Sunday, December 21, 2008

Objectivism & Economics, Part 12

Objectivism and Austrian Economics: entrepreneurship. Richard Salsman is on record for criticizing von Mises’ “(absurd) theory of the essentially-passive, arbitrage-chiseling entrepreneur (and ‘the consumer is king’).” Now this issue has been a bone of contention between Austrain economists and Objectivists for several years. Nearly eight years ago, Mark Skousen, a prominent exponent of free market ideology and Austrian economics, penned a mildly critical attack of Rand’s view of entrepreneurship and what he describes as Rand’s “strange, distorted view of the money-making process.”

[Rand’s hero from her novel The Fountainhead, Howard] Roark denies a basic tenet of sound economics--the principle of consumer sovereignty... [T]he goal of all rational entrepreneurship must be to satisfy the needs of consumers, not to ignore them! Discovering and fulfilling the needs of customers is the essence of market capitalism... In short, Howard Roark's [view of the customer] is irrational and contradicts a basic premise of Rand's Objectivist philosophy. For Roark, A is not A. He wants A to be B--his B, not his customer's A. Thus, Ayn Rand's ideal man misconceives the very nature and logic of capitalism--to fulfill the needs of customers and thereby advance the general welfare. As Ludwig von Mises writes in his book, The Anti-Capitalist Mentality, "The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way. Wealth can be acquired only by serving the consumers." (1972:2) Apparently Howard Roark doesn't believe in consumer sovereignty. As he states in his final court defense, "An architect needs clients, but he does not subordinate his work to their wishes." (1994:714) Really?

So who is right about this issue? Is Salsman and Rand right that the entrepreneur should never "subordinate" his work to the wishes of his clients? Or is Skousen and Mises correct in their emphasis on consumer sovereignty?

Although Rand and Salsman are clearly guilty of exaggerating and over-stating the case, their view comes a tad closer to the truth than the Skousen-Mises position which over-emphasizes consumer sovereignty. Although few if any entrepreneurs would succeed if they were as inflexible and uncompromising as Howard Roark, it is entrepreneurial leadership and not consumer sovereignty that is critical in advancing a capitalist economy. As economist Joseph Schumpeter explained in his classic The Theory of Economic Development:
[Although] we must always start from the satisfaction of wants, since they are the end of all production, and the given economic situation at any time must be understood from this aspect, yet innovations in the economic system do not as a rule take place in such a way that first new wants arise spontaneously in consumers and then the productive apparatus swings round through their pressure. We do not deny the presence of this nexus. It is, however, the producer [i.e., the entrepreneur] who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using.

Of course, in educating consumers, the entrepreneur does not have unlimited scope. It would be virtually impossible for any entrepreneur to educate consumers to prefer candles to light bulbs or black bread to meat. Consumer “wants” (rather than “sovereignty,” which overstates the case) remain critical. And so Skousen is right on target when he writes:
[The Fountainhead's] thesis is entirely unrealistic in the everyday world of commercial building. Occasionally a client values more the notoriety of living in a home built by a signature designer than getting what he really wants, but not many. Almost all of Rand's scenarios are extreme and idealistic, a strategy that works to sell novels, but does violence to all sense of reality. Normally architects work closely with the client and make numerous changes in order to fit the client's needs.

21 comments:

Neil Parille said...

If you look at many (or perhaps most) of the inventions in history they are extensions of what people want and use, not drastic changes.

For example the CD replaced the vinyl record. Certainly the businessmen who marketed this technology knew that people wanted music without the pops and scratches. Obviously it took a lot of foresight to determine what would work and what could ultimately be produced at a reasonable price.

I don't see what is objectionable about the Misesian/Austrian view. They emphasize that in a free society there will plenty of "niche" products that centralized planners might well ignore.

I suspect that what Salsman doesn't like about the term "consumer sovereignty" is that it is "value free."

JayCross said...

So it looks like what we have here is some type of middle ground between the "passive, arbitrage-chiseling" entrepreneur and the "my way or the highway" idealism of Roark. I can buy that.

But it's certainly true that the better you are at something, the more freedom you have to pick and choose your work. I had to take what I could get when I started freelancing. Now that I have a track record, I not only pick and choose jobs that meet my growing list of requirements, but actually have an active say in how the projects are carried out. If I don't have substantial decision-making power I simply reject the project.

Roark would likely have similar autonomy as an architect if he really was as good as the book says.

Then again, I can't launch a DDOS attack on one of my client's server if he edits something I write. Just like Roark couldn't actually dynamite the Cortlandt in real life. So it's a compromise, like I said.

Neil Parille said...

