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.

Building Tomorrow's Randroids

The ARI's annual school essay contest about three of Ayn Rand's novels is, allegedly, "designed to promote critical thinking and writing skills". Here are the winners from the last few years. If anyone can detect anything other than standard ARI bromides regurgitated without the smallest glimmer of critical thinking or individual imagination, please let us know. In fact so great is the intellectual and stylistic conformity on display that, with the prospect of a grand or more on the line one can only assume the students involved are shrewd enough to know exactly who they are writing for.

For a core sample of today's Randroid, Objectiblog's Neil Parille directs us to a review by libertarian economist Larry Sechrest of Objectivist Richard M. Salsman's essay on The Great Depression. Sadly this essay is not itself on line, for as well as venting some ancient animosty against potential allies, the Austrian economic school, Salsman's essay also offers us a jaw-dropping Randroidian fantasia, metastasized to levels not seen since James Valliant. Sechrest describes one such passage:

Woven throughout the fabric of Salsman’s essay is a rather striking vision of American businessmen. In this “subtext,” one can locate both praiseworthy virtues and condemnable flaws. At a deep emotional level it is, one surmises, that message that Salsman most dearly wished to convey. By his account, businessmen are the heroeswho call upon their initiative and intelligence in order to restructure the resources of Earth, thereby creating the wealth from which we all benefit. They struggle on, often burdened by outrageous laws and regulations, not because they are Christ-figures who choose to suffer for their fellow men, but because they profoundly, egoistically enjoy the act of creation. So far, so good. But Salsman goes further. He insists that these producers cannot be deceived. They “know when it’s worth producing and when it’s only worth shrugging” (2004a, 23). They also buy and sell stock shares, but such shares are never overpriced. They invest millions in capital projects but never at artificially low market interest rates, because they are never fooled by the interest rate shenanigans of the Federal Reserve. In addition, Salsman’s businessmen are innocent of any wrongdoing. They never seek government favors, never lobby for corporate welfare, never try to gain at the expense of their competitors. They never miscalculate. They are without error, either factual or moral. What can one say? These are not real businessmen that he portrays. They are cardboard cutouts.

The creation of "cardboard cutouts" seems to be Job Number One at the ARI.

Objectivism & Economics, Part 3

Market failure: derivatives As is well known, Ayn Rand opposed any “interference” in the market by the government on moral grounds. Government intervention, for Rand, is immoral. Since Rand believed that the moral course is also the practical course, she held that any so-called “market failures” were ultimately caused by government intervention in the economy.

Is this true? Well, not entirely. Consider the role that derivatives played in the current financial meltdown, as outlined by Doug Noland at prudentbear.com:

I am of the opinion that derivatives have played a critical role in the ongoing global crisis. Importantly, the proliferation of derivatives has come to radically distort financial markets. As such, I see derivatives as a very close partner to credit excess. Both work to distort market-pricing mechanisms. It is certainly my contention that derivatives affect risk perceptions and change behavior. In this regard, when discussing derivatives I like to use a flood insurance analogy. Say we have a homeowner who would like to build his dream home along the river. Yet, if this homeowner lacks access to affordable flood insurance, the risk of building is likely to be perceived as too great. If, however, inexpensive flood insurance is readily available, the perceived risk of building on the river is acceptable and building begins.

Now, taking this analogy one step further, let’s say that there has been a very long drought, which has led to a stampede of companies writing flood insurance. Why not? Premiums in this environment are as close as it gets to "free money." Here, insurance only gets cheaper, encouraging more exuberant homeowners to build dream homes on the river. Despite the appearance of prosperity, risk grows for the entire system. Importantly, the proliferation of cheap insurance fosters a change in behavior – encouraging a building boom along the river and the acceptance of greater risk by individual homeowners and the insurance companies. So come the inevitable flood, there will be more homes destroyed, the solvency of the insurance companies will be in jeopardy, and the risk of failure for the entire system will be much greater than if the building boom had never occurred. Importantly, if a few homeowners purchase insurance and build on the river, flood insurance works fine. If everyone builds on the river and there is a flood, there is a big problem.

All the same, a very strong consensus led by Greenspan and Wall Street argues that derivatives reduce risk. I disagree. Derivatives simply shift risk from one party to another. Sure, an individual market participant can use derivatives to transfer risk. But if much of the market moves to transfer risk, there will simply be no one to take the other side of the trade. Entire markets can not hedge themselves. Indeed, for the system, the proliferation of derivatives significantly increases the risk of both market distortions and dislocations.

Noland’s analysis pretty much hits the nail on the head, but I think that nail could be driven in even further. Derivatives are often seen as a form of insurance. That’s what the whole notion of a hedge fund is all about. Investors are “hedging” their speculative bets, with the underlying idea that, if their investments turn sour, they’ll still get something out of it. Yet this is plainly irrational behavior. The economist Frank Knight distinguished between risk and uncertainty. Risk, Knight contended, is something calculable. For example, mortality is something that is fairly steady over time. Therefore, there is a calculable risk that an individual will die in a given year, and based on that calculable risk, a company can provide life insurance and still expect to make a profit. Speculative investments do not, on the other hand, involve calculable risks. They are, as Knight would say, uncertain. Hence, it is irrational to try to “insure” investments. For the reasons given by Noland, they can’t be insured.

Where is the market failure in all of this? Well, it’s quite simple: derivatives are a market phenomenon. They are the product of freely acting market participants. They prove, once and for all, that the market is no guarantee of rational behavior. Whenever the effects of irrational behavior are (1) not felt immediately and (2) profitable in the short-run, human beings will tend to behave irrationally. The question then is: should the government have intervened to stop or limit this irrational behavior, particularly the large consequences it has had over society at large?

Objectivism & Economics, Part 2

Government interference. In Capitalism: The Unknown Ideal, Ayn Rand wrote:

If a detailed, factual study were made of all those instances in the history of American industry which have been used by the statists as an indictment of free enterprise and as an argument in favor of a government-controlled economy, it would be found that the actions blamed on businessmen were caused, necessitated, and made possible only by government intervention in business.

