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.