Economic Theory and Conceptions of Value (Part 3)

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 “Smith 1776”) to published works. A key to those references appears at the end of each installment.

Start with Part 1 here.

Austrian Economics: Objective Value

There is a fundamental commonality between Rand and the Austrian school, grounded broadly in a shared objective conception of value (only implicit in Austrian theory), which leads the Austrian school to recognize the centrality of knowledge to evaluation, and thus to make the creative integration of knowledge, in forming goals and plans, the very heart of their economic theory. However, to begin with, it should be noted that Rand would disagree, on philosophic grounds, with many of the ideas of various thinkers in the Austrian school. She disagreed vehemently, for example, with Hayek’s political arguments in defense of capitalism, which she thought granted too much to collectivist premises.¹ She disagreed with many of Mises’s philosophical statements, particularly his wider framework of “praxeology.”² She also rejected some of Mises’s economic concepts (for example, “consumer sovereignty”).³ There is no evidence that she ever read Menger, whose famous book was largely inaccessible in its original German edition and was published in English for the first time only in 1950.

We should note also that the Austrian school encompasses a diversity of views on many topics, and it would be impossible to survey them all. Nevertheless, I believe there is a core set of fundamental underlying ideas that unites the Austrian school as a school, and it centers on an implicitly objective conception of value. I’ve tried to highlight here those elements that I think best cohere with this underlying conception of value, and to show how this set of ideas is broadly consistent with Rand’s views. Since the objective conception of value is only implicit in Austrian economics, and only imperfectly recognized and imperfectly applied by different thinkers, I will highlight some elements more starkly and more in Rand’s terms than any Austrian thinker does, so it is not the case that any particular Austrian thinker can be expected to agree in every respect with my presentation.

The objective conception of value is only implicit in Austrian economics, because Austrians explicitly place themselves in the “subjective value” category, along with neoclassical economics. This prevents them from tracing their differences with the neoclassical school to a fundamentally different concept of value. Instead, they characterize their differences in a variety of ways: that Austrians view knowledge as “subjective” (subject-dependent), where neoclassicals view it as universally given and known; that Austrians focus on the market process, where neoclassicals focus on equilibrium; and so on. But ultimately, all these differences are expressions or consequences of an objective conception of value. Whether they know it or not (and despite their sometimes mitigating or contradicting it), this is the fundamental that differentiates Austrians from the neoclassical school.

I’ve mentioned Carl Menger as one of the three codiscoverers of the marginal value principle, but it is his unique way of conceptualizing value (fundamentally different from Jevons’s) that launches the Austrian school and establishes its distinctive approach to economics. At the outset of his book Principles of Economics, Menger establishes his basic conception of value (of a “good”):

If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:

1. A human need.

2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.

3. Human knowledge of this causal connection.

4. Command of the thing sufficient to direct it to the satisfaction of the need.

Only when all four of these prerequisites are present simultaneously can a thing become a good. When even one of them is absent, a thing cannot acquire goods-character, and a thing already possessing goods-character would lose it at once if but one of the four prerequisites ceased to be present. (1871 [1994], 52)

The concept of a good, for Menger, denotes a concrete unit of something, serving a specific conceived goal, as judged by the individual in question. Menger’s conception of a good falls broadly in Rand’s category of objective value: that a good is a particular object pursued by an individual who rationally grasps its causal relation to his needs. For this reason, Menger’s is a conceptual view of value (versus Jevons’s conception of value as “pleasure”), and it accords knowledge a central role in the process of evaluation and in the status of an item as a value. Since value involves knowledge, creative conceptual thought becomes crucial to the process of forming a value (i.e., identifying something as a good).

After defining a good, Menger immediately goes on to discuss “The Causal Connection between Goods” (1871 [1994], 55), and “The Laws concerning Goods-Character” (58), a discussion that is consistently conducted in terms of viewing a good as necessarily involving a rational grasp of a causal connection to one’s needs. The principles he discusses here do not concern the laws of, or relations among, physical objects; nor do they concern laws or principles of “pleasure,” or any other purely conscious phenomena. Rather, they are laws concerning the nature of, and changes in, the four-part relationship that his concept of “good” denotes, especially the element of a conceptual grasp of causal connections.

