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Saturday, November 12, 2005 - 3:19amSanction this postReply
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Ed:

"My conclusion was that praxeological economics and Objectivism are complementary and compatible disciplines, and that when they are used together to explain reality, the case for a free society is strengthened."

Well, I'm glad you feel that way, Ed, otherwise I'd feel like I've been pissing into the wind for the last 25 years :-)

Ross



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Saturday, November 12, 2005 - 4:54amSanction this postReply
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Ed,

Excellent article and I look forward to reading your book.

I saw that Andrew Bernstein has your review of The Capitalist Manifesto on his web site.  Hopefully he will return the favor and say something nice about your book.




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Post 2

Saturday, November 12, 2005 - 5:31amSanction this postReply
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Ed, please check out my book, Capitalism and Individualism, Reframing the Argument for the Free Society (St. Martin's Press, 1990) for some explorations along lines you are pursuing.



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Saturday, November 12, 2005 - 7:11amSanction this postReply
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Then of course, there's George's book, Capitalism, which details much along this same line...



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Post 4

Saturday, November 12, 2005 - 7:41amSanction this postReply
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Ross:

I am sorry but somehow I missed your writings on bringing together Austrian Economics and Objectivism.  :(  I would love to see your ideas! Where can I read them? Thanks!!!!

Neil:

Thanks, I appreciate your continual support, and usual agreement with, my essays.

Tibor:

Your book, Capitalism and Individualism, is one of my favorite books! Also, I really appreciate that you have permitted me to include your fine article, "Reason in Economics versus Ethics" in Philosophers of Capitalism! Thank you!

Robert:

Yes, George Reisman's Capitalism is a tremendous work integrating Classical Economics,. Austrian Economics, and Objectivism.

Take care.

Ed




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Saturday, November 12, 2005 - 8:37amSanction this postReply
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Ed--

Bravo! I'm sure it will be a great contribution.

Sheldon



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Saturday, November 12, 2005 - 4:13pmSanction this postReply
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Thank you Sheldon!!!

I really appreciate your good words.

Cheers!!!

Ed




Post 7

Saturday, November 12, 2005 - 8:15pmSanction this postReply
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Excellent article on a subject that needs elaboration. Quite often Austrians export the concept of subjective ends from the realm of understanding and proving principles of economics, to the broader world, thereby denying the existence of moral principles. These Austrians seem unaware that their implicit moral nihilism leads to impossible problems and logical quandries. And they seem deeply attached to this position.



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Post 8

Sunday, November 13, 2005 - 10:35amSanction this postReply
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The Journal of Ayn Rand Studies Vol. 6 No. 2 Spring 2005 was concerned with "Ayn Rand Among the Austrians". The authors include: Sciabarra,  Sechrest,  Reisman,  Block, Long, Johnsson, Younkins, Horwitz, Jackson, Boettke, Yeager, and Thomas. 

Ed's book, Philosophers of Capitalism: Menger, Mises, Rand, and Beyond and this JARS issue should be complementary and mutually reinforcing with respect to constructing the architectonic that Ed is proposing.  The two together should be of immense interest to those interested in this project.

Alysha




Post 9

Sunday, November 13, 2005 - 2:02pmSanction this postReply
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The Journal of Ayn Rand Studies issue on the the Austrians and Ayn Rand mentioned above would make a great book with some repackaging. Then there would then be two books out there on the interaction and potential integration of Objectivism and Austrian Economics.

Karen




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Sunday, November 13, 2005 - 6:45pmSanction this postReply
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Ed,

Have you examined Henry Hazlitt's book The Foundations of Morality?  I read it a while ago, but I think he attempts to developed an ethical theory based on Austrian economics in general and cooperation in particular.  As I understand it, L. Yeager follows this approach in his book on ethics.

It might be interesting to compare how differen thinkers in the Austrian tradition have  diverged from Mises on this point.




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Post 11

Saturday, May 14 - 10:43amSanction this postReply
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Richard Salsman’s recent essay Economics in Atlas Shrugged is an excellent study. It is complementary with the essay of Peter Boettke (2005; see #8).

