Comments on Richard Salsman Review of Objective Economics by Northrup Buechner

Richard Salsman wrote an extensive review of Dr. Northrup Buechner’s book, Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics (OE) that appeared in the recent issue of The Objectivist Standard, Vol. 7, No. 1.

Salsman doesn’t like what is in Objective Economics – any of it. He says, “That which is true in the book is not new, while that which is new in it is not true.” (SR 10)

The review, which goes on for ten pages, comments upon many different aspects of the book. In fact, the approximately 50 paragraphs contain almost as many different points. One might think that the review is offered for people with a background in academic economics, however it is offered in a journal with a broad audience.

It might have served Salsman’s purpose better if he had selected a couple issues and focused on explaining his positions and how he differed from Buechner. Taking my own advise, instead of plodding through all of Salsman’s comments, I will restrict myself to only a few points.

Buechner’s focus is on the development of his own theory and its underlying justification, but Salsman doesn’t state what Buechner’s theory is or how he proves it. Salsman’s review ignores 90% of Buechner’s book, its theme, and its purpose.

Salsman is very upset that Buechner rejects a lot of “contemporary, academic economics.” (SR, 1) Salsman thinks that modern economics has improved significantly over the last decades – Buechner doesn’t. Buechner explicitly rejects the venerable theory of the law of supply and demand as a true theory of economic prices and proceeds to create his own, which he calls The Theory of Objective Price (Chapter 8, OE). Since Salsman insists on the importance of the law of supply and demand, I will start there.

Salsman says on page 2, “in crucial areas [Buechner] strips modern economics of its more rational doctrines… the law of supply and demand….” (Salsman mentions several other “rational doctrines”). Page 3: “Modern economics does have a theory of objective prices (i.e., the law of supply and demand)….” Page 5: “But Buechner insists that there is only a law of demand, and, strictly speaking, no law of supply – hence no unified law of supply and demand. Buechner disintegrates this law, insisting that supply somehow is less crucial than demand, which is equivalent to insisting that one side of a coin is less important to the whole than the other.” And: “…the law of supply and demand is one of the more magnificent, integrative achievements in the history of economics.” Salsman then goes on to quote John Locke and Jean-Baptiste Say who say that the law of supply and demand is important. Page 7: “Since at least Alfred Marshal, economists have said that prices are determined jointly and equally by supply and demand, that our desires coupled with our purchasing power (supply) (sic) entail our demand for goods and services whose attributes yield utility (satisfaction) for us, and that profit-seeking supplier try to offer products with utility-yielding features. In [Alfred] Marshall’s famous metaphor, it takes both blades of the scissors (supply and demand) to cut the paper (establish price). …this depiction captures the relational aspect of the economic valuer and what is economically valued, of mind and reality, of consciousness and existence. This is the essence of a valid theory of objective economic value.” (Italics in original; SR, 7) The quotations are only the spots where Salsman uses the term “the law of supply and demand”.

But in spite of all of these statements, Salsman does not tell you what the law of supply and demand is, what it does, or how it is proved. You might say that this is a review and not a place proof. Nevertheless, when he is denying that Buechner has proved his theory, Salsman should at least say something about the law’s proof. It is as if Salsman regards the law as self-evident. He should tell you where you can find a full discussion and a proof. Actually, I have never seen a proof. At best you can find descriptions, which is what you find in Adam Smith’s initial discussion.

For references purposes, here is what Wikipedia says this about this law:

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.
The four basic laws of supply and demand are:
5. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity.
6. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity.
7. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.
8. If supply decreases and demand remains unchanged, then it leads to higher equilibrium price and lower quantity.

This is total demand and total supply, not just what is in front of you in the grocery store and not just what a certain manufacturer produces, but everything. Thus, the idea is that, generally, prices move according to changes in the total supply and total demand. This happens regardless of the knowledge or understanding of any or all of the participants in the market. Not every theorist holds that the changes in price are immediate or worldwide at any particular time or situation. Actually, these issues are rarely covered or acknowledged. The forces of the market are considered impersonal and unaffected by individuals or individual firms.

