The status of automatized knowledge in his mind is experienced by man as if it had a direct, effortless, self-evident quality (and certainty) of perceptual awareness. But it is conceptual knowledge --- and its validity depends on the precision of his concepts, which require as strict a precision of meaning (i.e., as strict a knowledge of what specific referents they subsume) as the definitions of mathematical terms. (It is obvious what disasters will follow if one automatizes errors, contradictions and undefined approximations.)
This paragraph provides the very core of what is wrong with Rand's epistemology; and it will require a number of posts to identify and elucidate all the various fallacious branches that sprout from this one trunk. Right now I wish to concentrate on the final sentence, the one embalmed in parenthesis: It is obvious what disasters will follow if one automatizes errors, contradictions and undefined approximations. Is it really obvious? Rand's assertion assumes the following: (1) concepts can be erroneous; (2) concepts can be contradictory; and (3) improper concept formation leads to concepts that are ill defined and merely approximate. I will contend that these three presumptions are wrong.
(1) What does it mean to say that a concept is erroneous, or that it "automatizes errors"? A concept, taken by itself, can neither be true or false, erroneous or correct: it just is. Like Rand says, A is A: a concept is a concept.
Aren't there concepts that don't exist? No, of course not. The very fact that a concept is brought up in discussion ipso facto proves that it exists as a concept. If it be argued that the question is whether the referents of the concept exist in the "real" world (i.e., outside the mind), then in that case the issue goes well beyond whether the concept is "erroneous." There is nothing erroneous about the concept unicorn. I can, for example, create propositions about this concept that are eminently true and which accord to the external world of fact. For example: Unicorns don't exist. The fact that the referents of a concept fail to exist in no way "invalidates" the concept itself. Nor does the formation of a concept ever involve the automazition of errors. Errors arise when we make assertions about concepts. The concept taken by itself remains free of all such blemishes, even when the concept refers to something entirely imaginary.
What about so-called "conceptual errors": don't such errors exist? Yes, such errors exist, but they don't involve erroneous concepts. Our conception of something is not the same as our concept of it. A man's conception of economics may be dim and contradictory, but this in no way affects his concept of economics, which remains clear and distinct. He knows how to identify the subject matter of economics, even if he can't make heads or tails of actual economic doctrines. He knows what the concept economics refers to; he just doesn't understand the particular doctrines which the concept symbolizes. His lack of understanding in no way involves automatizing errors. Any erroneous presumptions he may entertain about the subject matter of economics (which the concept economics merely refers to) involves erroneous opinions concerning various propositions about the subject matter of economics. Again, errors arise out of assertions, propositions, arguments, theories, not stand-alone concepts.
Now it could be objected that Rand never said errors arise out of "stand-alone" concepts. While she never used the term "stand-alone," her position strongly implies such a view. Consider the following:
Since concepts, in the field of cognition, perform a function similar to that of numbers in the field of mathematics, the function of a proposition is similar to that of an equation: it applies conceptual abstractions to a specific problem. A proposition, however, can perform this function only if the concepts of which it is composed have precisely defined meanings. If, in the field of mathematics, numbers had no fixed, firm values, if they were mere approximations determined by the mood of their users -- so that "5," for instance, could mean six-and-a-half or four-and-three-quarters in others, according the users "convenience" -- there would be no such thing as the science of mathematics. Yet this is the manner in which most people use concepts, and are taught to do so. Above the first-level abstractions of perceptual concretes, most people hold concepts as loose approximations, without firm definitions, clear meanings, or specific referents.... Starting from the mental habit of learning words without grasping meanings, people find it impossible to grasp higher abstractions, and their conceptual development consists of condensing fog into thicker fog.... This process is encouraged and, at times, demanded by many modern teachers who purvey snatches of random, out-of-context information in undefined, unintelligible, contradictory terms. [IOTE, 75-76]
I can't unravel all the errors packed into this passage in just one post. I will merely note here that Rand provides no convincing evidence on behalf of her assertion that "most people" hold concepts as loose approximations. Her view, in the light of what we know from cognitive science, is grossly implausible.
Now it could be argued that Rand's view is an attempt to explain why so many people have trouble providing definitions for the terms they use in speech. However, the inability to define one's terms in no way establishes that people don't know what they mean by what they say. How many people can define the or and or but, words that are commonly used and understood by everyone? I'll have more to say on this subject when we get to Rand's views on definitions.
(2) How can a concept be contradictory? Only arguments, propositions, assertions can be contradictory. Contradictions arise from how concepts are employed in arguments; they don't arise from the concepts themselves. Even if you conceptualized a contradictory argument, the concept itself would not be contradictory. The concept ad hominem is not a contradictory concept, nor does is automatize contradictions. It merely refers to a type of contradiction found in argumentation.
Can contradictions be automatized? Perhaps (it depends on what this means). But not as concepts. If a person holds contradictory ideas, it is not the ideas per se that are contradictory, but the assertions they represent.
(3) Can a concept be an ill-defined approximation? Rand seems to believe so. As we have seen from earlier quotes, Rand believed that "most people" hold concepts as loose approximations. Presumably, this means they haven't defined their concepts. Without "correct" definitions, people cannot know the exact meaning of the concepts they are using. As Rand puts it: "To know the exact meaning of the concepts one is using, one must know their correct definitions..." 
Again, this is a topic which will require several posts to entangle the errors involved. I will concentrate in this post on examining one important implication of Rand's view, namely, the view that concepts are ill-defined approximations because of "improper" concept formation. Objectivism implies that if only concepts were formed "properly," under the guidance of a "focused," rigorously "precise" logical awareness, then the resulting concepts would not be ill-defined approximations.
Describing a concept as an ill-defined approximation is misleading, for it suggests that, if only a concept were better defined, it wouldn't be a mere approximation. Rand here seems to be confusing misunderstanding with vagueness. In general, people know what they mean. They don't always do a great job of expressing their meanings to others, but that's a different issue. Where people run into trouble is when they are confronted with a subject matter that is difficult, like quantum mechanics or calculus. They may have a vague idea of what these subject matters are about; but that is all. Now is this vague idea merely an ill-defined approximation? No, not if by ill-defined one means: lacking "precise" definitions. If a person does not understand a concept, providing a definition will not help. For example, Wikipedia defines the uncertainty principle as "any of a variety of mathematical inequalities asserting a fundamental lower bound on the precision with which certain pairs of physical properties of a particle, such as position x and momentum p, can be simultaneously known." Now if you don't already understand the uncertainty principle, providing the definition is not going to improve matters. Understanding a concept is the same as understanding its definition. There is no priority to understanding one or the other. Nor does the individual have to form a definition in order to understand the meaning of the concept. The definition merely expresses the meaning of the concept in other words. It adds nothing, cognitively speaking, one way or the other; and it is entirely possible to understand a concept without being able to provide its definition. As we shall see later on, definitions only tell us about word usage; they don't give us any additional information about the concept itself. Therefore, providing strict definitions of concepts in no way increases our precision of meaning. In any case, it is not an issue of precision, it's an issue of understanding. Either the individual understands the concept or he doesn't. If he doesn't understand the concept, he won't understand the definition. If he understands the concept, the definition adds nothing to his understanding, since its meaning is identical to the concept.
Rand's decision to make the concept formation a primary source of cognitive error is itself an immense error. But more of this anon.