Review of Weiss' "Ayn Rand Nation"

Gary Weiss' new tome, Ayn Rand Nation, looks to be the first critical examination of Rand from the Left that we've seen since Ellis' Is Objectivism a Religion? It's well written, well researched, and, despite all the anti-market innuendo, makes for an absorbing read. Its main value is the glimpse it gives us into the lives of several prominent Objectivists. A secondary virtue of the book is that it provides a critique of Rand's doctrinaire laissez-faire capitalism from a strong pro-regulation, pro-big government view. Sometimes Weiss' arguments are very good; sometimes they are not so good. The books main weaknesses is that it tries to squeeze Objectivism and the Tea Party into a left-wing narrative that is, in many important respects, not in accord with the facts.

Weiss' main thesis is that Rand is much more influential than people realize and that, unless she is vigorously opposed by morally enlightened individuals (i.e., people who agree with Mr. Weiss), American society will be hijacked by Objectivism. He quotes ARI Director Yaron Brook's blueprint for the future: ""A hundred years from now, I think Objectivism will be the dominant secular philosophy in the United States." Weiss believes that Brook's prediction "makes logical sense." I suspect Weiss regards the threat of Objectivism as credible because he buys into the way Rand frames the debate between left and right. Weiss gives credence to the left-wing carricature of conservatism as a mean, anti-government, anti-regulation, anti-welfare state ideology. He believes, for instance, that the Tea Party advocates full "laissez-faire" capitalism, and describes Congressman Paul Ryan's plan to save Medicare "an incremental step toward a goal long favored by Objectivists — abolition of Medicare." For Weiss, right-wing economic ideology is merely a rationalization for the predatory and callous behavior of business elites on Wall Street, and he spends much of Ayn Rand Nation attempting to explain why decent people in the Tea Party buy into an ideology which, he contends, is not in their self-interest. He fails to realize that when Tea Partiers complain about over-regulation or high taxes, they are not thinking exclusively in terms of Sarbanes–Oxley or Dodd-Frank. Indeed, they may not be thinking of Wall Street at all, but of Main Street. Starting a business not only involves huge financial risks (as many businesses fail, something leftist critics of the market such as Weiss blithely ignore), but may involve wading through oceans of bureaucratic red tape. While middle class families struggle to pay their mortgages, tax burdens remain onerous. Meanwhile, local, state, and federal governments continue to amass regulations. California recently passed a law that requires child seats until a kid is at least 4'9" tall or nine years old. On the Federal level we have the immense regulatory burden of Obamacare, which is threatening to make health care unaffordable to the middle class. Regulations are so complex that they can neither be followed nor enforced. Instead, they merely give bureaucrats arbitrary power over the citizenry, as we see with the EPA, where we find public officials declaring this or that piece of private property a "wetlands," much to the detriment to the titular owners of the property. While such laws (or bureaucratic meddling) may be "well-meaning," they do come off as rather patronizing and heavy-handed, if not actually harmful and tyrannical. They are poles apart from the pioneer spirit that once prevailed in the land of the free and home of the brave.

Objectivism & Politics, Part 35

Politics of Human Nature 19: Businessmen and the state. In the last post, I examined how economic interests can bias even businessmen against laissez-faire. In this post, I will examine another side of this issue illustrated by Rand’s tendency to rigidly divide businessmen into two classes: (1) competent businessmen who, like the heroes of Atlas Shrugged, make “their fortunes by their own personal ability”; and (2) incompetent businessmen who need government help to compete with their betters. Rand’s conviction appears to be that “It is only with the help of government regulations that a man of less ability can destroy his better competition"—and he is the only type of man who runs to government for economic help.

Is that really true? No, not at all. There is a third class of businessmen: (3) competent businessmen who use government as a source of additional capital. This class includes even those businessmen Rand singles out for praise for making their fortunes by their own personal ability, James Jerome Hill, Commodore Vanderbilt, Andrew Carnegie, and J.P. Morgan. Yet each of these men either took government funds or lobbied for funds or supported measures which involved transfers of money to the business class. Early in his career Hill took advantage of several government land grants. For instance, he attempted to reacquire a grant forfeited by a railroad company he had taken over. This grant had already been settled by farmers who, alarmed at the prospect of eviction, appealed to Congress. The dispute was resolved by merely giving Hill valuable timber lands in Montana and Idaho.

Vanderbilt's dealings with government were very complex. Local government in New York City was extraordinarily corrupt, and so bribery was a necessary part of doing business in that city—so in one sense you could argue that Vanderbilt had no choice but to engage in bribery. Yet it would be a mistake to argue, as Rand did, that Vanderbilt engaged in political chicanery merely for defensive reasons, to protect his legitimate interests. Vanderbilt, for instance, persuaded the city to pay him $4,000,000 to replace a dangerous section of his railroad with a tunnel. There are, in addition to this, many other government financed favors done for Vanderbilt of a more ambiguous nature, such as building streets that benefited Vanderbilt’s business interests.

Andrew Carnegie admitted "the single most important event" in prompting him to enter the steel business was the $28-per-ton tariff on imported steel, passed by Congress in 1870. J.P. Morgan, for his stead, rejected the notion of a pure free market, believing it would lead to “ruinous competition.” Morgan began his career selling faulty rifles to the army; and while his subsequent dealings with the government seem to have at least honored the letter of the law, it would be naive to conclude he achieved a Roark-like level of integrity in his affairs with the state.

Rand’s belief that only men of less ability go to the government for economic help is not supported by the facts. Regardless of their ability, entrepreneurs are always looking for ways to get their hands on capital. Their function is to “lead” the means of production into new channels—hardly a trivial task. Economic development did not arise due to capital accumulation or to increases in the quantity of labor. As Schumpeter explained more than a century ago: “The slow and continuous increase in time of the national supply of productive means and of savings is obviously an important factor in explaining the course of economic history through the centuries, but it is completely overshadowed by the fact that development consists primarily in employing existing resources in a different way, in doing new things with them, irrespective of whether those resources increase or not.” [Theory of Economic Development, 68]

So it’s not necessarily how an entrepreneur gets ahold of the necessary resources: it’s what he does with it once he gets control of it that counts. If he makes good decisions with his capital, it will create new products, new jobs, increase productivity, and lead to what is broadly described as economic “development.” In this, we see both the splendor and moral ambiguity at the heart of capitalism. An entrepreneur, a capitalist, a businessmen can enrich himself and help raise society’s general standard of living by resorting to methods that are not entirely honorable. As a zealous advocate of “capitalism,” Rand could not admit the seamier sides of free enterprise. To admit such a thing would hurt the cause. Moreover, Rand tended to resent the very notion of ambiguity, particularly of the moral variety. So she created her rigid division between the heroic entrepreneurs who never soiled themselves with the spoils of the state and the Wesley Mouches who required the state to keep their businesses from going under.

The willingness of even competent entrepreneurs to use the state as a means of raising capital and fending off "ruinous competition" adds yet another obstacle to finding support for laissez-faire. If Rand's vision of Capitalism were correct, we would expect to find the most zealous advocates of laissez-faire among prosperous businessmen. Is that what we find in reality? Not exactly. While most businessmen advocate free enterprise, the majority of them don't exactly embrace the "laissez-faire" version of free enterprise propagandized by Rand and her disciples. Nor should this be in the least surprising: for it is not always clear that laissez-faire is in the interest of the business class. The state is too rich a source of business and capital to be shunned altogether by the intrepid entrepreneur.

Objectivism & Politics, Part 6

Politics and the non-rational 2: constructivism. In the last "Objectivism and Politics" post I introduced the concept of non-logical conduct, which I contended is an important element in what happens in society. Now while Rand probably might not have much cared for the notion of non-logical conduct, it is not, in and of itself, contrary to Objectivism. An Objectivist, for instance, could easily accept the fact of non-logical conduct and its important affect on society. What he would have to add, as a sort of caveat to this acceptance, is the conviction that this non-logical conduct is bad society; that is, indeed, primarily what is wrong with society. “Yes, non-logical conduct is an important fact about society,” this Objectivist might admit. “But it’s precisely because people are ‘non-logical’ that things are so bad. If we could teach people not to be non-logical in their conduct, we would have a much better world.”

There are two problems with this view of non-logical conduct.

1. It is not clear, and certainly cannot be assumed a priori, that non-logical conduct in all instances is “bad.”
   
2. A society based solely on logical conduct and “reason” simply is not possible.
   

In this post, I will examine the first of these two problems.

Despite Rand’s vehement denial, it simply isn’t true that “reason” (i.e., consciously deliberated reasoning which applies logical reasonings to facts) can be the only guide to one’s life. Reason tends to break down and falter whenever it is facing any issue of great complexity and uncertain outcomes. Few things are quite so complicated as the social order. To believe that one can, through “reason,” construct a rational social order is to commit what F. A. Hayek called “the fatal conceit.” Civilization itself is the product of “non-logical” conduct. Nor does can it be otherwise. As Hayek notes:

We flatter ourselves undeservedly if we represent human civilization as entirely the product of conscious reason or as the product of human design, or when we assume that it is necessarily in our power deliberately to re-create or to maintain what we have built without knowing what we are doing…. Many of the greatest things man has achieved are the result not of consciously directed thought, and still less the product of a deliberately coordinated effort of many individuals, but of a process in which the individual plays a part which he can never fully understand. They are greater than any individual precisely because they result from the combination of knowledge more extensive than a single mind can master….

