Why Austrian Economics Subjectivity is Wrong and Condemns Economics to Being a Pseudo-Science
Economic and moral values are not separate and cannot be isolated. Both are based on the objective nature of man. Austrians by choosing a STV for economics are logically compelled to the conclusion that ethics is subjective
I truly enjoy your articles of this nature and find myself in serious contemplation. Of the three theories, the objective theory is the most satisfying. "The objective theory holds that the good is … an evaluation of the facts of reality … according to a rational standard of value. (Ayn Rand Lexicon “What Is Capitalism?” Capitalism: The Unknown Ideal, 21)"
I would like to see economics developed, practiced and understood as a science. I have a few questions; I hope you can help me with. I wish to argue the objective theory well prepared and I find myself in need of additional persuasive arguments and a deeper understanding. Can a true science of economics with such a theory be practiced when many people make economic decisions irrationally? We know many purchase their wants over their needs and end up bankrupt. Who determines what is a "rational standard of value," if not the traders, whose subjectivity is inherent and affects their decisions? How is the subjectivist theory unrelated to the subjectivity each individual naturally applies to their purchases, since men have disparate hierarchies?
Also from Capitalism: The Unknown Ideal, pg 17-18 (paperback) "... a manufacturer of lipstick may well make a greater fortune than a manufacturer of microscopes-- even though it can be rationally demonstrated that microscopes are scientifically more valuable than lipstick. But---valuable to whom?
This does not mean, however, that the values ruling a free market are subjective. If the stenographer spends all her money on cosmetics and has none left to pay for the use of a microscope (for a visit to the doctor) when she needs it, she learns a better method of budgeting her income; the free market serves as her teacher; she has no way to penalize others for her mistakes. If she budgets rationally, the microscope is always available to serve her needs and no more, as far as she is concerned: she is not taxed to support an entire hospital, a research laboratory, or a space ship's journey to the moon. Within her own productive power, she does pay a part of the cost of scientific achievements when and as she needs them. She has no "social duty," her own life is her only responsibility---and the only thing that a capitalist system requires of her is the thing that nature requires: rationality, i.e., that she live and act to the best of her own judgment. "
Clearly the "best of one's judgment" is an individual variable subject to individual subjectivity. Before the stenographer learns her lesson from the free market, her decisions distort the market value of some products in spite of objective value. Other consumers suffer the consequences. Is it marginal and of little consequence overall? How much of this behavior is irrelevant?
Ibid. pg19 "The economic value of a man's work is determined, on a free market, by a single principle: by the voluntary consent of those who are wiling to trade him their work or products in return. This is the moral meaning of supply and demand." If this be so, then the market price is affected by whatever bargain the traders strike and since they apply their own subjectivity to the trade they are distorting objective value, unless you consider their decisions completely objective and rational. No?
What I am getting at boils down to the supposition that economics, divorced from individual irrational decisions, works on an objective theory of value, but in practice, is distorted by irrational decisions. Could it be that subjectivity is an individual distortion on a micro economic level, but on a macro level objective theory of value prevails? Could the confusion stem from different senses/uses of the term subjective--- subjective in the common vernacular meaning according to disparate individual judgments? If some consumers make purchases on a subjective basis, doesn't it distort economic practice such that objective theory is not applied uniformly, rendering economic practice in the real world distorted such that a definitive science can't be absolute? If products have an objective value, aren't they compromised by this type of market influence? If so, can an absolute science be predictive when applied to a market distorted by unpredictable variables? Humanity is clearly not always rational, thus irrational influences affect economic activity. No? Ultimately objective value may win the war, but along the way is the battle not chaotic? Is this all irrelevant to the basic premise of the theory? Man may have an objective nature, but doesn't he often abandon objectivity in his market decisions? Why buy a Ferrari when a Fiat will do? Is it as simple as, the theory is sound regardless of human interaction? Is the theory sound and consequences of individual choices to the contrary only born by those individuals? Do the rules governing a free market, with objective value, simply penalize the individual subjective choices?
Regards,
O.A.
Thank you for the questions. Part of the problem of economics is it attempts to dive into the middle before the foundations are established. This is similar to Rand’s complaint about people who try to define ethics based on extraordinary circumstances (would you risk your life to save someone who is about to be hit by a train); or like attempting to solve the motion of a top without understanding friction, mass, momentum, or force; or attempting to show an inverse square attractive force will result in an elliptical orbit without knowing calculus. The result is always a mish mash of pseudo-explanations that don’t add up.