Let’s examine those aspects of the current financial crisis that unquestionably corroborate Rand’s thesis, starting with the government sponsored enterprises, Fannie Mae and Freddie Mac. Back in 1999, financial analyst Doug Noland gave a fascinating lecture entitled “Putting a Coin in the Fuse Box.” (The title is inspired by a phrase used by Alan Greenspan in his Objectivist period to describe the Fed policies that led to the Great Depression.) Nearly ten years ago, Noland saw what the GSEs were up to. They were keeping the credit bubble alive and thriving, flooding the market with a fresh supply of liquidity. As Noland explains:

[I]n the midst of financial crisis and dislocation in the mortgage securities market, mortgage rates dropped dramatically as Fannie & Freddie incited an historic refinancing boom. Fannie & Freddie, with their implied government debt guarantees, were able to borrow easily, largely from the money markets, and ballooned their balance sheets with new mortgages. The holders of the old mortgages ... received desperately needed liquidity as households refinanced and Fannie & Freddie bought these new mortgages as well as other debt securities in the open market. During the final three months of 1998, Fannie, Freddie and the Federal Home Loan Bank System together expanded borrowings by almost $130 billion.

Admittedly, this had both the look and feel of a true miracle, but in reality this was one of history’s greatest episodes of credit excess. Some may argue, of course, that Fannie and Freddie are not banks and do not create credit. I disagree and see this [as] a critical analytical misconception. Actually, I see Fannie & Freddie as the greatest instigators of credit excess in history. I even go one step further and believe they also create “money.” Consider: as these institutions borrow aggressively from money market funds ... they exchange their short-term IOUs for existing money stock. This borrowed "money" is then instantly used to purchase financial assets. Importantly, this "money" remains within the financial system where Fannie and Freddie can borrow it again and again, repeatedly replacing it with additional IOUs, thus increasing total money market assets. The money just spins around the system as the amount of debt multiplies. Actually, this mechanism works much like the old bank multiplier effect from econ 101, except for one crucial difference. Since Fannie and Freddie liabilities are not subject to reserve requirements, these institutions can virtually create an "infinite multiplier effect."

Here is an obvious example of the pernicious effect of government in the economy. Since no one believes that the government will allow a GSE to go out of business, such corporations are not beholden to market discipline—with cataclysmic results, as we’ve seen in recent months.

Another pernicious effect of government is the implementation, through various legal and tax devices, of incentives that work against rational decision making. The government wants more people to own homes. After all, homeowners make better citizens. So the government pressures the GSEs and other lending institutions into lowering lending standards. Of course, this winds up having the deplorable effect of increasing the amount of bad credit flooding the economy. Examples of this sorts mal-incentives could be multiplied endlessly.

One final example that could be used to bolster Rand’s thesis is the Fed. Again to quote Doug Noland:

Like the Fed of the 1920s, the 1990s Fed has repeatedly put "Coins in the Fuse Box" over what I see as a "Persistent Financial Crisis" going back to the 1987 Stock Market crash. I believe this post-crash accommodation helped foster the real estate bubbles in the Northeast and California, the junk bond fiasco, the S&L debacle and other excesses from the late 80s….And it was during the early 1990’s that the Greenspan Fed "let their guard down" and began to lose control of the financial system. First, the Fed’s aggressive move to bailout the bankers created a big moral hazard issue. Second, with short-term rates plummeting, an opportunistic Wall Street went into what I call "harvesting asset mode," inciting a major shift of funds from bank deposits to mutual funds, money market funds, and securities, thus sowing the seeds for today’s financial bubble. Third, by pushing Fed Funds to 3% and creating an unusually steep yield curve, the Fed incited unprecedented credit market speculation, thus playing a major role in the proliferation of both leveraged speculation and its close sibling, derivatives. After all, 3% Fed funds were a godsend for the hedge funds, Wall Street proprietary traders, and derivative players.

Fourth, ultra-easy money fostered leveraged speculation in high-yield emerging debt markets. And fifth, a very important but unappreciated factor, was the emergence of Wall Street inspired non-bank financial companies and the incredible growth of the asset-backed securities market. As an aside, it was in 1991, during the darkest days for the banks, that Fannie Mae and Freddie Mac began to aggressively expand their balance sheets. Yet, Greenspan acquiesced, apparently more focused on the "Strong Headwinds" of an impaired US banking system that he saw as restricting the US economic recovery. He was loose and Wall Street took full advantage. The explosion of non-bank financial credit had begun and the Fed was quickly losing control.

Objectivism & Economics, Part 1

My original intention was to start a series of posts on Objectivism and politics. But the seriousness of the crisis in the credit and finance markets suggests that our focus should turn to economics. What is happening to finance capitalism is extremely serious—more serious even then what happened in October 1929. While much of what has happened in the last 20 years can easily be laid at the hands of government interference, it is not clear that everything that has happened is the government’s fault. No specific ideology comes out of this mess looking like it has all the answers.

Yaron Brook from ARI has issued the following statement about credit debacle:

But the mounting financial problems reveal that Paulson and Bernanke are as clueless as any other central planners who try to control an entire economy. They are not saving us from anything; they are delaying some of the pain that necessarily follows from a Fed-induced credit bubble, and redistributing that pain to innocent victims. They are punishing responsible individuals and rewarding irresponsible individuals.

“The bailouts must stop. The government must make clear that from now on, those who are in financial trouble must turn to the private market for help if they are to avoid failure; the government must no longer foist their failures on others, and invite another crisis in the future.”



For better or worse, Brook’s "do-nothing" approach to the problem is not a viable option. Any politician who stood for it would be immediately discredited in the eyes of the electorate. The political reality is that market solutions are not allowed in crisis situations like the one we are facing. Hence we find former Objectivist Alan Greenspan (who understands the underlying political climate better than any of the ARI folks) suggesting another approach. "We need laws that specify and limit the conditions for bailouts -- laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly rather than circuitously through the central bank as was done during the blowup of Bear Stearns," Greenspan has written in the paperback version of his autobiography, The Age of Turbulence. In other words, Greenspan is arguing that, since the government is going to intervene anyway (no preventing that), at least it should intervene in as rational a way as possible.

