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.

PARC: The Compleat Debunking

James Valliant's "The Passion of Ayn Rand's Critics" is to literary biography what "Plan 9 From Outer Space" was to cinema. Now the indefatigable Neil Parille has compiled his series of posts critiquing this uber-weird tome - which has become a kind of cultic litmus for Objectivism - into one essential essay. Parille concludes:

"Simply put, James Valliant's PARC is filed with erroneous readings of sources, poor research, double standards, dubious reasoning and a profound unwillingness to come to terms with evidence that undermines its case."

In other words, it is written according to Objectivism's standard operating procedure.

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.

Inevitably

We noted this oddity back in 2007. No surprises how it turned out.

NEW YORK (AP) -- A construction official falsely billed $1.2 million for supplies not delivered to clean up a toxic ground zero skyscraper in exchange for cash, clothes and trips to the Caribbean, prosecutors said Tuesday.

Robert Chiarappa was the purchasing agent for the John Galt Corp., which was hired to clean up the former Deutsche Bank tower after it was heavily damaged in the 2001 terrorist attack on the World Trade Center across the street.

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.

"Compromising on her philosophy"?

Ayn Rand at Alan Greenspan's inauguration as Chairman of the Council of Economic Advisers, 1974.

Currently the Ayn Rand Institute is enthusiastically issuing denunciations of Alan Greenspan to try to distance Ayn Rand's reputation from the current economic meltdown. However, it seems they doth protest too much. Here's Harry Binswanger from his recent ritual condemnation, Alan Greenspan vs Ayn Rand and Freedom:

"I can't say I knew Alan Greenspan, though, being an associate of Ayn Rand, I met him a few times in the 1960s. But by 1970--almost 40 years ago--I and a couple of other Objectivists in that circle already realized that Greenspan was compromising on her philosophy."

Funny that. The above photo is from 1974 - four years after Binswanger claims to have discovered Greenspan's "compromising" on Rand's philosophy - of Ayn Rand and Frank O'Connor at Alan Greenspan's official inauguration by President Ford as Chairman of the Council of Economic Advisers". Hardly the way Rand recommended dealing with "compromise." Clearly Rand, despite the "MRI-like" psychological acuity attributed to her by followers such James Valliant and the generally millenial mental capabilities attributed to her by Binswanger and the ARI, had been unable to detect such serious divergences from her principles, despite the fact that she was closely associated with Greenspan (the other woman in attendance there is Greenspan's mother) and Binswanger had only ever met him a few times. Binswanger is saying in effect that he is better able to spot philosophical errors than Rand herself. Either that, or Greenspan's evil is so profound it was able to fool even the greatest genius of the past two thousand years.

I suspect we'll increasingly be hearing the latter narrative. In other words, it's Nathaniel Branden all over again.

(Thanks to Neil Parille for the photograph)

Hoisted from comments: Michael Prescott On Rand's Ethics

Former Objectivist and regular ARCHNblog commenter Michael Prescott replies to current Objectivist and regular ARCHNblog commenter John Donohue, Pasadena with a simple yet devastating summary of the problems with the Objectivist Ethics.

Prescott: John, I'm afraid you can't dismiss the is-ought issue merely by saying that Rand didn't regard it as a problem. It remains a huge stumbling block (in my opinion, a fatal one) for any naturalistic ethics, whether Rand chose to acknowledge it or not.

"The fact that a living entity is, determines what it ought to do."

In a certain sense, this is true, but it is not helpful to Rand's ethics. Here are some of the questions Rand needed to ask:

1. Is self-preservation the primary imperative of living things, or is it procreation? (Many species risk or even lose their lives in the act of reproducing, so it would appear that reproduction is, or can be, a stronger biological imperative than self-preservation.)

2. Does the concept of values apply to living things that have no conceptual consciousness? If not, isn't it a category error to talk about the "values" of plants and insects?

3. If biological self-preservation is the standard of value, then are we talking about the preservation of the individual or the community/species? If the former, then can't the individual do whatever is necessary to survive, even if it means looting and killing? If the latter, then can't the individual be sacrificed to the collective?

4. Isn't it begging the question to say that man's standard of value is the life "proper" to man, when determining what is "proper" requires a standard of value in the first place?