Mr. Salsman notes a discord with Austrian economics, a discord I noticed about twenty years ago, but never saw anyone address until now. He observes that the good businessmen in the capital goods industries in Atlas are not driven by “desires of the consumer, as in ‘the consumer is king’” (56). He quotes Ludwig von Mises in Human Action: “‘Neither the entrepreneurs nor the farmers nor the capitalists determine what is to be produced’ because ‘the consumers do that’” (88n7).
    Atlas, on the other hand, shows the businessman . . . [as] dedicated to the production of values that will enhance human life and thus be embraced by consumers regardless of their prior desires. Atlas depicts the businessman as the prime mover in markets, the “first cause” of production, and the shaper of consumer desires. (Observe that no one desired Rearden Steel—or could have desired it—until Rearden created it.)” (56; cf. Roark’s lines in the 3rd paragraph here).
I see that little word prior in the quotation. It means that the point of general economics by the Austrians—the particular point that consumer value is the value from which capital value is imputed—is not really at odds with Rand's display of capitalism in her novel notwithstanding the great emphasis in Atlas (and in Fountainhead) on the originative value intelligent producers bring to production. At time T3 present consumer demand will determine the previously indeterminate economic worth of capital outputs at the earlier time T2; that is Mises, Rothbard, et al. It is imagined future consumer demands at T3 (not past demands at T1), imagined future demands multiplied by probabilities, that drives development of new capital goods at T2. (It remains, of course, that capital goods in a developed market are possible at all only because consumers have saved something for lending, rather than consuming all their wealth.)

The reader of Atlas who has not yet studied Austrian economics can come away with an oblique and significantly mistaken conception of free-market capitalism. That is how it was with me. I did not study Austrian economics until a dozen years after reading the novel.

In Atlas one is rightly shown that a progressing capitalist economy could not exist without investors, entrepreneurs, inventors, and other intelligent producers. This is joined with the following idea, spoken here by Francisco: “Dagny, we who’ve been called ‘materialists’ by the killers of the human spirit, we’re the only ones who know how little value or meaning there is in material objects as such, because we’re the ones who create their value and meaning” (620). Yes, that is true of such characters. However, the error to which this reader, untutored in economics, vaguely drifted was the idea that manufactured goods such as copper wire or locomotives have been supplied their economic value only by their creators. Whereas in truth, that is only half the story of their economic value.


(Edited by Stephen Boydstun on 5/14, 10:49am)




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Saturday, May 14 - 1:49pmSanction this postReply
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Stephen,

That is a good post.

Straying slightly off topic, it reminds me of the other unmentioned aspect of politics, ethics, economics, history, etc. - Psychology.

Rational egoism and self-esteem (psychology) will take a producer/innovator slightly away from a purely consumer oriented approach. As in the case of Rand's heroes, they work for the personal exhilaration first, and satisfy the consumers as part of the arrangement to make their life financially sustainable and/or to expand their capacity to pursue their dreams more effectively. And they will feel pleasure from those consumers who recognize the value they bring to them. It is a source of pleasure to Reardon that Dagney recognizes the value of his steel. He isn't in business for that reason, but because he is oriented towards building value, he feels a sense of pleasure and kinship to others that see that value. Aristotle's described a friend as "another self" - it only works if you don't change who you are to be like them and they don't change who they are to be like you.

Ethic can't be seen apart from understanding what is involved in making choices in emotionally charged, conflict laden situations and the role of self-esteem in creating the leeway to make more rational choices. And the primary choice is to serve one's best interests which will always boil down to our long-term happiness. Psychology can't be excluded from ethics any more than it can from economics.

As Branden has pointed out, the choices made by leaders that have shaped history may reflect ideas first, but psychology as well. Sometimes the ideas we choose make the emotions we later experience but it is also true that the emotions we experience influence the ideas we accept - for better or worse. History is a product of men's actions and psychology is there as well.

Psychologically we yearn for leaders - just as we hunger for art that reflects our deepest sense of man, of the universe, of what is good and what is not. The culture is both the product of past philosophies. It is also made of the art that projects the dominate values and virtues of those past philosophies and the emerging philosophies. The culture is also the lens on today's heroes, which influence the ideas of tomorrow. We have politicians, mostly a disgusting group, and celebrities, mostly an uninspiring group, that the culture holds up as icons of virtue or wisdom. It should be men and women of integrity, intelligence, creativity and productive achievement.

