Objective Economics: How Ayn Rand's Philosophy Changes Everything About Economics, by M. Northrup Buechner. University Press of America, Inc., 2011. 360 pp. $48.50 (paperback).
Despite its many errors, contemporary academic economics has improved considerably in recent decades, especially after the Keynesian detour of interventionism from the 1930s to the 1970s.1 There is a lagged influence between academic economics and public policy, but increasingly since the 1970s academic economists have recognized that free markets work, that “market failure” reflects poorly defined and ill-protected property rights, and that boom-bust cycles and sapped prosperity are consequences of bad public policies.
Economics has improved due to five main influences: Austrian economics (with F. A. Hayek awarded the Nobel Prize in 1974), monetarism (with Milton Friedman, Nobel Prize winner in 1976), rational expectations (with Nobel Prizes to Robert Lucas in 1995 and Thomas Sargent in 2011), public choice (with James Buchanan, Nobel Prize in 1986), and supply-side economics (Robert Mundell, Nobel Prize in 1999). If any economists today are still anticapitalist (Paul Krugman, Nobel Prize in 2008) it’s not because they believe free markets “fail” or that Soviet-style planning now “works,” but because ideologically they despise capitalism’s egoism, profit motive, and unequal incomes.
In his first (and recently released) book, Objective Economics, Dr. Northrup Buechner argues, instead, that “modern economics,” which he defines as academic teaching since about 1960, has gone haywire, using as its “foundation for practically everything” a “method of imaginary worlds” (p. 306).
Having taught economics for four decades at St. John’s University, and having spent these decades writing his book, Buechner should know the current state of the field. Yet his assessment seems stuck in a time warp. Nowhere does he acknowledge the spread of the five positive schools cited above. But he proceeds to indict modern economists on multiple counts. In his most important indictment, Buechner declares that “modern economics has no theory of price,” that modern economists lack even a basic grasp of “how prices are set or what principles determine prices,” and that his colleagues “are in a state of virtually perfect ignorance regarding prices” (p. 282).
Elsewhere, in treating the concept of “competition,” he says, “modern economics has gone most totally wrong” (p. 56). On the whole, he insists, modern economics “is mostly a mudslide of arbitrary concepts” (p. 283). If such sweeping harangues were valid, one might suspect that the profession had collapsed, not that it might have benefited from an influx of Austrians, monetarists, and supply-siders.
In fact, Buechner’s sweeping indictment of modern economics is not valid, at least not as he portrays matters, and the book itself makes this clear in its less-hyperbolic sections. Moreover, contrary to his pledge to proceed inductively, Buechner’s alternative theories are not proved inductively and thus do not root out the deficiencies of modern economics. Worse, in crucial areas he strips modern economics of its more rational doctrines—notably the law of utility, the law of supply and demand, the doctrine that wages reflect marginal revenue product, the law of derived demand, and the principle that profits are the “value-added” component of a product or service earned legitimately by businessmen. Although some falsehoods surely beset modern economics (such as its Platonic notion of “perfect competition,” which, Buechner observes, fuels trust-busting), the law of supply and demand is not one of them. Modern economists at least still propound that fundamental law, whereas Buechner remarkably does not, as we’ll see.
Much of Buechner’s book is patently self-contradictory. For example, although he claims that “modern economics has no theory of price,” he concedes that its theory of competition (the “market structure” approach to pricing) “is the concept at the root of modern economics’ theory of price” and that the law of supply and demand is “the closest thing modern economics has to a general theory of price” (pp. 282, 273, 276). Thus modern economics does have a theory of price after all (and perhaps more than one); so Buechner’s question should be whether or not conventional theory is true, and, if not, whether his alternative theory is true and to what extent it departs from convention.
Before recounting Buechner’s price theory, it’s worth informing potential readers of the book what it neglects to include, not because the author is obliged to cover more than he intended, but because the title suggests more content than the author delivers.
