Economic Theory and Conceptions of Value (Part 1)

The editors of New Ideal are delighted to republish, with permission, Rob Tarr’s chapter from Foundations of a Free Society: Reflections on Ayn Rand’s Political Philosophy. Note: this text includes a number of abbreviated references (such as “VOS” and “CUI”) to published works. A key to those references appears at the end of each installment.

Ayn Rand is best known in contemporary culture for being an intransigent defender of capitalism. She always insisted, however, that “I am not primarily an advocate of capitalism, but of egoism; and I am not primarily an advocate of egoism, but of reason. If one recognizes the supremacy of reason and applies it consistently, all the rest follows” (TO 1089). She was adamant that capitalism had to be defended on philosophic grounds: “I want to stress that our primary interest is not politics or economics as such, but ‘man’s nature and man’s relationship to existence’  —  and that we advocate capitalism because it is the only system geared to the life of a rational being” (“Introduction,” CUI vii).

Understanding the basic nature of value is crucial to understanding capitalism, Rand thought. A rational being must be a rational valuer, and she held that conventional theories of values and of evaluation did not treat these as rationally derived. These theories fall into two basic categories, which Rand called “intrinsic” and “subjective.” In contrast, she defined and defended a new category: a new concept of objective value. She writes: “Capitalism is the only system based implicitly on an objective theory of values  —  and the historic tragedy is that this has never been made explicit” (CUI 15). She made this base explicit in her essay “What Is Capitalism?” (CUI ch. 1).

Every theory of economics necessarily assumes at its base a particular conception of the nature of value. I aim to examine how the different conceptions of value have been assumed by different economic theories, and how these shaped the theories. Classical economics assumed and was shaped by an intrinsic theory of value, while modern mainstream neoclassical economics was shaped by a subjective theory. More controversially, I argue that Austrian economics was shaped by implicitly assuming an objective conception of value (in Rand’s sense). It is the elements of an objective conception of value embedded in their theories that explain why Austrian economists reach a (largely) proper understanding of the nature of capitalism (from Rand’s perspective) and are rightly viewed as the preeminent advocates of capitalism in the economics profession.

Ayn Rand: Value Deriving from Conceptual Knowledge

One of Rand’s main intellectual goals was to define a rational ethics. In her essay “The Objectivist Ethics,” she writes:

Most philosophers have now decided to declare that reason has failed, that ethics is outside the power of reason, that no rational ethics can ever be defined, and that in the field of ethics  —  in the choice of his values, of his actions, of his pursuits, of his life’s goals  —  man must be guided by something other than reason. By what? Faith  —  instinct  —  intuition — revelation — feeling — taste — urge — wish — whim. Today, as in the past, most philosophers agree that the ultimate standard of ethics is whim (they call it “arbitrary postulate” or “subjective choice” or “emotional commitment”) — and the battle is only over the question of whose whim: one’s own or society’s or the dictator’s or God’s. Whatever else they may disagree about, today’s moralists agree that ethics is a subjective issue and that the three things barred from its field are: reason — mind — reality. (VOS 15)

Rand begins her ethics with a conception of value grounded in goal-directed action: “‘Value’ is that which one acts to gain and/or keep” (VOS 16). She traces the phenomenon of goal-directed action to the fundamental nature of living organisms: that living organisms in order to survive must systematically pursue goals aimed at preserving their lives. But while plants and animals have their goals (their values) automatically prescribed for them, man, as a volitional conceptual being, does not.¹ Man’s basic means of survival is his conceptual faculty:

Man cannot survive, as animals do, by the guidance of mere percepts. . . . He cannot provide for his simplest physical needs without a process of thought. He needs a process of thought to discover how to plant and grow his food or how to make weapons for hunting. His percepts might lead him to a cave, if one is available — but to build the simplest shelter, he needs a process of thought. No percepts and no “instincts” will tell him how to light a fire, how to weave cloth, how to forge tools, how to make a wheel, how to make an airplane, how to perform an appendectomy, how to produce an electric light bulb or an electronic tube or a cyclotron or a box of matches. Yet his life depends on such knowledge — and only a volitional act of his consciousness, a process of thought, can provide it. (“The Objectivist Ethics,” VOS 23; quoted in “What Is Capitalism?” CUI 7)