The point in the law of supply and demand is not that there has to be a supply, which seems to be Salsman’s thought in places, but that the amount of total supply directly affects the price. You can see something like that in certain auction markets or produce markets in which the product moves swiftly from the field to the store. The immediate supply of limes, for example, immediately affects the price. Gasoline prices also closely follow the international supply. But that is misleading since the international price, or what is called the Light Sweet Crude Oil priced in the Oklahoma market reflects the oil that is offered at that time at that market of that quality and not the total supply.

I want to point out two things about the law of supply and demand. First, it has no mechanism for explaining the prices of new products. And not just new products for which there is no demand, but no knowledge of it in the marketplace. We have seen hundreds of new products offered in the past decades that no one has thought of before and for which there was no demand. In order to get a demand people had to be educated (one of the functions of a sales force). Yet when these products reached the consumer, they had prices.

Salsman says, “…Buechner finds the first method [of how prices are set] ubiquitous [the method in which someone sets the price], even though it entails the oxymoron of solo price determination, in direct defiance of the basic fact that every price is an exchange ratio and that it takes (at least) two people to arrive at a price.” (SR, 5) That is obviously not the case. It does take two people for an exchange to take place. But in our every day experience, including what we read in the papers, etc., prices are set by individuals all the time.

Consider the initial public offering of the stock in a company that is going public. The price is set by the owners, with advice from experts in the equity markets. The stock is sold and immediately goes on to the secondary market, the stock exchange, and then the price fluctuates. On what we call the secondary market for stocks, price is set not by the total demand or the total supply, but the marginal supply and demand, that is the number of shares supplied at that time and the demanded at that time. If the numbers, the shares and prices, do not balance, a “market maker” steps in and either holds them or fills from his own account.

When I was a general manager of a small retail chain and responsible for setting our prices, I used a standard markup. I didn’t go into the shop and bargain. I didn’t do a survey. Sometimes, if we had gotten a good deal on an item, I would use a higher markup. I set prices. I practiced solo price determination. Buechner stresses that the businessman tends to have significant experience in his market. He knows his customers, his total costs, and his competitors and then uses his judgment to set a price that will in the long term maximize his profits. Certainly he could adjust the price if he doesn’t get the result he wants. But still, in any circumstance, the price is set by the actions of a human consciousness.

Consider what someone does who wants to buy something. The buyer, whether he is a consumer or the purchasing agent for a company, goes to the source of the product and asks what the price is. Price is not some disembodied thing, but a real concrete that is known by the seller or the person who facilitates the transaction (broker, market maker, etc.). The market may be such that the buyer may bargain or negotiate a different price, but starts with what the seller has decided. If there is a negotiation, the seller has to agree to the final price. Price is not a separate thing from the actions and decisions, conscious decisions, of the people involved in the transaction.

What is your experience? If Salsman, and by extension modern economics, is right, we should all experience influence on prices daily. Salsman is wrong, there is no such “basic fact.”

Second, the law of supply and demand as a determinate of price does not have a mechanism to explain how prices change. It says that when the total supply or total demand changes the price changes. How? Exactly how does that happen. What concrete steps does the total supply impact the market price? Buechner’s explanation is that businessmen keeps informed about his market. When conditions change, demand changes for example, in order for the price to change some businessman has to decide to change his price. He does not consider total supply. He considers his costs, his profits, and his competitors and then he makes a decision. There are no other actors but human beings who are the producers who are buying and selling. There are no disembodied forces.

But Salsman is interested in defending not just the law of supply and demand, but “contemporary, academic economics.” (SR, 1)

I wonder why. As an academic discipline, economics in the last century has been impacted by the same influences as every other academic pursuit and aspect of our culture. The Twentieth Century was the century of nihilism (except for Ayn Rand). It was the century of constant attacks on civilization, reason, man’s rights, everything we hold dear. It is the century that produced the slow disintegration that we see in theoretical physics, for example, as described in David Harriman’s The Logical Leap. It is the century that has seen the growth of American government without interruption regardless of which political party was in power. It was the century that has seen the nearly complete disintegration of all art forms. We do live in a wasteland, again except for Ayn Rand and her followers. Yet, Salsman wants us to understand that economics is mostly solid.

