Objectivism & Economics, Part 14

Rand’s “objective” value theory. Austrian economics ascribes to what is called the “subjective value” theory:

An individual's actions and choices are based upon a unique value scale known only to that individual. It is this subjective valuation of goods that creates economic value. Like other economists, the Austrian does not judge or criticize these subjective values but instead takes them as given data.

For obvious reasons, Rand did not like this theory. In her essay on capitalism, she provided an “objective” theory of economic value to take its place. The difficulty with all such “objective” theories is that they tend to equate objective value with success in the market. Hence popular music, headed by Elvis Presley and the Beatles, is objectively superior to classical music, because it has sold a lot more recordings and grossed far more profits. The Bible is objectively more valuable than Atlas Shrugged because it has sold more copies and, presumably, netted a greater profit.

To get around this difficulty, Rand introduces a distinction between what she calls “philosophical” and “social” value. The free market value of goods and services, she grants, “does necessarily represent their philosophically objective value, but only their socially objective value, i.e., the sum of the individual judgments of all the men involved in trade at a given time, the sum of what they valued, in the context of their own life.”

If Rand’s “socially objective” value sounds suspiciously like the the subjective value theory, well, that’s because there is very little difference between the two. So in order to draw a larger contrast between the two theories of value, Rand introduces another distinction. She claims that what makes her “socially objective” value truly objective is the discipline of the market:

Within every category of goods and services offered on a free market, it is the purveyor of the best product at the cheapest price who wins the greatest financial rewards in that field—not automatically nor immediately nor by fiat, but by virtue of the free market, which teaches every participant to look for the objective best within the category of his own competence, and penalizes those who act on irrational considerations. [CUI, 24-25]

As with many of this Rand’s theories, this one only remains plausible if we ignore the many facts that fail to accord with it. One of the long lasting criticisms of capitalism is that, under its regimen, business are often forced to appeal to the lowest common denominator to survive. The tacky, the tasteless, the vulgar, the obscene often triumphs over products that, from an “objective” point of view, appear more useful and “edifying.”

As an example of this, consider the most popular non-free iphone application, a piece of software appropriately entitled “iFart mobile.” According to the iFart website, their application is “Ranked #1 in overall sales of all applications in the world.” The video below goes into greater detail:



As amusing as all this may be, one still wonders what sort of “objective” value, even of the “social” type, a product like iFart can possibly have. Obviously, it is little more than an “entertainment” product and shouldn’t be taken too seriously. But where is the “objective” value in such a thing, beyond the obviously subjective humor that some people find in it? Can we really say that iFart, within its category of goods and services offered on the free market, is the “best product and the cheapest price”? How can this be? Is it because it's the best flatulence imitating application for the iphone? Even if this were so, it still doesn’t answer the question why flatulence imitating iphone apps have more objective value than other iphone apps. Beyond mere success in the market, what objective value, established by human “reason,” can be attributed to iFart?

The iFart application merely skims the surface of what is wrong with any objective theory of economic value. One can think of many worse examples: e.g., what about all those astrology books that are sold every year? or the billions of dollars spent on internet porn? or “gangsta” rap? Where is the objective value in these horrors? Yet they all thrive in the market. It simply will not do to mix economics with morality. Economic value—that is, the values people actually pursue in the market (rather than the values they “ought” to pursue) cannot in any meaningful sense be regarded as “objective.” The Austrians show good sense in regarding economic value as subjective.

Objectivism & Economics, Part 13

Objectivism and Austrian Economics: Salsman as “hyper-inflationist.” Stefan Karlsson over at mises.org complained a few years ago that many ARI-affiliated economists have “abandoned Mises” in favor of “supply-siders”:

[I]f you look at their articles on economics [over at capmag.com], you will ... find the pro-inflationist supply-side economics advocated there.… This is particularly true if you look at older articles from 1999 or 2000. There you'll find many articles strongly attacking Ayn Rand's former associate Alan Greenspan—but not because he has abandoned his former hard money stance. No quite to the contrary, in true supply-sider fashion he was attacked for not being inflationist enough. Of course, in true supply-sider fashion they profess to be anti-inflation only to go on to attack the Fed for not lowering interest rates and increasing the money supply.

Karlsson has discovered a glaring contradiction at the heart of those Objectivists who, like Salsman, reject Austrian economics: they are all inflationists! It is this sort of thing that causes those of us at ARCHNBlog to be so very unimpressed whenever we hear Objectivists making virtuous noise about “reason” and logic and “rationality.” In practice, those who talk a great deal about “reason” are almost always found to be mere rationalizers of their own personal interests and private shibbeloths. Salsman, for example, is an investment analyst for his own company, InterMarket Financing, which “quantifies market price indicators to guide the asset allocation decisions and trading strategies of institutional investors. [InterMarket Financing helps] pension plans, asset managers, financial institutions and hedge funds use disciplined methods to outperform benchmarks.”

Given how embedded such financial advising firms have been in the speculative excesses of the last quarter century, it is not surprising that Salsman would favor an economic ideology that supported the economic conditions that feathered his own nest. The difficulty for Salsman was trying to harmonize his supply side ideology with orthodox Objectivism’s traditional allegience with Austrian economics. It turned out to be easier than many of us might have expected. There already existed points of difference between Rand and the Austrians (e.g., Mises’ neo-Kantian epistemology and “radical subjectivism”), and Salsman merely exaggerated these differences and added several more of his own, nearly all based on absurd economic heresies He has even had the gall to excuse for Rand for her advocacy of Austrian economics: “By the way, I do not fault Ayn Rand for having promoted the Austrian School in the 1960s,” he writes. “I suspect she was merely trying to suggest the best economics books then available, realizing they weren't perfect.”

