objeco

Book Contents

 

TABLE OF CONTENTS

PREFACE                                                                                          1

INTRODUCTION                                                                              7

CHAPTER ONE

METHOD AND CONTEXT                                                             11

I. The Method of Economics                                                        11

A. Induction                                                                          13

B. Other Things Equal                                                            15

C. How to Evaluate This Book                                               16

II. Laissez-Faire Capitalism                                                         16

Money                                                                                  19

CHAPTER TWO

OBJECTIVE ECONOMIC VALUE                                                  23

I. The Modern Meaning of Value                                                  23

The Role of Philosophy                                                         24

II. The Objective versus the Intrinsic and the Subjective                 25

A. The Intrinsic                                                                     26

B. The Subjective                                                                  27

C. The Objective                                                                   27

III. Intrinsic Value versus Subjective Value                                   28

A. Intrinsic Value                                                                  28

B. Subjective Value                                                               30

IV. Objective Value                                                                     31

A. Introduction                                                                      31

B. The Standard of Objective Economic Value                        31

C. Knowledge and Objective Economic Value                         33

Three meanings of value                                                  34

D. Optional Values Are Objective Values                               35

E. Nonobjective Values Are Objective Disvalues                     35

F. Objective Value versus Subjective Value                             36

G. Objective Economic Value                                                 37

CHAPTER THREE

FUNDAMENTAL ECONOMIC CONCEPTS                                   39

I. Supply and Demand                                                                  39

A. The Importance of a Theory of Price                                 39

B. The Historical Role of the Law of Supply and Demand        40

C. The Meaning of Supply and Demand                                  41

D. The Law of Supply and Demand                                        44

II. Goods and Services                                                                 45

III. Market                                                                                  47

IV. Capital and Wealth                                                                 48

V. Price                                                                                      49

A. The Doctrine of Relative Prices                                         49

B. The Objective Price                                                           51

C. The Opportunity Cost Doctrine                                           53

D. The Intrinsic Conception of the Real Price                          54

Intrinsic price in Adam Smith                                            55

VI. Competition                                                                           56

CHAPTER FOUR

FOUNDATIONAL THEORIES                                                        59

I. The Theory of Consumer Choice                                               59

A. Hierarchies of Values                                                        60

B. Consumer Choice                                                              63

C. The Diminishing Marginal Value of Money                         67

II. The Law of Demand                                                               69

III. The Principle of Gains from Trade                                          71

IV. The Theory of Objective Business Costs                                 74

A. Alternative Concepts of Business Costs                              74

B. Problems in the Calculation of Business Costs                     75

1. Anomalies of cost allocation                                          77

Labor costs                                                               77

Materials costs                                                          78

Machine costs                                                           79

Handling and carrying costs                                        79

Administrative costs                                                   79

Advertising and promotion costs                                  80

2. Erroneous cost calculations                                           80

3. Costs calculated by reference to the selling price            81

4. Summing up                                                                 82

C. The Theory of Objective Costs                                           82

CHAPTER FIVE

INTRODUCTION TO THE THEORY OF OBJECTIVE PRICES     85

I. The Three Theories of Price                                                     85

A. The Intrinsic Theory of Price                                             85

B. The Subjective Theory of Price                                          86

C. Marshall’s Theory of Price                                                88

D. The Objective Theory of Price                                           88

II. Background Considerations                                                      89

A. Case 1                                                                              90

B. Case 2                                                                              90

C. Case 3                                                                              91

III. How Prices Are Created                                                        92

A. Preliminary Comments on Terminology                               92

B. The Markets of a Free Economy                                        93

C. The Five Methods of Price Creation                                   94

CHAPTER SIX

SOMEONE SETS THE PRICE                                                         97

I. Introduction                                                                              97

The Calculation of Profit                                                        98

II. Demand                                                                                  99

Socially Objective Value                                                         99

III. Unit Costs                                                                            101

A. Average Cost Pricing                                                      101

B. Variable Cost Pricing                                                       102

C. Marginalism                                                                    102

D. The Required Relation of Cost to Price                             103

E. The Structure of Unit Costs                                              104

IV. Competition                                                                         108

A. The Prices Currently Charged by One’s Competitors         108

B. The Quality of One’s Product Relative

to Competing Products                                                     108

C. Price Leadership                                                             109

V. Additional Issues                                                                   109

A. Expectations                                                                   109

B. Complications                                                                  110

VI. The Long-Run, Profit-Maximizing Price                                 110

A. The Meaning of Long Run and Profit Maximizing              110

B. The Long-Run, Profit-Maximizing Facts                            111

C. Short-Run Profit Maximization Is a Nullity                         112

D. The Alternatives to Long-Run Profit Maximization            113

1. No standard                                                               113

2. Alternative standards                                                  115

E. Creation of the Long-Run, Profit-Maximizing Price            117

F. Altruism versus the Profit Motive                                      118

CHAPTER SEVEN

THE OTHER METHODS OF PRICE CREATION                          121

I. Negotiated Prices                                                                   121

A. Facts Affecting the Negotiated Price of

an Individual Item                                                            122