5. Using the vague concepts of "life" and "what is proper to man," couldn't we rationalize and justify almost any course of action? (In fact, this is the is-ought problem in a nutshell; the ethical naturalist always makes an unwarranted move from facts to values, blurring the distinction with rhetoric or equivocation. The values in question are never necessitated by the facts, but rather are values that the ethicist happens to prefer - in Rand's case, honesty, integrity, productiveness, pride, etc.)

6. Is it really the case that man cannot survive unless he practices the Objectivist ethics? Do people who are dishonest, who lack integrity, who are nonproductive, who have self-esteem issues ... really die? Or do they somehow usually muddle through? Isn't it the case that some dishonest people make out very well in life? Is material success inextricably tied to personal virtue, so that millionaires are inevitably more virtuous than people who are less well off?

7. If life is the standard, then what exactly do we mean by life? Are we talking about simple longevity, or about quality of life? If the former, aren't there are many evil and destructive people who live to a ripe old age? If the latter, how do we use "quality of life" as a standard of value, when we need a standard by which to judge "quality"? And how can we objectively judge "quality of life" anyway?

8. Rand says that people who don't live up to her standards are subhuman. Isn't this is a backhanded way of admitting that it is possible to live a long, comfortable life without practicing her virtues, but then waving off this fact by asserting that such people "don't count" because they're not "really" human? In other words, isn't it just a rhetorical device used to disguise the fact that non-Objectivists often survive and even flourish - a fact that, if openly acknowledged, would prove fatal to her argument?

9. If man cannot survive without an explicit code of values, then how did human beings survive for all the centuries before philosophy came along to enlighten them?

There are other questions, but I think that's enough to show that Rand's argument doesn't amount to much. It is good rhetoric, though. She was a first-rate polemicist, just not a first- or even second-rate philosopher.

For reasons unknown, the sidebar disappears unless I insert a post above the "Ethics Of Emergencies" post. So here it is.

Slow read with commentary:"The Ethics of Emergencies" (3)

Continuing our para by para examination of Rand's "The Ethics of Emergencies" (Earlier Parts here). Paragraph 9:

Most men do not accept or practice either side of altruism's viciously false dichotomy, but its result is a total intellectual chaos on the issue of proper human relationships and on such questions as the nature, purpose, or extent of the help one may give to others. Today, a great many well-meaning, reasonable men do not know how to identify or conceptualize the moral principles that motivate their love, affection or good will, and can find no guidance in the field of ethics, which is dominated by the stale platitudes of altruism.

Comment:The classic Randian bamboozling continues. Having argued, bizarrely, in the previous paras that altruism is simultaneously the cause of both complete self-sacrifice to others and sociopathic disregard of others, Rand then tells us that despite the "vicious" nature of this false dichotomy, most men do not actually accept either side of it. Well now, if that was the case one would think that harmless might be a better description than "vicious" - but we are not allowed to pause to notice such details as the outraged flood sweeps us on down to the sea of "total intellectual chaos" typical of human relationships over the unfortunate millennia prior to Rand's arrival. Things are in such a state that even well-meaning and reasonable people, minus Objectivism, simply are not able to "identify or conceptualize" the rational principles behind their emotions such as love, affection, or good will, and thus don't even know what "proper human relationships" are.

On the question of why man is not a sacrificial animal and why help to others is not his moral duty, I refer you to Atlas Shrugged. This present discussion is concerned with the principles by which one identifies and evaluates the instances involving a man's nonsacrificial help to others.

Comment: Two or three generic Randian tics are nicely evident over the past couple of paras. The first is the "false dichotomy". She manages to find one of these just about everywhere she looks for them, which I fear only engenders confidence in her when it should engender the opposite (one day it might be worth adding all of them up). The second is that no-one had Clue No.1 about anything - not even human relationships! - until she showed up. The third is the inevitable referral to the works of her favourite philosopher, herself. With these now out of the way we move to the fourth and most dominant Randian rhetorical move, and that is verbalism : the manipulation of the meanings of words.

"Sacrifice" is the surrender of a greater value for the sake of a lesser one or of a nonvalue.

Comment: Here, wittingly or not - English was not her native language, and Rand had consistently misunderstood other English words before - Rand performs a verbal switcheroo, and replaces the usual meaning of "sacrifice"- the surrender of a lesser value for a greater value - for its opposite meaning. This complete switcheroo (discussed a little more in our ever-popular "Understanding Objectivist Jargon" series) passes unremarked, and of course immediately begins confounding the argument.

