Economic Theory and Conceptions of Value (Part 4)

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.

Is Economics Value-Free?

The debate over whether economics is a value-free science has a long history, one impossible to summarize here. On this question, Austrians and neoclassicals agree: economics is indeed value-­free. In contrast, Rand emphatically rejected the idea that economics can be separated from morality.¹ Her remarks on this subject were brief (she never elaborated on her view of the exact connection of morality to economic theory), but a few important points can be made.

First, the urge to separate economics from morality seemed to originate with the desire to establish economics as a factual science — one that could reach true conclusions apart from any political or moral considerations (just as, e.g., the truth of the principles of physics are grasped independently of one’s moral or political views). Whether one views markets as moral or immoral, desirable or undesirable, economics can nevertheless reach factual, objective, scientific conclusions about how, for example, the laws of supply and demand operate. One may not like the consequences of the operation of those laws, but one still must acquiesce (in this view) to the fact that these laws do operate in the way that economic science describes.

My main purpose, however, has been to show precisely that (and how) a conception of value shapes the entire framework of an economic theory, even if just implicitly. One cannot, in fact, reach true conclusions in economics without a correct conception of value. The root of the fundamental disagreements between the Austrian school and the neoclassical school come down (as I’ve argued) not to a disagreement on “factual” or “scientific” points but to an implicit disagreement about the fundamental nature of value: an objective versus a subjective conception of value. As a result, the two schools approach economic science from completely different perspectives and reach radically opposed conclusions.

Ethics is indispensable to economics, for it is only in rising to the philosophic level that one can investigate and make explicit any implicit assumptions about the nature of value. It is only at the level of ethical theory that one can identify, define, and validate a proper conception of value.² But the fact that ethical conceptions are crucial to economics does not mean thereby that “nonfactual” or “nonscientific” considerations are being imported into economics. For Rand, ethics is a science just as much as economics (or any other science) and itself rests on factual, descriptive, observational data.

There is a long-standing controversy in economics regarding the nature of man and how to reflect it in economic theory. W. C. Mitchell, for example, criticizing theories built on the foundation of a rational view of man, objects that the empirical facts of the matter indicate that most men are driven more by habit and custom than by careful rational planning and calculation: “Reason is . . . very imperfectly developed in the case of most people. For the great bulk of mankind it is true from first to last that their activity is determined for them by these instinctive impulses to act, of the source of which very little is known, and that being the case, any account of human conduct, which makes man primarily a rational creature, pursuing a calculated course leading toward some logical end, is not true to the facts” (Mitchell 1969, 288).

Economic theory, in this type of view, must fundamentally reflect the fact of how most men are. The neoclassical equilibrium framework does in fact (as we’ve seen) express a kind of economic system that reflects a view of man as passive, reactive, algorithmic in his thinking (rather than active and creative), as repeating rote activities (rather than seeking goals), and so on — in other words, a view of man as functioning habitually and instinctively. This is the view that a subjective conception of value leads to.

Austrian economics, in contrast, with its implicitly objective conception of value, expresses a view of man as a rational, creative, purposeful goal-seeker. This is the base of Mises’s system, his starting concept of “human action.” However, in trying to justify this starting point, Mises goes so far as to argue that passive inaction also qualifies as a type of purposeful action. Mises seeks to secure the foundation for his system in this way: “Praxeology consequently does not distinguish between ‘active’ or energetic and ‘passive’ or indolent man. The vigorous man industriously striving for the improvement of his condition acts neither more nor less than the lethargic man who sluggishly takes things as they come. For to do nothing and to be idle are also action, they too determine the course of events” (1949 [1996], 13).

From Rand’s perspective, the choice between the two views of man (rational and purposeful versus passive and unthinking) is not a matter of either/or; both views of man are true. Rand (in contrast to Mises) does distinguish between active, energetic man and passive, lethargic, indolent man — and she does so at the most fundamental level. This distinction represents her deepest categorization of men: the conceptual mentality versus the anticonceptual mentality.³ Both types of men exist: those who exert the effort to use their conceptual faculty (i.e., to be rational), and those who don’t. (In her view, most men are in the middle, switching between the two modes of functioning.)

But how are we to decide which view of man is the correct base for economic theory? Particularly if Mitchell is right, that the passive, unthinking types statistically dominate a society? How do we decide whether objective value or subjective value is the right basis for economics?

