. Both are very inexpensive and no one has reason to think much about them or to consider what their objective value might be. But if salt or sugar were rare and hard to get and each container cost $500 or $1000, people would value both salt and sugar in accordance with their prices. They would be thought of as precious commodities like caviar, saffron, or platinum.

Alternatively, suppose you have one roll of Bounty paper towels left in your kitchen, so you buy a package of fifteen Bounty towels on your next shopping trip. If storage is not a problem, the fact that you now have sixteen rather than one does not change the value to you of an individual roll. This contradicts the law of utility, but it is true nevertheless.

The proof is introspection—that is, each of us can imagine ourselves in these circumstances and grasp that we would still value a roll of Bounty towels the same as before. The reason is that, since we can buy more Bounty towels whenever we need them, we have no reason to value them at anything other than their price.

Evaluation is more variable with some expensive items. Consider a house, for example. Normally, when one buys a house, one values it at the price one paid. But, if the buyer thinks he got a bargain, he will value the house at more than he paid. Over time, as the housing market goes up or down, the value of the house goes up or down, and the owner revises the value in his mind, depending on what may be more or less reliable sources of information. However, a change in circumstances can change the value of a house to its owner, independently of its market value, such as an increase or decrease in the number of occupants or a change in the neighborhood.

In general, people value exchangeable items, that is items that can be bought or sold, at what they can be bought or sold for. For the most part, this includes even the most expensive things. If this is true, the law of utility is irrelevant.

The preceding discussion applies to consumer goods and services in an exchange economy. Things are different with producer goods. However, the law of utility does not apply to producer goods; it has always been applied only to consumption items. In the context of consumer goods, it is hard to think of cases where the law of utility helps us understand what people buy and what they pay. Additional units are not identical, and if they are, such as gasoline, we value them by what they cost, not according to an alleged diminishing utility.

Next time we will take up what I think is the truth about why and how people decide what to buy.

 

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Marginalism V

Marginalism V

By M. Northrup Buechner

June 1, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

[Apologies for the long hiatus. I have been out of the country giving a paper at an economics conference.]

Marginalism and subjectivism are completely integrated and mutually interdependent in modern economics. Marginalism is the idea that the value people place on things is the value of the last one acquired, and subjectivism is the idea that the prices of things are determined by the value people place on them. Subjectivist economics gives priority and causal power to people’s preferences, but those preferences rule the economy in a definite pattern defined by the law of utility—that as one acquires additional units of a good, each additional unit is worth less and less. This is what keeps subjective preferences from being completely arbitrary. It is also what allows economists to say something more about the economy than “Who knows?”

Without marginalism, economic subjectivism would have nothing to say. People’s preferences could take any form whatever. They might want more when the price went up and still more if it came down, and there would be no limit on how much they wanted. Or, they might want less when the price fell and more when the price went up and everyone might be satisfied with the bare minimum possible or be happy to die of starvation in a week. Marginalism and subjectivism entered economics together in the solution to the diamond/water paradox, and they exist together in roles of mutual support. In the field of economics, neither could survive without the other.

Last time, we saw what is wrong with the subjectivism of modern economics. Now we will look at the marginalism of modern economics.

There was some truth in the discovery of Jevons, Walras, and Menger. Certainly, the explanation for the relative prices of water and diamonds has something to do with the value people place on them, and that in turn has something to do with their relative scarcity. As a broad generalization, it is true that people tend to put greater value on things that are scarce than on things that are abundant. But there is no specific relationship of the kind projected by the law of utility that applies to everything, and that can be taken as the basis for the whole economy.

The first problem with the law of utility is that, in order for it to hold, all the units under consideration must be identical. This point is well recognized. Suppose a farmer has three identical buckets for work around the farm. If he loses one, he will value each of the two remaining buckets more highly than before. Alternatively, if he acquires another bucket identical to the first three, the farmer will value each of the four buckets less than before. The fourth bucket is worth less to him, but so are each of the first three because they are all the same.

This analysis is completely dependent on the buckets being identical. Since they are all the same, the farmer values each of them the same, and that value goes down if he gains buckets and up if he loses buckets. But what if the buckets are not the same? What if he has three identical wooden buckets and then he gets a steel pail?

Sometimes we buy additional units that are identical to the previous units we have purchased. This is not the norm, but also it is not unusual. Everybody does it when they buy gasoline, heating oil, electricity, water, natural gas, and perhaps some food items like butter and milk. For almost everything else we buy, however, including most food items, the units are not identical—and usually we do not want more than one at a time. Examples are legion: a house, a car, an ipad, a shirt, a skirt, a steak, a bunch of bananas, a lamp, a rug, a TV set, a CD player, a computer, a movie ticket, a restaurant meal, and so forth. The complete list would embrace virtually the entire realm of the millions of consumer goods and services.