[The] belief that processes which are consciously directed are necessarily superior to any spontaneous process is an unfounded superstition…. [The] spontaneous interplay of social forces sometimes solves problems which no individual mind could consciously solve, or perhaps even perceives, and if they thereby create an ordered structure which increases the power of the individuals without having been designed by any one of them, they are superior to conscious action… Insofar as such processes are capable of producing a useful order which could not have been produced by conscious direction, any attempt to make them subject to such direction would necessarily mean that we restrict what social activity can achieve to the inferior capacity of the individual mind….

It may prove to be far the most difficult and not the least important task for human reason rationally to comprehend its own limitations. It is essential for the growth of reason that as individuals we should bow to forces and obey principles which we cannot hope fully to understand, yet on which the advance and even the preservation of civilization depend. Historically this has been achieved by the influence of the various religious creeds and by traditions and superstitions which made men submit to those forces by an appeal to his emotions rather than his reason. The most dangerous stage in the growth of civilization may well be that in which man has come to regard all these beliefs as superstitions and refuses to accept or to submit to anything which he does not rationally understand. The rationalist whose reason is not sufficient to teach him those limitations of the powers of conscious reason, and who despises all the institutions and customs which have not been consciously designed, would thus become the destroyer of the civilization built upon them. This may well prove a hurdle which man will repeatedly reach, only to be thrown back into barbarism. [The Counter-Revolution of Science, 149-163]

Hayek’s discussion is rather abstract, so we might do well to flesh it out a bit. His focus is primarily on those who believe that all institutions ought to be based on “reason” (i.e., “conscious direction”). He believes that the desire to found the institutions of society entirely on “reason” is incompatible with freedom. “Those who believe that all useful institutions are deliberate contrivances [of reason] and who cannot conceive of anything serving a human purpose that has not be consciously designed [i.e., not product of logical conduct] are almost of necessity enemies of freedom.” [Constitution of Liberty, 61]

Now while Rand is not an enemy of freedom, her belief in the “supremacy” of reason leads her to a kind of social constructivism that is more compatible with the social views of the political left. Rand’s constructivism arises mostly clearly in remarks she made about common law:

Common law is good in the way witchdoctors were once good: some of their discoveries were a primitive form of medicine, and to that extent they achieved something. But once a science of medicine is established, you don’t return to witchdoctors. Similarly, common law established—by tradition or inertia—some proper principles (and some dreadful ones). But once a civilization grasps the concept of law, and particularly of a constitution, common law becomes unnecessary (p. 44). [because "reason" provides a better guide than established usage.]

In other words, Rand is admitting that in the past there was some real utility in non-logical conduct, but now that “rational” law has been (or ought to be) established, we can do away with Hayek’s spontaneous formations and found everything on “reason.” But if this is true, why stop with the law? Why not found economic policy on “reason.” Yes, I know, Objectivists believe that a rational economic policy entails laissez-faire. But that is a minority opinion among those believing in the supremacy of reason, most of whom are interventionists or socialists of one stripe or another. Before World War II, many intellectuals were convinced that “reason” supported socialism, because a system of production consciously directed and planned by experts seemed more “rational” then the “anarchy” of the market. Yet the fact remains that the so-called “blind” forces of the market do a much more efficient job of coordinating the factors of production than conscious reasoning on the part of a central planner ever could. An economy is far too complex to be governed by “reason.” Non-logical conduct therefore has an important place and society, and the prejudice against it is simply that: a prejudice.

Objectivism & Economics, Part 23

Conclusion. In The Virtue of Selfishness, Rand makes the following remark:

[T]he Objectivist ethics is the moral base needed by that politico-economic system which, today, is being destroyed all over the world, destroyed precisely for lack of a moral, philosophical defense and validation : the original American system, Capitalism.

We’ll ignore whether the statement about capitalism being “destroyed all over the world," which, even if it were true when Rand made it, is hardly true any more. Our focus instead regards Rand’s view of “moral base” or moral foundation. What Rand means by moral base is a set of ethical arguments that can be made on behalf of capitalism. She is declaring that Capitalism requires moral rationalizations to survive. She appears to believe that if these rationalizations are good (i.e., logical and “rational”), capitalism can survive. If the rationalizations are bad (i.e., illogical and irrational), capitalism cannot survive. In other words, the survival of capitalism depends on how it is defended verbally.

The economist Wilhelm Roepke had a very different view concerning this matter of moral “foundations” and the like. Roepke is little concerned with abstract theories and other such editorial page verbiage. He is more focused on character and conduct. What sort of moral standards do people have to live up to in order for a free market to flourish? “Is it enough to appeal to people’s ‘enlightened self-interest’ to make them realize that they serve their own best advantage by submitting to the discipline of the market and of competition?” Roepke asks. He answers:

The answer is decidedly in the negative. And at this point we emphatically draw a dividing line between ourselves and … a school which we can hardly call by any other name but liberal anarchism, if we reflect that its adherents seem to think that market, competition, and economic rationality provide a sufficient answer to the question of the ethical foundations of our economic system.

What is the truth? The truth is that … we have made it abundantly clear that we will have no truck with the sort of economically ignorant moralism which … always wills the good and works the bad [i.e., “socialism” in the broad sense of the word]. But we must add that we equally repudiate morally callous economism [i.e., capitalism based on self-interest], which is insensitive to the conditions and limits that must qualify our trust in the intrinsic morality of the market economy. Once again, we must state that the market economy is not enough….

Self-discipline, a sense of justice, honesty, fairness, chivalry, moderation, public spirit, respect for human dignity, firm ethical norms—all of these are things which people must possess before they go to the market and compete with each other. These are the indispensable supports which preserve both market and competition from degeneration. Family, church, genuine communities, and tradition are there sources. It is also necessary that people should grow up in conditions which favor such moral convictions [and] fosters individual independence and responsibility as much as public spirit which connects the individual with the community and limits his greed. [Humane Economy, 123-125]

Rand, it goes without saying, would have strongly disagreed with Roepke. She had no use for traditional values or such things as “public spirit” and “connection” with community. Nor would she have approved of putting limits on greed. For Rand, greed is good, and any limits on greed are merely gratuitous concessions to altruism and “self-sacrifice.” She regarded “trade” as “the only rational ethical principle for all human relationships, personal and social, private and public, spiritual and material,” She would probably have disagreed with Roepke’s assertion that society “cannot be ruled by the laws of supply and demand [i.e., by trade].” Nor would she have been willing to accept any limits on her precious ethical principles.

Who is right on this issue? Is it enough to convince everyone they ought to be selfish? Could a society based primarily on enlightened self interest and Rand’s “trader principle” lead to greater wealth and happiness for individuals and society? Or would it simply bring about moral degeneration and collapse?

The evidence strongly suggests that Rand is wrong on this issue: that society cannot be based solely or primarily on enlightened self-interest and the trader principle. The majority of people are not rational, and self-interest, if left to its own devices, quickly degenerates into predatory behavior. Consider Enron, for example. Enron was governed by self-interest and greed. Jeffrey Skilling, Enron’s Chief Operating Officer, believed that “all that matters is money… You buy loyalty with money. This touchy-feely stuff isn’t as important. That’s what drives performance.” And so Enron was run merely as a money making machine by people lacking the “ethical norms” that come from community and tradition. “You were really less thought of if you got a percentage, even if it was 75 per cent of your annual base pay,” noted one ex-employee. In tapes that became public in 2004, Enron employees are heard asking electric companies to shut down production in order to maintain prices. And why shouldn’t they have cut power to increase profits? After all, it was in their self-interest! Another exchange involves “all the money you guys stole from those poor grandmothers of California.” In yet another tape, Enron traders watching a California wildfire are heard shouting “Burn, baby, burn." It was in Enron’s self-interest for California’s electrical infrastructure to be seriously damages by fire: so let it all burn, regardless of who gets hurt (or even killed). Self-interest, it turns out, is not always so benign. Nor can it be counted upon to make people honest or benevolent toward others. Morality cannot depend, as it does in Rand’s Objectivist philosophy, on self-interest and verbiage about honesty. Arguments about the “rational” self-interest of honesty will not convince people to refrain from defrauding and harming others. If the institutions of society don’t instill the values of honesty and empathy for others into the very moral fibre of the individual, “rational” arguments will prove useless.

Objectivism & Economics, Part 22

Ayn Rand's insistence on the separation of the economy and the state means that she opposes all regulations, even those that would prevent serious market failures with widespread externalities. Indeed, there is a tendency among Objectivists to deny that regulations can ever have a positive effect. The implicit argument is that, because regulations infringe on individual rights, they are immoral; and since Objectivists insist on equating the moral with the practical, this suggests that any infringement of "individual rights" must lead to bad results (such as aversely affecting millions of people). But if this isn't true, if certain types of financial instruments produced by the market lead to extreme financial dysfunction which harms millions of people, shouldn't the government seek to regulate those financial instrumen? Martin Hutchinson over at prudentbear.com presents a convincing argument for regulating the CDS (Credit Default Swaps) market:

In the early years of the London insurance market, it was possible to buy a life insurance policy on a complete stranger. Then insurance companies noticed the high incidence of unexpected homicides among their lives assured, and the concept of insurable interest was devised, codified by the Life Assurance Act of 1774. Today, you can’t buy a life insurance policy unless you can demonstrate some loss by the assured party’s death. The business is safer that way!