Thus, altruism gauges a man's virtue by the degree to which he surrenders, renounces, or betrays his values (since help to a stranger or an enemy is regarded as more virtuous, less "selfish," than help to those one loves). The rational principle of conduct is the exact opposite: always act in accordance with the hierarchy of your values, and never sacrifice a greater value to a lesser one.

Comment: Obviously if you switch the meanings of words to their opposite, then start arguing against them, you are going to descend into nonsense. To start with, it's not necessarily the case that helping strangers is considered more virtuous than helping loved ones; for example the expression "charity begins at home." Further, people would normally consider a sacrifice virtuous when someone gives up something important to them - say their high paying job - for something more important to them - say to care for their children, or study a particular passion, or to help people if they so desire. In none of these cases are they "surrendering, renouncing, or betraying their values". Thus Rand's proposed "rational principle of conduct" is merely what people do already.

Top Ten Philosophy Books

Jason Sieckmann has requested that one of us at ARCHN provide "a list of [his] top ten fave philosophy books." Since this seems like a good idea, particularly in this Christmas season that is fast upon us, I will provide mine. Others can give theirs, if they are so inclined.

In no particular order, my list would go as follows:

1. Scepitism and Animal Faith, by George Santayana
2. An Enquiry Concerning Human Understanding, by David Hume
3. Realism and the Aim of Science, by Karl Popper
4. Beyond Good and Evil, by Friedrich Nietzsche
5. The Open Society and its Enemies, by Karl Popper
6. The Plato Cult, by David Stove
7. Three Philosophical Poets, by George Santayana
8. Realms of Being, by George Santayana
9. The Revolt Against Dualism, by Arthur Lovejoy
10. Personal Knowledge, by Michael Polanyi

Word of caution: the works by Santayana, Polanyi and Lovejoy make for rather difficult reading. But as Spinoza says, "All things excellent are as diffcult as they are as rare."

Objectivism & Religion: Three Common Fallacies

Guest commenter Neil Parille finds that some of the classic Objectivist talking points on religion are in fact simple misunderstandings:

Ayn Rand and her followers have a bee in their bonnet when it comes to religion. In particular, contemporary Objectivists often fret about the influence on the Religious Right on politics. It doesn’t appear, however, that they have spent much time studying the topic of religion because the same old chestnuts keep popping up again and again. Here I’ll discuss a couple quotes that appear frequently in Objectivist literature and an additional claim made by Leonard Peikoff.

“Judge Not, That You Be Not Judged”

This is from Matthew 7:1 and is part of Jesus’ famous Sermon on the Mount. It first entered the Objectivist lexicon with Rand herself:

“The precept: ‘Judge not, that ye be not judged’ . . . is an abdication of moral responsibility: it is a moral blank check one gives to others in exchange for a moral blank check one expects for oneself.”

It is mentioned most recently in Andrew Bernstein’s just published Objectivism in One Lesson.

The full quote (KJV) is:
“(1) Judge not, that ye be not judged. (2) For with what judgment ye judge, ye shall be judged: and with what measure ye mete, it shall be measured to you again.”
Objectivists, proud of Rand’s moralism, see in Christianity a precursor to the non-judgmentalism present in the post-modern world. (Objectivism must be one of the few philosophies in history which finds Christianity insufficiently judgmental.)

But does Jesus prohibit judging? This appears unlikely, if for no other reason than that Jesus was quite judgmental and judging is a part of life. A couple standard commentaries might help. According to Craig Keener (A Commentary on the Gospel of Matthew, pp. 240-41):

“As noted above, the issue is not failure to discern, but hypocrisy in judging others for one’s own faults. Later rabbis declared that one should ‘remove [one’s] own blemish first,’ giving the example of a rabbi who deferred a case to correct his own behavior before he ruled that another must do the same. Greek and Roman sages offered similar wisdom: for example, one must solve one’s own problems, and only then in turn to criticize others accurately; we see others’ faults more quickly than our own. Likewise, ‘Practice nothing in your deeds for which you condemn other in your words’ which seems to have become part of the common moral wisdom.” (Citations omitted.)

Donald Hagner (Matthew 1-13, p. 169) agrees: “[T]he way one judges others will be the way one is judged by God . . . .”

Rand says that, in judging, one must “possess an unimpeachable character,” so perhaps Rand is saying something similar to Jesus and the ancients.