Can the government intervene without making things worse? Well, given how dire the situation really is, it may not really matter. If market forces were allowed to do their thing, the consequences would be little short of catastrophic. There is at least $2 trillion dollars in bad debt out there (and this is not even including bad derivative-related debt, which may be in the tens of trillions). If you allow company A to go under, then it can’t pay it’s obligations to company B. But then company B can’t pay company C, which in turn can’t pay company D, etc. etc. In other words, if the market it allowed to do its thing we would almost certainly see a collapse of a good portion of the financial system. Even more serious, such a collapse could trigger a very serious deflation, as the credit bubble bursts and suddenly you have massive contraction in the money supply (some of this deflation has already occurred, but it has been confined to the housing and asset markets). Deflation is one of the worse things that can happen to an economy in peacetime. If the United States went through a major deflation, that would greatly strengthen the anti-capitalist left in this country, which would put the nation in serious peril (and put an end to any hope for a market solution).

Perhaps the real truth is that nothing can be done one way or the other. Whatever we do, we’re screwed and there’s an end to it. As Doug Noland, the financial analyst who more than ten years ago saw what would happen as a result of wildcat financing of the nineties wrote:

As we are witnessing today, the issue is not some manageable amount of new “capital” to replenish banking system losses.  Instead, the predicament is the massive and unmanageable amount of new Credit necessary to, on the one hand, sustain a mal-adjusted Bubble Economy and, on the other, the Trillions more required to accommodate a gigantic speculative de-leveraging.  I have a very difficult time seeing a way out of this terrible mess.

Objectivism & History, Part 12

Eschatology. Eschatology is a part of theology or philosophy dealing with the ultimate destiny of humanity or end of the world. While Objectivism does not have an explicit eshatology, it’s philosophy of history contains obvious eshatological implications. Consider the following from the pen of Leonard Peikoff: 



From another point of view, however, [the power of philosophy to change the world] is not ominous—it can even be regarded as encouraging. For it means that if a good philosopher arises who answers and philosophically destroys [a pernicious philosopher like Kant], that will turn the reign of the evil and save the world. And such a philosopher has arisen in our time—in my judgment, at least, and I am sure in most of yours. I am speaking, of course, of Ayn Rand.

On the basis of the theory of history I have put forth today, therefore, it is proper to have hope for the future. I do think that Objectivism will triumph ultimately and shape the world’s course, and that today’s culture will be remember in the end only for what it is—which I refrain from saying.

So Objectivism will “ultimately” triumph! Here we find the primary raison d’être of Rand’s philosophy of history. “It took decades of collectivist philosophy to bring this country to its present state,” Rand wrote to a correspondent in March of 1962. “And it is only the right philosophy that can save us. Ideas take time to spread, but we will only have to wait decades—because reason and reality are on our side.”

This optimistic prognosis was made over four decades ago, and still Objectivism has made little if any progress towards its “ultimate” triumph. Indeed, if by Objectivism we mean the purest, orthodox brand of that philosophy, we would have to admit that it has regressed since 1962, thanks to two major schisms in the movement, one involving Rand and her leading disciple Nathaniel Branden, the other involving Rand’s intellectual heir Leonard Peikoff and the movements most promising and effective advocate, David Kelley.

Since Rand’s 1962 prognosis has turned out to be so palpably wrong, how much faith should we place in Peikoff’s suggestion of an “ultimate” triumph? Given the intellectual foundation that these Objectivist hopes are based on, no faith should be placed in them. The Objectivist hope for an “ultimate” triumph is on the same level as the Marxist’s hope of for the eventual triumph of the communist paradise or the Christian’s hope for the rapture. It is an extra-empirical hope, without basis in fact, science or even good sense. It completely ignores what actually motivates human beings, substituting instead an entirely baseless schema of motivations based on abstruse metaphysical and epistemological notions that hardly anyone understands or cares for. Worst of all, it is a species of conceit so gross and intense that it boggles the mind: for it suggests that Rand and her disciples, simply by wagging their tongues and jiggling their pens, can “turn the reign of evil and save the world.” Under this notion of history, ideas become a kind of talisman or power. “In the beginning was the Word,” begins the Platonist gospel of John. Rand’s philosophy of history is merely a kind of secularist riff on this mystical theme.

Should this mystical, Platonist detour surprise us? Not at all. For that is the tradition of philsophy that Rand harkens from: the Platonic-Aristotelean tradition of metaphysics and wishful thinking, rather than the tradition of the Greek Naturalists, modern science and the critical empiricism of Hume and Popper.

Objectivism & History, Part 11

Heresy. Heresy is a concept generally related to religion. It refers to views that flout doctrinal orthodoxy. Such ideas are often considered dangerous, evil, and thoroughly wicked. They must be denounced and perhaps even put down by force. In Objectivism, the notion of heresy finds a secular equivalent in the view that most of the ideas opposed by Randian orthodoxy are evil. Since ideas determine the course of history, ideas leading to bad or evil outcomes are considered especially “horrendous.”

This view is used, among other things, to justify Rand’s anger. “Ayn Rand not infrequently became angry at me over some philosophical statement I made that seemed to ally me with one of the intellectual movements she was fighting,” confessed Leonard Peikoff in his short memoir “My Thirty Years with Ayn Rand.” ”Since her [Rand’s] mind immediately integrated a remark to the fundamentals it presupposes, she would project at once, almost automatically, the full, horrendous meaning of what I had uttered, and then she would be shocked at me.”

This “justification” of Rand’s anger is important, because Rand’s anger is a weapon Rand used to keep her disciples in line. That it was taken to absurd lengths can be heard in question and answer periods in which Rand participated. Anyone who ventured to submit any question in the least challenging would go out of his way to insist he did not advocate any of the philosophical implications of the challenge. Even then, Rand would sometimes go ballistic and attack the questioner. Ludwig von Mises and his wife were shocked at Rand’s conduct toward questioners when they attended a lecture in the early sixties.

That this notion of denouncing people, not merely for their views, but especially for the implications of their views, is highly mischievous can easily be established by simply examining some of the implications of the Objectivist philosophy of history. If the terrible evil of history finds its roots, not in the psychology of evil men, but in ideas, then why should evil ideas be tolerated? Why shouldn’t they be put down by force?

In his essay “Philosophy and Psychology in History,” Peikoff wrote:

Millions, billions of men may be oblivious to the mind, they may be ignorant of philosophy, they may be contemptuous of abstractions. But, knowingly or not, they are shaped ultimately by the abstractions of a small handful. It is far to weak, therefore, to say the pen is mightier than the sword. The pen, and only a very few pens, create all the swords and the swordsmen, and set the cause of their battles and the final outcome.