For Rand, values are conceptual: “Man’s actions and survival require the guidance of conceptual values derived from conceptual knowledge” (VOS 21). But this involves two distinct types of thought process: conceptual thought to discover knowledge of facts and conceptual thought to form values. Or: a thought process aimed at discovering the facts of reality (including facts about man’s needs), and a distinct type of thought process aimed at integrating these facts so as to conceive goals and devise plans for achieving them. The first category of thinking (discovering factual knowledge) is widely recognized. The latter category (conceptual, goal-­directed thinking) is less so. Rand emphasized the role of creative thinking in forming and achieving goals.

After describing the enormous complexity of the conceptual integrations necessary for identifying factual knowledge of reality, Rand writes:

Yet this is the simpler part of his psycho-epistemological task. There is another part which is still more complex.

The other part consists of applying his knowledge — i.e., evaluating the facts of reality, choosing his goals and guiding his actions accordingly. To do that, man needs another chain of concepts, derived from and dependent on the first, yet separate and, in a sense, more complex: a chain of normative abstractions. While cognitive abstractions identify the facts of reality, normative abstractions evaluate the facts, thus prescribing a choice of values and a course of action. Cognitive abstractions deal with that which is; normative abstractions deal with that which ought to be (in the realms open to man’s choice). (RM 6)

Goal-­directed thinking crucially depends on factual knowledge but is distinct from it. The facts, by themselves, do not automatically dictate what goals man should pursue nor what steps (what means, what conceptual plans) will achieve them. It takes a separate, and different, process of thought to conceive and achieve goals.

The type of conceptual thinking involved in goal-directed thinking (of creatively conceiving goals and creatively integrating means to ends) Rand calls “teleological measurement”:

In regard to the concepts pertaining to evaluation (“value,” “emotion,” “feeling,” “desire,” etc.), the hierarchy involved is of a different kind and requires an entirely different type of measurement. It is a type applicable only to the psychological process of evaluation, and may be designated as “teleological measurement.” . . . Teleological measurement deals, not with cardinal, but with ordinal numbers — and the standard serves to establish a graded relationship of means to end.

For instance, a moral code is a system of teleological measurement which grades the choices and actions open to man, according to the degree to which they achieve or frustrate the code’s standard of value. The standard is the end, to which man’s actions are the means.

A moral code is a set of abstract principles; to practice it, an individual must translate it into the appropriate concretes — he must choose the particular goals and values which he is to pursue. This requires that he define his particular hierarchy of values, in the order of their importance, and that he act accordingly. Thus all his actions have to be guided by a process of teleological measurement. (ITOE 32–33)

For fully rational, conceptual evaluation to be possible, an individual’s values must form a consistent, integrated harmony. This is an important principle of Rand’s ethics: that one must do the hard thinking to integrate all of one’s goals into a consistent whole, to avoid working at cross-purposes (one must know that the pursuit and achievement of one goal won’t contradict and negate another goal). This integrated hierarchy must be applied to the evaluation of every particular goal, plan, action, or object. It is only by having all one’s goals integrated in this fashion that one can rationally assess what will in fact advance one’s goals or sabotage them. But the only way to know this is to trace all the complex indirect links and causal chains to assess the consequences for all of one’s goals. For this reason, Rand continues:

(The degree of uncertainty and contradictions in a man’s hierarchy of values is the degree to which he will be unable to perform such measurements and will fail in his attempts at value calculations or at purposeful action.)