Given his conception of value, there is no dichotomy for Menger between consumer goods and producer goods. Instead, he categorizes goods as “first-order” versus “higher-order”, where a higher-order good can be characterized as second-, third-, fourth-order, and so on, depending on its distance in the productive structure from the consumption level. The difference is one of degree, not of kind. All fall under the same basic category of value: they involve a mind’s grasp of the causal connection of an object to human needs. This connection can be simple and direct, or complex and indirect, but nevertheless all goods are valued in the same way: “It is not a requirement of the goods-character of a thing that it be capable of being placed in direct causal connection with the satisfaction of human needs. It has been shown that goods having an indirect causal relationship with the satisfaction of human needs differ in the closeness of this relationship. But it has also been shown that this difference does not affect the essence of goods-character in any way” (1871 [1994], 56–57).

Moreover, for Menger, even first-order goods are, and only can be, valued in the context of an integrated hierarchy of values — that is, with reference to the role they play in a man’s integrated plan of life. Valuing first-order goods involves assessing all the interrelated causal connections involved (not merely experiencing “reactions” of pleasure to isolated objects).

The needs of men are manifold, and their lives and welfare are not assured if they have at their disposal only the means, however ample, for the satisfaction of but one of these needs. Although the manner, and the degree of completeness, of satisfaction of the needs of men can display an almost unlimited variety, a certain harmony in the satisfaction of their needs is nevertheless, up to a certain point, indispensable for the preservation of their lives and welfare. . . . It is clear that even the most complete satisfaction of a single need cannot maintain life and welfare. In this sense, it is not improper to say that all the goods an economizing individual has at his command are mutually interdependent with respect to their goods-character, since each particular good can achieve the end they all serve, the preservation of life and well-being, not by itself, but only in combination with the other goods. . . .

The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves. (1871 [1994], 74–75, 76)

In Jevons’s theory, we saw value split from knowledge. We saw that consumer value is conceived as a type of value (“pleasure”) that excludes knowledge, and production is conceived purely as a matter of technical knowledge that excludes any value concerns. With Menger, we have a unified conception of value: value conceived as crucially embodying knowledge and applying to all goods (consumer and producer). Evaluation is a conceptual perspective on an object that is based on a grasp of its causal connections to man’s needs, and it is only as a result of a valuer’s taking (and maintaining) this perspective that the object qualifies as a value. It is a view of value that sees value and knowledge as thoroughly integrated, and applying to every instance of a good.

Later Austrians criticized Menger’s theory of needs for being too “objective” (“nonsubjective” in their view), and they shifted to a more subjectivist conception of consumer valuations of first-order goods. These criticisms tend to misinterpret Menger; they stem from the limited view that a subjective or intrinsic conception of value are the only two possibilities into which Menger can be slotted. What was missed was the possibility of a third category, Rand’s category of “objective value,” into which Menger’s conception broadly falls. Unfortunately, the move toward conceiving consumer value in subjectivist terms has somewhat muddied the Austrian conception of value, making it harder for Austrians to appreciate the root of their differences from the neoclassical school.

Nevertheless, later thinkers such as Hayek and Mises do preserve crucial elements of Menger’s distinctive conception of value (albeit expressed in different terms), which leads them to continue to frame economic issues from the perspective of a conceptual mind conceiving goals and forming plans. This activity of goal-directed thinking cannot be encompassed under a subjective conception of value, which causes the neoclassical school to ignore it and simply assume all goals and plans to be “given.” Austrians such as Mises do not ignore it; but because it cannot be subsumed under the category of subjective value Mises came to view it as the subject of a new field of inquiry, hitherto unrecognized and unconceptualized: the science of goal-directed human action — that is, praxeology.

Mises recognized that certain fundamental concepts and principles about goal-directed action in general are needed to properly ground economics. For Rand, this need is filled by ethics or morality (she uses the terms interchangeably); she views ethics as the fundamental science of values, and values as the objects of goal-directed action. For Rand, all of man’s goal-directed activity falls squarely under the purview of ethics, which establishes at the most abstract level the fundamental concepts and principles regarding human goals, choices, and actions. She remarks in her marginal comments to Human Action: “Isn’t it clear by now that ‘praxeology’ is intended as a substitute for morality? What is morality, if it is not the science of ‘all human choices’?” (Marginalia 133). It is the task of ethics to define the fundamental nature of value. For Rand, value is objective — that is, it crucially involves a conceptual mind creatively grasping means-ends relationships to achieve conceived goals. It is a unified conception of value that, like Menger’s, applies to both consumer goods and producer goods. It encompasses the conceptual goal-directed thinking that the neoclassical school ignores and that Mises sees as the subject of praxeology.