If additional units are not identical, the second unit is not a unit. It is something else. Or, to put it a little differently, if the additional units are not identical, the second unit may have more value than the first, and the law of utility is irrelevant. If you buy a 36-inch TV set and then you buy a 50-inch TV set, what does the law of utility tell us? Nothing! There is no law governing the relationship between the values people place on two different products, even if the products are very closely related. Only if they are the same can we say that the second unit will have less value than the first.

Next time we will see additional limitations in applying the law of utility to consumer goods and services.

 

 

 

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Marginalism IV

Marginalism IV

By M. Northrup Buechner

May 13, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

Now, let us see what is wrong with the subjectivist conception of the economy. There are three fundamental errors.

1) The subjectivists claim that consumer preferences are the starting point for the economy. That is not true. Production comes before consumption. You cannot consume, or prefer, what has not been produced.

The starting point for the economy is the production of objective economic values. Economic values are goods and services. Objective economic values are goods and services whose value is based on a rational grasp of the facts, evaluated (at least implicitly) on some version of the standard: “good for my life.” They are a subdivision (a very large subdivision) of Ayn Rand’s objective concept of the good: “an evaluation of the facts of reality by man’s consciousness according to a rational standard of value” (CUI, p. 14; also see “The Theory of Price 4”).

An objective value is not a mere subjective feeling or desire or preference. Human beings can and do desire all sorts of things that are destructive of their own lives and the lives of others. Today’s terrorists openly worship death. Many others pursue death in ways less obvious and more drawn out. More people still desire things that are obviously bad for them. An economic system which simply expressed peoples’ subjective preferences would have nothing to recommend it. One could not say why such a system should be defended or put into effect.

There is a life and death difference between objective values and subjective preferences: a preference may be bad for your life, and an unexamined preference probably is. The failure to satisfy such a preference may be displeasing. But the loss of an objective value is a hole in one’s life. A free economy produces primarily objective values, that is, values that support human life and happiness. Economically, that is its most important attribute.

2) Subjectivists hold that the prices of consumer goods are determined by consumer preferences. That is not true either.

Every price is set by someone. This is the starting point for any theory of price. The prices of most consumer goods are set by businessmen who have never heard of consumer preferences and could care less.

The businessman sets a price that he hopes and expects his customers will be willing to pay in sufficient numbers to yield a total revenue that will cover his costs and create a profit. This total revenue is what Ayn Rand called socially objective value, that is, “the sum of the individual judgments of all the men involved in trade at a given time, the sum of what they valued, each in the context of his own life” (her emphasis). Socially objective value is not a sum of preferences. It is a sum of objective, rational judgments. That is the form in which objective value rules a free market.

The objectivity of prices is also reflected in the market context. The market context consists of the quality and prices of competitors’ products, plus everyone’s expectations for the near future. The businessman takes those facts into account when setting his price, as do his customers when deciding whether or not to pay the price.

Finally, the businessman knows that over the long run, his total sales receipts must exceed his total costs (see “The Theory of Price 1, 2, & 3”). This absolute requirement is independent of consumer preferences, but it is irrevocably linked to the socially objective value of the product: the higher that value is relative to costs, the greater are the profits.

The root significance of profits to the businessman is that, at least for the time being, the survival of his business is assured. The greater his profits, the better positioned he is to go on producing and selling and, perhaps, expand his business.

3) The subjectivists hold that the wages of workers are bid up and down by businessmen to reflect the value of the workers’ products to consumers. Again, that is not true. Indeed, it is hard to think of plausible examples of such a phenomenon. (McDonalds’ hamburgers vis–á–vis minimum wage labor is one.)

The wages of any particular type of worker are set by businessmen’s demand relative to the supply of workers of that type. If demand exceeds the supply, businesses find it difficult to hire the workers they need. In the competition for employees, some businessman will go first, raising the wage he offers, and his competitors must follow. Wages rise. If supply exceeds demand, businesses are inundated by workers looking for jobs. As a consequence, businessmen offer lower wages and/or workers volunteer to take less. Wages fall.

There is nothing about this process that links the individual worker’s wage rate to the value of his product. In fact, most workers do not have a product; that is, they do not produce something that is sold to a customer.

A car manufacturer, for example, consists of thousands upon thousands of people performing thousands of jobs, all of which are necessary to the production and sale of the firm’s cars. These include accountants and secretaries, salesmen and janitors, assembly-line workers and foremen, vice presidents and clerks, and so on and on and on. Of these, only the assembly-line workers actually do something to the car in production, and even they perform some narrow service, like installing seats (OE, pp. 45-46).

Cars are the joint product of all the employees of the business. The idea that each of those employees’ wage rates is determined by the value of the cars is simply unintelligible. The connection between employee wage rates and the price of cars is the universal requirement that the socially objective value of the business must exceed its total costs, which includes the cost of its employees. In principle, this is the connection between wage rates and prices throughout the economy.

The preceding is the essence of my case against the subjectivist conception of the economy. My conception represents a different universe from the subjectivist conception, and subjectivist economists want nothing to do with it.

We have not yet considered the law of utility, which is deeply flawed on its own account. We will take up that law next time.

 

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