Teleological measurement has to be performed in and against an enormous context: it consists of establishing the relationship of a given choice to all the other possible choices and to one’s hierarchy of values. (ITOE 33)

Such an integration can only be done by reference to an ultimate standard, which, for Rand, is man’s life. By tracing the causal consequences of all one’s goals (and all their means of achievement) to the ultimate consequences they entail for one’s life (and weighing them and integrating them accordingly), one can have a fully integrated conceptual justification of all one’s goals.

For Rand, then, value (in the case of man) crucially depends on and embodies conceptual knowledge. Value requires the conceptual identification of the causal role that an object or action can play, within an integrated plan, aimed at achieving a goal (with the ultimate goal being the individual’s life). To “evaluate” is to engage in this sort of thought process.

In contrast to views that treat fact and value as radically different categories, Rand writes: “Knowledge, for any conscious organism, is the means of survival; to a living consciousness, every ‘is’ implies an ‘ought’” (VOS 24). This does not mean, for Rand, that the “ought” follows as a direct or automatic implication from the “is.” A separate (and different) process of creative thought is required to identify the value implications of “what is.”

To concretize this distinction: Everyone has had experience with the type of person who has (or can easily get) all the factual information he needs, and yet who is passive or paralyzed in action. Often he is paralyzed in action precisely because he hasn’t chosen to engage in a goal-­directed thought process — that is, to conceive a goal and devise a plan to achieve it. This type of thought process doesn’t happen automatically; the facts by themselves don’t mandate what to do.

Rand’s Atlas Shrugged is replete with illustrations of this issue. Her positive characters regularly engage in goal-directed thinking, conceiving new goals and constantly making the effort to devise new plans to achieve their goals. In contrast, the negative characters do not engage in creative goal-directed thinking and do not have or pursue any creative goals. Most often they subsist in passive mental lethargy, merely reacting (usually emotionally) to whatever facts and circumstances happen to hit them. The worst characters actively evade awareness of important facts and circumstances, precisely to avoid grasping the need for action and for the thought processes to guide it. This point, in fact, forms part of the central theme of Atlas Shrugged: the role of reason in man’s life, which includes, importantly, the role of reason in conceiving and achieving goals that further man’s life.

Without Rand’s conception of values as essentially embodying conceptual knowledge, knowledge is separated from value, giving rise to the “is-ought” gap. In contrast to her conceptual view of value (which she designates as “objective”), Rand defines two main categories of theories that exclude conceptual knowledge from value, which she designates as “intrinsic” and “subjective”:

The intrinsic theory holds that the good is inherent in certain things or actions as such, regardless of their context and consequences, regardless of any benefit or injury they may cause to the actors and subjects involved. It is a theory that divorces the concept of “good” from beneficiaries, and the concept of “value” from valuer and purpose — claiming that the good is good in, by, and of itself.

The subjectivist theory holds that the good bears no relation to the facts of reality, that it is the product of man’s consciousness, created by his feelings, desires, “intuitions” or whims, and that it is merely an “arbitrary postulate” or an “emotional commitment.” . . .

The objective theory holds that the good is neither an attribute of “things in themselves” nor of man’s emotional states, but an evaluation of the facts of reality by man’s consciousness according to a rational standard of value. (Rational, in this context, means: derived from the facts of reality and validated by a process of reason.) The objective theory holds that the good is an aspect of reality in relation to man — and that it must be discovered, not invented by man. Fundamental to an objective theory of values is the question: Of value to whom and for what? An objective theory does not permit context-dropping or “concept-stealing”: it does not permit the separation of “value” from “purpose,” of the good from beneficiaries, and of man’s actions from reason. (CUI 13–14)

The subjective theory of value holds that value is rooted in some conscious phenomenon in the mind of the subject, detached from any facts of reality (e.g., Hume’s view or the hedonic utility of Utilitarians); it is rooted in consciousness without reference to a mind grasping reality. The intrinsic theory holds that value is something inherent in existential objects (or actions); it is rooted in reality, without reference to a mind grasping reality. In contrast, Rand’s conception of objective value is fundamentally about a mind grasping reality. Although not denying the wide variety and complexity of different theories of value, it’s Rand’s view that in each case somewhere along the line, implicitly if not explicitly, all intrinsic theories ultimately rely on the individual “just knowing” what’s good, while all subjective theories ultimately rely on the subject “just feeling” what’s good. Completely left out of each case is any sort of rational process of forming values. It is precisely this issue that Rand has in mind when she asserts that “most philosophers agree the ultimate standard of ethics is whim.”²