Rand got her start in Hollywood as an extra on, of all things, DeMille's The King of Kings (a film about Jesus). In her career as a writer she seemed to write pretty much what she wanted, so perhaps she projected something of an idealized version of her life on everyone else.

JayCross said...

People do have a tendency to generalize from their own experiences.

Daniel Barnes said...

Skousen: "Almost all of Rand's scenarios are extreme and idealistic, a strategy that works to sell novels, but does violence to all sense of reality."

This is key point, and probably worth developing somewhere: that is, gradually Rand's novels come to replace reality in the minds of many Objectivists. This first came to my attention many years ago when I noticed a passing remark made by someone leaving an Objectivist conference. They said something like:"Oh well, back to unreality."

It was a light-hearted remark, yet underscored the fact that a subtle switch had occurred.

Red Grant said...

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In short, Howard Roark's [view of the customer] is irrational and contradicts a basic premise of Rand's Objectivist philosophy. For Roark, A is not A. He wants A to be B--his B, not his customer's A. - Mark Skousen? as quoted by Greg
-----------------------------------
Apparently Howard Roark doesn't believe in consumer sovereignty. As he states in his final court defense, "An architect needs clients, but he does not subordinate his work to their wishes." - Mark Skousen? as quoted by Greg
___________________________________





Indeed, there's something distinctively "Stalinisque" about Howard Roark.




___________________________________

Although few if any entrepreneurs would succeed if they were as inflexible and uncompromising as Howard Roark, it is entrepreneurial leadership and not consumer sovereignty that is critical in advancing a capitalist economy. As economist Joseph Schumpeter explained in his classic The Theory of Economic Development:
[Although] we must always start from the satisfaction of wants, since they are the end of all production, and the given economic situation at any time must be understood from this aspect, yet innovations in the economic system do not as a rule take place in such a way that first new wants arise spontaneously in consumers and then the productive apparatus swings round through their pressure. We do not deny the presence of this nexus. It is, however, the producer [i.e., the entrepreneur] who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using.
Of course, in educating consumers, the entrepreneur does not have unlimited scope. It would be virtually impossible for any entrepreneur to educate consumers to prefer candles to light bulbs or black bread to meat. -Greg
___________________________________





My ideal state capitalism would be primarily based on utilizing/organizing and "culturing" "Howard Roarks" of the world.





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If you look at many (or perhaps most) of the inventions in history they are extensions of what people want and use, not drastic changes. - Niel
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Indeed, but truly significant inventions that transform the world in a revolutionary way,

are they based on a few major inventions based on mass acceptance/implementation

or

are they based on many "Nick-Nacks"?





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For example the CD replaced the vinyl record. Certainly the businessmen who marketed this technology knew that people wanted music without the pops and scratches. Obviously it took a lot of foresight to determine what would work and what could ultimately be produced at a reasonable price. - Niel
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Has cd changed the world in the sense automobiles, trains, planes, electricity, computers, and internet changed the world?

Red Grant said...

___________________________________

Rand got her start in Hollywood as an extra on, of all things, DeMille's The King of Kings (a film about Jesus). In her career as a writer she seemed to write pretty much what she wanted, so perhaps she projected something of an idealized version of her life on everyone else. - Neil
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There is a story about Ayn Rand, the second owner of the von Sternberg house in the San Fernando Valley (now destroyed), told by Neutra's contractor Fordyce "Red" Marsh: Once when Neutra took a group of people to see the von Sternberg house, she spotted the tall, handsome Red for the first time. She brushed past Neutra and grabbed the unsuspecting Red by the shoulders, exclaiming:

"You are the physical embodiment of Howard Roark!"

Red knew nothing of the hero architect of Rand's famous novel The Fountainhead and its architect-hero Howard Roark and was bewildered by her actions. Neutra, feeling excluded, gathered up his group and left.


http://en.wikipedia.org/wiki/Richard_Neutra





Good thing, that "Red" was into orchid, not philosophy,

otherwise

can you imagine what kind of sexual harrassment he would have faced from Ayn Rand?

Michael Prescott said...

Today, it seems to me, corporations often impose change on consumers who aren't that interested in it.

For instance, I'm perfectly happy with standard DVDs and not interested in switching to Blu-Ray. But soon all the DVDS available for sale or rental will be Blu-Ray, so I'll have to switch.

How many people actually require a phone that can take pictures or play music and videos? Yet consumers have been pressured into thinking that if their phone is just a phone, there's something wrong with it.

Increasingly, corporations (not entrepreneurs per se) seem to have the power to impose their choices on the public, rather than vice-versa. There are exceptions, as when New Coke engendered a public backlash, but most of the time people go along with what the corporations tell them they are supposed to want.