Now if the pen is so very mighty, shouldn’t it be regulated? If somebody is hatching “horrendous” philosophical premises and letting them loose against an unsuspecting world, shouldn’t that person be stopped? While Objectivism strongly opposes state supported censorship, the implications of their philosophy of history could easily be used to support such censorship. And indeed, that has always been the main argument for censoring thought. Since some thoughts are heretical and heresy is “dangerous,” the authorities have to put it down by force.

The sociologist Vilfredo Pareto took a different view of the matter. He believed that men were motivated by psychological states, not by ideas. Ideas merely rationalized those psychological states. From this point of view, Pareto concluded that all censorship was futile, because it attacked rationalizations, rather than what was being rationalized. If one rationalization were suppressed by the state, that was of little consequence, because there were many more that could be brought forward to rationalize the very same human sentiments and interests defended in the suppressed rationalization.

Objectivism & History, Part 10

History, Objectivism, and Sarah Palin. In the last week we have seen the meteoric rise of Alaska governor Sarah Palin within the GOP and among conservatives. If she can survive the next two months with her reputation intact, she could eventually become the most powerful figure in the Republican Party. She would, in that case, either be McCain’s heir apparent (assuming McCain wins in November) or the frontrunner for the Republican nomination in 2012. How are Objectivists going to view this woman? On the one hand, she is precisely the strong, tough, savvy, good-looking type of female celebrated in Rand’s novels. On the other hand, she may be the most religious candidate on a Presidential ticket this side of William Jennings Bryan. Her emergence is bound to stir up some conflicted feelings within the Objectivist fold—as can be gathered by a cursory glance at the Objectivst blogosphere.
Back in February, we find one neo-Objectivist noting: “Aside from [Palin’s] obvious vice of religion, [she] has all the makings of a splendid vice president. Don't you think?” After McCain selected her late in August, several commentators made it clear they regarded Palin’s selection as an “excellent choice.” Other Objectivist posters are more conflicted. A poster calling himself “Myrhaf” begins by praising Palin’s convention speech and attacking Obama’s inept and dishonest criticism of McCain’s running mate. He almost sounds enthusiastic, until he remembers Palin’s religiosity, which brings him back to earth. He has seen Palin’s controversial speech given before an Assembly of God congregation, and is disturbed by Palin’s “insane mystical ideas.” I came away with a different impression from Palin’s performance in front of her hometown church. Rather than disturbed, I was reassured: because if you look beyond some of Palin’s sentimentalized Pentecostal rhetoric, you will find a surprisingly strong statement in support of the separation of church and state. She in effect told the congregation that, because she was governor, she could not take part in their work to win hearts and minds for Christ. That was the congregation’s job. Her job was to run the state. This suggests that Palin’s religiosity should not be regarded as a threat or a danger. Examining Palin’s record as public official only serves to affirm this judgment. Very little of what she has done publicly has any real connection to her religious convictions. What, after all, does opening Alaska to more energy development have to do with Pentecostal theology? Or lowering taxes? Or suing the Federal government over the decision to make the polar bear an endangered species? Human beings are not determined by their religious beliefs. A person can be religious and still be rational in other domains of experience.

Myrhaf concludes with the following observation: “Palin said in her speech that she would challenge the status quo, but she can't do it. She will fail because she has no intellectual ammunition.” Now this statement relates directly to the subject I’ve been discussing in recent weeks: the Objectivist philosophy of history. “Intellectual ammunition” is important to the Objectivist because he believe that “ideas” determines what happens. Yet it should be clear from Palin’s career that this isn’t altogether true; that what is important is not what people say or pretend to believe, but what they actually do. Although Palin is hardly perfect and, like any politician, has committed mistakes and blunders throughout her political career, she still, despite her obvious flaws, has done a decent job as governor of Alaska. In just a week’s time, she has excited the Republican base more than any candidate since Ronald Reagan. What does “intellectual ammunition” have to do with any of the things she has accomplished? It’s not intellectual ammunition that gets a politician elected or allows them to get things done in government. Politics is about coalition building and out-maneuvering your opponent. So-called “intellectual ammunition” has little to do with it. A politician does not gather support by winning debates or changing people’s mind. In 2000, polls suggested that Bush “won” his debates with Al Gore. Yet Bush clearly did not make a better case for his position in those debates. Not at all: he won because he came off as more "personable." So much for intellectual ammunition!

The Objectivist philosophy of history causes Rand’s followers to misread political and social reality. They end up placing to much stress on what politicians say and not enough on what they do. Even worse, because they have no appreciation or understanding for the institutional constraints that politicians must act under, they are incapable of realistically assessing individual politicians or grasping who should be supported and who should be opposed.

Objectivism & History, Part 9

The force of logic Sometimes the most curious doctrines in Objectivism are not those that are explicitly formulated but rather those that are merely hinted at or presupposed by explicit convictions. One such presupposition is the very odd view that neither people nor societies can long hold contradictory beliefs. Consider this passage from Rand’s “For the New Intellectual”:

From her start, America was torn by the clash of her political system with the altruist morality. Capitalism and altruism are incompatible; they are philosophical opposites; they cannot co-exist in the same man or in the same society.

Rand believed that people cannot long hold beliefs that contradict their fundamental premises. Such contradictions will eventually be resolved in favor of the more “fundamental” belief. So if an individual believes in altruism and capitalism, his belief in altruism will undermine his belief in capitalism because (1) altruism and capitalism contradict each other and (2) altruism is more “fundamental” than capitalism.

Here we find Rand once again misrepresenting human nature. There is no evidence that the majority of human beings have any great concern for whether they hold contradictory beliefs. As human experience repeatedly testifies, most human beings have a weak grasp of logic and are blissfully ignorant of the many contradictions floating about in their brains. The sociologist Vilfredo Pareto dedicated a 250,000 word volume to analyzing what he called “non-logical” action, which is to say, action based on contradictory or non-logical notions. “Pareto not only shows that non-logical conduct is predominant,” noted James Burnham; “his crucial point is that the conduct which has a bearing on social and political structure, on what he calls the ‘social equilibrium,’ is above all non-logical. What happens to society, whether it progresses or decays, is free or despotic, happy or miserable, poor or prosperous, is only to the slightest degree influenced by the deliberate, rational purposes held by human beings.” Pareto, therefore, comes to almost the exact opposite conclusion from Rand. Human beings, he notes, are frequently destitute of logic. And he gives hundreds of examples of non-logical actions in his treatise Mind and Society.