Rand would argue that the only way to choose is by bringing in moral considerations. It may be factually true that a great many men are passive and unthinking. But Rand’s view that reason is man’s basic means of survival leads her to identify rationality as the primary virtue of her ethics. Man should be rational, because he must exercise his conceptual faculty, if he is to survive. She emphasizes that even the survival of those who are passive and unthinking (however numerous they may be) depends on the creative thought and production of the rational thinkers: “If some men do not choose to think, they can survive only by imitating and repeating a routine of work discovered by others — but those others had to discover it, or none would have survived. If some men do not choose to think or to work, they can survive (temporarily) only by looting the goods produced by others — but those others had to produce them, or none would have survived” (CUI 8).

Mises seeks to coerce agreement with his system by asserting purposeful, goal-directed action as a universal, inescapable axiom, arguing for all human activity to be uniformly categorized this way. But for Rand, conceptual, goal-directed functioning is a moral choice (and man’s fundamental choice); it’s a moral achievement for an individual to reach. It is precisely because it is the moral choice necessary for man’s survival that Rand would view the rational conception of man as the correct foundation for economic theory.⁴

The objective conception of value is factually descriptive of how men act when they choose to rationally pursue life-serving goals. But it is also prescriptive, in that it is the mode in which men morally should function. It is for this reason that Rand advocates capitalism as the only moral social system, since it is the only system that embodies an objective conception of value; it is the only system that protects and rewards a rational mode of functioning. But it’s also factually true that capitalism is the only practical system.⁵ Mises’s socialist calculation argument showed that production under a division of labor economy is impossible under socialism; pure socialism is thus ultimately doomed to collapse into autarkic production. Rand similarly argues at the ethical and political level that socialism, by thwarting the conditions necessary for men to think and produce, can only end in destruction and collapse.

It is only to the extent that people choose to creatively pursue long-range productive goals (and are free to do so) that a sophisticated division of labor economy can arise and be sustained at all. Thus, in fact, it is free markets (embodying an objective conception of value) which alone give rise to the complex phenomena which economics studies. The fundamental to be explained by economics (for Rand and the Austrians) is how rational goal-seeking individuals successfully evaluate and thus produce under the division of labor (i.e., while jointly forming the increasingly complex integration that constitutes the division of labor). The subject matter of economics is the description and explanation of the principles and dynamics of the operation of objective value and objective evaluation. In contrast, if everyone were universally passive and unthinking, in the way Mitchell asserts, actuated only by the (intrinsic) values of tradition and authority or by nonrational (subjective) impulses or instincts rather than by long-range goals and plans, there could be no production of any degree of complexity. There would be no division of labor to speak of, merely a primitive level of bare, isolated agricultural production. There would then be nothing for economics to describe or explain.

For Rand, there can be no tension or conflict between morality and economics, since an objective conception of value is both the crux of her morality and the proper base for economics as a science. Any apparent conflict between morality and economics, or between morality and capitalism, or between morality and free market outcomes necessarily stems from an assumed perspective of intrinsic or subjective value. Rand argues (CUI 12–15) that both intrinsic and subjective conceptions of value necessarily lead to a collective view of the good — that is, some notion of the “common good,” an alleged collective scale of values against which social outcomes can be compared and judged. In contrast, with an objective conception of value there can be no such thing as the “common good,” only the individual good of each individual thinker and goal-seeker. From this perspective, there can be no moral meaning per se to any particular pattern of free market outcomes, other than that it represents the free, voluntary choices of the individual market participants, each pursuing his own goals.

Without an explicit understanding of the objective value perspective, it is all too easy, even for many defenders of capitalism, to implicitly slip into a perspective of viewing market outcomes from a collective (“common good”) perspective. It is for this reason that Rand writes: “It is in regard to a free market that the distinction between an intrinsic, subjective, and objective view of values is particularly important to understand” (CUI 16). Free market prices and outcomes (profits, sales revenues, incomes, etc.) represent aggregate outcomes, to be sure, but not collective outcomes — that is, they are not the results of the actions of a collective qua collective, seeking a collective goal according to a collective scale of values. Rand coins the concepts of “socially objective value” and “philosophically objective value” to help sort out the proper way to think about these aggregate economic outcomes, while strictly maintaining the individualistic objective-value perspective, and avoiding falling into collectivist, tribal perspectives on the economy and economic quantities.