B. Facts Affecting the Negotiated Price of a Contract            123

II. Sealed Bid Prices                                                                  125

A. Why Price by Sealed Bids?                                              125

B. Deciding Whether or Not to Bid                                       126

C. Deciding What Price to Bid                                              127

III. Auction Prices                                                                     128

A. Auctions to Individuals                                                     128

B. Auctions to Businesses                                                    131

IV. Brokered Prices                                                                   132

V. Someone Sets or Negotiates the Wage                                   134

CHAPTER EIGHT

THE THEORY OF OBJECTIVE PRICES                                       139

I. The Extent to Which Market Prices Are Objective                   139

II. Nonobjective Prices                                                               140

A. Someone Sets the Price                                                   140

B. Negotiated Prices                                                            142

C. Sealed Bid Prices                                                            143

D. Auction Prices                                                                143

E. Brokered Prices                                                               144

F. Nonobjective Markets                                                      144

G. Conclusion                                                                      145

III. Market Prices and Objective Prices                                       145

IV. Evaluation of the Theory                                                       146

A. The Answers to Three Questions                                     146

B. A Causal Explanation                                                       147

C. A Universal Explanation                                                   148

D. An Explanation of How Prices Reflect Economic Facts     148

E. The Theory of Objective Prices Is Not Circular                 149

F. Price Is the Value versus Price Measures the Value         150

V. Objective Economic Value                                                     150

CHAPTER NINE

THE FACTORS OF PRODUCTION                                               153

I. The Original Factor of Production                                            153

II. The Law of Demand for Factors of Production                       155

A. The Rate of Profit on Investment                                     156

B. Relative Importance to the Businessman                           159

III. The Worker Markets                                                            160

A. The Market Demand for Workers                                    160

B. The Market Supply of Workers                                        162

C. Worker Pools                                                                  163

D. How Wages Rise                                                            164

E. How Wages Fall                                                              165

F. Supply and Demand and Relative Scarcity                         166

G. Executive Compensation                                                  168

III. Conclusion                                                                           170

CHAPTER TEN

CHANGES IN OBJECTIVE PRICES I

THE EFFECT OF CHANGES IN FACTS ON SET PRICES            173

I. Background Premises                                                             173

On the Origin of Changes in the Facts                                   175

II. Changes in Average Cost                                                       176

A. Increases in Average Cost                                               176

1. An industry-wide increase in average cost                   176

a) Price elasticity of demand                                     177

b) The cost classification of industries                        178

2. The effect on profits of increases in price                    181

a) Demand is inelastic                                              181

b) Demand is elastic                                                 181

(1) A constant cost industry                                182

(2) An increasing cost industry                            182

(3) A decreasing cost industry                             182

3. Restoring an industry’s profits                                     183

4.  An increase in average cost unique to the

businessman                                                              184

B. Decreases in Average Cost                                              184

1. An industry-wide decrease in average cost                  184

2. The effect on profits of decreases in price                   184

a) Demand is inelastic                                              185

b) Demand is elastic                                                 185

(1) A constant cost industry                                185

(2) An increasing cost industry                            185

(3) A decreasing cost industry                             185

3. Why prices fall                                                           186

4. A decrease in average cost unique to the businessman  187

III. Changes in Demand                                                             187

A. Increases in Demand                                                       187

1. An industry-wide increase in demand                           187

When the supply of a good does not equal

the demand                                                              191

2. An increase in demand unique to the businessman        193

B. Decreases in Demand                                                      193

1. An industry-wide decrease in demand                          193

a)  When all industries in the chain of production

are able to reduce supply                                      193

b)  When an industry in the chain of production

is unable to reduce supply                                     194

c)  When the supply of a good usually does not

equal the demand                                                 196

2. A decrease in demand unique to the businessman         197

IV. Long-Run Results                                                                197

A. When the Rate of Profit Rises                                          197

B. When the Rate of Profit Falls                                           199

Comment on the preceding in relation

to modern economics                                                      201

V. Changes in Competition                                                         202

A. An Increase in Competition                                              202

1. Price competition                                                        202

2. Quality competition                                                     204

Producer sovereignty                                                204

B. A Decrease in Competition                                              207

VI. Conclusion                                                                           207

CHAPTER ELEVEN

CHANGES IN OBJECTIVE PRICES II

THE EFFECT OF CHANGES IN FACTS ON OTHER PRICES      211

I. Negotiated Prices                                                                   211

A. Changes in Average Cost                                                212

1. An increase in average cost                                        212

2. A decrease in average cost                                         212

B. Changes in Demand                                                         213