The same consideration must surely apply to the CDS market. The legitimate hedging purpose of CDS today represents only a tiny proportion of contracts outstanding.... With multiple bankruptcies and huge market instability owing at least part of their provenance to CDS, the public policy consideration for closing or at least sharply restricting the CDS market is even clearer than that promoting the restriction of the insurance market in 18th century London (at least taxpayers weren’t expected to pick up the tab for insurance policies on murder victims!)

As a minimum, therefore, CDS writing should be restricted to those holding bond, loan or swap obligations against which CDS might reasonably hedge. CDS should be distinguished from stock short positions and stock options (which have similar theoretical possibilities) because their greater leverage and higher outstanding volume make them uniquely dangerous. Such a market would be highly illiquid, but it would fulfill CDS’s essential function of enabling credit risk transfer. CDS’s other advantages, of demonstrating credit spreads over a public marketplace, allowing the hedging of baskets of similar credits, providing an instrument for hedge fund “investment” and making huge returns for the major dealers, would be lost. However, CDS’s destabilizing effect on global financial markets would also be lost, and the cost to taxpayers of rescues for those major institutions which had either got the CDS market wrong or were victims of CDS “bear raids” would be eliminated.

The free market is a wonderful thing. However, allowing unrestricted free markets in everything, without regard to the real-world economic effect of those markets, is a Whig shibboleth similar to the “Repeal the Corn Laws” unilateral free trade policies that destroyed Britain’s economic strength in the 19th century. The great and economically highly sophisticated Tory Prime Minister Robert Lord Liverpool, a generation prior to the mid-century free traders, also believed in free markets, but was a realist in their application to the world in which he lived.

The real world is messy and does not conform to simplistic equations either mathematical or moral. The wise policymaker will legislate accordingly, providing the maximum market freedom but inserting restrictions where the temptations to malfeasance are too great. The CDS market forms an open and shut case for restrictive regulation.

Objectivism & Economics, Part 21

Uncertainty. Central to the Objectivist philosophy is the notion that certainy is possible. Rand went so far as to suggest that the denial of certainty “means that no knowledge of any kind is possible to man, i.e., that man is not conscious.” It is also generally believed among the Objectivist faithful uncertainty, or “skepticism,” is a morally deplorable philosophical position, an epistemology that paves the way for dictatorship and tyranny.

Despite these rather eccentric views of uncertainty, Objectivists nevertheless recognize that not all knowledge claims are certain. They tend to assume that most knowledge claims made by Rand or by the denizens of ARI are “certain” and therefore can’t be wrong. But Peikoff does admit the existence of a class of claims that are merely “probable” or “possible.”

How does one distinguish between a claim that can be regarded as certain and one that is probable or possible? Peikoff explains: 


Idea X is “certain” if, in a given context of knowledge, the evidence for X is conclusive. In such a context, all the evidence supports X and there is no evidence to support any alternative.

The problem with this “solution” to the issue of certainty is that it evades the “hidden data” problem. When Peikoff talks about “all the evidence,” what does he mean? All the evidence available to one person? to group of people? to all mankind? The most likely interpretation is that he means the single individual. But individuals are limited in the amount of knowledge they know. Worse, they are not aware of what they don’t know, which means they have no way of knowing whether they are in command of all the evidence or not. As Thomas Gilovich points out in How We Know What Isn’t So:

It should be clear that the problem of hidden or absent data ... affects the kinds of inferences we draw and the beliefs we have about everyday life. Oftentimes, the lifestyles we lead, the roles we play, and the positions we occupy in a social network deny us access to important classes of information and thus distort our view of the world.

Another source of hidden data relates to all estimates dealing with the possible outcomes that arise from choices made by human beings. Since human beings exercise volition, it is impossible to know for certain how they are going to behave. Action within a social context magnifies this uncertainty. How, for example, will Obama’s “stimulus” package affect the economy? Since our estimate depends on attempting to figure out how the stimulus will affect thousands of people whom we don’t even know, to regard any such estimate as “certain,” even in the odd Objectivist sense of the word, would be ludicrous. Yet nearly all non-trivial judgments about economics and business are tainted with this uncertainty, since they all involve guessing how people will behave in general situations that are assumed to arise from a given policy.

The businessman is also afflicted by this kind of uncertainty, as the economist Frank Knight has shown:

Take as an illustration any typical business decision. A manufacturer is considering the advisability of making a large commitment in increasing the capacity of his works. He "figures" more or less on the proposition, taking account as well as possible of the various factors more or less susceptible of measurement, but the final result is an "estimate" of the probable outcome of any proposed course of action. What is the "probability" of error (strictly, of any assigned degree of error) in the judgment? It is manifestly meaningless to speak of either calculating such a probability a priori or of determining it empirically by studying a large number of instances. The essential and outstanding fact is that the "instance" in question is so entirely unique that there are no others or not a sufficient number to make it possible to tabulate enough like it to form a basis for any inference of value about any real probability in the case we are interested in. The same obviously applies to the most of conduct and not to business decisions alone.

Knight’s point about the uniqueness of a given situation is an important insight: each instance is unique because (1) of the inordinate complexity of any given social situation and (2) because the outcome of a given decision or policy must depend on how a great many individuals react to it, and it is impossible to have certain foreknowledge about those reactions, because people have volition.

Now Rand believed that innate tendencies don’t exist. If she were right about this, it would be impossible to make any kind of rational estimate about human behavior, and social science would be a futile exercise. Fortunately, Rand was wrong on this issue: human beings do have innate tendencies, and from these innate tendencies one can fashion estimates or guesses as to what is likely to happen under a specific set of conditions. But these estimates are only guesses. Even when such estimates enjoy a high degree of “probability,” it would be gratuitous to regard them as certain. So when Objectivists declare that the current crisis was caused solely by government interference, they are at best making only a guess. They can’t know such a thing for certain. Nor would such a claim constitute a particularly good or even probable guess, since some of the worst financial dysfunction occurred in the least regulated markets.

To sum up: even if certainty were possible, it would hardly matter, because most of things people argue about in economics and pubic policy are not capable of meeting even Objectivism's standard of certainty. Most of the things people argue about can never be known with certainty. If certainty could be attained, there would exist a consensus among the intelligent and the rational. Where no such consensus exists (as on most issues relating to social and economic policy), certainty is also, in all likelihood, impossible.

Objectivism & Economics, Part 20

Privatization of Roads. Leonard Peikoff on his mid-90s radio show on KIEV in Los Angeles stated his belief that public roads should be privatized. While this view is entirely consistent with Objectivism's laissez-faire dogmatism, it does raise questions concerning Peikoff’s grasp of basic social realities.

The issue of road privatization illustrates some of the weaknesses of the laissez-faire position, particular on the issue of whether economic behavior can be effectively regulated by mere self-interest. There are basically two main issues: (1) whether the private sector would find it profitable to build roads into undeveloped or underdeveloped areas; and (2) whether private ownership of roads might lead to gross abuses that would greatly inconvenience consumers.

(1) Sometimes infrastructure (such as roads, canals, railroads) is required before a given locality becomes productive. It is not unlikely, for example, that if no road existed between Los Angeles and Las Vegas, private companies would be able to raise the capital necessary to build one. Yet if there had been no road between Las Vegas and Los Angeles to begin with, it’s not clear that Las Vegas would have become the glitzy mecca it has developed into. Hence, building the road before it is needed helps bring about the very development that would render the road profitable later on via private means.

(2) While it is entirely reasonable to think that many people (or maybe even most people) could be trusted to run private roads through self-interest alone, it is grossly implausible to believe that every individual owner of private roads can be trusted. There are always going to be at least a few people who will use their property in ways that seriously harm the so-called public interest. What if the road to my house, for example, was inherited by a radical leftist, or a white supremacist, or an extreme environmentalist? What would prevent such a person from discriminating against any individual he doesn’t like? What would prevent the radical leftist, for instance, from refusing to allow conservatives to use his road? Or the white supremacist from refusing to allow blacks to drive on his street? Or the extreme environmentalist from refusing anyone to drive a car on his property? How would you like to be unable to get to your place of residence because the owner of the road to your home doesn’t, for one reason or another, approve of you? “But the market punishes such irrational people,” advocates of private roads might say. “They will lose control of their road, eventually.” Eventually? How long is “eventually”? One month? One year? Ten years? In the meantime, you can’t access your own property. There’s a very good reason for making roads public property. They are too important to be placed in the hands of whimsical private interests. Rational self-interest cannot be assumed to work in all cases, because not all people are rational.