In defining her intrinsic/subjective/objective trichotomy, Rand conceptualizes the terms differently from the traditional objective/subjective dichotomy. This can be a source of confusion, particularly when we apply her ideas to economics. In the traditional dichotomy, “objective” designates a phenomenon that is in reality independent of consciousness; while “subjective” denotes a phenomenon that is “subject-dependent” — that is, a phenomenon that depends on the subject’s consciousness in some form. Rand uses the term “intrinsic” to denote theories that view knowledge or values as mind-independent features of reality. Meanwhile, the category of “subjective,” as often used in economics, lumps together the views of value that Rand calls “subjective” and “objective.” For Rand, “subjective” designates conscious phenomena that are unconnected to reality, and “objective” designates conscious phenomena that represent deliberate, conceptual, mental integrations of facts of reality. Both can be construed as “subject-dependent,” but they differ fundamentally in their connection to reality. (I use the terms “subjective,” “objective,” and “intrinsic” in Rand’s meanings of the terms, unless otherwise noted.)

Both the mainstream neoclassical school of economics and the rival Austrian school are traditionally considered “subjective value” schools in contrast to the “intrinsic value” perspective of classical economics. I believe that the stark differences between these two schools of thought ultimately trace back to different conceptions of value: the neoclassical school assumes a purely subjective conception of value, while the Austrian school implicitly assumes an objective conception of value. While it’s true that for both schools value is subject-­dependent, their stark differences trace to the fact that the neoclassical school conceives value in purely subjective and thus nonrational terms, and the Austrians broadly (and implicitly) have a view of value as involving conceptual knowledge to conceive ends rationally and to integrate means to ends. Unfortunately, the traditional category of subjective value confuses many later Austrians, too, such that they come to view value as rooted in subjective consumer preferences; this muddies but does not destroy their implicitly objective conception of value.

Later thinkers in the Austrian school often talk about “subjective knowledge.”³ But this idea again is meant only to emphasize subject-dependence, that each individual has his own particular, finite context of knowledge that guides his actions (he cannot be presumed to know things he has no way of knowing, in contrast to mainstream assumptions of “perfect knowledge”). The Austrian idea, generally, is only meant to convey this subject-dependence and not the philosophic idea that one can only know “things-as-they-appear-to-us” (i.e., only the phenomena of our own consciousness).⁴ Essential to the Austrian theory of the market process is precisely that the individual learns new knowledge about reality (and about the goals, plans, and actions of other people), such that he comes to increasingly conform to reality. He forms new evaluations accordingly; new goals, plans, and courses of action. When Austrians use the term “subjective,” then, in most contexts the proper way to understand it is simply as “subject-dependent.”

Another potential confusion to avoid is that, for Rand, the values required by man’s life do not solely refer to physical or material needs. In her view, man’s conceptual consciousness has a specific identity with its own needs and requirements, which, if not fulfilled, will lead to impaired functioning. But since man’s conceptual faculty is his basic means of survival, impaired conceptual functioning means impaired survival. Thus, the needs of man’s consciousness are just as real, just as important, and just as objective as man’s physical needs.⁵ Rand’s view contrasts with the view that grounding the concept of value in the biological life of man necessarily makes value purely about satisfying man’s physical needs.⁶ There appears to be a wide range of things that men “subjectively” like and pursue, but which don’t seem to have any connection to his physical survival, such as poetry, music, philosophic discussion, and so on. Rand’s view is that all such “spiritual” values (e.g., art or philosophy) do in fact have crucial survival value for man.⁷ Even pleasure itself, for Rand, is an objective need that stems from man’s metaphysical nature as a living organism.⁸ Far from mere subjective likings, the needs of consciousness are objective needs that man must discover and fulfill as much as any physical needs.