“I Believe It Because It is Absurd”

This is another chestnut appearing in, among other places, Leonard Peikoff’s Religion Versus America.

“What if a dogma cannot be clarified? So much the better, answered an earlier Church father, Tertullian. The truly religious man, he said, delights in thwarting his reason; that shows his commitment to faith. Thus, Tertullian's famous answer, when asked about the dogma of God's self-sacrifice on the cross: ‘Credo quia absurdum’ (‘I believe it because it is absurd’).”

Tertullian didn’t say “credo quia absurdum.” (Peikoff is not the most accurate of intellectual historians.) As one writer puts it:

“Credo quia absurdum is, of course, a misquote. Tertullian's words are credibile est, quia ineptum est (De carne Christi 5.4). The difference between the imputed and actual words is striking and important. James Moffatt in a sadly neglected article of a half-century agodiscovered the clue to the interpretation of the words in observing that here Tertullian ‘follows in the footsteps of that cool philosopher Aristotle.’ In Rhetoric 2.23.22 Aristotle shows that an argument from probability can be drawn from the sheer improbability of a story: some stories are so improbable that it is reasonable to believe them. On this view, the words presuppose a tidy correlation between faith and reason, and a consideration of Tertullian's aims in the treatise in which they are found supports this interpretation.”
“Tertullian recognizes, however, that in spite of its distortions, pagan philosophy has often enjoyed glimpses of the truth. In recalling his quotable strictures against philosophy, we must not forget his equally quotable Seneca saepe noster (De anima 20.1). In the Ad nationes, an early work, Socrates becomes a forerunner of the Christian martyrs, because he suffered, as they suffer, on behalf of the truth at the hands of those ignorant of it (1.4.6-7). If there is a change of tone in the more artful Apologeticum, Tertullian still grants that Socrates aliquid de veritate sapiebat deos negans (46.5). “

Those Secular Greeks

Leonard Peikoff, again in Religion Versus America, makes the following claim:

“Ancient Greece was not a religious civilization, not on any of the counts I mentioned. The Gods of Mount Olympus were like a race of elder brothers to man, mischievous brothers with rather limited powers; they were closer to Steven Spielberg's extra-terrestrial visitor than to anything we would call ‘God.’ They did not create the universe or shape its laws or leave any message of revelations or demand a life of sacrifice. Nor were they taken very seriously by the leading voices of culture, such as Plato and Aristotle. From start to finish, the Greek thinkers recognized no sacred texts, no infallible priesthood and no intellectual authority beyond the human mind; they allowed no room for faith. Epistemologically, most were staunch individualists who expected each man to grasp the truth by his own powers of sensory observation and logical thought. For detail, I refer you to Aristotle, the preeminent representative of the Greek spirit.”

Even though Peikoff qualifies his statement somewhat, it is still more than a little misleading. As a leading scholar of ancient Greek religion put it:

“The paradox is that, although Greek religion seems to lack so many of the things which characterize modern religions and which require degrees of personal commitment and faith from their followers, Greeks were involved with religion to a degree which is very hard nowadays to understand. . . . The Greek household had its shrine to Hestia or to Zeus Ktesios . . . . At a meal a libation or drink-offering to the gods was an automatic custom . . . . The great landmarks of human life – birth, coming of age, marriage and death – were all marked by rituals with religious significance. . . . it is against this background of a way of life interpenetrated by an enormous variety of religious ritual, practice and belief . . . that the questioning of religion was seen as a dangerous threat.” (J.V. Muir, “Religion and the New Education” in P.E. Easterling and J.V. Muir, Greek Religion and Society, pp. 194-95.)

Even the supposedly enlightened Athenians consulted the oracle at the shrine dedicated to Apollo at Delphi and made military decisions based on what they were told.

Going John Galt

While we're on the subject of Objectivism and the economic crisis, it seems many Objectivists are reacting to that (and the election of the dreaded Obama) by threatening to "go John Galt" - withdrawing their skills from society and letting the damn thing fall to the ground. The comments are a must-read, and we note among them our very own John Donohue, Pasadena!

Only thing is, I'm not sure that many of these would-be Galts have recently invented a perpetual motion machine...

Atlas Updated

Jeremiah Tucker revisits "Atlas Shrugged" for financial apocalypse.