Rand writes that “the market value of a product does not reflect its philosophically objective value, but only its socially objective value” (CUI 16). She defines socially objective value as “the sum of the individual judgments of all the men involved in trade at a given time, the sum of what they valued, each in the context of his own life.” (CUI 17). A common confusion regarding “socially objective value” is to assume that Rand is referring to market prices. However, nowhere in the essay introducing this concept (“What Is Capitalism?” CUI ch.1) does she use the word “price.” She refers to “market value” and seems to have in mind something like the total sales revenue of a good, relative to the economy. She defines socially objective value as “the sum” of what men value. She introduces the concept with the analogy: “Just as the number of its adherents is not a proof of an idea’s truth or falsehood, of an art work’s merit or demerit, of a product’s efficacy or inefficacy. . .” (CUI 17). The parallel in markets is the number of people who purchase a product — that is, something like sales revenue, not price. As an example of socially objective value, she speaks of a lipstick manufacturer earning greater profits than a microscope manufacturer, which is true not because the price of lipstick is higher (obviously), but because total sales revenue is much higher; people spend more in aggregate on lipstick than they do on microscopes.

Viewed from an intrinsic value perspectives, the lipstick/microscope outcome can seem problematic. Even leaving aside some religious perspectives (e.g., that it represents the sin of vanity, angers God, and should be suppressed), a common implicit perspective is to view it as problematic that so much money in society is spent on something that may seem relatively trivial and frivolous, while less is spent on something as “serious” and “important” as microscopes. On this sort of intrinsic-value perspective, spending patterns should reflect what’s “best,” or “highest,” or “noblest” for human life (e.g., producing more Hugo novels and fewer true-confession magazines). Since people aren’t voluntarily spending their money in this way, the government “should” redirect spending to these (intrinsically) “better” values.

What lends plausibility to this perspective (and what can make it hard to untangle) is that those products are better, in an important sense. On rational, objective grounds, microscopes are scientifically more valuable than lipstick and can lead to life-saving discoveries on a large scale; Hugo’s novels are aesthetically more valuable than true-confession magazines (and people should aspire to enjoying them); and so on. This is the perspective on value that Rand conceptualizes as “philosophically objective value,” which she defines as “a value estimated from the standpoint of the best possible to man, i.e., by the criterion of the most rational mind possessing the greatest knowledge, in a given category, in a given period, and in a defined context (nothing can be estimated in an undefined context)” (CUI 16–17).

Such products may be objectively “better” in terms of their value (potential or actual) to human life. But “better” to whom, and for what? The objective-value perspective always stays cognizant of these two crucial questions, to keep the concept of value firmly grounded in the individual.⁶ Such products are only values to those who can and do creatively conceive goals and plans requiring the use of those products for their goal-fulfillment. Forcing an object on someone, simply because it seems intrinsically “better” according to some abstract standard, by no means causes an individual to suddenly have, without any cognitive effort, specific goals and plans vis-à-vis that product, which alone would allow him to value it and use it. It is this sort of perspective that leads, for example, to an impoverished country building mega-dams and superhighways (using government-granted global development loans), because such things are seen as “intrinsically valuable” to human life — while the population is starving for lack of farm implements and the private property protections that would allow individuals to invest in and acquire such objects as they actually need for the pursuit of their individual productive goals and plans.

The fact that market outcomes merely reflect the sum of what people currently value does not, however, mean that values are subjective. A subjective-value perspective naturally leads to the view that the moral imperative is to maximize subjective “utility” or “preference satisfaction,” which becomes a collective standard against which aggregate market outcomes are measured. While many free market advocates try to defend capitalism on this standard (that free markets are what maximize total societal utility), the collective perspective embodied in this viewpoint inevitably undercuts capitalism. Critics of markets argue that there is no reason to suppose that the “arbitrary” pattern of market outcomes is what maximizes aggregate utility; nor is there any reason that some people should get “more” preference satisfaction than others, rather than distributing it equally. Any sort of interpersonal summation or comparison of subjective utility or preference-satisfaction itself is inevitably subjective, so it becomes a matter of subjective preference as to what distribution of subjective utility is deemed to be the “maximum.” Moreover, a subjective-value approach leads to the view that collective action can or should be taken in order to realize a collective goal, one that is “subjectively preferred” by the majority. If the majority subjectively “likes” environmental regulation, or the “security” of socialized health care, then the advocate for markets would have to argue to thwart the subjective likings of the majority — or else he is relegated to making the rather inconsistent argument that a free market is what people “really” do, or really would, subjectively like, but they just don’t know what is good for them.