In the early part of the twentieth century, the Austrian school was considered one of several allied schools developing the emerging marginal utility ideas, differing from other schools stylistically, but not in essentials; this view changed as a result of the famous socialist calculation debate, when stark differences began to emerge between the Austrian school and the developing mainstream neoclassical school. In 1920 Ludwig von Mises published his famous paper “Die Wirtschaftsrechnung im Sozialistischen Gemeinwesen,” in which he argued that economic calculation is impossible under socialism.⁴ It concluded that socialism is doomed to failure as an economic system, because it is impossible to know how to rationally organize the production of goods, without the price system with which to calculate the best courses of action. Mises gives the example of a mountain lying in the way of a proposed rail line (Mises 1927 [2005], 47–48). Should track be laid around the mountain, or over it, or should a tunnel be dug through it? All these alternatives are technically feasible, but the technical knowledge by itself does not dictate which course of action is best — that is, which plan achieves the most value. This can only be determined by calculating the costs and benefits of each plan using market prices, in order to identify the most profitable route. Such an evaluation is impossible to a socialist state, which has no markets for factors of production (since all means of production are owned by the state), hence no prices with which to perform such a calculation. The crux of Mises’s argument is that a distinct (but interrelated) process of evaluation of the facts and technical possibilities is necessary, which a socialist state simply cannot perform. Technical knowledge alone does not provide the guidance needed for the production of value.

Neoclassical economists responded that standard neoclassical equilibrium theory could solve the problem — at least in principle. Given all the information about consumer preferences, resource availability, and technical recipes, one could construct a huge matrix of simultaneous equations and then solve for the optimal values of prices and quantities. Admittedly, gathering the information, constructing the matrix, and performing the calculations might be practically impossible at the present time; but with a large enough computer (it was asserted), the socialist state could organize production just as well as the market economy.⁵

This rejoinder baffled the Austrian side, which led Hayek (the main protagonist for the Austrians in the English language debates) to begin to elaborate elements of the Austrian view that sharply differentiate it from the neoclassical school. Mises also developed his ideas along similar lines, culminating in his monumental treatise Human Action (1949 [1996]).⁶

Essentially, Hayek brought to the forefront elements from Menger’s view of value that made the neoclassical rejoinder seem incoherent. Against the neoclassical assumption that consumer preferences, resource availability, and technical preferences are “given” and “known,” Hayek began to elaborate the elements of the process of evaluation by which these things can only come to be known, by individuals conceiving productive goals and formulating plans to achieve them. Hayek points out that the neoclassical framework completely ignores this activity. For example, he writes incredulously about Schumpeter’s “(to me startling) pronouncement [that] . . . the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist ‘from the elementary proposition that consumers in evaluating (“demanding”) consumers’ goods ipso facto also evaluate the means of production which enter into the production of these goods.’ Taken literally, this statement is simply untrue. The consumers do nothing of the kind” (Hayek 1948, 90). For Hayek, it is only a process of evaluation by individual producers that brings about the integration factors of production, by identifying their value in achieving productive goals. Ignoring this, the neoclassical framework simply assumes that the factors of production are already optimally integrated to achieve “given” goals (which are already “known” to be valuable), and therefore consumer utility (value) can be simply mathematically imputed to these known goals and given integrations of factors.

Regarding the overall debate, Hayek writes: “This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning — direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons” (Hayek 1948, 79). It is no accident that the concept of “planning,” for Hayek’s opponents, had only one sense, a sense that did not apply to the individual; for the idea that the individual plans, that he conceives goals and creatively forms an integration of means aimed at achieving them, is not part of the neoclassical conception of value. As we saw earlier, Robbinsian man maximizes, but he does not plan; all his ends and the available means to them are already given and known; all the integrations are already formed. The neoclassical view leaves no room for conceptual thought, conceptual planning, or conceptual evaluation, but only deterministic, mathematical optimizing. Hayek’s focus on individual planners stems from Menger’s contrary conception of value.