(hat tip to Jason at Catallaxy)

Hoisted from Comments: Atlas Begs

It turns out there are no true Randian individualists  in foxholes. Sharp-eyed commenter Michael Prescott notes West Virginia's BB&T bank has recently put its hand out for $3.1 billion in Federal rescue money. What makes this ironic is that its CEO, John A. Allison IV, is a big time contributor to the ARI, and makes reading "Atlas Shrugged" compulsory for all his executives. This capitulation, accompanied by statements about how doing so is  "consistent with our values and philosophy" and supporting the Treasury's interventions to stabilise the economy,  has led to a minor flurry of hand-wringing ( here, here) at the ARI's Center For The Advancement of Capitalism, with conspiracy theories being mooted that Allison was "coerced" into making such statements.

Despite this apparently dire moral and philosophical lapse, I'm sure the ARI won't be turning down Allison's cheques any time soon.

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.

It's All A Socialist Plot!

An anonymous commenter points us to this piece posted at Objectivism Online, which claims that any proposed bailout of the auto industry is "an enormous power grab" by the forthcoming neo Fascist Democratic State. This argument might perhaps have merit had the American auto industry been itself a global power instead of a global cripple. But unfortunately this is not the case, so it is simply a laughable confusion of cause and effect.

Objectivism & Economics, Part 7

Greenspan’s breaking away from Objectivism. In his autobiography, The Age of Turbulence, Greenspan explains why he stopped being an orthodox acolyte of Rand’s Objectivist philosophy:

Like any new convert, I tended to frame the concepts [of Rand’s philosophy] in their starkest, simplest terms. Most everyone sees the simple outline of an idea before complexity and qualification set in…. It was only as contradictions inherent in my new notions began to emerge that the fervor receded.

One such contradiction I found particularly enlightening. According to the objectivist precepts, taxation was immoral because it allowed for government appropriation of private property by force. Yet if taxation was wrong, how could you reliably finance the essential functions of government, including the protection of individuals’ rights through police power? The Randian answer, that those who rationally saw the need for government would contribute voluntarily, was inadequate. People have free will; suppose they refused?…

I still found the broader philosophy of unfettered market competition compelling, as I do to this day, but I reluctantly began to realize that if there were qualifications to my intellectual edifice, I couldn’t argue that others should readily accept it. By the time I joined Richard Nixon’s campaign for the presidency in 1968, I had long since decided to engage in efforts to advance free-market capitalism as an insider, rather than as a critical pamphleteer.

Greenspan here admits what has been suspected for some time: that he came to believe that Objectivism was flawed and so ceased being an orthodox advocate of Rand’s philosophy. More interesting is his decision to advance free-market capitalism “as an insider, rather than as a critical pamphleteer.” This is really where Greenspan most differentiates himself from his former Objectivist comrades. Objectivists want to change the system without being part of it. Hence their conviction that social change can be brought about through philosophical patter.

But what is the real reason why Objectivists shrink from attempting to make change through action rather than merely talking about it? I can think of two main reasons:


1. Most Objectivists don’t have the ability to make change as an insider. While this lack of ability may be rationalized as an unwillingness to compromise (which all insiders must do), let’s not be naive: if every advocate of the free market adopted the attitude of “I will never compromise, therefore I won’t ever become an insider,” all this would accomplish is to surrender the political realm to advocates of various anti-market nostrums. Greenspan became an insider because he had the political chops to do so. Few people who came under Rand’s orbit have comparable chops.

2. Trying to change things as an insider as risky: one is inevitably competing against people who want to change things in a different direction, and it’s quite possible they will win out. Just look what’s happened with Greenspan: from our current vantage point, his attempts to advocate free market capitalism as an insider do not appear altogether successful. But is that any reason for not trying at all? Either one is willing to fight for one’s ideals on the political stage, or one isn’t. Those who are capable of fighting on political stage but choose not to are cowards—plain and simple.

Objectivists are now frantically trying to rid themselves of the taint of Greenspan’s former association with Rand. Yaron Brook and Alex Epstein have accused Greenspan of being “the voice of government central-planning”—another instance of Objectivists discrediting themselves by over-stating their case. They do nothing but talk and scribble—while attacking the one of the few individuals influenced by Rand who actually had the courage and the capability of trying to affect change within the political realm. Where are such people going to come from if they know ahead of time how they are to be treated if they fail? The hysterical denunciations of Greenspan demonstrate once again why Objectivism will never succeed as an agent of political change.

Election 08: Who would Rand vote for?