By conceptualizing aggregate free market values as “socially objective value,” Rand cuts off at the root any sort of collective perspective and shows how to interpret the nature of aggregate market outcomes entirely from the individual’s perspective. What makes socially objective value “objective” is precisely that these free market values arise under a social system that reflects, protects, and encourages an objective-value mode of functioning: each individual is free, within his own life context and context of knowledge, to creatively conceive his own goals, form his own plans, and achieve them as best he can (while relying only on the voluntary cooperation of others who are doing the same with their lives).⁷ Rand elaborates, for example, what the value and use of a lipstick could mean to the life of a stenographer, and how it can be more valuable to her than the use of a microscope. Or, that someone of modest intelligence might be unable to read Hugo but does enjoy true-confession magazines, and thus in the context of his life and goals and enjoyment, it’s objectively right that he spends his money on the latter. Market values are the sum of all such evaluations.

Capitalism as a social system provides the conditions that alone make objective evaluation possible, but it does not (and cannot) guarantee that every member of society will evaluate objectively (no social system can). To call market values “socially objective” is not to assert that they reflect only objective evaluations on the part of every individual. But a crucial part of the objective-value perspective is to view the market as a process and not as a static snapshot. (In contrast, intrinsic-­and subjective-value perspectives do and must view market outcomes as static snapshots; for example, neoclassical equilibrium theory.) What makes market values socially objective is not only that they arise from the conditions that make objective evaluation possible, but that there is an inbuilt dynamic in free markets that progressively encourages objective evaluation and penalizes its opposite. The free market rewards those who evaluate objectively with greater incomes, greater profits, greater sales revenues — that is, with a greater role in the economy, thus giving their future evaluations a greater impact on aggregate market values. Conversely, those who do not evaluate objectively are penalized and see their role and power in the economy increasingly shrink. While free market values do not (necessarily) reflect “philosophically objective value,” they do progressively move in this direction, at least within each field: “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 18). And “The ‘philosophically objective’ value of a new product serves as the teacher for those who are willing to exercise their rational faculty, each to the extent of his ability. Those who are unwilling remain unrewarded” (18).

In this way, an objective-value perspective explains the fact of the continuous progress of free markets. In contrast, a subjective-value perspective is helpless on this score. If market values merely reflect the subjective “likings” of market participants, then any change in subjective values can only be conceptualized as merely a “shift” to reflect a new pattern of subjective likings, not as an “improvement.” It would always be akin to, for example, a change in color preferences for shoes, causing the market for brown shoes to decline and the market for black shoes to increase — nothing more significant than that.⁸

Another sense in which economics is traditionally said to be “value-free” is the idea that the economist does not and cannot prescribe which particular ends individuals should or will seek. It doesn’t matter if the products and services sought are moral or immoral, objective or nonobjective, rational or irrational. Independent of the economist’s moral judgments, economics will disinterestedly explain how and why prices for all such goods are formed. In this view, a subjective conception of value is perfectly sufficient as far as economics is concerned. We need only know that someone seeks a particular end and is willing to exchange for it; we need not inquire into his motives or the moral status of those ends. However, the discussion above of socially objective value has already shown why this view is inadequate. While people are free to pursue nonobjective values under capitalism, capitalism contains systematic forces that discourage, limit, and progressively diminish the role and influence of nonobjective values (and those who evaluate nonobjectively) in free markets. In this deeper sense, capitalism is decidedly not value-neutral; it is morally biased in favor of the pursuit of objective values and against the pursuit of nonobjective values. For the same reason, economic theory, in studying and explaining the functioning of markets, is not value-neutral in this deeper sense.⁹