Broadly construed, academic economics today comprises three subfields: microeconomics, macroeconomics, and public economics. Microeconomics concerns price theory and the behavior of firms (which are said to maximize their profits) and consumers (who are said to maximize their utility or satisfaction). Macroeconomics treats aggregate phenomenon such as interest rates, money, business cycles, inflation, unemployment, growth, and foreign trade. Public economics deals with government spending, taxing, borrowing, and regulating. To their credit, academic economists in recent decades became more consistent and integrated in their general approach to the science, providing what they call “micro-foundations for macroeconomics.” They also became friendlier to freer markets after the abject failure of Keynesian policies in the 1960s and the collapse of the USSR in the early 1990s. But Buechner’s book covers only price theory; macroeconomics is mentioned only briefly, and public economics not at all.
A forewarning also is justified regarding the book’s unjustifiably sweeping subtitle: How Ayn Rand’s Philosophy Changes Everything About Economics. First, the book ignores two-thirds of economics (namely, macroeconomics and public economics), so it cannot possibly show her philosophy changing “everything” about the field.
Second, Buechner implicitly accepts the false “is-ought” dichotomy, contending that economics is a “positive” science having nothing to do with morality or what he calls “normative” theory. But if economics had nothing to do with normative theory, then economics would have nothing to do with Rand’s morality of egoism or her consequent politics of capitalism—both of which are normative. Although Buechner tells us that “my general thesis” concerns “the practicality of capitalism,” not its morality, he fails to acknowledge, and even denies (pp. 2–3), that this is also a general thesis of modern economics and thus not a novel point.
Third, Buechner’s main resort to Rand’s philosophy is his use of her distinction between “intrinsic,” “subjective,” and “objective” value (from her essay, “What is Capitalism?”). Here he strains to portray modern theories of price as defiantly nonobjective and the history of economic thought as devoid of theories of objective price, neither of which is true. Modern economics does have a theory of objective prices (i.e., the law of supply and demand), however flawed or incomplete it may be. And the history of economic thought does include theories of objective economic value (i.e., economic value that recognizes the relationship between the valuer and the object valued), notably in the works of Jean-Baptiste Say (1767–1832) and Carl Menger (1840–1921). In this regard, Buechner cites only the latter and then only in a footnote.
In short, the book does not treat economics broadly defined, does not make a moral-political case for laissez-faire capitalism, and does not provide an original theory of objective price.
Even though Buechner eschews moral-ideological arguments for laissez-faire capitalism, he also contends that his theory of objective price-setting is valid and applicable only in that unique context, and (by implication) not in the mixed economy. “The general context in which my theory applies is laissez-faire capitalism,” he says; “this political-economic system” “defines the surrounding conditions” for the theory (p. 16).
But Buechner does not meet the obvious objection that, if his theory applies only to a context of laissez-faire capitalism, then it is not a general theory but rather a special case—a case applicable only to a system that has yet to exist, and inapplicable to anything outside of it, including the world in which we live. This violates his pledge to be inductive and to provide a truly universal theory of price that is pertinent to all places, peoples, and times (pp. 13–14, 147–48).
Buechner assumes his own “imaginary world,” where “all property is privately owned and the government does nothing but protect men’s rights,” where “there is complete separation between the economy and the state” and “no government intervention in the economy” (p. 18). This is surely capitalism, and undoubtedly the ideal, but if Buechner’s price theory does not hold true in other contexts, as he clearly states it does not, his theory is not general and thus fails to meet his own criteria. A valid general price theory must pertain in all economic cases and contexts, most notably the ones that have come to dominate our modern life (the mixed economy), not only in the ideal case and context (laissez-faire).
Further, Buechner says his price theory is applicable only in that rarified context in which every economic actor is always rational, egoistic, and reality-oriented (p. 13). Although a rational, egoistic, and reality-oriented actor is surely the ideal, such an actor is by no means the norm today and would not be ubiquitous even in a genuinely capitalist society. As Buechner writes later, there is a “frenzy of self-sacrificing rising in our culture,” and “the altruist moral code of selflessness and self-sacrifice” “has been relentlessly growing in power and influence over the last 200 years” (p. 119). Although altruism has, in many respects, grown in power and influence over the past two hundred years, recognition of this fact does not bolster Buechner’s case. Indeed, by his own standard, it renders his theory of price moot on yet another count. It means the theory is based on a world of individuals acting as they have never acted, and in an economy that has never existed.