If humans did not have objective needs in order to stay alive, there would be no point to working, trading, manufacturing, invention – or studying these which is economics. This shows that economics is based on objective values, starting with the fundamental value which is your own life. Without your own life, nothing else can have value.
Here are some fundamental truths of economics that I have shown elsewhere.
1) Inventions are the only way to increase our wealth (population)
2) The first time in history people escaped the Malthusian Trap (subsistence living i.e., edge of starvation)
3) The cause of the Industrial Revolution was legally protectable property rights in invention, which are built on the foundation of Natural Rights.
Who determines what is a "rational standard of value," if not the traders, whose subjectivity is inherent and affects their decisions?
Who determines that opposite interior angles of a line passing through two parallel lines are equal? Logic Who determines that tides are the result of the gravitational pull of the Sun and Moon? Reason – evidence and logic.
This is why I gave the example of Robinson Crusoe trading his canteen of water for a gold coin on a deserted island with no water.
Traders may determine the market price of an item, but not the objective value for each person.
How is the subjectivist theory unrelated to the subjectivity each individual naturally applies to their purchases, since men have disparate hierarchies?
Value is determined by each person and every person is in a different circumstance so of course they have different values (priorities). The question is not whether each person determines value based on their circumstance, but whether values are related to reality. If you read footnote one, you will see the Mises clearly defines subjective values as independent of reality.
Other consumers suffer the consequences. Is it marginal and of little consequence overall? How much of this behavior is irrelevant?
If you live in a world of irrational people, then it will degrade the value you can create and may result in your death even if you are rational. See Venezuela or the USSR or John Galt in Atlas Shrugged not to mention Eddie Willers etc.
If this be so, then the market price is affected by whatever bargain the traders strike and since they apply their own subjectivity to the trade they are distorting objective value, unless you consider their decisions completely objective and rational. No?
Sure, but see above. You cannot impose reason from above and the attempt destroys the ability of people to reason and therefore defeats the supposed purpose. In a free market, these traders will be punished by the market. Profit and loss are not arbitrary concepts (monopoly money). They are related to reality and consistent losses result in death – see Venezuela.
Real wealth is created by solving objective problems that does not mean that some people do not get wealthy selling BS, but that does not add to the overall wealth.
Could it be that subjectivity is an individual distortion on a micro economic level, but on a macro level objective theory of value prevails?
Objective reality cannot be cheated. A thief and dictator can wealthy, but they do not create wealth. Creating wealth is objective and the thief and dictator destroy wealth and appropriate some of it for themselves as part of the process.
Could the confusion stem from different senses/uses of the term subjective--- subjective in the common vernacular meaning according to disparate individual judgments?
Yes it could, but the Austrians are explicit in their position that by subjective they mean disconnected from reality. See Footnote 1.
If some consumers make purchases on a subjective basis, doesn't it distort economic practice such that objective theory is not applied uniformly, rendering economic practice in the real world distorted such that a definitive science can't be absolute?
No. You have accepted the idea that economics is about determining market prices. That is a boring trivial part of economics. Supply and demand are not where real wealth is created, so it is a minor side show at best. Elsewhere I have written about the very definition of economics as being fundamentally flawed as are what are considered the important questions of economics. The two most important questions in economics are: 1) What is the source of real per capita increases in wealth (population)? and 2) What caused the Industrial Revolution?
If products have an objective value, aren't they compromised by this type of market influence?
No. You are confusing market prices with value.
Regards
DB
Just fantastic! Thank you very much! Last night I was thinking, could it be that what this means is that value is divorced from market price and then the light went off in my head! Today I find that is what you are saying. It all makes good sense.
Thank you for the elaboration. I am a detail guy and want to get it right.
Your answers are fantastic and I am saving this conversation to my economics folder.
Regards,
O.A.
Ultimately, I do not think determining how market prices are set is all that important in economics.
Yes. I believe we have a meeting of the minds. In the context of study value is more important. In the context of practice price may be of more importance. A participant always wishes to buy low and sell high. I have been looking at the wrong things. I had this foggy notion in my mind that value and price were closely related and affected each other and ascribed too much import, without thinking it through. It becomes quite clear when I think of something like my WW2 vintage lathe that has tremendous value to me, but could fetch a paltry price on the market. What is important and of value to me is how much it aids me in my production, not how much I could sell it for. So price is affected by market forces, whereas value is affected by utility and the value of a product may be changed by invention. If one invents a better mousetrap the value of the old ones may be diminished...