Buechner does comment on this issue, “The philosophical overview of my book is this: Modern economics is the product of modern philosophy. Since on every important issue, Objectivism is the opposite of modern philosophy, Objectivism changes everything about economics. This includes economics’ method, the conception of the economy, the meaning of competition, the concepts of supply and demand, the theory of price, the role of scarcity, and the theory of aggregate production. Overall, as the result of all the preceding, Objectivism confirms the practicality of capitalism.” (OE, 3)

At the beginning of his review, Salsman lists several influences that he credits with the positive intellectual results in economics, i.e., Austrian economics, Supply-side economics, monetarism, rational expectations, and public choice (and he includes all of their Nobel Prize winners!) (SR, 1). Yet none of these people are advocates or practitioners of reason, induction, rational self-interest, or even of introspection. None of these influences are advocates of laissez-faire capitalism. All that Salsman offers to support his contention is that economics has improved is that some contemporary, academic economists are willing to consider less regulated markets rather than government activity in certain circumstances. Certainly that is better than being an outright socialist. But Salsman’s favored economists do not understand or accept the absolute necessity of individual rights and the use of reason for the survival of man as man.

In fact, these people are the appeasers of the progressives and leftists who wish to destroy capitalism and freedom. They need to be swept aside. Ultimately, Salsman’s favored economists are not valid alternatives for the Objectivist. (Go listen to Yaron Brook’s talk, “Why Bad Economics Won’t Go Away”)

What is vitally important in considering economics, and any science studying some aspect of man, is the initial view the science takes of what a man is and what is the proper method of studying the subject. You will find in Buechner explicit answers to both questions. Salsman does not address the first issue at all. He makes only minor references to induction and objectivity. Salsman declares, “Moreover, contrary to his pledge to proceed inductively, Buechner’s alternative theories are not proved inductively….” (SR, 2) Salsman does not tell you Buechner’s method of induction or why Salsman believes it to be invalid, or even that Buechner does have a method. For that matter, Salsman does not tell you what a valid method of induction within economics might be or where to find it. This vital issue is ignored and replaced with repeated statements about the law of supply and demand and “contemporary, academic economics.”

At points it seems that Salsman dislikes this book sufficiently to make amazing claims, amazing to someone who has read Objective Economics. Amazing in that the book does not say what is being claimed. I want to show you examples of Salsman’s criticisms that seem to me to be incomprehensible. I will limit myself to two examples. The one I am offering first comes in a very confusing paragraph (SR, 6), Salsman argues “…, on Buechner’s own account, even in the normal case no general theory of price, objective or otherwise, can hold.” (Italics in original) Salsman sites pages 283, 277, and 278. I’m sorry, that is wrong. These pages come from Appendix A, “The Theory of Price in Modern Economics: A Critique,” in which Buechner has placed his discussion of modern economics’ theory of supply and demand. It is Buechner’s conclusion that the entire modern theory is wrong, and founded on concepts with no relation to reality. The quotations Salsman used are clearly about modern theory and not Buechner’s. Buechner presents his own theory in Chapter 8, pages 139 to 152. Buechner states unequivocally that he holds his theory to apply to all exchanges within an economy.

But Salsman also says that “[Buechner] contends that his theory of objective price-setting is valid and applicable only in that unique context, and (by implication not in the mixed economy.” (Italics in original) Salsman quotes Buechner, “The general context in which my theory applies is laissez-faire capitalism, this political-economic system”…”defines the surrounding conditions” for the theory. (SR, 4; OE, 16; the formulation here is how Salsman wrote it) But, at the end of that two page section, Buechner says, “In fact, the study of economics has to begin, and always has begun, with the assumption, more or less fuzzy, that men are free to act on their best rational judgment. It is not possible to begin with a system in which the government initiates physical force, intervening, regulating, controlling, and usurping countless details of economic activity and then ask a question such as “Why do prices rise?””
Buechner continues, “One has to begin by seeing how capitalism would work when there are no government controls or regulations. Once that is clear, it is possible to project government action or regulation and consider how it changes the free market result. But first one has to have the free market result. That is what I provide in this book.”

