THE THEORY OF PRICE 5

By M. Northrup Buechner

February 22, 2013

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

In my book, I misinterpreted Ayn Rand’s concept of socially objective value. Remember what she says: “The free-market value of goods or services” represents “their socially objective value, i.e., 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 (Capitalism: The Unknown Ideal [CUI], 17, her italics).

In economics, the term “market value” almost always means “price.” Ayn Rand does not use the word price in her discussion of this subject (CUI, 16-17), but she says “market value” three times. I interpreted market value to mean price. I now believe that this was a mistake.

When she says that socially objective value is “the sum of the individual judgments of all the men involved in trade at a given time” (my italics), we need to take the word “sum” literally. We need to add up all the prices paid by everyone who bought the product. By market value, she meant the total value of all the sales of the product—not the price of one unit, but the value of all the units added up.

In “What Is Capitalism?”, Ayn Rand was aiming at something different than what I was aiming at in Objective Economics. Her goal was to present a moral/philosophical overview of the capitalist system, showing that objective values rule the economy, that the values of a free market are objective values. Consequently, her perspective was from the side of the buyers and the moral significance of their purchases, namely, that each buyer values the good at its price, and the total spending on the good reflects its socially objective value.

I was not that ambitious (though I was not unambitious). I was primarily looking for a theory of the economy, for an explanation of how an economic system works, and for a theory of price that would enable that explanation. Consequently, my focus was on the sellers and the fact that the prices they set represent the objective economic value of their products—“objective” because businessmen choose prices based on their grasp of the surrounding economic facts. When all the sales receipts are added up, from the perspective of the businessman, that is his reward for producing that output. The same total sales receipts, from a moral/philosophical perspective, represent the socially objective value of the businessman’s output.

This is the only place in my book where I am aware of having made an error. Everything else I stand by as written. With this blog, I am elaborating, explaining, and clarifying ideas that I think are true as they stand.

Next time, we will consider how to interpret this statement by Ayn Rand: “the free-market value of goods or services does not necessarily represent their philosophically objective value, but only their socially objective value.”