But even if Pareto turned out to be wrong on this issue, Rand and her disciples would still not be in the clear; for they would still have to reckon with the evidence of cognitive science, which pretty much settles the issue. Cognitive scientists have conducted a great many experiments examining the degree to which human beings are logical, and they have found that nearly all human beings not only lack any natural facility for logic, but that, in the normal business of life, they make frequent use of illogical inferences to get things done. As Morton Hunt puts it:

[F]ormal logic is not a good description of how our minds usually work. Logic tells us how we should reason when we are trying to reason logically, but it does not tell us how to think about reality as we encounter it most of the time.…

Logic enables us to judge the validity of our own deductive reasoning, but much of the time we need to reason non-deductively — either inductively, or in terms of likelihoods, or of causes and effects, none of which fits within the rules of formal logic. The archetype of everyday realistic reasoning might be something like this: This object (or situation) reminds me a lot of another that I experienced before, so probably I can expect much to be true of this one that was true of that one. Such reasoning is natural and utilitarian — but logically invalid....

If there still remain doubts on this score, simply attend more closely to the beliefs of other human beings. If one observes the human animal, one will find an astonishing mixture of contradictory notions and clashing ideas. I have recently been listening David McCullough’s The Great Bridge, in which one finds a biographical portrait John Augustus Roebling, the engineer who designed and built the Brooklyn Bridge. Although Roebling was a man of science and a great engineer, this did not prevent him from wallowing in non-logical and empirically dubious activities. In his youth, he studied philosophy under the exquisitely preposterous Hegel. In later years, he dabbled in spiritualism and hydropathy. Hegel’s arch-enemy, the philosopher Arthur Schopenhauer advocated quietism and asceticism, but he didn’t practice what he preached. He declared he was incapable of practicing his philosophy, even though he insisted that his philosophy was right. I’ve talked to several Obama supporters in the last few months who don’t seem to agree with many of Obama’s positions. Yet when this is pointed out to them, they are unphazed. They simply don’t care whether a contradiction exists between the policies the favor and the candidate they support.

Examples of this sort could be multiplied many many times. Some people—perhaps even most people—don’t really care too much about either logic or consistency, particularly about matters that are remote to their particular sphere of practical action. Rand and her disciples seem to admit of this non-logical aspect of human belief when they talk of people with “mixed” premises. But they don’t seem to realize that the very fact that people can hold mixed premises contradicts Rand’s conviction that capitalism and altruism cannot exist the same person because the two are contradictory.

Yet this is not the only contradiction involved in insisting that contradictions in the human psyche will tend to be resolved in favor of the more “fundamental” belief. Rand and Peikoff both contend that epistemological ideas are more fundamental than ethical and political ideas. This, however, is a problematic position. What if an individual were to embrace epistemological convictions that deny the importance or “validity” of logic? If an individual doesn’t believe in logic, wouldn’t this mean that there would exist no force or tendency in his mind to resolve contradictions between his ethical and political beliefs? After all, why should such contradictions matter to someone who doesn’t give a fig for logic? Moreover, since Rand did not belief that people had innate tendencies, she can hardly presuppose the existence of an innate tendency to resolve contradictions in favor of the more fundamental view. Since people have free will, they should be able to hold as many contradictory beliefs as they damn please? The Objectivist supposition that contradictory beliefs tend toward a resolution in favor of the more fundamental premise can therefore be dismissed as a mere prejudice, without basis in either logic or fact.

Anvilicious!

TV Tropes, the site dedicated to popular culture cliches, takes a hilarious look at the various cliches populating "Atlas Shrugged". Particularly good are "Nice Job Breaking It, Hero", the "Author Filibuster", and the spot-on neologism for Rand's writing style, "Anvilicious."

Anvilicious: A portmanteau of anvil and either delicious or malicious, depending on the usage, anvilicious describes a writer's and/or director's use of an artistic element, be it line of dialogue, visual motif, or plot point, to so obviously or unsubtly convey a particular message that they may as well etch it onto an anvil and drop it on your head. Frequently, the element becomes anvilicious through unnecessary repetition, but true masters can achieve anviliciousness with a single stroke

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(Hat tip to The Atheist Experience)

Objectivism & History, Part 8

Kant contra Rand There appear to be many orthodox Objectivists still in denial about Kant’s influence on history. Despite never having read Kant or the philosophers Kant influenced, they are nevertheless certain that Kant’s influence is precisely as Rand limned it. This prejudice can easily be refuted by quoting any non-controversial account of Kant. Take, as an example, what Karl Popper writes about Kant in the Open Society:

Kant, in his Critique of Pure Reason, asserted under the influence of Hume that pure speculation or reason, whenever it ventures into a field in which it cannot possibly be checked by experience, is liable to get involved in contradictions or ‘antinomies’ and to produce what he unambiguously described as ‘mere fancies’; ‘nonsense’; ‘illusions’; ‘a sterile dogmatism’; and ‘a superficial pretension to the knowledge of everything’. He tried to show that to every metaphysical assertion or thesis, concerning for example the beginning of the world in time, or the existence of God, there can be contrasted a counter-assertion or antithesis; and both, he held, may proceed from the same assumptions, and can be proved with an equal degree of ‘evidence’. In other words, when leaving the field of experience, our speculation can have no scientific status, since to every argument there must be an equally valid counter-argument. Kant’s intention was to stop once and forever the ‘accursed fertility’ of the scribblers on metaphysics.

Popper’s summation of Kant’s Critique is in line with the mainstream view. Kant’s attack on “pure reason” was not meant as an attack on knowledge as such, but only on speculative knowledge, i.e., claims of knowledge about matters of fact that aren’t backed by evidence. As Thomas Henry Huxley put it:

The aim of the Kritik der reinen Verunft is essentially the same as that of the Treatise of Human Nature, by which, indeed, Kant was led to develop that “critical philosophy” with which his name and fame are indissolubly bound up: and, if the details of Kant’s criticism differ from those of Hume, they coincide with them in their main result, which is the limitation of all knowledge of reality to the world of phenomena revealed to us by experience.