I'm not saying this is the worst situation in the world - it's a lot better than living in the enforced scarcity of a communist state - but it does call into question the assumptions of both Austrian and Objectivist economists.

Maybe the ones with real power are neither the consumers nor the Roarks, but the corporate marketing department!

Neil Parille said...

Michael,

You may have a point, but the price of cell phones that take pictures and record music costs only a small amount more, so maybe it isn't worth it to make the other kinds.

Neil Parille said...

Michael,

But even so, it seems that corporations are appealing to the public's interest in the new, the better, etc.

Take a related example of wine. I can tell the difference between a $5 bottle, a $10 bottle and a $20 bottle, but beyond that no way. Corporations are just serving people's vanity.

Red Grant said...

___________________________________

Today, it seems to me, corporations often impose change on consumers who aren't that interested in it.

For instance, I'm perfectly happy with standard DVDs and not interested in switching to Blu-Ray. But soon all the DVDS available for sale or rental will be Blu-Ray, so I'll have to switch. - Michael
___________________________________





Using your logic,

would the society be better off with cassettes than cd?

would the society be better off with vhs than dvd?

would the society be better off with horse and buggy than automobiles?

After all, who "imposed" standard DVDs you are happy with?



___________________________________

How many people actually require a phone that can take pictures or play music and videos? Yet consumers have been pressured into thinking that if their phone is just a phone, there's something wrong with it. - Michael
___________________________________






People who don't want those phones don't have to buy one.





___________________________________

Corporations are just serving people's vanity. - Neil
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Are you suggesting then there's no economic utilitarian need for corporations?

Naumadd said...

Actually, the basic premise of capitalism has nothing to do with the general welfare. Capitalism's fundamental principle is the voluntary and free offer of value in exchange for the same. Capitalism is about balances of value. "General welfare" promotes the value of the group above the value of the individual. The problem inherent in that thinking is the fact a group has no value without the individual values of its members who, as it happens, are the only entities who can create value to exchange with others. Capitalism is the fullest expression of individuality, liberty and self-ownership.

Individuals are primary, the group secondary. If each individual is strong and prosperous, only then is the group they create together of any value at all. To say that individual value is less than the value of the group is to declare group value has no foundation.

Wells said...

If there are no customers for a product, there is no sense making the product, producer sovereignty be dammed.
I'm not saying that the thinking of an entrepreneur counts for nothing. Someone who is business for themselves usually knows more about what would be a good idea for a market and how to make/do something than someone who is merely buying the product or service. Customers can be wrong about what they really want, and it is better to deliver something that solves their problem then something that they asked for but doesn't.Entrepreneurs who don't realize where the customer is right or wrong are just middlemen, and like all middleman, liable to be cut out.
The successful business person attempts to listen to the customer when the customer is right, convince the customer to change their minds when the customer is wrong, and collect their fee at the end of the day. They do not attempt to be hubristic or egotistical, nor do they cut off their nose to spite their face.

Fortunately, Lots of products have had a none-zero amount of demand for a long period of time, Simply a zero amount of supply. For instance people have wanted to buy an ipod ever since the 80's when kats would walk around with a boombox on their shoulder and the speakers pointed at their head. Or people wanted a UAV that you could launch from a ship ever sense people would put tall masts on boats, and a crows nest on top of the mast.
Entrepreneurs find these products, make them, then make money.

Red Grant said...

___________________________________

Customers can be wrong about what they really want, and it is better to deliver something that solves their problem then something that they asked for but doesn't.Entrepreneurs who don't realize where the customer is right or wrong are just middlemen, and like all middleman, liable to be cut out.
The successful business person attempts to listen to the customer when the customer is right, convince the customer to change their minds when the customer is wrong, and collect their fee at the end of the day. - Wells
-----------------------------------
Fortunately, Lots of products have had a none-zero amount of demand for a long period of time, Simply a zero amount of supply. For instance people have wanted to buy an ipod ever since the 80's when kats would walk around with a boombox on their shoulder and the speakers pointed at their head. Or people wanted a UAV that you could launch from a ship ever sense people would put tall masts on boats, and a crows nest on top of the mast. - Wells
___________________________________





Indeed.

Red Grant said...

___________________________________

As economist Joseph Schumpeter explained in his classic The Theory of Economic Development:
[Although] we must always start from the satisfaction of wants, since they are the end of all production, and the given economic situation at any time must be understood from this aspect, yet innovations in the economic system do not as a rule take place in such a way that first new wants arise spontaneously in consumers and then the productive apparatus swings round through their pressure. We do not deny the presence of this nexus. It is, however, the producer [i.e., the entrepreneur] who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using. - Greg
___________________________________





What do you think of Schumpeter?



