Wednesday, December 02, 2009

Objectivism & Politics, Part 35

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

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

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

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

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

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

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


Xtra Laj said...

Great post. I would have liked a clearer separation of getting capital from government and using government regulation/legislation to create/protect competitive advantages, but you gave examples of both. For Objectivists though, all that matters is that John "Galt" Allison exists!

Dragonfly said...

It is "Carnegie", not "Carneige" - as the latter appears twice, it seems not to be just a typo...

RDCushing said...

What you must prove, if your argument is to be sustained, is that the businessmen who turn to "corporatism," seeking the aid of the government to supply, buy from, or protect their enterprises from competition (foreign or domestic) were, in fact, "competent" and would have survived and prospered to the extent that they did (and do, yet today) in the absence of the government intervention that they sought and won.

I do not see that proof in your article. Therefore, one could argue that the examples you list are examples of "incompetent businessmen." We cannot know what level of success they would have achieved without the aid of government.


Kelly said...


Wouldn't the responsibility of proof be on Rand? Shouldn't she provide the proof that all of these extraordinarily successful businessmen where in fact incompetent? Why should anyone take Rand's view of the matter as fact and work backwards.


Dragonfly said...

@Kelly: Exactly, the claim that those businessmen were "incompetent" is a rather extraordinary claim, which has to be proved by the claimant. That they were not conform to the ideal businessmen in Atlas Shrugged is not a very convincing argument.

rtaylortitle said...

You are assuming that it is legitmate for business and state to interact to begin with. Wrong! There should be a true separation of business and state similiar to the separation of church and state.

gregnyquist said...

rtaylortitle: "You are assuming that it is legitmate for business and state to interact to begin with."

I make no such assumption. Business and state interaction may be as "illegitimate" as one pleases: there are nonetheless powerful economic incentives which will prevent any attempt to get rid of it. In politics, the fact that something is deemed "right" or "moral" or "just" in no way guarantees its political viability. Politics is not about morality; it's about interests, faction, power. If these interests, factions, powers stand against your morality, then too bad for your morality.

Mark Plus said...

Successful business people tend to display greater than average "social intelligence," for want of a better term, which enables them to coordinate the activities of a lot of other people in the market for the business people's benefit. The same ability also pays off in forming relationships with politicians and government officials to get them to supply additional capital and favorable laws. Therefore it seems arbitrary to call a business man "competent" when he succeeds in the market and "incompetent" if he also succeeds in gaining political patronage, because he uses the same skills in both areas.

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Anonymous said...

Nice post! It is a mistake to view this issue in terms of class. Rather, one is better off in considering self interest. Welfare recipients operate in terms of self interest, whether that recipient is a poor, single mother who lives in a ghetto or a large corporation such as ADM accepting government money whose cause is to create artificial scarcity. You are right to point out that what is more important is the reinvestment of "government" resources into a viable product, such as railroads or crops.

Oddly enough, Ayn Rand, though she perversely projected her own convictions onto all who partake in the free market (which in a sense makes her a collectivist), she would agree with you while still contradicting herself.

She proclaims that a rational man "does not permit himself to hold contradictory values, to pursue contradictory goals, or to imagine that the pursuit of a contradiction can ever be to his own interest." She then goes on to call men who do not fit her mold "mystics and subjectivists."And further "a rational man does not live by means of 'luck,' 'breaks,' or favors...he does not regard any concrete, specific goal or value as irreplacable." Only in a world without Nyquist's "third man" would this be a consistent conjecture.

Rand would have been more wise (perhaps even ahead of her time) if she took into account the constant intersubjectivity of the market which is best represented by Adam Smith's invisible hand. The market is an auto-poetic system which is self cleaning and self improving. If businesses decide to partake in irrational government programs which help them conceive rational benefit (aka. profit) the funds are better used by constitutionally compromised "John Galts" than by zombie banks and investment firms such as Freddy and Fannie. In either case, the government is hurtling toward collapse, but in the former wealth is produced rather than destroyed. Industrious businessmen would understand that government assistance is one of many, limited means to any number of ends - once again in Rand's own words, such a man would not regard the involved "...concrete, specific goal(s) or value(s) as irreplacable."