A further issue to mention is Rand’s category of “optional value.” Within her category of “objective value,” there is a wide range of optionality. Shoes, for example, are an objective value to man’s life; but, in most cases, the particular color of shoes does not make a difference and can be whatever the wearer chooses. This kind of issue is often used in economic theorizing to illustrate that value is “subjective”; but Rand’s view is that the proper way to conceptualize it is in the category of “optional,” within the wider category of objective value.⁹

The issues of spiritual values and optional values have motivated economists to conceptualize value in purely subjective terms, suggesting that value, as far as economics is concerned, simply denotes whatever someone likes and pursues, period. It is true that anything someone seeks to obtain on the market (for whatever reason) will lead to the formation of prices — which are then subject to some form of economic explanation. This is true even for cases of irrational/immoral products (drugs, prostitution, etc.), which are objective disvalues in Rand’s view. But this manifestly does not mean that a subjective conception of value is necessary or sufficient for economic theory (as will be argued in detail in the balance of this essay).

For Rand, the concept of “objective” designates conscious phenomena that represent deliberate, conceptual, mental integrations of facts of reality. A full understanding of this concept requires an understanding of the epistemological nature of these conceptual integrations.¹⁰ Rand’s view is that a concept represents a mental grouping of referents, according to definite criteria, to form a new mental integration. This mental grouping is a creative, factbased act that results in a new (previously nonexistent) mental product. The facts of reality alone do not automatically dictate how to form the appropriate conceptual integration of those facts. It takes creative effort to identify the criteria for grouping that are required by the nature of the referents, of the human mind, and of the cognitive purpose one is trying to fulfill.

At a higher level, this is what all creative problem-solving involves: mentally manipulating the elements of a problem until one discerns a new way of integrating them so as to solve the problem. Three aspects of Rand’s view are important to emphasize. First, it takes volitional effort on the part of the individual to initiate and sustain such a thought process, or else thinking does not take place. Second, the resulting integration is something new that is formed in the mind of the thinker (it would not exist without his efforts). Third, a new integration is creative; it is not an automatic result algorithmically written on his mind from a mere surveying of the facts. These are all inseparable aspects of the single act of creative thinking — volitional, creative formation of a new mental integration — but it’s important to emphasize them separately.

It’s exactly mental integration of this type that Rand thinks lies at the root of production. Production is the production of value, and value (for Rand) crucially involves conceptual knowledge; which means, at root, that it involves a conceptual mental integration. For Rand, “production is the application of reason to the problem of survival” (CUI 8). Rand regularly stresses, throughout her novels and her nonfiction essays, that the root of all production is an idea, a creative mental integration: “Whether it’s a symphony or a coal mine, all work is an act of creating and comes from the same source: from an inviolate capacity to see through one’s own eyes — which means: the capacity to perform a rational identification — which means: the capacity to see, to connect and to make what had not been seen, connected and made before” (Atlas 782–83).

To identify value is to engage in the process of teleological measurement discussed above — that is, goal-directed thinking aimed at conceiving a new end and forming new integrations of means. Forming a new integration in this way is the root value-creating activity. Although a plan must be executed for a value to be achieved in reality, it’s the formation of the mental integrations guiding this action that is the root source of the value.

An entrepreneur starting a new venture needs to conceive a vision and discover what integration of inputs can achieve the vision he seeks to produce. Given his estimation of the potential value of the product, he consciously imputes value to the inputs, each one based on its respective contribution to the output. The inputs are neither “intrinsically valuable” nor “intrinsically productive.” By themselves, they have no value and no use. The only value they have is the value the entrepreneur conceives them to have, given their role within some plan he has devised, to achieve some value he has conceived, based on the facts he has identified.¹¹ The inputs only have a “productive use,” because the entrepreneur consciously seeks to use them in some particular role.