Just as a valid general theory would accommodate and explain price formation amid departures from laissez-faire capitalism (i.e., the mixed economy), so it would explain prices amid departures from rational egoism (i.e., altruistic behavior). Modern microeconomists have done as much. Assuming a base case in which economic actors tend to pursue their rational self-interest (the textbook premise known as “homo economicus”)—in particular that firms tend to maximize profits while consumers tend to maximize utility—they also demonstrate how markets are distorted when such behavior is handicapped by price controls, taxes, or subsidies.
Buechner does none of this. It is neither necessary nor valid to suggest, as he does, that the free economy requires one theory of price formation and the un-free (or partially-free) economy a different one. Just as medical scientists use their understanding of health (the ideal) to understand pathology, so economists should use their understanding of capitalism (the ideal) to understand interventionism.
In presenting his theory of “objective prices,” Buechner tries to be descriptive and inductive, and presents five possible methods of pricing: “someone sets the price,” “negotiated prices,” “sealed-bid prices,” “auction prices,” and “brokered prices.” Without getting into the details, suffice it to say that Buechner finds the first method ubiquitous, even though it entails the oxymoron of solo price determination, in direct defiance of the basic fact that every price is an exchange ratio and that it takes (at least) two people to arrive at a price.
Price is never some Platonic value that one side hopes or wishes to obtain, regardless of what someone is willing to pay; it is always the product of a mutual exchange between economic valuers, one of whom (a seller) values the cash more than his goods, and another (a buyer) who values the goods more than his cash. The two actually disagree about the relative value of what they own, yet agree to exchange, and do so to mutual advantage—that mutual advantage being the price.
In any trade, both sides—supply and demand—are equally relevant, but Buechner says the method of “brokered prices” (for stocks, houses, etc.) is the only case in which the quantity supplied is as relevant as the quantity demanded. In all other cases, he claims, “the relation between price and supply is a minor phenomenon compared to the relation between price and demand” (p. 222). This is a bizarre claim because, in every exchange, supply is offered by both sides; a seller offers his supply of goods for the buyer’s money, and the buyer offers his supply of money for the seller’s goods. From both sides, supply constitutes demand; one cannot demand unless one first has some supply to offer. In this sense, the supply side is the only side. But Buechner insists that there is only a law of demand, and, strictly speaking, no law of supply—hence no unified law of supply and demand (p. 222). Buechner disintegrates this law, insisting that supply somehow is less crucial than demand, which is equivalent to insisting that one side of a coin is less important to the whole than the other.
Buechner’s protestations notwithstanding, the law of supply and demand is one of the more magnificent, integrative achievements in the history of economics. Political philosopher John Locke (1632–1704) identified the law as follows: “The price of any commodity rises or falls by the proportion of the number of buyers and sellers,” and “that which regulates the price . . . [of goods] is nothing else but their quantity in proportion to their demand.” Jean-Baptiste Say, capitalism’s greatest economist, described and explained the law best: “At a given time and place, the price of a commodity rises in proportion to the increase of the demand and the decrease of the supply, and vice versa, or in other words, the rise of price is in direct ratio to the demand, and inverse ratio to the supply.” In short, wrote Say, “demand and supply are the opposite extremes of the beam, whence depend the scales of dearness and cheapness; the price is the point of equilibrium, where the momentum of the one ceases, and that of the other begins.” (Economists since Say have shown that alleged “exceptions” to the law of supply and demand entail but extraneous influences.)
Yet Buechner makes no reference to Say’s advocacy of the law of supply and demand, or to any other of its many advocates—with one exception: his brief mention of the famed founder of economics, Adam Smith. To “save the concepts of supply and demand,” we have to “define them” as Smith did, writes Buechner; but he later makes us question that advice when he tells us that Smith’s price theory embodies the error of intrinsic value (pp. 41, 293).
Buechner mostly derides modern economics for allegedly mishandling the law of supply and demand. As mentioned, he says the law is “the closest thing modern economics has to a general theory of price” and that it was “the first great theoretical step in the direction of grasping that prices are objective” (pp. 276, 44). He even concedes that “the law of supply and demand is by far the most widespread economic theory held by the public,” that most people believe its words “stand for the rule of facts in the determination of prices,” and that people believe politicians cannot violate it with impunity (p. 41). But “properly understood,” Buechner insists, “the law of supply and demand is not a theory of price,” for although “it says prices are caused by the facts of supply and demand,” “it does not tell us how these facts cause the price” (p. 44).