But what if the advocates of the privatization of roads are willing to make an exception for residential streets? Shouldn’t we at least have highways privately owned? Not at all, for the same logic holds. I live in one of the more isolated areas in the country, along the northern coast of California, in Humboldt County. On one side I am faced by a treacherous Pacific Ocean, a grave yard of many a ship, and all other sides, by steeped, rugged, mountainous terrain. There are only four roads leading out of western Humboldt County: one to the south, one to the north, and two to the east. Suppose these roads were private. In that case, they could be sold. What if some left-wing billionaire (a cross between, say, George Soros and Al Gore) got ahold of all four of those roads: what would prevent him from basically shutting the roads down? After all, they are his property: he may do with them as he pleases, the public be damned!

I haven’t even mentioned the very real possibility of monopoly abuses of roads. Given the immense costs of building the road (and the immense difficulties of acquiring the property for that road), many highways would constitute natural monopolies that could easily be used to exploit consumers.

Even though society may be little more than a collection of individuals, this doesn’t mean there aren’t broader interests shared by most of the individuals in that society. One of the interests that all rational individuals in a society share is to live in a society where roads aren’t at the mercy of the individual whims and eccentricities of private owners.

Objectivism & Economics, Part 19

Rearden/Mouch dichotomy. It is well known—nor would Objectivists disagree—that many businessmen want government help. What are all these bailouts and stimulus plans that we have seen in recent months but crony capitalism at its most perfervid? Nevertheless, Rand and her disciples have given this unappetizing phenomenon a strange twist. They claim that only businessmen of “lesser ability” go to the government for help. There are, in the Objectivist world-view, mainly two types of businessmen: Rearden types who only wish to be left alone, and Mouch types who are incompetent and require government help to get on in the world. “It is only with the help of government regulations that a man of lesser ability can destroy his better competitors,” claimed Rand—”and he is the only type of man who runs to government for economic help. [CUI, 108, emphasis added.]

The facts, however, tell a different story. Businessmen, whether competent or not, generally have no scruples about seeking government favors. Nor are they doing so merely for defensive reasons, to protect themselves from harmful government interference, as Rand herself suggested. Nearly all businessmen, whether competent or incompetent, brilliant or mediocre, seek government favors and largesse. Indeed, in the 19th century, it’s difficult to find any major ones that aren’t, at least in some degree, “tainted.” Rand mentions Vanderbilt, James Hill and Edward Harriman as examples of competent businessmen who did not seek government favors. She defends Vanderbilt’s bribery of the New York state legislature as merely “to buy the removal of some artificial restriction.” Yet that is hardly the case: Vanderbilt often bribed politicians to get special privileges or to gain an edge against his competition. And he also actively sought government business during the Civil War, hiring out dangerously sub-par and undermanned boats to transport Union troops.

Raising capital, particularly for capital intensive industries such as railroads and steelworks, is an extremely difficult and arduous task. It was impossible for capitalists in the nineteenth century to raise the capital from purely private sources, so various methods, often involving government largesse in the form of tariffs and land grants, were used. Other popular methods involved various forms of financial chicanery, such as watering down stocks, or seizing a business by intentionally sabotaging it, as James Hill and his cronies did with the Minnesota and Northwestern Railroad Company. In a sense, the old charge of nineteenth century industrialists being “robber barons” has a grain of truth in it. Yet, whatever their level of spoliation, whether through government aided means or through sheer fraud, they nevertheless are responsible for building the country, using their ill gotten gains to capitalize their respective industries.

Objectivism & Economics, Part 18

Limits of free-trade. Ayn Rand and her followers are well known advocates of free trade. In her Playboy interview, Rand explained:

The essence of capitalism’s foreign policy is free trade—i.e., the abolition of trade barriers, of protective tariffs, of special privileges—the opening of the world’s trade routes to free international exchange and competition among the private citizens of all countries dealing directly with one another..

Although Rand’s primarily rationalization of free trade rests on moral arguments, nonetheless, Objectivists also contend that free trade is, in terms of economic efficiency and productivity, superior to protectionism. Yet this view is not as irrefragable as laissez-faire and other free trade zealots tend to believe.

The Italian social thinker Vilfredo Pareto, who, early in his career, had been a fervent advocate of free trade, adopted a more impartial view later in life. Although Pareto continued to maintain that protectionism destroys wealth, he came to understand that it had other effects which, under special circumstances, might make up for the wealth lost through the imposition of trade barriers. As Pareto explains in his mammoth The Mind and Society:

We find that protectionism transfers a certain amount of wealth from a part, A, of the population to a part B, through the destruction of a certain amount of wealth, q, the amount representing the costs of the operation. If, as a result of this new distribution of wealth, the production of wealth does not increase by a quantity greater than q, the operation is economically detrimental to a population as a whole; if it increases by a quantity greater than q, the operation is economically beneficial. The latter case is not to be barred a priori; for the element A contains the indolent, the lazy, and people, in general, who make little use of economic combinations; whereas the element B comprises people who are economically wide-awake and are always ready for energetic enterprise—people who know how to make effective use of economic combinations. [§2208]

Pareto’s theory explains why protectionism helped, rather than hindered, wealth creation in 19th century America. American protectionism transferred wealth from agricultural interests to industrial interests—that is, from those who would’ve used the wealth primarily to buy consumer goods to capitalists who invested the money in industrial production. Hence the great success of American capitalism during the latter half of the nineteenth century despite the high tariffs. Entrepreneurial capitalism works best when capital is transferred into the hands of those best fitted to use it. When protectionism manages to accomplish this end, it can be economically beneficial. When protectionism achieves the opposite effect and transfers capital from those best fit to use it to those least fit to use it, the results are economically pernicious.

The typical Objectivist position is that protectionism always diminishes economic efficiency. As Objectivist write Dave Holcberg puts it: [Protectionism] destroys more jobs than it creates because the overall productivity of businesses is diminished by the higher costs imposed on them.” This view, however, flies in the face not merely of the experience of 19th century American capitalism, but of Pareto’s theory, which states that, under special circumstances, protectionism may create more wealth than it destroys.

Objectivism & Economics, Part 17

Laissez-faire as a rationalization for fraud. In her essay “The Nature of Government,” Ayn Rand wrote,

A unilateral breach of contract involves an indirect use of physical force: it consists, in essence, of one man receiving the material values, goods or services of another, then refusing to pay for them and thus keeping them by force (by mere physical possession), not by right—i.e., keeping them without the consent of their owner. Fraud involves a similarly indirect use of force: it consists of obtaining material values without their owner’s consent, under false pretenses or false promises.

We will ignore Rand’s odd decision to describe fraud as an “indirect use of physical force” and instead merely note that Rand opposed fraud. While we congratulate Rand for opposing fraud, nonetheless there are serious questions at to her willingness to effectively combat it. It is one thing to oppose fraud verbally; the real question is: What are you willing to do about it?

Alex Epstein and Yaron Brook attempt to answer this question when they write:

In an unfettered free market the desire for profit is satisfied by honest, long-range, rational behavior.... As for the real swindlers, existing laws against force and fraud are sufficient to protect us. If our politicians are indeed concerned about the stock market, let them demonstrate it by eliminating, not adding, regulations and making the market truly free.

Epstein and Brook would have us believe that enforcing “existing laws” is “sufficent” in the sempeternal war against fraud. Yet what does this mean? What specific laws are Epstein and Brook talking about? And why, in the very next sentence, do they insist on the elimination of regulations (that is, of laws) in order to make markets “free”?

One of the main goals of regulation is to increase the integrity and transparency of markets. As Charles Morris explains in Trillion Dollar Meltdown:

It is the transparency and integrity of American financial markets that has made them such a magnet for foreign investment… That hard-won reputation was, to a great extent, the consequence of generally superb American market regulations, epitomized by the SEC.

The American regulatory scheme is based on the insight that government can best support financial markets by ensuring that investors get accurate information…. After a quarter century of antiregulatory zealotry, however, and a parade of fiascos from the S&L crash through the Enrons and WorldComs … the credibility of that system, and with it the attractiveness of American markets, is at risk.

Naive intellectuals like Rand, Epstein and Brook apparently believe that, as long as they ennuciate their disapproval of fraud, they won’t have to worry about anyone using their laissez-faire ideology as a rationalization for crippling the ability of the government to combat fraud. Yet this is part of what happened in the current economic crisis. The deregulation of markets and hostility toward government oversight is an important factor in credit market meltdown of the last year. Many unscrupulous operators in the markets become anti-regulatory and laissez-faire zealots for the simple reason that they wish to do as they like, even if doing as they like means committing fraud. They use laissez-faire ideologies such as Rand’s to rationalize crippling the government’s ability to combat fraud.

While Rand and her disciplines may consider themselves opposed to fraud, they certainly do not appear particularly eager to prevent such abuses. Indeed, they seem to oppose many of the attempts on the part of the government to embattle fraud. Take, for example, Leonard Peikoff’s hostility toward the SEC. On his nineties radio show on KIEV in Los Angeles he stated his desire to see the SEC abolished and declared his approval for insider trading.