The view of production, then, is a teleological one. Production of value stems from the mental conception of a goal and the conceptual integration of a plan to achieve that goal. The fundamental, root act of production is the volitional, creative formation of these conceptual mental integrations.

As with any mental integration (for Rand), the three points mentioned above apply. The integration underlying production is a direct result of the volitional thinking of the producer. It is a new phenomenon (it wouldn’t exist at all but for the producer’s mental effort). And it is creative (it’s not “intrinsic” in the facts of reality, to be algorithmically or automatically imprinted in his mind, but is the result of a creative thought process). These are the factors that underlie Rand’s fundamental justification of why a producer is the fundamental cause of production of value, and thus why, in justice, he fully deserves the value he produces.

This is the view of production from an objective conception of value. If value is conceived as intrinsic or subjective, however, then value does not essentially involve any mental work. Instead, all value is simply “given” to the mind, quite apart from any deliberate conceptual act (value is “just known” or “just felt”). On these conceptions of value, there is no room for any mental integration to play a role, no room for the mind to do anything in producing value per se. If conceptual knowledge is not involved, then value cannot be something rationally created by the mind; it cannot be some new mental integration that the thinker brings into existence; and it is not the result of any volitional mental effort on the part of the individual.

What does this imply for a view of production? A teleological view of production is impossible on intrinsic or subjective conceptions of value since they exclude a view of valuing in terms of conceiving ends that guide the creative integration of means. But the only real alternative is an “efficient cause” view of production, where the value of output is deemed to stem entirely from the inputs to a production process (raw materials, labor, machines, etc.). In this view, the producer plays no fundamental role in creating value; at best, he is merely a deterministic cipher passively reacting to circumstances. There is nothing for him to do, since all production stems directly (and effectively “automatically”) from the factors of production themselves; they are the source and cause of value.¹² These sorts of views have been important in mainstream economic theory, but they are antithetical to Rand’s view of production.¹³

Production also effectively comes to be conceived as static. If production of value doesn’t fundamentally stem from conceiving goals and creatively integrating means, then there is no room to account for a process of creating such new mental integrations, as the driver of progress in production. Scientific and technical knowledge may be acknowledged as one of the input factors to production, but there is no recognition of the distinct process of goal-directed thinking to identify the value of integrating factors of production (including technical knowledge) into a given process of production. Any innovations in technical knowledge are therefore conceived as occurring completely independently from any value considerations; they occur exogenously to economic production (in this view), and are then simply “automatically” reflected in production. Production itself is just the static process of output stemming from given and known input factors rather than a continuous process of new value-­integrations.

As discussed above, factual knowledge alone does not automatically dictate how to integrate those facts into goals and plans. But this whole category of a distinct process of goal-directed thinking is precisely what drops out on intrinsic or subjective conceptions of value. The three different conceptions of value (intrinsic, subjective, objective) lead to fundamentally different views of production in economic theory (as argued below): a view where goal-directed thinking is central to production (as in the Austrian school) and a view where goal-directed thinking is absent from production (as in classical and neoclassical economics).

Rand’s advocacy of capitalism was based on her view that it embodies an objective conception of value: “Of all the social systems in mankind’s history, capitalism is the only system based on an objective theory of values” (CUI 14; original emphasis). It is only capitalism, in her view, that guarantees men the freedom to produce. It is only with capitalism that production (production of value) is truly possible, because it is only capitalism that protects the root mental act of the creative formation of goals and plans and the freedom to act on them. There are three elements fundamental to the functioning of capitalism: the entrepreneur, profit-seeking, and competition. In Rand’s view, all three of these center around the view of production as the creative formation of conceptual goals and plans.