Worse, he says, the law lacks supporting facts. “In this book,” he says, “we have focused on the facts of demand, cost and competition,” but “supply is not among these facts” (p. 238). He further contends that although the “norm of a market economy” is oligopoly, wherein industries have but a few competing firms, “neither demand nor supply apply [sic] to oligopolistic firms and the law of supply and demand is moot”; thus, on Buechner’s own account, even in the normal case no general theory of price, objective or otherwise, can hold (pp. 283, 277, 278).
Buechner makes each of these claims against the law of supply and demand even while he uses the concept of “relative scarcity,” which he designates as legitimate and defines as “the demand for a good relative to its supply” (p. 238). He also concedes that businessmen “produce the supply that their customers demand at the price they charge,” but insists that supply is “not a fact they respond to,” because “businessmen know and care nothing about relative scarcity” and “certainly do not change their prices because of changes in demand relative to supply” (pp. 238–39). Such claims are prima facie confusing and contradictory, not clarifying or consistent.
Citing Ayn Rand’s defense of the concept of objective value, as against the twin falsehoods of “intrinsic” value and “subjective” value, and endorsing her designation of market price as “socially objective value,” Buechner contends that “in all their thinking and theorizing, [modern] economists have been caught between the intrinsic and the subjective”—that is, between the notion that value resides solely in goods and services apart from valuing beings (intrinsic value), and the notion that value resides solely in the mind apart from facts about goods and services (subjective value) (p. 24). Buechner notes that “subjectivists hold that no facts of reality cause value,” and he contends that “subjective value is the dominant concept of value in the modern era” (p. 30). Attempting to support this latter charge, he cites only the pro-capitalist Austrian economist, Ludwig von Mises (and out of context).
In fact, modern economics is not mired in either subjective value or intrinsic value (or “caught” between the two). No prominent economist (or school of economics) in the past century has embraced those extreme errors. Since at least Alfred Marshall (1842–1924), economists have said that prices are determined jointly and equally by supply and demand, that our desires coupled with our purchasing power (supply) entail our demand for goods and services whose attributes yield utility (satisfaction) for us, and that profit-seeking suppliers try to offer products with utility-yielding features. In Marshall’s famous metaphor, it takes both blades of the scissors (supply and demand) to cut the paper (establish price). Contrary to Buechner’s claims, this depiction captures the relational aspect of the economic valuer and what is economically valued, of mind and reality, of consciousness and existence. This is the essence of a valid theory of objective economic value.
Yet Buechner rejects the law that best embodies this crucial valuer-object relationship—the law of supply and demand—and often does so in a petty manner, as when he says the law is invalid because it is not susceptible to precise geometric-graphical illustration. In deriding and rejecting the law of supply and demand, Buechner derides and rejects one of the most integrative achievements in the history of economics.
Buechner also rejects a less-abstract but well-established (and valid) law of economics: the law of utility, which holds, simply, that our desires and preferences for goods and services contribute much to our valuing (and pricing) of them. After a brief discussion of this law, he dismisses it as “irrelevant”: “[P]reference has the fundamental characteristic of subjective value,” and “it is hard to think of any economic good for which the law of utility is valid,” so “I have abandoned the term utility” (pp. 31, 295, 67). Having dismissed the law of utility, Buechner must also reject the well-established (and valid) law of diminishing marginal utility, a crucial aspect of the law of demand—which he purports to uphold—that says we value each extra unit of a good less, and thus will pay successively less for each extra unit.
In rejecting the law of utility Buechner rejects a valid law whose discovery dates (again) to Say and Menger, which famously liberated economics from the false (because intrinsic) labor theory of value set forth by Adam Smith, David Ricardo, and Karl Marx. In all of this, Buechner has essentially revived what is known as the “Ricardian cost-of-production theory” of price, which was used in the mid-1800s to fuel Marxism and various labor “exploitation” doctrines. Thus although he claims he will target “modern economics” and generate progress in economics by providing a newer, better price theory, Buechner actually reintroduces premodern errors that constitute a theoretical retrogression.
By his own account Buechner says his purpose is to present “the foundation, derivation, explanation and proof of a new theory of price,” or a theory of “objective economic value,” which he equates with “market price” (pp. 10, 335). But he does not accomplish this purpose, because he creates and then surrounds himself in a fog of floating and contradictory definitions and formulations.