Hayek goes on to outline some of the kinds of knowledge that are relevant to an individual’s plans, ridiculing the notion that such knowledge could be collected by and known to the state (to be used in its “planning”):

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge: But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. The shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others. (Hayek 1948, 80)

Hayek thought that the essential issue was that this sort of knowledge is insurmountably “dispersed” (not centralizable, therefore unavailable to the state to use in “planning”). More fundamentally, the kind of knowledge he calls attention to here goes beyond factual, scientific knowledge, encompassing knowledge of what ends can be achieved and what resources might serve as means. “Means” and “ends” are evaluative terms that go beyond the factual information. Hayek’s “particular knowledge of time and place” is just the sort of knowledge that must be evaluated — that is, integrated by an individual’s thought process in conceiving and pursuing goals. This is a process that can only be performed by an individual mind.

It’s sometimes expressed in Austrian circles that Hayek and Mises extended the subjectivism of the Austrian paradigm during this period to include “subjective knowledge” (i.e., knowledge as subject-dependent, pertaining only to an individual and his context), to supplement Menger’s concept of “subjective value.” But these are not two distinct issues; rather, they are inseparable elements of an objective conception of value. The kind of knowledge that Mises and Hayek (mis)describe as “subjective” is precisely the kind of knowledge an individual needs in order to form an integrated plan to achieve his specific goals. This sort of knowledge, in contrast to abstract, impersonal, universal scientific knowledge, is subject-dependent, precisely because conceived ends and the mental integration of plans to achieve them are subject-dependent. This category of knowledge was already embedded in Menger’s objective conception of value from the start.

In the midst of these discussions, Hayek came to point out that the state of equilibrium at the heart of the neoclassical framework is identical with the state of affairs where all knowledge is given and known; that they are one and the same issue. In the state of equilibrium, all the plans of all individuals dovetail perfectly because there is perfect knowledge of all possible ends and means, and perfect knowledge of what everyone else is planning to do. Hayek regarded it as absurd to assume this sort of knowledge as “given.” To do so is to assume away the real problem that economics must explain: How is it that all the separate plans of every individual come to be coordinated or integrated?

At root, then, the fundamental problem of economics is a knowledge problem. Each individual, pursuing his own productive goals and plans, needs a method to coordinate his plans and goals with those of others. Otherwise, the expectations embedded in his plans will be disappointed. He will be unable to sell what he intended to sell (at the prices he expected), or to buy what he intended to buy (at the prices he expected). He needs to learn what others do value, will value, or could value, in order to integrate his plans with theirs, in order to achieve his goals. It is a continuous process of evaluation, learning, and re-evaluation; of conceiving goals and formulating plans; and of subsequently reconceiving goals and reformulating plans, as new information comes to light and as circumstances change. This conception of the fundamental problem of economics is basically consistent with the conception that I showed follows from Rand’s philosophy.

This coordination of plans is precisely what the market price system enables; the information about what others value is embedded in market prices. The fundamental task of economics, then, is to describe the process by which individual goal-seekers use market prices in evaluating and reevaluating their goals and plans, to progressively coordinate their productive activities. In stark contrast to the neoclassical paradigm with its focus on the unchanging perfect-knowledge equilibrium state, the Austrian framework centers on studying the nature of the evolving market process, the ongoing process of the discovery, evaluation, and coordination of knowledge in a nonequilibrium world.

In a nonequilibrium state, supply does not always equal demand, markets may not clear, different prices for the same good may exist in different parts of the market, and so on. This opens the door for entrepreneurial activity: the opportunity to buy lower in one place or time, to sell higher at a different place or time, to create new products and new enterprises, and to capture the difference in prices as entrepreneurial profit. All this sort of activity was systematically excluded from the neoclassical equilibrium framework. But the fundamental reason that any such price discrepancies can exist is because of lack of knowledge that there is a price discrepancy. If everyone knows about a price discrepancy, then buying and selling to capture the embedded profit opportunity will already have raised one set of prices and lowered others, such that no profit opportunity remains. At this point, the prices would be fully integrated.