The function of the entrepreneur is preeminently to engage in the process of creatively conceiving new productive goals and integrating the means to achieve them. Rand writes: “The professional businessman is the field agent of the army whose lieutenant-commander-in-chief is the scientist. The businessman carries scientific discoveries from the laboratory of the inventor to industrial plants, and transforms them into material products that fill men’s physical needs and expand the comfort of men’s existence” (FTNI 23). In other words, the fundamental role of the businessman is to take factual knowledge and figure out what value it can serve. It is precisely the businessman’s role to engage in goal-directed thinking so as to form the conceptual integrations necessary for identifying and achieving value.

Profit is the reward for successfully discovering new value opportunities, and it pertains precisely to the discovery. Once knowledge about value opportunities becomes widespread and widely implemented, the profit is competed away and disappears. The only way to consistently earn new profits is to continually engage in a process of discovery of new value opportunities.

Competition, for Rand, is effectively competition in this type of cognition. The competitive race is at root the race to create new value. One’s “advantage” over competitors is precisely the creation of new products valued more highly by the market, or the discovery of how to better integrate factors of production to higher-valued uses — knowledge that competitors do not possess. For Rand, the fundamental issue is the creative evaluation and grasp of new opportunities, however, not the competition per se. She writes: “Competition is a by-product of productive work, not its goal. A creative man is motivated by the desire to achieve, not by the desire to beat others” (“The Moratorium on Brains,” ARL 8).

What context then does Rand’s philosophy set for economics? What facts of reality give rise to the science of economics? We’ve seen how her concept of objective value shapes her concept of production, and how production of value is central to man’s life and survival. For an isolated individual (e.g., Robinson Crusoe), there is no further problem or question about production, beyond what philosophy describes. Crusoe needs to engage in a constant process of thought to discover factual knowledge about reality and to integrate this knowledge into values — that is, to conceive the goals that will sustain his life and to devise integrated plans for achieving these goals. For Crusoe, all the knowledge he needs in order to evaluate what to produce is in principle accessible to him. Since he is thinking, valuing, and producing for his own needs, given his own context and knowing full well his own integrated set of goals, there is no additional issue for him beyond the problems of conceptual thought and evaluation that we have already discussed.

Production under the division of labor introduces an entirely new question and problem. Under the division of labor, most people spend most of their time producing value for others. But since a value (for Rand) stems from a conceptual conclusion reached by an individual mind (within its own context of knowledge and integrated hierarchy of values), and since we can’t directly know the minds of others (nor think nor value for them), how are we to know what others value? How are we to evaluate what to produce, what counts as production? It’s possible to engage in physical production under the division of labor, while not producing value (when the objects created turn out not to be valued by others or are valued less than the inputs used to create them). General Motors may physically produce cars; but if the company is losing money, then it’s engaged in value destruction, not production.

In a small self-sufficient village, this problem of production might be solved by direct communication. The blacksmith can approach the cobbler and commission directly what he wants. But in today’s complex economy, goods are produced by strangers, often halfway around the world and by a long chain of production. And yet, we can walk into any local shoe store and usually find just the pair that suits us. How does this work? This is the basic task of economics: to detail the principles and processes by which this value problem is solved; to explain how it is that we can come to know about the values of others, such that we can successfully evaluate what to produce. To explain this interpersonal integration of knowledge of others’ values is to explain the interpersonal integration of production under the division of labor.¹⁴

Rand’s fundamental approach to all ethical, political, and economic questions is always the radically individualistic perspective, the perspective of the individual. For her, the correct perspective for economics would be: How am I (the individual) to evaluate what counts as production under the division of labor? This must be the fundamental starting point for economics. She categorically rejects any perspective on economics that operates from an aggregate or societal-level perspective, such as “how to most efficiently allocate society’s resources.” She designates this sort of collectivist perspective as the “tribal premise,” which, she writes, “leads . . . to a baffling sort of double standard or double perspective in their way of viewing men and events: if they observe a shoemaker, they find no difficulty in concluding that he is working in order to make a living; but as political economists, on the tribal premise, they declare that his purpose (and duty) is to provide society with shoes” (CUI 6).¹⁵ For Rand, the correct perspective from which to approach economics is the perspective of the shoemaker trying to make a living. It is Rand’s conviction that an intrinsic or subjective conception of value will necessarily lead to a view of society as organized around collective goals. This logically leads to an aggregate, tribal perspective on society, including in economics.¹⁶ In contrast, an objective conception of value logically leads to a radically individualistic perspective on society, and in economics. We won’t have space to pursue this point in depth, other than to note that mainstream economics, in both its classical (intrinsic value) and neoclassical (subjective value) variants, has consistently maintained a tribal perspective in economics. Only the Austrian school, operating implicitly with an objective conception of value, has approached a radically individualistic perspective similar to Rand’s. This is most consistently expressed in Mises’s theoretical system, in Human Action (1949 [1996]).