I believe the Austrian theory has muddled my prior thinking.
I hope to be on proper footing now. Have I got anything wrong?
Regards,
O.A.
Thoughts, Actions, Decisions can be:
-Subjective, depend on the conditions pertaining to the person making the decision
-Irrational, without logical thought
-Objective, demonstrable use of logic
-Universal, depends only on the question not on the person or the conditions applicable.
To say that a decision is subjective is therefore not a criticism but acknowledging that all relevant criteria have been used. Such criteria used in price setting such as trading water, depend on the thirst, feelings, health, and endurance of the buyer among many other factors. The price of a good will vary then according to the conditions of trade.
I wonder if I may be disagreeing with dbh here as the word subjective as I define it would apply.
If the Austrian school regard the subjective process for pricing as irrational it is clearly wrong, there can be careful logic used in quantification even, and especially when, the answer depends on the conditions around the situation.
Now, what about value? If Rand's use of the word implies it is quantifiable and is the correct number for price and cost then it is wrong, but I do not think Rand had that meaning. dbh's follow-up here fills in gaps in the article.
Economics is usually defined as the study of the use of scarce resources (and price setting).
Yes, this is not so much wrong as trivial. dbh's inclusion of reducing scarcity, creating value, and interpreting economic history is a big step forward.
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"Little else is requisite to carry a state to the highest degree of opulence... but peace, easy taxes and a tolerable administration of justice."
Adam Smith
the invisible hand (the market)
v. the heavy hand (government)
Part of the problem of economics is it attempts to dive into the middle before the foundations are established. This is similar to Rand’s complaint about people who try to define ethics based on extraordinary circumstances (would you risk your life to save someone who is about to be hit by a train); or like attempting to solve the motion of a top without understanding friction, mass, momentum, or force; or attempting to show an inverse square attractive force will result in an elliptical orbit without knowing calculus. The result is always a mish mash of pseudo-explanations that don’t add up.
Elsewhere I have written about the very definition of economics as being fundamentally flawed as are what are considered the important questions of economics. The two most important questions in economics are: 1) What is the source of real per capita increases in wealth (population)? and 2) What caused the Industrial Revolution?
I still think you are too harsh on Adam Smith.
I've just come across 2 recent refs.-
https://www.youtube.com/watch?v=8ruiU...
http://www.realclearmarkets.com/artic...
Any shortlist of the creators of the industrial revolution would surely include Smith.
What Smith said then needs reference to his time, but of course we judge today by what we know today.
Smith was great friends with David Hume, who is perhaps one of the most evil philosophers since 1600. Hume is anti-reason and there is nothing in Smith to suggest he rejected Hume's ideas.
Smith defined economics as:
The philosopher Adam Smith (1776) defines the subject as "an inquiry into the nature and causes of the wealth of nations," in particular as: a branch of the science of a statesman or legislator [with the twofold objective of providing] a plentiful revenue or subsistence for the people ... [and] to supply the state or commonwealth with a revenue for the publick services.
That is not a defense of individualism or a limited state.
Smith might get some minor credit for the Industrial Revolution from a management consultant point of view - his idea on division of labor.
I admire your efforts to find an objective scientific basis for it's study. Txs
I have investigated the philosophical basis of the "social sciences" and all of them are not based on a proper philosophy of science Economics is based on the irrationalism of Hume/Smith and on the Austrian side Franz Brentano.
Brentano was also the inspiration for Freud and therefore psychology. Brentano maintained that our senses were invalid and could not tell us anything about the world.
The driving force behind sociology was Auguste Comte, who defined altruism.
However, if economics today was based more on Hume and Smith, and less on Marx and Keynes, we would be further along the road.
I know this is a simplistic example of what the article's saying, but I think it's relevant to Ayn Rand b/c it's second-hander behavior under the guise of using objective data (i.e. market price).
The article add discussion, though, make me think trying to find such a yardstick is a fool's errand because price is not the same as value. This explains to me why some people might see central banks' offering such a yardstick is manipulative, even if they make public what they're doing.
The most important question in economics is not how prices are determined. Value is only open to those things that face a choice and the most fundamental choice in the world is life or death and it only applies to living organisms. Organisms that do not value their life go extinct. Values are therefore objective and failure to make rational choices for humans results in their death, see Venezuela. Prices are determined when people think that it is in both persons' interests to do so. If one of these people is making irrational choices (values) often enough he will die.