The kinds of price discrepancies involved are rarely the “simple” price discrepancies of classic arbitrage opportunities (e.g., buying gold in New York, while instantly selling it higher in London, to capture momentarily different prices for the same good). Such opportunities are infrequent and rapidly disappear. Usually it’s necessary to perform a complex integration of prices and goods, in order to identify a profit opportunity. This may take the form, for example, of the accounting calculations of a proposed business plan (how a business could buy certain resources, transform them, and sell the output at higher prices, to earn a profit). It may take the form of the formulas of a financial model, to identify situations where assets should trade according to a certain relationship (but perhaps currently do not). It may take the form of the economic forecasts by which large corporations plan their investments to meet future demand to earn higher profits. There are innumerable forms of this sort of creative integration to discover potential price discrepancies and hence profit opportunities. The crucial point is that such integrations are creative integrations; they require fresh thought in order to integrate the price information in new ways (including to project and anticipate future prices), in order to evaluate alternative goals and identify new profit opportunities. The discovery of profit opportunities is specifically the result of this creative thought process and not merely a quantitative maximization problem.

The market process, then, is driven by individuals creatively seeking profit opportunities in this fashion. Kirzner (following Mises) designates this process of intellectual discovery the “pure” entrepreneurial function.⁷ In effect, it is the pure intellectual act of creatively integrating knowledge to evaluate an opportunity.

The entrepreneur is commonly thought of as the figure who starts new businesses, but the “pure” entrepreneurial function, for Mises and Kirzner, is a broader concept that centers on this intellectual act of evaluation, which applies far more broadly than just to the activities of businessmen. Every market decision by anyone in the economy, in Mises’s view, necessarily involves an element of creatively seeking to discover value (whether it’s the job-seeker looking for better employment, the investor weighing investment decisions, the consumer shopping around, etc.). As Mises puts it: “Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not the particular feature of a special group or class of men; it is inherent in every action and burdens every actor. . . . The capitalists, the landowners, and the laborers are by necessity speculators. So is the consumer in providing for anticipated future needs” (1949 [1996], 253).

In this view, everyone, to the extent he participates in the market at all, engages in the creative discovery of value, guided by market prices.⁸ It is nevertheless true that the traditionally labeled entrepreneur is the figure in the economy for whom the pure intellectual act of discovering profit opportunities (and acting to realize them) is the primary activity. It’s for this reason that Mises views the entrepreneur as the central force at the heart of the economic system: “The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible” (1949 [1996], 255). And “The driving force of the market process is provided . . . by the promoting and speculating entrepreneurs” (328).

The Austrian perspective reaches its culmination and full, systematic presentation with Mises’s treatise Human Action, where Mises develops in depth the economic calculation perspective (1949 [1996]). For Mises, the concept of economic calculation is the root principle of his entire system of economics.⁹ He writes: “Monetary calculation is the guiding star of action under the social system of the division of labor. It is the compass of the man embarking upon production” (229). And “Monetary calculation is the main vehicle of planning and acting in the social setting of a society of free enterprise directed and controlled by the market and its prices” (230).

With this root principle, Mises brings a radically individualistic perspective to economics: the perspective of the individual creatively pursuing his goals and plans, using economic calculation to guide him in identifying a potential value, and then acting to achieve it. Like Rand, then, Mises’s fundamental perspective is the perspective of the shoemaker trying to make a living. The problem the shoemaker faces is not only that of combining physical elements (tools, machines, leather, labor time, etc.) to make shoes for others; he must figure out how to combine these elements profitably, so that the revenue from selling finished shoes exceeds the cost of the resources used to make them, and he must do this continually in the face of constantly changing circumstances. This problem of identifying profit opportunities can only be solved by means of economic calculation; and it is this process of economic calculation that shapes and drives which physical, technical combinations of resources will be discovered and employed at all.

By using economic calculation in this way, the shoemaker serves his own goals by means of producing value for others. It is only by using economic calculation that he can know he is successfully producing value for others (and thus can profit for himself). The process of economic calculation performed by an individual mind, then, is the fundamental solution to the economic problem: how the individual is to know what counts as production under the division of labor.

The neoclassical idea that all technical possibilities of production can be given and known, apart from any value considerations, is simply absurd from the Austrian viewpoint. The technical possibilities we now know and use were mainly investigated and selected because they were seen to be economically feasible. Vast areas of technical possibility are simply ignored from the start (never investigated or developed) because they are obviously economically impossible. The technological innovator is guided at every step, in every element of his creation, by value considerations. The goal of the innovator is not merely to create something new, but something better — that is, more valuable. Essential to this goal is an evaluation that, in the Austrian view, requires economic calculation. The technical integration involved in production plans is first and foremost value integration. It represents a process of thought that is essentially evaluative — one that integrates facts (including facts about human needs and one’s own circumstances) to form and rank new goals, devise means to them, and integrate these means into coherent plans. This process can only be understood from the perspective of Rand’s objective conception of value, since, according to the subjective and intrinsic conceptions, value does not essentially involve knowledge, and means are “given” rather than devised.