End of chapter

“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. She once wrote, for example, regarding Ludwig von Mises: “His book, Omnipotent Government, had some bad flaws, in that he attempted to divorce economics from morality, which is impossible; but with the exception of his last chapter, which simply didn’t make sense, his book was good, and did not betray our cause” (Letters 308).
2. Some theorists seek to avoid making any assumptions about the nature of value by working merely with “choice” or “revealed preference” as allegedly neutral substitutes for a concept of value. But this is self-deceiving. The elimination of any reference to the conceptual thought processes of the individual is ipso facto to exclude an objective conception of value and to default to a subjective conception of value.
3. This is the root difference between the heroes and villains in Rand’s novels. She elaborates on the nature and functioning of the anticonceptual mentality in many of her nonfiction writings, starting with her first post–Atlas Shrugged essay, “For the New Intellectual” (FTNI ch. 1). See also “The Missing Link,” and “Selfishness without a Self” (PWNI chs. 4, 5).
4. Peikoff puts the broad point (not specifically in reference to economics) as follows: “In the Objectivist view, the proposition that man is the rational animal does not mean that men always follow reason; many do not. Nor does it mean merely that man alone possesses the faculty of reason. It means that this faculty is a fundamental of human nature, because man is the organism who survives by its use” (Peikoff 1991, 195).
5. For Rand, since value is based on and derives from facts, there can be no issue of a clash between fact and value or between the moral and the practical.
6. As we saw earlier, classical economists fell prey to this intrinsic-­value error by failing to reach the perspective of these two questions, causing them to reify the abstract value of a good to human life as necessarily occurring equally in every concrete instance of the good, regardless of individual context, purpose, knowledge, and so on.
7. It’s crucial to bear in mind that “socially objective value” pertains only to market value as it arises in a free market; any government interference into markets to that extent diminishes or negates the social objectivity of the resulting distorted market values.
8. Not coincidentally, neoclassical economics has long had difficulties incorporating any sort of theory of growth into the main body of economics, typically tacking it on as a sidecar to macroeconomics. Even then, it invariably remains a theory of growth (quantitative increases in preexisting goods), rather than a theory of progress. See for example, Holcombe (2007, 8): “The neoclassical vantage point leaves out the two central concepts of this book: progress and entrepreneurship. Neoclassical theory analyzes growth, not progress. Output is measured as a homogeneous quantity, which assumes away the possibility for developing new and improved products.”
9. I should briefly mention George Reisman’s book Capitalism (1996), the most prominent and ambitious work in economics by an adherent of Ayn Rand’s philosophy. Reisman’s stated purpose was to integrate Austrian and Classical schools of economics (an “Austro-classical synthesis”), while also integrating economic theory to Rand’s philosophy. Unfortunately, while the book contains some excellent material on certain specific topics, it does not succeed in presenting a valid new system of economic theory and, in fact, goes badly awry.

   As Kirzner (1999) charges in a review article, Reisman fundamentally misses (or ignores) the uniquely Austrian perspective on economics, and thus his “synthesis” defaults into the intrinsic value framework (which Kirzner calls “objective”) of the Classical system, with some Austrian ideas patched on. Such a synthesis has to fail, since the two schools do represent fundamentally different, and fundamentally incompatible, perspectives.

   Reisman seems to miss entirely that the Austrian system is built on an (implicitly) objective conception of value, in Rand’s sense of objective. This is doubly unfortunate. He not only fails to adopt the essentially correct Austrian approach to economics, but at the same time his own intrinsic value perspective, which pervades his system, only serves to cement in the minds of Austrian thinkers that Rand uses the term “objective” to denote an intrinsic conception of value (cohering with their use and understanding of the term “objective”). The conceptual confusion between the two camps (Austrians and Objectivists) is only thickened and the perceived gulf widened. (Kirzner, for example, mentions at several points in his review that Reisman’s view of value presumably derives from Rand’s “objective” view.)

   All the fundamental elements of the Austrian perspective are missing from Reisman’s system. Reisman conceives “wealth” as essentially physical objects, and thus (following Classical economists) views the “economic problem” as the problem of maximizing the aggregate production of these physical goods. He regularly adopts an “aggregate” perspective in his systematic analysis, rather than the fundamental perspective of the individual creatively conceiving goals and forming plans. Production is conceived in efficient-cause terms, with inputs causing output (rather than the teleological view of production of Mises and Rand), and so on.