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.