What Rand, Peikoff, and other Objectivists fail to understand how difficult it is to enforce laws against fraud. Not every act of fraud is easy to detect or, even when detected, easy to prove in a court of law. White collar criminals, in contradistinction to common street criminals, are usually very intelligent and are very good at hiding their tracks. Corporations in which criminal activity has occurred sometimes, out of embarrassment and fear of Stock Market repercussions, try to conceal the criminal act. Investigations and trials of corporate criminals are very complex and expensive. The complexity of market transactions can serve as cover for fraudulent activity—which is one of the reasons why the SEC tries to keep markets as transparent as possible. They also make government oversight a necessary component to government regulation of markets.

In the laissez-faire model embraced by Rand, the courts are assigned the function of protecting private property and contracts from “breach or fraud.” In other words, the primary (if not sole) weapon for combatting fraud is the lawsuit. Fraud would, presumably, under such a vision of things, become an entirely civil matter, which of course would make easier for fraudulent economic behavior, along with other acts of questionable honesty, to go unpunished. The government and its citizens would be powerless to deal with any types of fraud that are not easily identified by the courts. As any in depth analysis of the relevant economic facts would demonstrate, it is not possible to regulate economic action solely (or even primarily) through lawsuits. That would merely bring about a society sunk in a morass of legal pettifoggery.

The role of the government in combatting fraud must go well beyond the old laissez-faire model of property rights and “freedom of contract.” As F. A. Hayek expressed it in The Road to Serfdom:

To create conditions in which competition will be as effective as possible, to supplement it where it cannot be made effective, to provide services which, in the words of Adam Smith, “though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals”—these tasks provide, indeed, a wide and unquestioned field for state activity. In no system that could be rationally defended would the state just do nothing [beyond protecting property rights and enforcing contracts]. An effective competitive system needs an intelligently designed and continuously adjusted legal framework as much as any other. Even the most essential prerequisite of its proper functioning, the prevention of fraud and deception (including exploitation of ignorance), provides a great and by no means yet fully accomplished object of legislative activity.

Objectivism & Economics, Part 16

Dishonesty, cheating, and theft. A recent study by the Josephson Institute found that 30% of today’s teenagers admit to having shop lifted in the last two year; that 42% said they lie for monetary gain; that 83% confessed to lying to a parent about a significant issue; and 64% admit to cheating in school over the past year. This sort of behavior is not, unfortunately, confined to teenagers, but afflicts all of society. In 2004, U.S. companies lost $4.7 billion to shop lifting and employee theft.

Corporate fraud remains a huge problem, despite the burdens imposed by the Sarbanes-Oxley regulations. Private equity firms, for example, aggressively buy up companies on the pretext of making these enterprises more efficient, yet statistics demonstrate that far more looting goes on than “value creation.” Subprime lending often was spearheaded by predatory mortgage brokers who made big promises to unsophisticated borrows only to charge immense fees and high interest rates further on down the road. Many of the financial instruments spawned by hedge funds have the whiff of fraud about them. Bad debt is mixed with good debt to create collateralized mortgage obligations (CMOs) which are then sold with triple A ratings, the good debt being used to conceal the bad debt. Then we have all the big news items in the corporate world: Enron, WorldCom, Madoff, etc. It doesn’t make for a particularly edifying spectacle.

Various explanations are given for the rise of dishonesty, cheating, and theft in America. Some blame it on secularization; some on the “greed” and “over-competiveness” of free enterprise; some on the decadence and demoralization caused by living in a wealthy society; some on the failure to discipline and instill self-control in young people. What do orthodox Objectivists blame it on? Consider Alex Epstein’s and Yaron Brook’s take on corporate scandals:

The common explanation that "greed" is to blame makes no sense--the abuses in companies like Enron and WorldCom were not exercises in self-interest, but in self-destruction. The shareholders of these companies lost huge amounts of money thanks to corporate mismanagement--mismanagement reflected by plummeting stock prices long before any scandals broke. Why did they tolerate incompetence for so long?
The reason lies in existing regulations that prevent shareholders from acting in their own interest. Anti-hostile-takeover legislation (passed in 1968 and reinforced by a myriad of state regulations) has made it difficult and costly for shareholders to replace incompetent management, thus allowing bad managers to get rich while driving companies into the ground, à la Enron. Arcane regulations passed in the 1930s limit the ability of the most knowledgeable shareholders to be involved in the board and therefore in decision-making. For example, financial entities, such as pension funds, insurance companies and mutual funds that own large stock positions in corporations, are either prohibited or strongly discouraged by law from board participation. Bankers who possess the financial resources and knowledge to take large positions in companies and promote rational corporate governance (as J. P. Morgan did at the turn of the century) are not allowed to do so.

As would be expected, Epstein and Brook blame government regulation. Is there any merit in their claim? No, not much. Several problems immediately come to mind. Note the dates of the regulations mentioned: the 1930s and 1968. Forty years ago in one instance, over seventy in the other. If these regulations are the prime culprits behind the rise of corporate fraud in recent years, why didn’t they lead to more fraud when they originally passed?

Be that as it may, it is unlikely that government regulations play a major role in shareholder power. The corporation, by dividing ownership into bits and pieces, creates institutional incentives that effectively empower management at the expense of ownership. As Schumpeter put it:

The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps.

If you are simply one owner among hundreds, you’re not likely to go any great lengths to defend your “interests.” Indeed, you probably won’t even know about the incompetence of management until it’s too late. After all, that is normally what corporate fraud is all about: to conceal incompetence in management by “cooking” the books.

Brook and Epstein also complain of “complex and contradictory rules” which “encourage bad accounting.” But is that really what happened with Arthur Anderson and other accounting firms that are guilty of fraudulent accounting? Not according to insiders.

One reason for [the failure of accounting] is the well-known problem of conflict of interest [writes Richard Bookstaber, the well known hedge fund manager]. Accountants have a financial incentive to be on the company’s good side so they can keep their mandate. This conflict was the main reason for the erosion in the quality of financial reports over the course of the 1990s.

Brook and Epstein insist that “Rational managers have an incentive to provide accurate information to shareholders--it establishes their credibility and reputation and allows them to raise capital when needed.” This observation, however, misses the point. The problem is that, in contemporary financial markets, the risks are so great and the rewards so immense that it is possible for a manager to make huge amount of money at first only to lose huge amounts later on. Corporate fraud often arises from trading strategies that make huge amounts of money in the short run only to lose huge amounts in the long run. If a brokerage firm that has reputation for making enormous profits hides recent losses, how is anyone to know that the managers are incompetent? Their record seems to state otherwise; and until the fraud is exposed, they will continue to be seen as brilliant. It’s only after the fraud is exposed and investors have lost billions of dollars that the market punishes the fraud. Yet by then it’s too late.

Brook and Epstein conclude:

In an unfettered free market the desire for profit is satisfied by honest, long-range, rational behavior: by innovating, by hiring the best employees, by selling quality products and by providing accurate information to the owners of the corporation--shareholders. As for short-range managers, the markets will not tolerate them. As for the real swindlers, existing laws against force and fraud are sufficient to protect us.

The issue is not whether markets tolerate “short-range managers.” Markets do in fact tolerate such managers in the short-run—but that gives the managers plenty of time to inflict serious damage on financial markets. And when these same “markets” punish such short-term strategies, the greatest victims are never the managers, but the shareholders and investors. In the end, we have to reject the notion that markets, by themselves, will make people honest. Whatever the cause of the epidemic of cheating, dishonesty, and thievery that afflicts our society, such behavior places capitalism at risk. To paraphrase Edmund Burke: It is ordained in the eternal constitution of things, that men of dishonest minds cannot be free. Their mendacity forges their fetters.

Objectivism & Economics, Part 15

Schumpeter’s challenge. The economist Joseph Schumpeter created quite a stir in the forties when he warned that “the capitalist order tends to destroy itself.” Schumpeter issued this warning despite his belief in what he described as “the impressive economic and the still more impressive cultural achievement of the capitalist order and at the immense promise held out by both.” Capitalism would destroy itself because it would undermine its own “protecting strata” and “institutional framework.” One of the reasons he gave for this pessimistic assessment seems rather prescient in relation to the current economic crisis:

Capitalist activity, being essentially “rational,” tends to spread rational habits of mind and to destroy those loyalties and those habits of super- and subordination that are nevertheless essential for the efficient working of the institutionalized leadership of the producing plant: no social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends.

In one sentence Schumpeter has put his finger on the greatest flaw of capitalist order. Contrary to what Rand and her followers believe, “rational” self-interest is not an entirely benign psychological force. Rand’s faith in self-interest (and it is only a faith) is not warranted by the facts. In the first place, it is absurd to regard human desires and sentiments as rational. A desire or sentiment can only be criticized in reference to an opposing desire or sentiment. As Spinoza famously put it: “an emotion cannot be destroyed nor controlled except by a contrary and stronger emotion.” Consequently, rationality, as an ideal, can only apply to the means by which desires and sentiments are satisfied. Yet this is not all. Even if there were (per impossible) such a thing as a “rational end,” it is very doubtful that very many human beings would be interested in pursuing it. If we make history and experience our guide in such matters—and whatever guide could possibly lead us to the truth besides history and experience?—then we are forced to conclude that the majority of human beings are largely non-rational in their conduct and are probably not even capable of being rational about any issue in the least complex (as rational methods of analysis tend to break down when applied to complex situations). When Schumpeter talks about “rational” habits of mind, he is not writing in the Randian sense of the word. He means something more along the lines of rationalism—i.e., the belief that no doctrine is true unless it can be proved “verbally,” through clever patter and other exercises of blatant sophistry. As a consequence of this sort of perfervid rationalism, individuals no longer believe in “higher” values or “lofty” moral ideas. Short-term self-interest and “immediate gratification” become the main desideratum, with sophistry being brought in to give the whole thing a window dressing of moral justification.