I like him along with Spengler, and Pareto.

Dragonfly said...

Neil: "You may have a point, but the price of cell phones that take pictures and record music costs only a small amount more, so maybe it isn't worth it to make the other kinds."

I think this isn't so much an evil conspiration of marketing departments to saddle us with phones with all these extra features, as that they often just don't realize that there are good opportunities for selling simple phones. They've focused on the market for young people as it was originally by far the greatest market for such products, and in general those extra features are for those young people only a great bonus. They just don't realize yet that there might be a significant and growing market for simple phones for "older" people (but I get the impression that there is an increasing awareness now for such a demand). Marketing departments aren't infallibe, sometimes they may be just lagging behind.

gregnyquist said...

Wells: "If there are no customers for a product, there is no sense making the product"

But that is precisely the problem with consumer sovereignty: before an innovative consumer good is introduced into the market, there are no customers for it—so what is the sense in making it? This is why entrepreneurs have to develop, cultivate, even manipulate consumers to create demand for their new innovations. And it is new innovations that drive the capitalist engine and give capitalism its economic superiority to non-capitalist systems.

Michael: "Today, it seems to me, corporations often impose change on consumers who aren't that interested in it. For instance, I'm perfectly happy with standard DVDs and not interested in switching to Blu-Ray. But soon all the DVDS available for sale or rental will be Blu-Ray, so I'll have to switch."

Not all consumers, of course, are equally willing to be re-educated—although, to be sure, it is not clear that Blu-Ray is going to supercede DVDs any time soon. Up scaling technology is getting better and better, and with the economy facing some heavy going, the Blu-Ray revolution may have to be put off for some time. This happened to stereo recording technology during the Great Depression. I've heard stereo recordings made in 1932 that were far superior to anything else being done at the time. But the technology was too expensive to be marketable during the Great Depression. Blu-Ray, although the technology is further on, is likely to suffer a similar fate. The movie industry is hoping for a repeat of what happened when DVDS were first introduced. But DVDs replaced VHS cassettes and records which wear out and have a short shelf life. DVDs, however, will last a lifetime and consumers will not be eager to replace them with costly Blu-Ray discs.

gregnyquist said...

"What do you think of Schumpeter?"

No economist understood the dynamic side of capitalism better than Schumpeter. And among economists, no one has a better grasp of the sociology of capitalism: many economists are hardly aware even of its existence! But Schumpeter understood that real capitalism has a sociological and political setting that it both influences and is influenced by. The alone places him above most other economists.

JayCross said...

Greg,

Since you're rendering opinions of economists...what do you think of Thomas Sowell?

gregnyquist said...

"what do you think of Thomas Sowell?"

Sowell is at his considerable best in his psycho-sociological work (such as Conflict of Visions) and in his sociology or race works. As an economist, he is fairly derivative and uninteresting.

Red Grant said...

___________________________________

Objectivism and Austrian Economics: entrepreneurship. Richard Salsman is on record for criticizing von Mises’ “(absurd) theory of the essentially-passive, arbitrage-chiseling entrepreneur (and

‘the consumer is king’).” - Greg
-----------------------------------
As

Ludwig von Mises

writes in his book, The Anti-Capitalist Mentality,

"The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way.

Wealth can be acquired only by serving the consumers." (1972:2) - Greg
-----------------------------------



I don't see what is objectionable about the Misesian/Austrian view. - Neil
-----------------------------------

Today, it seems to me, corporations often impose change on consumers who aren't that interested in it. - Michael
-----------------------------------

Michael,

You may have a point,... - Neil
-----------------------------------
Michael,

But even so, it seems that corporations are appealing to the public's interest in the new, the better, etc.

Take a related example of wine. I can tell the difference between a $5 bottle, a $10 bottle and a $20 bottle, but beyond that no way. Corporations are just serving people's vanity. - Neil
___________________________________




___________________________________

"A 'chocolate king' has no power over the consumers, his patrons. He provides them with chocolate of the best quality and at the cheapest price.



He does not rule the consumers, he serves them.

The consumers ... are free to stop patronizing his shops. He loses his 'kingdom' if the consumers prefer to spend their pennies elsewhere." (p. 272) - From "Human Action" by Mises?
-----------------------------------
I don't see what is objectionable about the Misesian/Austrian view. - Neil
___________________________________






Okay, so Neil, are you contradicting yourself?


Why did you agree with Michael that he may have a point in that
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Today, it seems to me, corporations often impose change on consumers who aren't that interested in it. - Michael
___________________________________

while maintaining that

___________________________________

I don't see what is objectionable about the Misesian/Austrian view. - Neil
___________________________________

?