The Theory of Price 8

By M. Northrup Buechner

March 30, 2013

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

Let us sum up the theory of price as I have developed it over the last seven entries here.

Objective economic values are values evaluated by an individual consciousness as good for his life “according to a rational standard of value”—that is, a standard “derived from the facts of reality and validated by a process of reason.” This is the basis on which people make most of their purchases and sales in a free market. Putting aside irrational values, the summation of all the payments by individual men for a product represents the product’s socially objective value.

Ayn Rand says, “Values cannot exist (cannot be valued) outside the full context of a man’s life, needs, goals, and knowledge” (her emphasis). But within that context, the values people chose are overwhelmingly rational, in the sense she defines. If that were not true, if the opposite were the case, if people overwhelmingly chose irrational values, that could only mean that they had given up their minds and the desire to live on earth. There would be no price system, and the theories of economics would be moot.

The theory of objective prices begins with the observation that every price is set by someone. As a consequence, prices reflect the relevant economic facts grasped by the people who exchange at those prices. Prices set in this way are objective prices in the full meaning of Ayn Rand’s concept of objective. Prices are the product of a relation between a conceptual consciousness and the facts; they are the result of volitional processing by man’s mind of the evidence of reality given by his senses. Prices are not forced on man by some intrinsic aspect of reality. They are not dictated by God, or supply and demand, or the labor embodied in a good, or the cost of production. But neither are they the result of the businessman’s arbitrary feeling. Prices are the result of a human consciousness grasping economic facts (Objective Economics, pp. 139-40).

In economics, an objective price is a price set to reflect the potential customers’ willingness to pay, based on the price-setter’s grasp of the economic facts. Willingness to pay is primarily caused by the facts of demand and competition. A long-run perspective is insured by the necessity of making a profit (total revenue must exceed total cost). Prices set in this way represent the objective economic value of the good. The underlying principle is that prices are based on facts—prices reflect facts—prices originate in facts. In a free economy, businessmen set prices that reflect the facts of their markets, because they want to stay in business.

Now we can say what is objective about irrational values. It is, of course, their price. The sellers of irrational goods and services want to set prices that reflect their customers’ willingness to pay, just like their rational counterparts, and like their rational counterparts, they are constrained by the necessity of making a profit over the long run if they want to stay in business.

It is probably true that irrational products give rise to more “fly-by-night” operators than we find for rational products—that is, purveyors who are uninterested in the long run, whose main concern is to grab a fast profit and disappear. This is because if you are selling charms or love potions or “cure-all” medicine or the knuckle-bone of a saint, most of your customers are going to be dissatisfied. This is no more than they deserve, but it does make such businesses more precarious that normal.

Let us conclude by observing that the business practices ascribed to all businesses by the enemies of capitalism are largely restricted to the cases of irrational products. Of course, as the rationality of people continues to shrink, we can expect irrational products and their associated practices to grow. Early in the twenty-first century, governments (including our own) have lost billions in the pursuit of green products. However, that is a reflection on policies of unreason, not on freedom or a free economy.

Next time, a new subject, yet to be determined.