Since Rand is no longer with us, we can only guess what she might have done. Here I offer merely two possible conjectures: (1) Either she would not have voted for either candidate; or (2) She would have voted for McCain. Let's examine both possibilities.

(1) The evidence supporting the conjecture that she would have refused to vote for either candidate comes largely from her refusal to vote for Ronald Reagan in 1980 and the fact that her intellectual heir, Leonard Peikoff, has stated quite clearly he believes that the Republican Party should either be wiped out or "severly punished." Peikoff's reason are stated in a recent podcast:



Peikoff's views are clearly influenced by Rand's disgust at Reagan's alliance with the religious right. The fact that the Reagan needed this alliance in order to have a chance at winning is of no concern either to Rand or Peikoff. In Peikoff's case, this militant animus against religion is taken to the length of insane paranoia. Peikoff mocks Palin for some of her odd religious beliefs, yet he fails to cite any instance in which her personal religious convictions have affected her political decisions as governor of Alaska. Yet Peikoff's paranoid horror of religion has its source in Rand, so it is quite possible that Rand would agreed with Peikoff and would therefore sit out the '08 election.

2. The evidence suggesting the possibility that Rand might have voted for McCain largely comes from her fear of George McGovern in 1972. Obama is the most left-wing candidate since McGovern: indeed, he might even be further to the left. Like McGovern, Obama is an anti-war leftist who supports a very strong redistributionist agenda, including giving so-called "tax credits" to people who don't pay any federal income tax. Would Obama scare Rand enough to make her vote for McCain? After all, even Peikoff admits that Obama is the first major Presidential candidate to have anti-American views. If McGovern was scary enough to cause Rand to vote for a President who extended the Great Society and implemented price controls, why wouldn't Obama be scary enough to convince her to vote for McCain?

Objectivism & Economics, Part 6

Rand’s influence on Greenspan. In his autobiography, The Age of Turbulence, Greenspan acknowledges an intellectual debt to Ayn Rand:

Ayn Rand became a stabilizing force in my life. It hadn’t taken long for us to have a meeting of the minds—mostly my mind meeting hers—and in the fifties and early sixties I became a regular at the weekly gatherings at her apartment. She was a wholly originally thinker, sharply analytical, strong-willed, highly principled, and very insistent on rationality as the highest value. In that regard, our values were congruent—we agreed on the importance of mathematics and intellectual rigor…

I was intellectually limited until I met [Rand]. All of my work had been empirical and numbers-based, never values-orientated. I was a talented technician, but that was all. My logical positivism had discounted history and literature—if you’d asked me whether Chaucer was worth reading, I’d have said, “Don’t bother.” Rand persuaded me to look at human beings, their values, how they work, what they do and why they do it, and how they think and why they think. This broadened by horizons far beyond the models of economics I’d learned… [Rand] introduced me to a vast realm from which I’d shut myself off.

Greenspan admits to being merely a “talented technician” until he met Rand. Rand, by introducing him to values, persuaded him to look at the motives and values of human beings. The question is: did Greenspan really learn anything about human beings from Rand? Or did he merely learn the wrong things?

We’ve already quoted Greenspan’s acknowledgement of mystification over what’s happened in the financial markets in recent weeks. Greenspan admits to being in “a state of shocked disbelief” that the “self-interest of lending instutitions” failed to protect shareholder’s equity. Some of us are shocked that Greenspan should be shocked. Those who understand human nature through and through know that the very notion of “rational self-interest,” so important to Rand and her Objectivist philosohy, is highly problematic: for how can self-interest be “rational” when even the intelligent human being in history, as Santayana once put it, holds “a lunatic in leash.” Nor should we underestimate the pernicious effects of crowd psychology on the so-called “rational animal.” As Schiller once put it: “Anyone taken as an individual, is tolerably sensible and reasonable—as a member of a crowd, he at once becomes a blockhead.”

In other words, if Greenspan wanted to figure out how and why human beings think, or what they do and why they do it, Rand was nearly the last person he should have consulted. Rand’s influence, therefore, did him little good. Despite all the broadening of horizons that he achieved as a consequence of Rand’s influence, he remained, at his core, merely a talented technician. When confronted with the credit bubble mania of the last twenty years, he failed to see the irrational elements that went into its creation. In particular, he never fully appreciated the irrationality of using derivatives as insurance instruments and, until very recently, has stubbornly maintained that regulating derivatives is impossible because such financial instruments are too damn complex:

Collecting data on hedge fund balance sheets, for example, would be futile, since the data would probably be obsolete before the ink dried. Should we set up a global reporting system of the positions hedge and private equity funds to see if there are any dangerous implosions?...I would not be able to judge from such reports whether concentrations of positions reflected markets in the process of doing what they are supposed to do...or whether some dangerous trading was emerging. I would truly be surprised if anyone could.