They have Edison's birthday as a national holiday in Japan.

The direction of our culture, and to a degree of history itself is thus deeply involved with raw motivational psychology - our need to see our abstract values expressed in concrete form. There is reciprocal causality here - yesterday's cause is today's effect which is the cause of tomorrow's effect - emotions/values - reasoning - choices/values - culture - leaders - emotions/values - ... etc.



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Post 13

Sunday, August 21 - 10:37amSanction this postReply
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Objective Economics
How Ayn Rand’s Philosophy Changes Everything about Economics
Northrup Buechner (University Press 2011)

“In the way that counts, modern economics is fully subjectivist. What makes it so is its explicit foundation in the idea that all economic activity flows out of consumer preferences” (37).

The Austrians held that “the foundation of value is the value placed on an item by consumers. That is the starting point. Then that value is reflected back to the factors [land and labor] that produce the item” (87).

Prof. Buechner certainly allows that consumer goods, not capital goods, are the goods that directly serve human life. “The output of each business in the economy functions as a link in a chain of cause and effect, the final link being a consumer good or service” (243). Demand for labor and capital goods—employees and producer goods—does indeed derive from consumer demand for consumer goods and services. However, according to Buechner, “most economists also interpret derived demand in a sense which is not valid: that consumers control the economy and that the economy is for the sake of the consumers” (244). To the contrary, Buechner argues that “capitalism is a system of producer sovereignty. Usually changes in the structure of production do not originate with changes in consumers’ demand, but with changes in producers’ ideas” (244).

“If we take men’s desires as the root of economic activity, we cut loose from reality the entire realm of economics. . . . For the economist, the issue must be: what are the relevant economic facts? The fact at the base of economic activity is man’s nature as a rational animal,” an animal producing by reason in order to survive (305).

The special area of interest in this work is theory of price. Buechner argues that price is almost always determined by objective values, in Rand’s sense of the concept objective value. This treatise does not deal with theories of money nor with theories of the business cycle.





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Sunday, August 21 - 6:14pmSanction this postReply
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That sounds like a really good book, Stephen.

Thank you for posting about it.

Ed




Post 15

Monday, August 22 - 6:10amSanction this postReply
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is not a cheap book, however.........



Post 16

Friday, August 26 - 10:27amSanction this postReply
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A thought
 
An Austrian economist might say that, while improbable, it is possible -- possible without a market crisis or a government intervention -- to have a really wide swing in the market price of something. Say, $100 for a gallon of gasoline. This is because they would say that the price of something is subjectively determined by consumers -- and, while improbable, it is possible that most all of the consumers could accidentally over-value gasoline. Actually, they would refrain from judging anybody's valuing of anything as an over- or under-valuing.

An Objectivist economist would disagree.

Ed




Post 17

Tuesday, September 13 - 2:50amSanction this postReply
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Thanks for the link Stephen.  I saw it on Amazon now as well.  Have you actually read this book?

This isn't the first time an Objectivist has tried to formulate a new and better approach to economics, dismissing the Austrian approach (as well as the others).  I have a very negative view of past attempts, and this one doesn't sound any better.

Ed, regarding your post 16, which part would an "Objectivist economist" disagree with?  That large price swings can happen?  Or that they're improbable?  Or that it isn't valid to say someone is under valuing or over valuing something?  I'm not sure what you were getting at.

Can large price swings happen?  I'm thinking of tickle-me Elmo dolls from several years ago.  Every kid wanted one for X-mas, and the gray-market price sky-rocketed.  After X-mas, it plunged again.  That wasn't government intervention.  It was supply and demand.  The demand at that point was huge, and it came crashing down right after.  There are lots of examples where prices have large swings. I'm guessing (never tried to buy any) super-bowl tickets go way up in price and then suddenly drop to nothing after the super-bowl finishes.  Large swings do happen because of changes in demand.