In Mises’s system, all the fundamental elements of economic theory are rooted in the mental process of an individual creatively conceiving goals and devising plans, guided by economic calculation, to achieve profit. It is this mental process that constitutes the crux of the concept of production for Mises (consistent with Rand’s view of production) as the creative origination of the ideas that guide a man’s productive actions. Mises writes: “Production is not something physical, material, and external; it is a spiritual and intellectual phenomenon. Its essential requisites are not human labor and external natural forces and things, but the decision of the mind to use these factors as means for the attainment of ends. What produces the product are not toil and trouble in themselves, but the fact that the toiling is guided by reason” (1949 [1996], 141–42).

It is this mental process that constitutes the “pure entrepreneurial” function, and it is just this sort of thinking that is the primary role of the entrepreneur in the economy. The standard that guides this creative mental process is profit, the hallmark of successful production. Mises (like Rand) tends to downplay the competitive element, while Hayek and Kirzner discuss it more; in any case it’s clear that, for Austrians, competition can only refer to competition in the creative discovery of value opportunities.¹⁰ These elements (creative thought, profit, the entrepreneur, competition), which are absent from the neoclassical framework, are at the very center of the Austrians’ economic theory.

Mises reconceptualizes all economic concepts in terms of his root principle of economic calculation.¹¹ Typically it is said, for example, that the Austrians treat “cost” or “profit” as subjective (i.e., “subject-dependent”). More precisely, these concepts denote mental tools used by an individual engaged in a conceptual thought process of evaluation. For Mises, these concepts only arise, and only have meaning, within the context of an individual’s engagement in economic calculation. The concept of “cost” only has meaning when it refers to the sum of prices of the particular constellation of goods the individual is contemplating using, per his plan. The concept of “profit” denotes the net result of the individual’s calculations, validating that his contemplated plan is an identification of value. Profit can only arise in, and be viewed from, the context of his plans, his integrations, his goal. Even the concept of “capital”, for Mises, arises only as an evaluative tool for the individual engaging in economic calculation: “The concept of capital is the fundamental concept of economic calculation, the foremost mental tool of the conduct of affairs in the market economy. . . . The concept of capital cannot be separated from the context of monetary calculation and from the social structure of a market economy in which alone monetary calculation is possible” (1949 [1996], 260–61).

The view of man embedded in the Austrian economic calculation framework is the opposite of the neoclassical “Robbinsian maximizer.” In contrast to the neoclassical view of a passive, deterministic, algorithmic maximizer, the Austrian view of man is that of an open-ended goal-seeker, creatively forming and evaluating new goals and plans by means of economic calculation. Although the exact epistemological nature of this creative thought process is not made clear in the writings of Mises and Kirzner, what’s important is that they do recognize it is some form of volitional act of creative conceptual evaluation that must lie at the root of economic theory. Mises emphasizes the uncertainty of the future as the reason that creative thought is required (versus being able to algorithmically deduce the future from current data); and, for the same reason, he insists that it must be a volitional act (it cannot be mere passive reaction to “given” data). Kirzner designates the unspecified creative thought process “entrepreneurial alertness.” In Discovery, Capitalism, and Distributive Justice (1989), in which he explores the nature of this process most deeply, Kirzner comes remarkably close to an explicit recognition of the category Rand calls “objective.”¹² It’s clear that he senses a missing category and struggles to make it explicit. Ultimately, however, it takes much deeper work at a higher epistemological level to fully grasp and understand Rand’s concept of “objective.”¹³

There is much to be said about all the particular differences between the mainstream neoclassical school and the Austrian school — differences in methodology, analytic concepts and conclusions, policy recommendations, and so on. But all trace back to their different foundational conceptions of value. Perhaps the culmination of these differences is that the neoclassical consensus believed socialist planning to be possible (while Austrians did not), because the absence of an objective conception of value led them to systematically ignore all the essential features of free markets (profit, entrepreneurship, competition). If these elements are dispensable from economic theory, then capitalism itself is dispensable. In fact, these elements were often conceived as negatives, sources or expressions of “market failure” or “inefficiency.” At the extreme, profits are seen as stemming from pernicious monopoly power, the entrepreneur is viewed as an exploiter who does no real work, and competition is considered wasteful and vicious. Not only were these elements considered dispensable, in many cases it was argued that they should be dispensed with. This is the inevitable result of theories that ignore the essential role of the operation of the market process in allowing individuals to discover knowledge relevant to forming and evaluating their own goals and plans (and reformulating as necessary to bring these plans into greater harmony with each other and with the facts). If all plans and goals are assumed known and coordinated in advance, then of course the operation of the market process is superfluous. Many free market institutions whose primary role is the dissemination and coordination of value-relevant knowledge (e.g., advertising) have been attacked as useless and wasteful, precisely because their functions would not be needed (or even possible) in a state of equilibrium.

