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
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