Kant’s basic position can be summed up from the famous aphorism from the preface of the second edition of The Critique of Pure Reason: “Concepts without percepts are empty; percepts without concepts are blind.” Whatever errors and mistakes Kant may have committed in explicating and developing this seminal insight, the principle itself remains sound. Nor would even Rand necessarily have disagreed with it, even if she might have quibbled about the terms in which the principle is expressed.

An anonymous commentator in an earlier post insisted “that Kant's philosophy and Objectivism are diametrically opposed.” This is a bit of exaggeration. Even in the field of ethics, where the differences between Kant and Rand are the most striking, there are still similarities (e.g., they are both absolutists, and they both believe in “autonomy”). So would Rand have necessarily disagreed with Kant’s view that “when leaving the field of experience, our speculation can have no scientific status”?

Orthodox Objectivists (including Rand herself) have always been vague on this point. While Rand and her disciples will occasionally stress the importance of keeping one’s concepts in touch with reality and avoiding what they call “floating abstractions,” if we judge Objectivists by how they act rather than on what they say it becomes clear that they really are quite attached to the type of speculative reason that Kant (and Hume) criticizes. Rarely do Rand or Peikoff provide detailed, convincing evidence for their numerous controversial assertions. If they deign to advance any kind of argument at all, it is nearly always of a wantonly speculative and, ipso facto verbalistic nature. Rand’s entire theory of human nature is merely a speculative leap from her equally speculative defense of free will! One can hardly get more rationalistic and non-empirical than that!

To the extent that there is real difference between Rand and Kant on this issue “pure” reason, it is Kant, not Rand, that is on the side of science, truth and realism. The world is weary of philosophers who seek to determine matters of fact with logical, rhetorical, or moral constructions. The sort of “reason” that Objectivists actually practice (as opposed to vague, amorphous “reason” they theorize about and provide genuflect-like homage to) is merely a futile exercise in generating concepts without percepts. Kant and Hume were right to criticize such an approach. To the extent that this aspect of their philosophy has been influential, it has been influential for the better. Objectivism, on the other hand, would, if it exercised any influence at all on this issue, would constitute a step backwards for the human intellect.

Objectivism & History, Part 7

Who is this guy Mansel? Among academics, one of the most controversial aspects of orthodox Objectivism is its interpretation of modern philosophy. Rand’s views on Hume, Kant, Hegel, William James, Dewey, Russell, et al. As Gary Merrill puts it:

These sorts of things [i.e., Rand’s sweeping, unsubstantiated generalizations] would not be so bad, though they are bad, were it not for the fact that she so frequently gets things wrong. There is the business above concerning Russell [i.e., of Russell allegedly “kinda” knowing the meaning of the concept of number]. There is the claim (p. 59) that “modern philosophers declare that axioms are a matter of arbitrary choice.” (no substantiation or reference is provided). There is the claim (p. 52) that “It is Aristotle who identified the fact that only concretes exist”. (Any of you Aristotle scholars want to wade in here with a brief account of particulars vs. concretes?) And none of this comes with even a hint of specific attribution that would allow a reader to evaluate it. The closest she gets is along the lines of (p. 60) “For example, see the works of Kant and Hegel.” Now that really narrows it down!

Rand’s interpretation of Kant is perhaps the most controversial of all. Again, to quote Merrill:

Rand mentions Kant repeatedly (he seems to be the guy she loves to hate), but there is absolutely nothing that is specific. She never quotes Kant directly, but when she apparently feels a need to justify her view of Kant she instead quotes from a book published in 1873 by Henry Mansel whom she describes as “a Kantian”. Again, I am not an expert on Kant, but who is this guy Mansel? I can find him mentioned in none of the histories of philosophy I have, and he is not mentioned in the fairly extensive bibliography on Kant in Lewis Beck’s 18th-Century Philosophy. So direct reference to Kant is replaced by reference to “a Kantian” (and a very obscure one at that). Why do this? Why not show how Kant himself held the position that is being attacked? There is no justification for this sort of thing. Again, poor scholarship. (I do not, by the way, believe that even the quote from Mansel supports Rand’s view of Kant. But I will not argue that point now.)

Even neo-Objectivists such as George Walsh and Fred Seddon have challenged Rand’s take on Kant. And one would be hard pressed to find any Kantian scholars of note who would agree with Rand’s assessment. There seems to be little room for doubt on this question: Rand got Kant wrong. What affect does this have on the Randian philosophy of history?

An important component of the Objectivist philosophy of history is Rand’s take on modern philosophy. Kant and the moderns have to be bad for the whole Randian eschatology to make any of sense. So if Rand is wrong about Kant and other modern philosophers, this provides us one additional reason to reject the Objectivist philosophy of history as mere a tissue of distortions and arrogant ignorance.

Yet this is not all. Even if Rand’s interpretation of Kant and other modern philosophers turned out to be correct, her philosophy of history would still have serious problems. Because even if Rand’s interpretation were correct, the fact that nearly everyone else has interpreted Kant differently it itself would constitute an insurmountable objection. Central to the Objectivist philosophy of history is the notion that Kant’s philosophy as interpreted by Rand exercised a pernicious influence on Western Civilization. But if most philosophers and intellectuals did not interpret Kant the way Rand did, then it would impossible for Kant to have the kind of influence that Objectivists ascribe to him.

The same line of reasoning can be extended to any of other controversial interpretations of philosophy offered by Rand and her orthodox disciples. If Rand is wrong in her interpretation, then the philosopher in question could not possibly have exercised the influence Rand ascribes to him; and if Rand is right in her interpretation and nearly everyone else wrong, then the philosopher’s influence differs from his actual philosophy. Either way, it demonstrates the poverty of the Objectivist philosophy of history. If an individual is in fact influenced by a specific philosopher, it is not the philosophy per se which exercises the influence, but the individual’s interpretation of that philosophy. If individuals routinely misinterpret a philosophy, it will be the prevailing misinterpretations, not the actual intended philosophy, that is critical in assessing questions of influence.

Objectivism & History, Part 6

Heterogeneity of human nature. Rand, as this blog has pointed out on countless occasions, rejected the traditional view of human nature. In his lecture “Philosophy and Psychology in History,” Peikoff encapsulates Objectivism’s two main arguments against human nature in two sentences:

1. “A given individual might have any kind of psychology in any era, because men have free will.”