For Mises, in contrast, the principle of economic calculation (implicitly embodying an objective conception of value) makes socialism impossible and free markets necessary, if there is to be a complex division of labor economy at all. Mises further argues that any government intervention in markets faces the same essential problem as central planning: to the extent the intervention distorts market prices (as it must), it disrupts the ability of individuals to accurately engage in economic calculation, making it impossible therefore for them to evaluate properly. Logically, this can only lead to the misperception and misallocation of value — that is, to the destruction of value.¹⁴

Mises viewed capitalism as the only social system that makes economic calculation possible — that is, which allows the individual to engage in creative, conceptual evaluation to achieve productive goals in the economic realm. At a more abstract philosophical level, Rand’s view of capitalism was that it is the only social system that protects the individual’s creative, conceptual functioning in discovering, pursuing, and achieving values. Rand states: “Of all the social systems in mankind’s history, capitalism is the only system based on an objective theory of values” (CUI 14). It is no accident that the Austrian school, starting with an implicitly objective conception of value, effectively shares with Rand a conception of capitalism as the only system that protects the functioning of the individual creative mind.

End of Part 3; continue to Part 4

“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. See Rand Letters, 308. I have found no evidence that she ever commented on Hayek’s specifically economic work, and it seems unlikely that she read any of it.
2. Nathaniel Branden’s review of Mises’s book Human Action, published in The Objectivist Newsletter under Rand’s supervision, states: “In justice to Professor Mises’ position and our own, it must be mentioned that there are many sections of Human Action with which Objectivists cannot agree. These sections pertain, not to the sphere of economics as such, but to the philosophical framework in which his economic theories are presented. We must take the gravest exception, for example, to the general doctrine of praxeology; to the assertion that all value-judgments are outside the province of reason, that a scientific ethics is impossible; to the disavowal of the concept of inalienable rights; and to many of the psychological views expressed.” Nevertheless, the otherwise glowing review concludes: “Notwithstanding these reservations, the book is of the first rank of importance, eminently deserving of careful study. It is a major economic classic. As a reference work, it belongs in the library of every advocate of capitalism” (TON vol. 2, no. 9, 34).
3. See Marginalia 105–41 for Rand’s marginal notes on portions of Human Action. On the issue of consumer sovereignty in particular, see Marginalia 132, 137.
4. The paper is republished in English in Hayek 1935, ch. 3.
5. For a detailed account of the socialist calculation debate, see Lavoie 1985.
6. These ideas in both Mises and Hayek were developed over time, and earlier statements of the issue by both were less clear and less focused on the creative element in evaluation than their later statements.
7. For Kirzner’s elaboration of this concept, see Kirzner 1973, ch. 2.
8. Rand would disagree with this view, to the extent that she disagrees with Mises that everyone is engaged in rational, creative goal-seeking action at all times (this point is elaborated in the final section below).
9. Mises’s economic calculation concept is viewed by some as a purely polemical point against socialism — but for Mises, it is a polemical point against socialism precisely because it is the root principle of production under the division of labor.
10. This is revealed, for example, in the very title of Hayek’s essay “Competition as a Discovery Procedure” (Hayek 1978, ch. 12).
11. In fact, the proper way to read Human Action (often missed) is to read it as a complete reconceptualization of economic theory from the perspective of economic calculation.
12. It does not appear that Kirzner ever encountered or was familiar with Rand’s concept of objective value.
13. Rand’s concept of “objective” is grounded in her theory of concepts; her theory explains the specific creative act involved in forming a conceptual integration, which underlies all creative thought (see ITOE).
14. This point parallels in economics (and for analogous reasons) Rand’s philosophic point that force can never achieve value but only destroy value (Peikoff 1991, 315–18).