1. An increase in demand                                               213

2. A decrease in demand                                                213

C. Long-Run Results                                                            214

1. An increase in supply                                                  214

2. A decrease in supply                                                  214

3. Conclusion                                                                 214

 II. Sealed Bid Prices                                                                  215

A. Changes in Average Cost                                                215

1. Industry-wide changes in average cost                         215

2. A change in average cost unique to the contractor        215

B. Changes in Demand                                                         215

An industry-wide change in demand                                215

C. Long-Run Results                                                            216

D. Changes in Competition                                                   217

1. Price competition                                                        217

2. Quality competition                                                     217

E. Conclusion                                                                       217

F.  The Meaning and Measure of Scarcity

When Pricing Is by Sealed Bid                                         218

III. Auction Prices                                                                     218

IV. Brokered Prices                                                                                    219

A. The Role of Supply and Demand in Stock Markets            220

1. The law of demand for stocks                                     220

2. The rule of supply for stocks                                       222

3. Supply, demand, and the price of stocks                       222

4. Excess demand and excess supply                               224

5. Fundamental analysis versus technical analysis             226

6. Relative scarcity and the price of stocks                      227

B. The Bond Market                                                            228

C. The Role of Supply and Demand

in Commodity Futures Markets                                         228

V. Conclusion                                                                            232

CHAPTER TWELVE

SCARCITY AND PROFIT                                                             235

I. Absolute Scarcity                                                                    235

II. Relative Scarcity                                                                   237

A. The Meaning of Relative Scarcity                                     237

B. The Subject Matter of Relative Scarcity                            238

C. Increases in Relative Scarcity                                           239

1. Demand increases relative to supply                            239

2. Supply decreases relative to demand                            239

D. Decreases in Relative Scarcity                                         240

1. Demand decreases relative to supply                           240

2. Supply increases relative to demand                             241

E. Relative Scarcity and the Cost of Production                     241

III. Relative Scarcity and the Theory of Objective Prices              242

IV. Derived Demand                                                                  243

V. The Distribution of the Factors of Production                          248

VI. The Economic Significance of Profit                                      250

The Theory of Economic Growth                                       252

VII. The Moral Justification of Wages and Profits                        254

CHAPTER THIRTEEN

TOTAL SPENDING AND PRODUCTION                                    257

I. The National Income and Product Accounts                             257

A. Income Received for Production

Equals the Value Produced                                              259

B. Income Received for Production

Equals the Value Added                                                   261

C. Total Value Added Equals Value of the Final Product        261

D. The Double-Counting Argument                                       262

E. Total Spending Equals Spending on Final Products             263

II. Intrinsic Value in the National Income

and Product Accounts                                                            263

III. National Income Based on Objective Value                           265

A. Total Spending                                                                267

B. Objective Value in the National Income

and Product Accounts                                                      270

APPENDIX A

THE THEORY OF PRICE IN MODERN ECONOMICS:

A CRITIQUE                                                                                  273

I. Market Structure                                                                    273

II. Pure Competition                                                                   274

III. Monopolistic Competition and Oligopoly                                 276

IV. Modern Economics’ Theory of Price for Oligopoly                 277

A. Game Theory                                                                  278

B. Modern Economics’ Conception of Price Theory               279

V. Pure Monopoly                                                                      280

Patents and Copyrights                                                         281

VI. Overview of Modern Economics’ Theory of Price                 282

VII. Conclusion                                                                          283

APPENDIX B

THE METHOD OF MODERN ECONOMICS:

A CRITIQUE                                                                                  285

APPENDIX C

MARGINALISM IN MODERN ECONOMICS:

A CRITIQUE                                                                                  293

A. The Law of Utility                                                           294

B. The Fallacy of Marginal Cost Pricing                                296

C. Marginal Revenue Product and

the Law of Demand for Factors                                       298

D. The Origins of a Business                                                299

E. Conclusion                                                                       301

APPENDIX D

THE MEANING OF SCARCITY IN MODERN ECONOMICS:

A CRITIQUE                                                                                  303

The Consequences                                                                     306

APPENDIX E

THE EFFECT OF CHANGES IN COST ON SET PRICES:

EXPANSION OF THE ARGUMENT IN CHAPTER TEN              307

A. Increases in Average Cost                                               307

1. A constant cost industry                                              309

2. An increasing cost industry                                         310

3. A decreasing cost industry                                          310

B. Decreases in Average Cost                                              312

1. A constant cost industry                                              314

2. An increasing cost industry                                         314

3. A decreasing cost industry                                          314

ENDNOTES                                                                                   317

EXEGESIS AND GLOSSARY                                                        333

REFERENCE LIST                                                                                          337

INDEX                                                                                           343