2. “You cannot say that any specific psychology emanates from human nature as such, because not everyone has the same psychology.”

I’ve discussed the first argument, the argument from free will, before. Rand believed free will extended all the way to a person’s character, so that, ultimately, the individual could choose his own personality. Therefore, the traditional view of human nature, which insists on the reality of innate tendencies of character which manifest themselves throughout human history, is rejected on the grounds that such a view violates the “axiomatic” principle of free will. (Other rationalizations are also brought forth against it, such as the view that innate tendencies cannot exist because that would be tantamount to asserting the existence of “innate ideas.”)

The second argument assumes that human nature is homogeneous: that is to say, any trait that can properly be ascribed to the concept of human nature must be applicable to all human beings. If trait is applicable to only some human beings, it cannot be considered a part of human nature.

This argument, when applied to the interpretation of history, leads to yet another argument that could easily be used to rationalize the Objectivist philosophy of history. It goes as follows: History cannot be explained by human nature, because human nature is uniform; and so if human nature were the primary cause of history, historical change would become inexplicable.

What is wrong with these arguments? The main error stems from the assumption that human nature is homogeneous. On this issue, the Objectivist epistemology and its classical theory of concepts has led Rand and her disciples astray. As I argued in an earlier post, human nature is a family resemblance concept:

Among the many lessons that can be drawn from the Cognitive Revolution, perhaps the most important has to do with the inevitable conflict between Objectivist methodology on the one hand and the understanding of human nature on the other. Human nature is a family resemblance concept which is partially based on tacit, intuitive knowledge. Consequently, no detailed ... understanding of human nature can be achieved through the sort of "reason" based essentialism advocated by Rand. The Objectivist definition of man as a "rational animal" provides no real insight into human nature and could [never] be used as a reliable guide in predicting how people are likely to behave in a given situation.

Once the heterogeneity of human nature is established, we can proceed to easily demonstrate the degree to which history may in fact be explained on the basis of innate tendencies. To say that human nature is heterogeneous is tantamount to suggesting that human beings can be classified into various types. From common experience, we know that traits of character are not evenly distributed. Some people are more aggressive, more courageous, more intelligent, more sensitive than others. At least some (if not all) of these differences are influenced by genetic factors. It is fairly well established, for instance, that introversion-extroversion are strongly influenced by genetics. There is no evidence that people “choose” their personalities? How could they? That very choice would itself be an expression of personality—which is a roundabout way of saying that choice presupposes character.

It is from this very heterogeneity of human character that we can explain social change. All change in society is primarily brought about by various elites—by leaders in the various fields of human activities. Carlyle was right on this issue. “Universal history, the history of what man has accomplished in this world, is at bottom the history of the Great Men who have worked here,” the dyspeptic historian wrote. “They were the leaders of men, these great ones; the modellers, patterns, and in a wide sense creators, of whatsoever the general mass of men contrive to do or attain.” But an important emendation must be added to Carlyle’s theory. Whether a “great man” exercises an influence on history depends on institutional factors: it depends, more specifically, on what is called the “circulation of elites.” The primary determining cause in social change is a corresponding change in the character traits of those who make up the ruling elite. If individuals of one character type replace, within the elites, individuals of a different type, this have an immense influence on the society at large. For example, some character types are drawn to militaristic values. If such individuals dominate within the ruling elite of a society, that society will inevitably become militaristic.

What determines which individuals dominate within the ruling elite? All sorts of factors—although philosophy rarely plays a part. If a society is attacked by its neighbors, for example, this alone will draw militaristic types into the elite. Institutions play an important role in the selection of elites. Democratic institutions tend to favor so-called “politicians”—i.e., individuals with supple spines who will not scruple to say whatever is needed to get elected. For this reason, democratic political institutions often deselect from the ruling elites just those individuals with strong back bones who refuse to bend the knee to his majesty demos.

The course of history itself is largely determined by the competition between various nations, some of which may have ruling elites of differing compositions. If, by way of example, China were to become the world’s leading power in the 21st century, the course of history could be very different than if America remains the leading power. China’s ruling elite has, for many centuries, been opposed to freedom and obsessed with saving face—a lethal combination. Philosophy has little to do with this. On the contary, the philosophy of China’s ruling elites, whether drawn from Confucius or Karl Marx, is merely an expression of the type of people that have ruled that nation throughout its history.

Objectivism & History, Part 5

W. G. Sumner contra Peikoff. The ideas of philosophy, claims Objectivism, determine the course of history. Very well. But where do these ideas come from? What is their cause?

Peikoff, in his lecture “Philosophy and Psychology in History,” argues that history is ultimately determined by “mankind’s most abstract minds.”

Millions, billions of men may be oblivious to the mind, they may be ignorant of philosophy, they may even be contemptuous of abstractions. But, knowingly or not, they are shaped ultimately by the abstractions of a small handful of individuals.

This curious position leaves unanswered the question: who (or what) shapes the handful of individuals who shapes everyone else? According to Peikoff, Kant unleashed “the power of philosophy” against the West in the last two centuries. Why did Kant do such a thing? What were his motives? What enabled him to develop and propagate his philosophical system? And why did he choose his particular positions, rather than some other? It couldn’t have happened for no reason at all. At bottom, Kant had to be motivated by something. Ideas aren’t formed in a vacuum. So how did Kant for his system? Why did he arise when he did? Why does any philosopher arise when they do? What explains the “emergence” of their philosophies?

According to Peikoff, these are not valid questions.

You cannot have an infinite regress. Suppose I were to say: “Philosophy derives from factor X; if a man has X, he becomes an original philosopher, and if not, not.” That answer would not satisfy you—it would prompt the question: “Where did X come from?” The point is: you have to start somewhere. The basic cause in this kind of series must be a primary.

Why so? Here we have a palpable rationalization put forth to avoid any questions which might expose the poverty of Peikoff’s view. Because once we start asking the question, Why did the philosopher choose to develop these particular ideas, rather than some other? we will immediately led to recognize the fact that ideas are not primaries, that they are developed for specific purposes, and it is these purposes that, this context, are (if anything is) “primary.”