M H J Bramwell said...

Greg, I am surprised that you missed a fourth category. Oligarchic old boys networks that control entire sections of government.

Very few key posts currently commanding the US economy are not Goldman Sachs ex-staffers. The director of the Bank of Canada is ex-of GSAX too. Change of government from looney Republican right under Bush to looney Democratic left under Obama did nothing to change that stranglehold on power, on the carotid artery of power.

It's an open question what the Objectivist opinion might be of that "group 4" reality. I think they refuse to admit its existence. The role of Morgan, Warburg and others in creating the Federal Reserve as a branch of government, for their own purposes is undeniable, but you will be labeled a 'troll' if you raise such issues in Objectivist forums.

Was Rand aware of it? There is little doubt that she revered J. P. Morgan. Meanwhile, in his people magazine style eulogy, "The House of Morgan" (pg 56), Ron Chernow states, with respect to the 1887 Interstate Commerce Commission Act, "...the House of Morgan always favoured government planning over private competition, but private planning over either."

Given the following, one wonders which category best fits Rands hero, J. P. Morgan.

On page 175, Chernow goes on to report, with reference to a huge acquisition (1907) by the New Haven Railroad monopoly, "This was so controversial that Pierpont and Mellen met with President Roosevelt in order to forestall any antitrust problems. Though the President gave his tacit consent, he later confessed that he had gone 'beyond the verge of propriety in condoning offenses' committed by the New Haven".

An interesting chain of events transpires. "As it paid exorbitant prices to swallow up competitors, its debt load grew crushing." Nevertheless, "The House of Morgan made enormous profits from this corporate maze, booking nearly a million dollars in commissions from an incessant flow of stocks and bonds." Then, "The New Haven's day of reckoning came in 1911, when its debt burden forced layoffs, pay cuts and deferral of critical track maintenance. The road piled up a grisly record of train wrecks ... that caused dozens of deaths."

What I find so interesting about this is that, in Atlas Shrugged, Rand used a railway accident to exemplify her views. She certainly would not have pointed out that Morgan was on the board of the New Haven but (pg 175), "Unbeknownst to the public, the House of Morgan itself was queasy ..." about the railroad's "... financial methods ..." and in 1908 "... began quietly to sell off its securities in (it)". Then (1913), .. in a final humiliation for the bank, the debt-riddled New Haven skipped its dividend in December... " "It was a classic widows and orphans stock, and thousands of small investors lost their income before Christmas." (pg 178) It is clear that Morgan, with no exposure of his own, was burning the candle at both ends, advising ever greater debt as a board member, supplying it as the railroad's banker by selling its bonds for lucrative commissions and all the while conscious of an ever increasing toll of ruined lives and family incomes.

gregnyquist said...

Martin: "Greg, I am surprised that you missed a fourth category. Oligarchic old boys networks that control entire sections of government."

Fortunately, I could get away with missing it, because you have filled the gap here. Although, to be entirely honest, I ignored it because it isn't entirely fair to criticize Rand for this sort of thing, because Rand made it clear that she was against this sort of crony capitalism. If the government is in fact being run for the benefit of Goldman Sachs, she would be against that. My criticism runs along different lines: that business involvement in government (whether it leads to good or bad results) exists and this will cause businessmen to oppose Rand's laissez-faire, since there will always be a class of businessmen who will wish to use the state to raise capital and combat the toll of uncertainty. Worse, not all these businessmen will be the incompetent loser-types imagined by Rand. The capitalist needs capital: and many a capitalist will resort to just about any means at all, however fair or foul one may please, to get his hands on the instruments of his trade.