Here Greenspan is talking like a talented technician, rather than a wise man who has the benefit of good judgment. Reports of hedge fund transactions are not need in order to determine whether systematic irrationality is taking place in the derivatives market. Some of us have known for years the dangers of derivatives. Doug Noland from prudentbear.com warned of such irrationality as long ago as 1999, and I warned about it back in 2003. Even Warren Buffet a few years ago described derivatives as "toxic" and "financial weapons of mass destruction." So it turns out that knowledge of the systematic irrationality of derivatives is possible after all! Nor are reports on hedge funds required to attain such knowledge! Merely knowledge of the the frailties of human nature and the mephitic influence of crowd psychology—knowledge, in other words, that Greenspan could never have attained from Rand.

Former Objectivist Quote of The Day

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief..." - Alan Greenspan

Objectivism & Economics, Part 5

Market failure: wildcat financing. After President Andrew Jackson succeeded in destroying the Bank of the United States (a great victory of Jacksonian democracy and laissez-faire), the country was plagued by so-called “wildcat” banks. According to Wikipedia:

The term Wildcat Bank refers to a particularly unsound and risky bank chartered under state law in the United States. They flourished after the national bank was decommissioned when a bank was started in a small town. When the banks acquired enough assets their owners would leave town with all deposits. The debt, which hurt many people, eventually became a reason for the Panic of 1857.

Wildcat banks were banks that issued money without proper gold in stock to back up the supply. These banks were often short-lived. Unfortunately, since these banks were issuing large amounts of money, many people lost their investment as the worth of their bank note dropped. These banks became a large problem, and were eventually restricted by the US Government.

Critical in the development “free” banking was the ability of individual banks to gains the privilege of issuing bank notes without being chartered by the state legislature:

In 1838 New York State passed a free banking law. Before this date all incorporated banks had been chartered by states and had been granted the note-issuing privilege. Under free banking, charters could be obtained without a special act of the state legislature. The main requirement for new banks was that they post collateral of government bonds equal in value to the notes to be issued. In principle, noteholders were protected because, if the bank failed, proceeds from the sale of the collateral would be used to reimburse them. Free banking was soon adopted by other states. Because there was little regulation of new banks, many banks failed and bank fraud occurred. The free-banking years of 1837 to 1863 are also known as the Wildcat Banking era. [Encarta]

What we have seen in the last 25 years is the return of wildcat banking, brought about largely through a very insalubrious mixture of government intervention and deregulation. Financial institutions have, in effect, used the securitization of debt to create a kind of money, which they’ve used to leverage more debt that is subsequently used to drive up asset and real estate prices and drive up the current account deficit.

One of the causes of this wretched state of affairs is the false dichotomy introduced by two ideologies which, although they seem poles apart, have each helped bring about the current mess. I have in mind free market fundamentalism on the one side and anti-market fundamentalism on the other. Both of these ideologies are more interested in their pet ideas than they are in understanding the facts of the matter. The free market fundamentalist won’t acknowledge any exception to his conviction that markets are purely “self-regulating” and that the only role of the state is to protect private property and uphold contracts between freely acting parties. The anti-market fundamentalist suffers from a pathological detestation of market processes and results. The debate about economic problems in too many instances has degenerated into a tug of war between these two unrealistic extremes—that is, into a debate between knee-jerk “deregulation” on the one side and knee-jerk anti-market regulation on the other. But the real issue is not between deregulation and regulation, but between pro-market regulation and anti-market regulation. Markets in an advanced, industrial society require a framework of law in order to flourish. Whether one wants to call these laws “regulations” or not is merely a matter of semantics. But laws are needed to define the extent and limitations of property rights, to determine which kind of contracts should be enforced, and to prevent systematic fraud and irrationality from harming the integrity and efficiency of the market.

Now Rand and her apologists clearly belong to the extreme wing of free market fundamentalist camp, where ideology trumps good judgment. Laissez-faire is a slogan, not an insight or a coherent policy. It is a product of rationalism, rather than of experience and wisdom.