We see this played out in the financial sector. The birth of complex financial instruments based on computer generated formulas has allowed finance capitalism to mask what ultimately amounts to a vast ponzi scheme which yields huge profits in the short-run but ends in bankruptcy and dishonor. This sort of finance capitalism fits into what is known as the “Minsky cycle”:

Firms participating in the early stages of the cycle typically are not leveraged; Minsky called them hedged firms because their cash receipts cover their cash outlays. The success of the first movers draws in additional players. Speculative firms then engage in leverage to the point where they must borrow to meet some of their interest payments—usually borrowing in short-term markets to finance higher-yielding long-term positions. None of this is irrational behavior; market players are chasing short-term gains, and some of them are getting very rich.

The final stages of the Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt burden continuously increases. At some point, a disruptive event occurs, … and markets abruptly reprice—the further along in the cycle, the more violent the repricing. [Charles Morris, The Trillion Dollar Meltdown, p. 133-4]

In other words, what we find in the world of high finance is a system which, by giving individuals the hope of huge rewards in the short-run, encourages them to behave in a ways that are destructive in the long-run. It takes strength of character to resist such huge short-run gains. Unfortunately, the very success of capitalism tends to create a prosperous society that weakens the moral fibre of individuals. Add to this situation the tendency of individuals—particularly intelligent individuals—to cloak their real motives under a thick shroud of ingenious rationalizations (e.g., “portfolio theory,” the “efficient market hypothesis,” “laissez-faire” ideology, etc.), and we have all the elements required to create market failure leading to widespread and socially harmful externalities, as can be readily corroborated by examining the 2008-2009 financial crisis.

Objectivism & Economics, Part 14

Rand’s “objective” value theory. Austrian economics ascribes to what is called the “subjective value” theory:

An individual's actions and choices are based upon a unique value scale known only to that individual. It is this subjective valuation of goods that creates economic value. Like other economists, the Austrian does not judge or criticize these subjective values but instead takes them as given data.

For obvious reasons, Rand did not like this theory. In her essay on capitalism, she provided an “objective” theory of economic value to take its place. The difficulty with all such “objective” theories is that they tend to equate objective value with success in the market. Hence popular music, headed by Elvis Presley and the Beatles, is objectively superior to classical music, because it has sold a lot more recordings and grossed far more profits. The Bible is objectively more valuable than Atlas Shrugged because it has sold more copies and, presumably, netted a greater profit.

To get around this difficulty, Rand introduces a distinction between what she calls “philosophical” and “social” value. The free market value of goods and services, she grants, “does necessarily represent their philosophically objective value, but only their socially objective value, i.e., the sum of the individual judgments of all the men involved in trade at a given time, the sum of what they valued, in the context of their own life.”

If Rand’s “socially objective” value sounds suspiciously like the the subjective value theory, well, that’s because there is very little difference between the two. So in order to draw a larger contrast between the two theories of value, Rand introduces another distinction. She claims that what makes her “socially objective” value truly objective is the discipline of the market:

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, 24-25]

As with many of this Rand’s theories, this one only remains plausible if we ignore the many facts that fail to accord with it. One of the long lasting criticisms of capitalism is that, under its regimen, business are often forced to appeal to the lowest common denominator to survive. The tacky, the tasteless, the vulgar, the obscene often triumphs over products that, from an “objective” point of view, appear more useful and “edifying.”

As an example of this, consider the most popular non-free iphone application, a piece of software appropriately entitled “iFart mobile.” According to the iFart website, their application is “Ranked #1 in overall sales of all applications in the world.” The video below goes into greater detail:



As amusing as all this may be, one still wonders what sort of “objective” value, even of the “social” type, a product like iFart can possibly have. Obviously, it is little more than an “entertainment” product and shouldn’t be taken too seriously. But where is the “objective” value in such a thing, beyond the obviously subjective humor that some people find in it? Can we really say that iFart, within its category of goods and services offered on the free market, is the “best product and the cheapest price”? How can this be? Is it because it's the best flatulence imitating application for the iphone? Even if this were so, it still doesn’t answer the question why flatulence imitating iphone apps have more objective value than other iphone apps. Beyond mere success in the market, what objective value, established by human “reason,” can be attributed to iFart?

The iFart application merely skims the surface of what is wrong with any objective theory of economic value. One can think of many worse examples: e.g., what about all those astrology books that are sold every year? or the billions of dollars spent on internet porn? or “gangsta” rap? Where is the objective value in these horrors? Yet they all thrive in the market. It simply will not do to mix economics with morality. Economic value—that is, the values people actually pursue in the market (rather than the values they “ought” to pursue) cannot in any meaningful sense be regarded as “objective.” The Austrians show good sense in regarding economic value as subjective.

Objectivism & Economics, Part 13

Objectivism and Austrian Economics: Salsman as “hyper-inflationist.” Stefan Karlsson over at mises.org complained a few years ago that many ARI-affiliated economists have “abandoned Mises” in favor of “supply-siders”:

[I]f you look at their articles on economics [over at capmag.com], you will ... find the pro-inflationist supply-side economics advocated there.… This is particularly true if you look at older articles from 1999 or 2000. There you'll find many articles strongly attacking Ayn Rand's former associate Alan Greenspan—but not because he has abandoned his former hard money stance. No quite to the contrary, in true supply-sider fashion he was attacked for not being inflationist enough. Of course, in true supply-sider fashion they profess to be anti-inflation only to go on to attack the Fed for not lowering interest rates and increasing the money supply.

Karlsson has discovered a glaring contradiction at the heart of those Objectivists who, like Salsman, reject Austrian economics: they are all inflationists! It is this sort of thing that causes those of us at ARCHNBlog to be so very unimpressed whenever we hear Objectivists making virtuous noise about “reason” and logic and “rationality.” In practice, those who talk a great deal about “reason” are almost always found to be mere rationalizers of their own personal interests and private shibbeloths. Salsman, for example, is an investment analyst for his own company, InterMarket Financing, which “quantifies market price indicators to guide the asset allocation decisions and trading strategies of institutional investors. [InterMarket Financing helps] pension plans, asset managers, financial institutions and hedge funds use disciplined methods to outperform benchmarks.”

Given how embedded such financial advising firms have been in the speculative excesses of the last quarter century, it is not surprising that Salsman would favor an economic ideology that supported the economic conditions that feathered his own nest. The difficulty for Salsman was trying to harmonize his supply side ideology with orthodox Objectivism’s traditional allegience with Austrian economics. It turned out to be easier than many of us might have expected. There already existed points of difference between Rand and the Austrians (e.g., Mises’ neo-Kantian epistemology and “radical subjectivism”), and Salsman merely exaggerated these differences and added several more of his own, nearly all based on absurd economic heresies He has even had the gall to excuse for Rand for her advocacy of Austrian economics: “By the way, I do not fault Ayn Rand for having promoted the Austrian School in the 1960s,” he writes. “I suspect she was merely trying to suggest the best economics books then available, realizing they weren't perfect.”

What is puzzling about all this is that no one over at ARI should raise a word in protest. Since economics is considered a non-philosophical subject-matter, differences of opinion in that discipline are allowed. While that is entirely understandable, shouldn’t there be at least some limits? After all, would ARI wish to be affiliated with an individual who denied that the earth is a globe? Wouldn’t they, at the very least, wish to be on record as not advocating so obvious a detour into blatant evasion of reality? Well, as it happens, Salsman’s view are nearly on the same plane as those of the flat-earthers. He scorns what he calls the “myth of scarcity” and holds that the Stock Market of early 2000 was not overvalued!

Incidentally, George Riesman, who represents the traditional view among orthodox Randians that seeks to integrate Objectivism with Austrian economics, had a reply of sorts to Salsman’s criticism of Austrians for favoring interest-rate hikes by the Fed:

Austrian economists ... actually do advocate this and it’s perfectly correct for them to do so [Riesman wrote]. This is because we would all be better off if the Federal Reserve refused to lend except at an interest rate that was too high for anyone being willing to borrow at. In that case the Federal Reserve would be unable to affect the market in any way and might as well not exist. The Federal Reserve exists in order to make interest rates lower than they would otherwise be. It tries to achieve this by creating new and additional money and lending it out. The new and additional money appears on the market as an increase in the supply of loanable funds and in this way brings interest rates down. However, once the new and additional money gets out into circulation and is spent and respent, sales revenues and profits tend to rise throughout the economic system, which serves to increase the demand for loanable funds. If the Fed does not raise interest rates but simply provides more new and additional money to meet the additional demand for funds, the problem grows worse and worse. A rise in interest rates is essential to choke off the flow of new and additional money—to prevent a continuous acceleration in the creation of new and additional money. In objecting to this rise in interest rates, Salsman is in the position of advocating hyperinflation. Hyperinflation is profoundly destructive of wealth and rests on the total obliteration of any kind of objective standards in the economic system.