What is puzzling about all this is that no one over at ARI should raise a word in protest. Since economics is considered a non-philosophical subject-matter, differences of opinion in that discipline are allowed. While that is entirely understandable, shouldn’t there be at least some limits? After all, would ARI wish to be affiliated with an individual who denied that the earth is a globe? Wouldn’t they, at the very least, wish to be on record as not advocating so obvious a detour into blatant evasion of reality? Well, as it happens, Salsman’s view are nearly on the same plane as those of the flat-earthers. He scorns what he calls the “myth of scarcity” and holds that the Stock Market of early 2000 was not overvalued!

Incidentally, George Riesman, who represents the traditional view among orthodox Randians that seeks to integrate Objectivism with Austrian economics, had a reply of sorts to Salsman’s criticism of Austrians for favoring interest-rate hikes by the Fed:

Austrian economists ... actually do advocate this and it’s perfectly correct for them to do so [Riesman wrote]. This is because we would all be better off if the Federal Reserve refused to lend except at an interest rate that was too high for anyone being willing to borrow at. In that case the Federal Reserve would be unable to affect the market in any way and might as well not exist. The Federal Reserve exists in order to make interest rates lower than they would otherwise be. It tries to achieve this by creating new and additional money and lending it out. The new and additional money appears on the market as an increase in the supply of loanable funds and in this way brings interest rates down. However, once the new and additional money gets out into circulation and is spent and respent, sales revenues and profits tend to rise throughout the economic system, which serves to increase the demand for loanable funds. If the Fed does not raise interest rates but simply provides more new and additional money to meet the additional demand for funds, the problem grows worse and worse. A rise in interest rates is essential to choke off the flow of new and additional money—to prevent a continuous acceleration in the creation of new and additional money. In objecting to this rise in interest rates, Salsman is in the position of advocating hyperinflation. Hyperinflation is profoundly destructive of wealth and rests on the total obliteration of any kind of objective standards in the economic system.

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.

Objectivism & Economics, Part 11

Objectivism and Austrian Economics: Salsman’s Revisionism. In the recommended bibliography of Capitalism: The Unknown Ideal, one finds more than a dozen books from economists associated with the so-called Austrian school, included eight works by Ludwig von Mises, whom Rand regarded as a “great economist” and whose works she recommended for dispelling the myth that ‘“laissez-faire’ capitalism is the cause of depressions.” Despite Rand’s endorsement of von Mises, Objectivism, under the influence of M. Northrup Buechner and Richard Salsman, has begun to distance itself from Austrian economics. Salsman has, in particular, focused his animus upon Austrian business cycle theory.

Another common claim about stock-price gains in the 1920s is that they were made possible by Federal Reserve “inflation.” This view is held by many supposed free-market economists—monetarists and Austrians—and is certainly a tempting thesis for those who oppose central banking. But was Alan Greenspan correct when he wrote [in the Rand approved CUI], in the mid-1960s, that the late-1920s represented a “fantastic speculative boom” that was triggered by “excess credit” pumped out by the Fed—credit which then allegedly “spilled over into the stock market”? This view of the late-1920s stock-price rise could not be more wrong.

Why is Greenspan and the Austrians wrong? Salsman explains:

In the Austrian theory of business cycles, it is easy to detect a lack of appreciation for the intelligence, wisdom and foresight of entrepreneurs, businessmen and investors. Austrian economists presume producers are easily fooled by government manipulations of money, credit, and the economy—especially by the alleged phenomenon of “artificially” low interest rates. They claim producers are conned into undertaking projects that later will turn out badly and require liquidation. In fact, producers are not fooled; they know, even if implicitly, which government policies are conducive to wealth creation and which are destructive. That is, they know when it’s worth producing and when it’s only worth shrugging. And when they shrug and production grinds to a halt, it does not grind to a halt because they had previously produced.

When the Austrian view of the business cycle is coupled with a malevolent-universe premise—with the view that in the economy or stock market “what goes up must come down,” that “all good things must come to an end,” that no long ride of unbroken prosperity can ever persist without taking on irrationally exuberant hitchhikers—the combination can be catastrophic. For it can bring even purported champions of capitalism to openly endorse destructive policies such as Federal Reserve interest-rate hikes, curbs on the stock exchange, and more burdensome government regulations.

I will discuss Salsman’s theory of the entrepreneur in my next economics post. I merely here wish to note the obvious ideological origins of Salsman’s ideas. Elsewhere on the web, Salsman has given 12 reasons why he disagrees with “contemporary” Austrian economics. I won’t list all the twelve reasons, since all but two of his reasons are either based on a malicious interpretation of Austrian doctrines or an inability to understand even the most basic economic concepts. But the last reason he lists is the most glaring and fatuous of all and gives the whole game away. Salsman complains of the “animosity (and/or indifference) towards Ayn Rand and Objectivism” manifested by Austrian economists. In other words, Salsman resents the failure of Austrian economists to bend the knee at the altar of Rand. But is that any reason to disagree with someone—that they don’t worship your own private idols? Does Salsman refuse to get medical attention from any doctor who is indifferent (or who entertains animosity) towards Rand? Does he disagree with any specialist who, even though Rand herself recommended him, is not an enthusiastic admirer of Objectivist (or approved of by ARI)? Here we see, quite plainly, the poisonous fruits of ideology—that is, of making subservience to a system of ideas more important than any other consideration, including every consideration of truth, justice, fact and science.