Instead of integrating facts into a unified theory, he disintegrates essentially valid economic laws into a wild proliferation of concretes and pseudo-concepts. Indeed, he introduces so many different meanings of the single concept “value” that he finds it necessary to inject a three-page “exegesis and glossary” in the back of an otherwise short book, in case “the reader is in doubt about the meaning of value in the text,” as the reader surely will be (p. 334). He provides roughly fifteen allegedly distinct meanings, including “objective value,” “nonobjective value,” “market value,” “economic value as a goal,” “economic value as a hierarchy,” “objective economic value as a goal,” “objective economic value as a hierarchy,” “socially objective value,” “philosophically objective value,” “disvalue,” “objective disvalues,” “optional values,” “nonobjective prices,” and “value added.” Yet there is more, because he omits from his “exegesis and glossary” at least four other value-related terms in the text: “nonobjective economic values,” “nonobjective markets,” “real price,” and “nonmarket prices” (pp. 37, 144, 50, 146). Some of these terms make sense, but others do not, and many contradict others. This is not what you might expect from an author who complains about “the vagueness of value’s meaning in modern economics” and about economists’ “contradictory hodgepodge” of concepts (p. 24).
On the whole, Buechner engages, not in “theorizing,” properly conceived, nor even in integration in any rational sense, but rather in differentiation gone wild. He is enamored of alleged exceptions to broad economic principles, yet cannot (or at least does not) derive valid substitutes inductively. To sum up (integrate) his own theory, in his own words, is to see the problem with the book plainly and transparently. He writes: “The proposition that prices represent the objective economic value of goods and services is this book’s theory of price” (p. 335). Yet on the same page he defines “objective economic value” as “the price of a good or service created on the basis of a rational grasp of economic facts” (p. 335). Thus by a substitution of his own terms we obtain this inanity: “The proposition that prices represent [the prices of goods or services] is this book’s theory of price” (p. 335). Having set forth this brazenly circular theory, he devotes a section of his book to insisting that “the theory of object prices is not circular,” even though he concedes that “in significant part, my theory of price explains prices by the price-setters’ consideration of other prices” (pp. 149–50). Indeed.
Although Buechner’s theory of price is simple, crude, and circular, it is nevertheless repeated ad nauseam in conjunction with various market facts. But his citations of market facts do not overcome the fallacy of assuming that which is supposed to be proved (petitio principii or “begging the question”). He says price is determined or “reflected” by three “facts” or “factors”: consumer demand, competition, and the costs of production (pp. 97–98, 141, 207–8). Thus when he says “the objective theory of price is that prices reflect the relevant economic facts grasped by the men who exchange at that price,” he refers to these three basic facts (p. 139). But this is still circular. First, demand for goods and services depends on price as much as price depends on demand for goods and services; second, competition is felt largely through rivals’ prices; and third, the producer’s costs are nothing but prices viewed from another’s
perspective (from those who supply to him the factors of production). No wonder, then, that Buechner says his price theory “explains prices by the price-setters’ consideration of other prices” (pp. 149–50).
Yet he also insists that, “in my theory, prices do not cause other prices” (p. 149). Elsewhere he cites many exceptions to the influences of his three factors, and in some cases they exert the opposite effects of those he hypothesizes, and only “usually,” he says, do the factors determine price (p. 170). In one section he denies that demand and cost determine price, when he rejects yet another valid law of economics (yet again previously established by Say and Menger), namely the law of derived demand, which holds that the anticipated price of the final product determines the value that businessmen place on factors of production (e.g., labor and capital), not the other way around. Buechner offers no good reason for rejecting this law; presumably he rejects it because it refutes his Ricardian “cost of production” theory, which is not only false but also, appropriately, no part of modern economics.
In contrast to Buechner’s thesis, it ultimately does not matter what a producer faces in terms of costs, demand, and competition; in the end, he must create a value added, a profit, and in doing so he cannot simply “set the price” unilaterally. This truth is nothing new to modern economics. For decades economists have stressed that a firm’s objective is profit maximization. What is shocking in Buechner’s account of profit, coming as it does from an avowed pro-capitalist, is his implicit denial that entrepreneurs (or business owners) earn all their profit, and his suggestion that they get some of it out of their “workers.” At one point he correctly defines “value added” as “the total revenue of a business minus the costs” and says profit is the firm’s “total revenue minus total costs” (pp. 335, 251). But he also says “the idea that businessmen produce the difference between the value of the products they produce and the value of the products they buy from other businessmen” is “a signpost of intrinsicism,” an idea that must be rejected because it assumes a difference between some “value stuff” produced and “value stuff” bought (his terms, p. 264).