There's a different point that's related.  If values are "subjective", can't they change radically for no reason at all?  If not, doesn't that imply that values are a product of something else, like objective requirements for living?  But just because they are based on something doesn't mean they are based on something rational.  People buy lots of bibles, and we don't need to argue that they are objectively valuable.  There's nothing wrong with saying that people value things for reasons.  I think there are some controversial Austrians that have tried a radical subjectivist approach, where value is treated as random or something.  But that's not necessary.  The subjective approach ignores the foundation of a person's values/desires, because the economic outcome is determined by the values themselves.  Whether you value something for good reasons or for bad reasons, the fact that you value is and act consistent with that value has economic effects.  There's no need to judge whether the values are objectively beneficial to a person's life.  Even if they aren't, they will still affect the pricing system.

That's why it doesn't make sense to talk about undervaluing or overvaluing.  If the value is the economically important criteria, because it is what has an economic effect, then any judgment of a value being too high or too low is based on some non-economic criteria and properly belongs outside of economic analysis.

Now we could set economics aside for a minute and ask whether people's values reflect their objective needs.  Do they value objective values?  And for the most part, we'd probably expect a reasonably good correlation between the values they pursue and the value they should pursue.  There will be exceptions, some large, but we might assume that most values pursued by most people are generally rational.  You make sure to pay your rent instead of spending it all on entertainment.  You buy enough food in order to live.  That sort of thing.  So we could reasonably expect that the values pursued by people often correlate well with objective values.  Maybe that's what this author is suggesting.  But that's not important economically.  Whether they do or not, supply and demand still rule.

It might be interesting to think a little why people value things, because one kind of economic activity involves entrepreneurs persuading people that value their product more highly.  But even then, they can appeal to irrational ideas to convince people.  It's important to note that it is possible to persuade people to value things in a different way, which implies that they value things for some reason, but the specific reason is not important. 




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Tuesday, September 13 - 7:55pmSanction this postReply
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Joe,

You made several good points.

Ed, regarding your post 16, which part would an "Objectivist economist" disagree with?  That large price swings can happen?  Or that they're improbable?  Or that it isn't valid to say someone is under valuing or over valuing something?  I'm not sure what you were getting at.

First of all, I agree with most all of your follow-up statements. I wasn't clear enough with my hypothetical 'price sky-rocketing' scenario. I was trying to set up a situation free of economic 'crises' as well as a situation free of government intervention, but that isn't all. I want to be more clear about the economic 'crises' -- i.e., I meant to set it up so as to mean that there was no big shortage of anything, and no big surplus of anything (no change in the supply of anything), and no special, external occasions (e.g., X-mas) to alter the price.

In this way, a change in price would necessarily imply a change in the differential valuation of a good or service (because all other price-affecting factors had been removed from the equation). In other words, supply hadn't changed at all, environment hadn't changed at all, but demand all of a sudden increased by a factor of 25. Gasoline, without external interfering factors (but only internal and subjective factors), became 25 times more valuable to people (in relation to everything else they could buy).

Let's leave aside the improbability of this example and examine it or follow it through to a conclusion. Austrians may tend to say that that's just how things go -- i.e., that people either value and are willing to pay for something, or they don't value it and aren't willing to pay (and it is not up to us to attempt to understand that process). People, on this view, are like wild animals, complete with moment-to-moment unpredictability. There may be some statistical predictability as far as what people are willing to pay for something (based on relative frequency and past behavior), but there is nothing other than this crude, enumerative induction that could ever be used in order to predict their behavior.

The reason for this state of affairs in the above example, is that valuation -- and therefore, with every other external factor equal, market price -- is entirely subjective (even across time). But valuation is more predictable than that. Let's take something you mentioned:

I'm thinking of tickle-me Elmo dolls from several years ago. Every kid wanted one for X-mas, and the gray-market price sky-rocketed.  After X-mas, it plunged again. 

Okay, but this example includes an external factor (X-mas) which can have an external effect on the moment-to-moment valuation of a good or service. Let's take out the X-mas part, for illustration. Let's say that the price just sky-rockets for a month and then plunges, and then we are left trying to explain that. One day, the price is $5 bucks a doll. Then, for a month, the price jumps to $50 a doll. Then, the next day, the price drops back down to $5 bucks a doll and it stays there. Austrians may say that, for a month, folks just all of a sudden really started valuing tickle-me Elmo dolls and then, without explanation, folks just all of a sudden stopped (or returned to the previous valuation of them). They may say that it's an improbable scenario (and they may point to relative frequency or price history charts while stating their case), but there is nothing to prevent it from actually occurring.