Objectivism & Economics, Part 4

Market failure: Greenspan’s testimony Alan Greenspan’s curious testimony before a House panel on Thursday brings forth a curious admission from the former Rand acolyte. According to an AP report:

Greenspan called the banking and housing chaos a "once-in-a-century credit tsunami" that led to a breakdown in how the free market system functions. Accused of contributing to the meltdown, but denying that it was his fault, Greenspan told a House panel the crisis left him -- an unabashed free-market advocate -- in a "state of shocked disbelief."

The longtime Fed chief acknowledged under questioning that he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan called it "a flaw in the model that I perceived is the critical functioning structure that defines how the world works." ...

Committee Chairman Henry Waxman, D-Calif., suggested that Greenspan contributed to "irresponsible lending practices" by rejecting appeals that the Fed intervene to regulate a surging subprime mortgage industry. "The list of regulatory mistakes and misjudgments is long," Waxman said of oversight by the Fed and other federal regulators. "My question for you is simple," Waxman told Greenspan. "Were you wrong?"

"Well, partially," Greenspan said. But [Greenspan] went on to assign the blame on soaring mortgage foreclosures on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward. He said what had been "a critical pillar to market competition and free markets did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened."

After reading this, Objectivists can take consolation in the fact that Greenspan no longer considers himself one of their number—and perhaps never did. Yet his vision of the free market is not so very different from Rand’s. Self-interest, Greenspan believed, would be sufficient to motivate banks to act in such as to protect their shareholders’ equity. Apparantly not so—much to Greenspan’s confusion and dismay!

Greenspan would have done well to have heeded Joseph Schumpeter’s insight about the sociological flaws of a free market based on “self-interest.” “[N]o 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,” Schumpeter warned.

The-Apparently-Not-An-Objectivist-But-Still-One-Hell-Of-A-Rand-Fan Quote of the Day 23/10/08

"Human nature is probably too primitive at this time to accept Rand's ideas." - commenter Herbsewell

The Objectivist Double Standard

Here's an interesting quote from Brandon Byrd over at the ortho-Objectivist site Noodlefood. We'll have more to say about Brandon's post "Getting Ayn Rand Wrong" when we have a moment. Suffice to say for now it is a perfect example of what I will dub The Objectivist Double Standard. That is, any criticism of Ayn Rand's philosophy is dismissed as careless and dishonest, and due to mere "personal biases" on the part of the critic, who "attribute all sorts of nonsense to Rand without actually considering what she has to say."

Yet when it comes to assessing other philosophers' work it would be hard to find more biased, careless and dishonest critics than Rand and her acolyte Leonard Peikoff who, regrettably, has followed in her footsteps all too closely in this as in all else. Rand's quote-free laziness and low intellectual standards should equally attract the ire of Objectivists - who after all claim to "take ideas seriously". Yet instead these glaring faults are either never mentioned (as in this post) or cheerfully and rather incredibly rationalised as her brilliant ability to "think in essentials". This is the ODS in action.

Byrd: I don't know what it is about Ayn Rand that makes many philosophers think they can get away with saying whatever they damn well please about her without having studied her work carefully and honestly. I suspect that the real explanation has less to do with Rand and more to do with personal biases on the part of her critics. But whatever the cause, the phenomenon is nevertheless real. It isn't just that many philosophers dislike Rand. We philosophers are an opinionated bunch; we dislike all sorts of things. Rather it's that many philosophers will attribute all sorts of nonsense to Rand without actually considering what she has to say.

Let's see now. Rand condemned Kant "the most evil man in history." Yet despite the slagging he gets throughout her oeuvre, how many times does she actually quote him in all her published works?

(In passing: who is the most quoted philosopher in Rand's works?)

Objectivist Quote of the Day 18/10/08

"This is about Ayn Rand winning, her ideas winning, so that the next centenary will include not an address by me, but by the president of the United States, as well as fireworks over Manhattan and over the capital...Victory is ours! Victory is ours! Because truth is on our side."- The Ayn Rand Institute's Yaron Brook becomes somewhat excitable at Rand's centenary event in New York, 2005

Incidentally, despite Brook invoking the typical fanatical cliche that "truth is on our side", one notes the appearance yet again of the Ayn Rand Institute's most regularly repeated fake tale: the notorious 1991 Library of Congress/Book of the Month Club survey.