Objectivism & Economics, Part 12

Objectivism and Austrian Economics: entrepreneurship. Richard Salsman is on record for criticizing von Mises’ “(absurd) theory of the essentially-passive, arbitrage-chiseling entrepreneur (and ‘the consumer is king’).” Now this issue has been a bone of contention between Austrain economists and Objectivists for several years. Nearly eight years ago, Mark Skousen, a prominent exponent of free market ideology and Austrian economics, penned a mildly critical attack of Rand’s view of entrepreneurship and what he describes as Rand’s “strange, distorted view of the money-making process.”

[Rand’s hero from her novel The Fountainhead, Howard] Roark denies a basic tenet of sound economics--the principle of consumer sovereignty... [T]he goal of all rational entrepreneurship must be to satisfy the needs of consumers, not to ignore them! Discovering and fulfilling the needs of customers is the essence of market capitalism... In short, Howard Roark's [view of the customer] is irrational and contradicts a basic premise of Rand's Objectivist philosophy. For Roark, A is not A. He wants A to be B--his B, not his customer's A. Thus, Ayn Rand's ideal man misconceives the very nature and logic of capitalism--to fulfill the needs of customers and thereby advance the general welfare. As Ludwig von Mises writes in his book, The Anti-Capitalist Mentality, "The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way. Wealth can be acquired only by serving the consumers." (1972:2) Apparently Howard Roark doesn't believe in consumer sovereignty. As he states in his final court defense, "An architect needs clients, but he does not subordinate his work to their wishes." (1994:714) Really?

So who is right about this issue? Is Salsman and Rand right that the entrepreneur should never "subordinate" his work to the wishes of his clients? Or is Skousen and Mises correct in their emphasis on consumer sovereignty?

Although Rand and Salsman are clearly guilty of exaggerating and over-stating the case, their view comes a tad closer to the truth than the Skousen-Mises position which over-emphasizes consumer sovereignty. Although few if any entrepreneurs would succeed if they were as inflexible and uncompromising as Howard Roark, it is entrepreneurial leadership and not consumer sovereignty that is critical in advancing a capitalist economy. As economist Joseph Schumpeter explained in his classic The Theory of Economic Development:

[Although] we must always start from the satisfaction of wants, since they are the end of all production, and the given economic situation at any time must be understood from this aspect, yet innovations in the economic system do not as a rule take place in such a way that first new wants arise spontaneously in consumers and then the productive apparatus swings round through their pressure. We do not deny the presence of this nexus. It is, however, the producer [i.e., the entrepreneur] who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using.

Of course, in educating consumers, the entrepreneur does not have unlimited scope. It would be virtually impossible for any entrepreneur to educate consumers to prefer candles to light bulbs or black bread to meat. Consumer “wants” (rather than “sovereignty,” which overstates the case) remain critical. And so Skousen is right on target when he writes:

[The Fountainhead's] thesis is entirely unrealistic in the everyday world of commercial building. Occasionally a client values more the notoriety of living in a home built by a signature designer than getting what he really wants, but not many. Almost all of Rand's scenarios are extreme and idealistic, a strategy that works to sell novels, but does violence to all sense of reality. Normally architects work closely with the client and make numerous changes in order to fit the client's needs.

Objectivism & Economics, Part 11

Objectivism and Austrian Economics: Salsman’s Revisionism. In the recommended bibliography of Capitalism: The Unknown Ideal, one finds more than a dozen books from economists associated with the so-called Austrian school, included eight works by Ludwig von Mises, whom Rand regarded as a “great economist” and whose works she recommended for dispelling the myth that ‘“laissez-faire’ capitalism is the cause of depressions.” Despite Rand’s endorsement of von Mises, Objectivism, under the influence of M. Northrup Buechner and Richard Salsman, has begun to distance itself from Austrian economics. Salsman has, in particular, focused his animus upon Austrian business cycle theory.

Another common claim about stock-price gains in the 1920s is that they were made possible by Federal Reserve “inflation.” This view is held by many supposed free-market economists—monetarists and Austrians—and is certainly a tempting thesis for those who oppose central banking. But was Alan Greenspan correct when he wrote [in the Rand approved CUI], in the mid-1960s, that the late-1920s represented a “fantastic speculative boom” that was triggered by “excess credit” pumped out by the Fed—credit which then allegedly “spilled over into the stock market”? This view of the late-1920s stock-price rise could not be more wrong.

Why is Greenspan and the Austrians wrong? Salsman explains:

In the Austrian theory of business cycles, it is easy to detect a lack of appreciation for the intelligence, wisdom and foresight of entrepreneurs, businessmen and investors. Austrian economists presume producers are easily fooled by government manipulations of money, credit, and the economy—especially by the alleged phenomenon of “artificially” low interest rates. They claim producers are conned into undertaking projects that later will turn out badly and require liquidation. In fact, producers are not fooled; they know, even if implicitly, which government policies are conducive to wealth creation and which are destructive. That is, they know when it’s worth producing and when it’s only worth shrugging. And when they shrug and production grinds to a halt, it does not grind to a halt because they had previously produced.

When the Austrian view of the business cycle is coupled with a malevolent-universe premise—with the view that in the economy or stock market “what goes up must come down,” that “all good things must come to an end,” that no long ride of unbroken prosperity can ever persist without taking on irrationally exuberant hitchhikers—the combination can be catastrophic. For it can bring even purported champions of capitalism to openly endorse destructive policies such as Federal Reserve interest-rate hikes, curbs on the stock exchange, and more burdensome government regulations.

I will discuss Salsman’s theory of the entrepreneur in my next economics post. I merely here wish to note the obvious ideological origins of Salsman’s ideas. Elsewhere on the web, Salsman has given 12 reasons why he disagrees with “contemporary” Austrian economics. I won’t list all the twelve reasons, since all but two of his reasons are either based on a malicious interpretation of Austrian doctrines or an inability to understand even the most basic economic concepts. But the last reason he lists is the most glaring and fatuous of all and gives the whole game away. Salsman complains of the “animosity (and/or indifference) towards Ayn Rand and Objectivism” manifested by Austrian economists. In other words, Salsman resents the failure of Austrian economists to bend the knee at the altar of Rand. But is that any reason to disagree with someone—that they don’t worship your own private idols? Does Salsman refuse to get medical attention from any doctor who is indifferent (or who entertains animosity) towards Rand? Does he disagree with any specialist who, even though Rand herself recommended him, is not an enthusiastic admirer of Objectivist (or approved of by ARI)? Here we see, quite plainly, the poisonous fruits of ideology—that is, of making subservience to a system of ideas more important than any other consideration, including every consideration of truth, justice, fact and science.

Objectivism & Economics, Part 10

The Fed. According to Jerome Tuccille, Alan Greenspan once testified in front of congressional committee that if it were up to him (i.e., Greenspan), the Fed would be abolished. But Greenspan quickly assured the committee that none of his colleagues agreed with him and nothing along those lines would ever be done. In taking this position, Greenspan was merely echoing a view that had long become gospel among his former associates in the Objectivist movement. “ [W]e need to end the government's ability to set interest rates and create inflationary booms—and their inevitable busts—by phasing out the Federal Reserve and allowing the United States to return to a gold standard,” writes the current President of ARI along with coauthor Don Watkins.

Now the real objection that Yaron Brook and other Objectivists have to the Fed is that it is associated with the government at all. It is the federal government’s bank run by the government’s appointees. The complaints about the government setting interest rates and creating inflationary booms and busts is merely an additional rationalization thrown in to strengthen their case. As such, it betrays a poor grasp of the relevant economic and political realities.

In denouncing the Fed, Objectivists tend to be ruled, not by intelligence, but by mere ideological pretension. Their identification of the Fed with “the government” constitutes their first error. It is important in such circumstance to look beyond words and other mere appearances and get at the actual realities. When Objectivists equate the Fed with the federal government, what can they possibly mean? What part of the government is the Fed beholden to? To the executive? To the legislature? To the judiciary? The answer is: the Fed is not beholden to any single authority in the Federal government. The Fed is an independent, quasi-private institution. The original legislation for the Fed intended for that institution to be entirely private. But this aroused fierce political opposition and so a compromised was arranged. Thus the Fed became a quasi-private institution that enjoys real independence from the federal government. The executive branch nominates those who control the Fed, but the nominations are spaced out in such a way that no single administration could ever gain control of the Fed by nominating their own people. As a matter of fact, the whole culture of the nomination process tends to favor choices approved of by Wall Street. Indeed, the Fed is far more likely to be pressured or influenced by Wall Street than by the federal government.

So if the Fed is not the creature of the federal government that it’s painted to be, what, then, is the objection to it? Objectivists might complain about the legal privileges enjoyed by the Fed. But it is not clear that getting rid of these privileges would get rid of the underlying problem. Even if the government had no official de jure bank, it would inevitably have a de facto bank that would enjoy many of the same privileges of a central bank.

Abolishing the Fed would not abolish the government’s need for banking. The government would merely have to do business with a private bank. Yet whichever bank the government decided to do business with would effectively become a central bank in all but name. It would, of course, have no legal privileges; but then again, it wouldn’t need them. The fact of doing the government's banking business would endow it with de facto privileges.