The Objectivist theory of market value explains prices differently. On that model, astute entrepreneurs can not only predict, but direct, how prices will eventually pan out (barring confounders such as government-induced currency inflation, etc). This is how they make the big bucks. An astute entrepreneur may say to herself: "People are eventually going to love this product."

Also, because human life has natural constraints, consumers are on a learning curve. The market teaches such people how much they ought to be willing to pay for something (all else equal). There is like an unseen equation which derives from a start-point of socially-objective value (the sum of all societal product valuation), a learning curve wherein folks learn to budget for things they objectively need (whether they originally knew it or not), and a driving curve where producers produce previously non-existent desires for things (e.g., cordless phones with video cameras inside of them). 

Entrepreneurs are like professors who know the answers beforehand, and who even create some of the very answers themselves. So, even though all purchases stem from subjective valuation, there is more than just a point-in-time 'snapshot' of subjective valuation (i.e., more than "consumer sovereignty") dictating demand for something -- and therefore, all else equal, the price of something.

Ed

(Edited by Ed Thompson on 9/13, 7:58pm)




Post 19

Tuesday, September 13 - 9:19pmSanction this postReply
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Ed, I get what you're saying.  I think your view of the Austrian approach is inaccurate, and even if there were an "Objectivist" approach, it only sounds good compared to that inaccurate view.

As I tried to say about the Austrian approach, the "subjective" theory does not say why people value things.  It only says that they do, and act or react appropriately.  It doesn't reject a foundation for those values.  It just abstracts it away.  Lots of possible foundations can exist.  It could be irrational beliefs, misunderstanding about the world, evasion, rational analysis of what benefits them, second-handedness, emotions, or anything else.  Any of these foundations for why someone values something still produces the same economic effect.  It still acts as demand.

So if there was some enormous change in demand, there's nothing that would make an Austrian say that's just how things are, as if values happen randomly and it is just a matter of probability.  Likely, they'd look for an explanation for why demand shifted so much and so suddenly.  But regardless of the cause, the fact that the demand changed is the economically significant act.  It's why the prices go up, and why there is suddenly new economic incentives.

So again, the "subjective" theory is not a theory that values are groundless, subjectivist, whim-worshipping, random effects.  It is actually "methodological subjectivism", which takes value as a given and ignores or abstracts away the cause of those values.  And it is in contrast with "objective value" approaches that try to search for value outside of the actual values of the market participants.

Now take this "Objectivist" approach you mention.  For it to be different from the subjective value approach, you'd have to say that value/demand in the marketplace is a direct output of some factor or particular combination of factors.  You might say that life is the standard, so value is based on what is beneficial to a person's life.  There are two major problems with this approach.  The first is that people don't always value things based on their actual best interests.  And second, even when people hold irrational values, those values still affect the market prices.  Note that it doesn't matter which foundation you pick, it always has these two flaws.  The act of excluding some sources of values is always going to lead to this broken system.

Now of course it's true that entrepreneurs try to increase demand through persuasive advertisement.  But even there, they can choose different approaches.  They can appeal to your rational self-interest, showing how a product will benefit you.  They can create a mystique around the product, like Apple products, where you're cool if you own one.  Or one that is popular is to make it seem like you will be more sexually attractive if you own or use a product.  My friends used to joke about televisions commercials that can be summed up as "If you buy this product, you will get laid."  So even here, we have a wide mix of different ways in which demand can be altered through persuasion.

A final note is that business/entrepreneurship is different from economics.  If you were training someone to be an entrepreneur, you might provide theories about why people value something, and what the easiest way to persuade them to buy a product.  You would be very interested in real, concrete markets instead of abstract economic theory.  But economics is different.  It deals with abstract principles.  Even if one approach to persuasion was more popular or effective, economic theory would be interested in the fact that people are trying and succeeding in persuading others, and not on the specific methods.




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