End of Part 1; continue to Part 2.

“Economic Theory and Conceptions of Value: Rand and Austrians versus the Mainstream” by Robert Tarr from Foundations of a Free Society: Reflections on Ayn Rand’s Political Philosophy edited by Gregory Salmieri and Robert Mayhew © 2019. All rights are controlled by the University of Pittsburgh Press, Pittsburgh, PA 15260. Used by permission of the University of Pittsburgh Press.

1. Following Rand’s usage, I use “man” and “mankind” to refer to human beings and humankind.
2. According to Rand, “A ‘whim’ is a desire experienced by a person who does not know and does not care to discover its cause” (VOS 14).
3. A more detailed discussion of this issue, with a focus on Hayek and Mises, will be addressed in a later section.
4. A few Austrian thinkers do explicitly commit to the view that knowledge is subjective in this philosophic sense.
5. She writes, for example: “Man’s consciousness is his least known and most abused vital organ. Most people believe that consciousness as such is some sort of indeterminate faculty which has no nature, no specific identity and, therefore, no requirements, no needs, no rules for being properly or improperly used. . . . The fact [is] that man’s consciousness possesses a specific nature with specific cognitive needs” (VOR 101).
6. For example, see the discussion of this type of view in Kirzner 1976, 32–37.
7. See RM for Rand’s theory on the connection of art to man’s survival, and see PWNI for the connection of philosophy to man’s survival.
8. See Nathaniel Branden, “The Psychology of Pleasure” (VOS ch. 6). “Pleasure, for man, is not a luxury, but a profound psychological need” (VOS 71).
9. See Peikoff 1991, 323 for discussion of this point.
10. For a detailed discussion of Rand’s theory of concepts, see ITOE.
11. To the extent that the inputs he is contemplating using already have economic value, it’s only because other entrepreneurs have consciously imputed value to them, given the role those inputs play in their plans aimed at their productive goals.
12. The fundamental role of the producer or businessman is the “entrepreneurial” role —  that of conceiving a vision and devising plans to realize it and bring it to fruition. There are other economically distinct roles that may be combined in the same person, such as manager/ supervisor or provider of capital. These latter roles fit perfectly well into an efficient-cause view of production as “inputs” or factors of production. Typically, therefore, the role of the businessman is reduced to only these. In contrast the entrepreneurial role, by its nature, is necessarily excluded from an efficient-cause view of production and can only be captured in a teleological view of production.
13. Rand illustrates (in a critical fashion) efficient-cause views of production in various places in Atlas Shrugged; for example, that production is just a matter of “muscles” (labor), or that a factory, or a machine, or a motor can be intrinsically (and hence automatically) productive regardless of who owns or directs it.
14. I don’t mean to suggest that Rand explicitly formulated the fundamental question of economics in these terms (she never really discussed it), but I believe this way of conceiving the economic problem follows fairly naturally from her views. My statement of the problem is informed by the way in which the modern Austrian school does explicitly conceive the economic problem, which I think is basically consistent with Rand’s ideas. The reasons for this basic consistency are explored later in the essay.
15. See her extended discussion of “tribal premise” in CUI, ch. 1.
16. See CUI 11–15, for her discussion of how intrinsic and subjective conceptions of value underlie and necessarily lead to the concept of “common good.”