First of all, such a bank, holding, as it would, all the government’s wealth, could not be allowed to fail. No government would ever allow such a thing to occur. But once a bank find itself in a position where it won’t be allowed to fail, many of the other privileges of legally established central banks inevitably follow. Because it won’t be allowed to fail, the bank would become the lender of last resort. This would allow it to set a de facto equivalent of the discount rate, just as the Fed does today.

One privilege such a private bank would not enjoy is the ability to engage in Open Market Operations. While some laissez-faire ultras might regard this as positive benefit, it is actually nothing of the sort. The Fed’s ability to engage in Open Market Operations is its one redeeming characteristic. For even if no Fed existed, Open Market Operations would still take place; only, instead of being conducted by an independent body, they would be conducted by the Treasury, under direct supervision by the President himself. Anyone who believes that would constitute an improvement suffers from an egregious naivete. The one advantage that the Fed brings to the table is that it prevents the executive or the legislature from having direct control over Open Market Operations. How important is that? Very important. It is through Open Market Operations that monetary policy is conducted. Any control that the Fed has over real interest rates and inflation is almost entirely exercised by buying or selling government securities to banks. Now it is important to understand that Open Market Operations are not a consequence of the Federal Reserve. Any militarily powerful and solvent government would be able to conduct monetary policy, by virtue of the fact that is has ample revenues. All that money concentrated in one institution would give that institution an inordinate influence over the banking system, regardless of any “legal” prerogatives it may or may not enjoy. Objectivists are naive about this because they are more concerned with defending their ideological convictions than they are with understanding the sobering truths of government finance.

Objectivism & Economics, Part 9

Role of deregulation in current crisis. David Horowitz, in his blog over at frontpagemag.com provides additional evidence of the role that deregulation has played in the current crisis. Horowitz writes:

The cause of this crisis is a change in the structure of financial markets which allowed hedge fund operators and other sharks to leverage bad loans geometrically. Republicans as well as Democrats supported this system and gave it legislative backing. You could look on the economic collapse as a convergence of socialist and free market (anti-regulatory) ideological manias. Phil Gramm's deregulatory prejudices are at least as responsible for this economic ruin as Barney Frank's ignorant redistributionist fantasies. No one's hands are clean.

Horowitz then quotes excerpts from an interview with Bill Janeway that provides evidence not merely for the role that dereguation played in the fiasco, but also mathematical economics:

It took two generations of the best and the brightest who were mathematically quick and decided to address themselves to the issues of capital markets. They made it possible to create the greatest mountain of leverage that the world has ever seen….It was a kind of religious movement, a willed suspension of disbelief. If we say that the assumptions necessary to produce the mathematical models hold in the real world, namely that markets are efficient and complete, that agents are rational, that agents have access to all of the available data, and that they all share the same model for transforming that data into actionable information, and finally that this entire model is true, then at the end of the day, leverage should be infinite.

Here was the theory. But banking and financial regulations made it impossible to put it into practice. So what was done about it? Academic economists appealed to Washington to have the regulations removed:


Milton Friedman was prevailed upon to write a letter to Secretary of the Treasury Nicholas Brady, Reagan’s Secretary of the Treasury, as a result of which the Chicago Board was cleared to trade stock index futures, all cash settlement. There is another story in which Alan Blinder on the Democratic side played a similar role, by providing the academic legitimacy for the markets and for the integration into the fabric of finance of the derivatives that instrumented modern financial theory. That enabling role … created a tool through which you could price things that did not heretofore trade. Puts and calls did not trade.

In brief, what happened is that these new financial tools, brought into being through the obtuse cleverness of econometrics, enabled the free market to generate a nearly infinite supply of credit. The so-called “funny money” that free market ideologues wish to blame the Fed for was largely created by the free market! Government regulation had nothing to do with it. On the contrary, it was the absence of government regulation that allowed these non-banking financial institutions to go create a massive credit bubble in the nineties, thereby driving up the Stock Market to five times its value in twelves years.

Objectivism & Economics, Part 8

Greenspan’s primary error. Despite the howls of condemnation hurled against Greenspan by the Objectivist rabble, which hsa been fervently trying to convince us that the former Fed chairman is some kind of Atila-like, arch-collectivist who long ago abandoned the free market, the most famous ex-Objectivist in the world is no such anti-market ogre. His attempts to “advance free-market capitalism as an insider” did not fail because of his straying from the Objectivist straight and narrow. Indeed, the Objectivist influence on Greenspan, if anything, remained a stumbling block, because it prevented him from fully appreciating the organic view of markets advanced by thinkers like Burke and Hayek (more on this in later posts). But even the Objectivist influence is secondary in importance to another, more serious problem. I have in mind Greenspan’s strong attachment to mathematics and statistics. “My primary obsession was math,” Greenspan admits in his biography. In 1951, Greenspan signed up for a course in mathematical statistics, and was immediately hooked: 



Today this discipline is called econometrics, but then the field was just an assemblage of general concepts, too new to have a textbook or even a name…. I immediately saw the power of these new tools: if the economy could be accurately modeled using empirical facts and math, then large-scale forecasts could be derived methodically, without the quasi-scientific intuition employed by so many economic forecasters. I imagined how the could be put to work. Most important, at age twenty-five I’d found a growing field in which I could excel.

Although Greenspan would later discover the limitations of forecasts based on econometric models, he would use his mastery of economic statistics to develop a successful private business (i.e., providing useful economic statistics to businesses), and later to establish himself as the most important economist in the Republican Party (which is why Reagan appointed him as Fed Chairman in 1987). So mathematics and statistics were the making of Greenspan. In places where such tools are useful and necessary, Greenspan was a consummate master. The problem is, mathematical statistics is a mere tool for acquiring economic facts: it does not, in and of itself, provide any understanding of those facts. Indeed, it predisposes one against understanding them by placing too much emphasis on calculation and technique rather than on understanding and “quasi-scientific” intuition. It causes economists to unwittingly regard the economy as a mechanism instead of a complex outgrowth of cooperating and clashing human motivations. Regarding the economy in this manner predisposes free-market orientated economists to accepting the errors of monetarism, particularly two beliefs that have governed the Fed’s monetary policy during Greenspan’s reign: (1) that the role of the Fed is to maintain price stability in consumer goods; and (2) that any crisis in liquidity (i.e. deflation) can be solved by merely increasing the monetary supply.

Greenspan and his colleagues at the Fed, by holding fast to these principles, failed to understand what was happening in the nineties. Specifically, they failed to appreciate how the deregulation of the eighties, by encouraging dangerous experiments in high finance, particularly in derivatives and debt leverage, had resulted in a massive credit bubble that had swollen asset markets to a very dangerous extent. Greenspan appears to have had an inkling that something was wrong in 1997 when he made his famous “irrational exuberance” remark. But he was either unwilling or unable to do anything about it. He would later claim that bubbles were impossible to identify until they burst—an obvious testimony to the poverty of Greenspan’s economic understanding.

What could Greenspan have done differently? What was his major policy error? His major error was not to have recognized the credit bubble in the nineties, when it could have been safely deflated. To be sure, he may not have been able to do anything about it: after all, the Fed chairman is not a dictator, but merely one vote among seven colleagues. Moreover, due to the increasing ability of non-banks to expand credit, the Fed was losing control of the money supply in any case.

Curiously, Objectivists like Richard Salsman have criticized Greenspan for raising interest rates and tightening monetary policy in 2000. “ Last week, for example, Greenspan told Congress that he'll keep raising interest rates,” Salsman wrote in March of 2000. “In response, the stock market plunged nearly 3%—meaning that about $400 billion of wealth was destroyed. We have only Greenspan to blame for the drop, because there's nothing wrong with the American economy.”

This is, of course, palpable nonsense, and demonstrates that Salsman’s understanding of economic reality is, if anything, even worse than Greenspan’s. As I wrote at the same time (in March of 2000):

The stock market is vastly over-inflated. It has risen by a factor of the more the six in the last twelve and a half years. Now what economic fact could possibly justify so immense an increase? No amount of rise in productivity, Gross Domestic Product(GDP), research and development, corporate profits, or stock dividends can possibly justify a six-fold increase in the stocks. To believe that the current stock market reflects the genuine economic realities of the present economic situation is to demonstrate a blindness equalled only by investors during the other great speculative euphorias in history.

Now how did I know, in March of 2000, that the Stock Market was grossly over-inflated? It’s really quite simple: I merely applied intelligence and the lessons of history to the economic facts. When the Stock Market goes up by a factor of six, there’s something seriously wrong. You don’t have to be a great mathematical economist to figure that out. So why did Greenspan and Salsman get it wrong? With Greenspan, I think (as I have explained) it had a lot to do with his mathematical training, which predisposed him to accepting mistaken monetarist notions. With Salsman, it is his commitment to ideology, which makes him sacrifice truth to advocacy. Hence the absurdity of his criticism of Greenspan. He is not interested in understanding Greenspan: he merely wishes to find a rationale for abusing the former Fed chairman because the institution of the Fed violates Salsman’s tender ideological scruples.