How did Salsman fail to see that statement?

The second example is Salsman’s reference to Leonard Peikoff’s Objectivism: The Philosophy of Ayn Rand (OPAR). Salsman suggests that “The best account of how Ayn Rand’s philosophy undergirds and further integrates economics – including the objectivity …of the law of supply and demand” you should read chapter 11 (Capitalism). (SR, 10) Well, yes, of course you should. But chapter 11 doesn’t help Salsman. There is no attempt to establish economic laws in that chapter. Dr. Peikoff is not an economists and doesn’t attempt to be.

Dr. Peikoff first discusses the relation between philosophy and economics. What is interesting in this context is that Dr. Peikoff’s discussion closely approximates what Buechner had to say (OE, 18-19). Salsman castigates Buechner because the book has no ethical argument for capitalism. (SR, 3) Peikoff and Buechner see that there is a division of intellectual labor. Apparently Salsman doesn’t. Buechner says, “In the preceding discussion, I have made no attempt to give the moral justification for laissez-faire capitalism. In particular, I have not defined man’s rights nor explained why men have rights. I have not explained what is wrong with the initiation of physical force and why it is only such force that violates men’s rights. I have not tried to argue that capitalism is the ideal social system, though I believe it is. Proving these things is the responsibility of political philosophy, not economics. Here, I have been concerned only to identify what laissez-faire is. That it should exist is another subject.” (OE, 18-19)

Peikoff also affirms that, “The dominant view today is that economic value (like every other kind) is not objective, but arbitrary. Monopolists or other “exploiter,” subjectivists claim, charge any amount they feel like charging….” (OPAR, 399) Buechner uses the concept of objectivity throughout the book, and identifies errors involving the subjective and intrinsic. Salsman denies that modern economics is stuck with the subjective and criticizes Buechner for saying so. (SR, 3)

What Peikoff has to say about the law of supply and demand isn’t very helpful either. “The economic value of goods and services is their price (this term subsumes all forms of price, including wages, rents, and interest rates); and prices on a free market are determined by the law of supply and demand. Men create products and offer them for sale; this is supply. Other men offer their own products in exchange; this is demand. “Supply” and “demand,” therefore, are two perspectives on a single fact: a man’s supply is his demand; it is his only means of demanding another man’s supply. The market price of a product is determined by the conjunction of two evaluations, i.e., by the voluntary agreement of sellers and buyers. If sellers decide to charge a thousand dollars for a barrel of flour because they feel “greed,” there will be no buyers….” (OPAR, 399). This is hardly a ringing endorsement of the economic theory that total supply and total demand converge to establish and change prices. It is the philosophical point that demand is not a floating governmental creation. It is also the point that an exchange occurs when both the buyer and the seller decide the price to be good for them individually. That Dr. Peikoff (or Ayn Rand, in her own writing) did not go out and personally evaluate the theory of price that is the law of supply and demand is not an endorsement.

Even more disappointing is the lack of discussion of Buechner’s understanding of objectivity and his application of that understanding to the actions of the producer (businessman), buyer, and economist. In his discussion of a businessman’s attempt to calculate his cost of production, Buechner says, “Objectivity is an issue of method. There is no way to determine the objectivity of a result other than by looking at the method by which that result was reached. If the method is based on facts, if it reflects a rational attempt to grasp reality, if nothing relevant is deleted or evaded, and nothing extraneous is introduced, then the resulting unit cost is objective.” (OE, 83)

Buechner also focuses on production and the producer as the driving force in an industrial economy (See, e.g., “Producer sovereignty?, OE, 204). In discussing capital goods and factors of production he says, “The original factor of production is the reasoning human mind. In the fundamental sense, there is no other factor.” (OE, 153) It is for this reason that Buechner holds that businessmen do not consider supply when setting their prices. Supply is what they create and control. That is what a businessman, an industrialist, a producer does.

What Salsman’s review amounts to is a ringing endorsement of “contemporary, academic economics” (SR, 1) and an attempt to stop you from reading Objective Economics without mentioning what is in the book. It is disappointing.