In other words, although Buechner concedes that a value added (a profit) exists, he also insists that “there is nobody to whom that is the value of anything,” “there is no purpose for which the value added is produced,” and at root “value added does not exist as anything” (p. 266). These are Buechner’s formulations, not those of any modern economist, and they are patently false and contradictory.
Still elsewhere Buechner asserts that “the rate of profit measures what a businessman gets out of his factors of production,” mainly wage-based “workers”; and “if the businessman’s rate of profit exceeds the average rate, then he is getting more from his factors than other businessmen using factors of the same value” (p. 251, italics added). Thus Buechner implies that the capitalist does not truly earn all of his profit, but rather extracts some of it from his workers. A reader aware of anticapitalist economists, especially those who are wedded to “cost-of-production” theories of price, may not be surprised to hear someone say that capitalists do not fully produce or earn their profits. He may, however, be surprised to hear a self-declared pro-capitalist economist say it.
One of the more disturbing aspects of this book is the author’s pose as an iconoclast slaying allegedly false economic laws, even though most of those he targets are valid (e.g., the law of supply and demand, the law of utility, the law of derived demand), and even though he endorses some of these same laws under other names (albeit with less clarity than in conventional accounts). This subterfuge occurs in at least a half-dozen cases. For example, Buechner denies the law of supply and demand, but presents a “theory” of “relative scarcity,” which says prices are determined by demand relative to supply (pp. 237–43). He rejects the doctrine that labor tends to be paid its “marginal revenue product,” and instead says it is paid what it helps add to a firm’s sales (which is the same thing). He rejects the law of utility, which says we value economically what satisfies our preferences; yet he endorses the law of demand, which relies on the same insight. He rejects economists’ resort to a “market structure” theory of bargaining (and pricing) power, yet endorses the concept of “price elasticity of demand,” which says firms differ in their power to secure the prices they seek from choosy buyers. He rejects the idea that a few large firms in the same industry (“oligopolies”) behave strategically and interact, for if they were to do so, he insists, prices would be indeterminate; yet he includes competition (rivals’ prices) as one of the three main factors in his “new” theory of price determination.
Modern economics surely could use a more refined and airtight theory of objective pricing; without such a theory, myths that market prices are set arbitrarily can more easily persist. But flaws in modern price theory are not the cause of the anticapitalist ideological trend in the past century. If economists today still misrepresent capitalism or concoct cases of “market failure” to justify government intervention, it’s mostly because they distrust or despise egoism and individualism, not because they uphold the law of supply and demand or depict it too imperfectly in their diagrams.
Buechner’s book sows more confusion than clarification about price determination. That which is true in the book is not new, while that which is new in it is not true. Most disturbing is what appears to be a strenuous effort not to simplify or integrate observations and validate a general theory of price, but instead to overcomplicate, disintegrate, and deny valid economic laws and doctrines already well known and well established for decades.
For a much broader and near-flawless treatment of the entirety of political economy, which includes a valid theory of price and is written from an unabashedly pro-capitalist perspective, there is no better volume than A Treatise of Political Economy (1803) by Jean-Baptiste Say.2
The best account of how Ayn Rand’s philosophy undergirds and further integrates economics—including the objectivity of production, of prices, of profits, and (yes) of the law of supply and demand—remains chapter 11 (“Capitalism”) of Leonard Peikoff’s Objectivism: The Philosophy of Ayn Rand (1991). Additionally, this journal has published my account of how her philosophy in fiction form corroborates and concretizes valid economic laws as against errors in modern economics (“Economics in Atlas Shrugged,” TOS vol. 6, no. 1, Spring 2011).
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1 I discuss many of the errors involved in modern economics in my article, “Economics in Atlas Shrugged,” in the Spring 2011 issue of TOS.
2 All of Say’s works are available for free at the Online Library of Liberty: http://tinyurl.com/7bel8lw.