The fundamental implication behind both the Objectivist view of human nature and its concomitant theory of history is the denial that men’s volition is ultimately affected by motivation. For the Objectivist, volition ultimately comes down to choice to think or not. This choice, by implication, is entirely unmotivated.

Beginning students often have a problem with this issue, asking “But what makes a person think or evade?” … Why he chooses one or the other on this level cannot be further explained. That is what it means to say that man has choice and is not determined. A volitional choice is a fundamental beneath which you cannot go.

In other words, what motivates an individual to choose or develop one idea over another is unknowable. Peikoff has here blocked the path of inquiry using that great bête noire of Objectivism, phyrric skepticism. This is a doctrine that you have to an Objectivist true-believer to swallow whole, because when mixed with just a little bit of good sense, it just won’t go down.

Human beings are not blank slates upon which “ mankind’s most abstract minds” may write whatever they wish. We know from the scientific study of human nature that many needs and proclivities of human beings are influenced by genetics. As sociologist William G. Sumner put it:



There are four great motives of human action… These are hunger, sex passion, vanity, and fear (of ghosts and spirits). Under each of these motives there are interests. Life consists in satisfying interests, for “life,” in a society, is a career of action and effort expended on both the material and social environment. However great the errors and misconceptions may be which are included in the efforts, the purpose always is advantage and expediency. The efforts fall into parallel lines, because conditions and the interests are the same…. The result is mass phenomenon; currents of similarity, concurrence, mutual contribution; and these produce folkways. The folkways are unconscious, spontaneous, uncoordinated. It is never known who led to devising them, although we must believe that talent exerted its leadership at all times. There are folkways in stage coach times, which were fitted to that mode of travel. Street cars have produced ways which are suited to that mode of transportation in cities. The telephone has produced ways which have not been invented and imposed by anybody, but which are devised to satisfy conveniently the interests which are at stake in the use of that instrument.

People have wants and needs and they seek to satisfy them, often resorting to nothing more intellectually rigorous than trial and error and the imitation of others. At a much later stage of civilization, conscious intelligence may be applied to some of these problems. But even so, the wants and needs remain primary. As Sumner says, life consists of conveniently satisfying interests. Hence arises the “folkways” or “mores.”

[A]ll the life of human beings, in all ages and stages of culture, is primarily controlled by a vast mass of folkways, handed down from the earliest existence of the race, having the nature of the ways of other animals, only the topmost layers of which are subject to change and control, and have been somewhat modified by human philosophy, ethics, and religion, or by other acts of intelligent reflection.

So what, then, is the role of “ mankind’s most abstract minds” in all of this? Sumner states his position very clearly:

Of course the view which has been stated is antagonistic to the view that philosophy and ethics furnish creative and determining forces in society and history. That view comes down to us from the Greek philosophy and it has now prevailed so long that all current discussion [circa 1900] conforms to it. Philosophy and ethics are pursued as independent disciplines, and the results are brought to the science of society and to statesmanship and legislation as authoritative dicta… It can be seen also that philosophy and ethics are products of the folkways. They are taken out of the mores, but are never original or creative; they are secondary and derived. They often interfere in the second stage of sequence,—act, thought, act. Then they produce harm, but some ground is furnished for the claim that they are creative or at least regulative. In fact, the real process in great bodies of men is not one of deductions from any great principle of philosophy or ethics. It is one of minute efforts to live well under existing conditions, which efforts are repeated indefinitely by great numbers, getting strength from habit and from the fellowship of united action. The resultant folkways become coercive…. Then they seem true and right, and arise into mores as the norm of welfare. Thence are produced faiths, ideas, doctrines, religions, and philosophies, according to the stage of civilization and the fashions of reflection and generalization.

Understanding Objectivist Jargon pt 15: "Objective"

The latest in our ever-popular series translating Objectivist jargon into ordinary usage:

"Objective" = subjective

The Objectivist jargon substitutes unusual or specialised word meanings for standard ones.These specialised meanings can even be the exact opposite of the usual ones (see for example "sacrifice"). The Objectivist meanings are then either insisted upon, or inserted alongside the standard meanings and equivocated between. Thus on examination much Randian argument, especially in epistemology, consists literally of double-talk.

A key example of this is the usual meaning of the word "objective", which is redefined to include the contents of consciousness ie that which is usually called subjective. In this classic passage from "Objectivism: The Philosophy of Ayn Rand", we observe exactly how Leonard Peikoff engineers this rhetorical switcheroo:

"People often speak of “objective reality.” In this usage, which is harmless, “objective” means “independent of consciousness.” The actual purpose of the concept, however, is to be found not in metaphysics, but in epistemology. Strictly speaking, existents are not objective; they simply are. It is minds, and specifically conceptual processes [including their products], that are objective (emphasis DB) — or nonobjective." - Leonard Peikoff, OPAR p117

Objectivism & History, Part 4

Philosophy versus psychology. If we examine the theoretic rationalization constructed around the Objectivist philosophy of history, one thing immediately becomes apparent: the Objectivist theory of history is merely an extension of Rand’s theory of human nature. “Ayn Rand’s theory of man leads to a distinctive interpretation of history,” notes Peikoff [OPAR, 451] In his lecture on "Philosophy and Psychology in History," Peikoff begins by trying to make the best case he can for the "psychological interpretaion" of history. "It is obvious that most people have no articulate. coherent philosophy," he admits. "It is even questionable, some observers claim, whether most people have a philosophy at all. But it is obvious that everyone does have a psychology.

So does this mean that psychology determines history? No, not at all. The “psychological interpretation” of history, Peikoff insists, is a plausible but mistaken theory. What is wrong with it? Let us examine the reasons Peikoff gives for rejecting the psychological interpretation:

The first thing to ask is: what is the source of psychological factors? Where do they come from? What is their cause? … Let me give you the answer… All the psychological factors … reduce to one element, however complex the terminology. They reduce to emotions… And the source of emotions is: ideas…

This is the basic answer to the psychological interpretation of history. That theory comes down to the view that emotions are the key factor in history. But emotions on a scale that shapes a culture are a consequence of philosophy.

In other words, the Objectivist philosophy of history is the application of Rand’s theory of emotions to history. If Rand’s theory of emotions is wrong, then her theory of history must be wrong as well. So this leads to the obvious question: Is Rand’s theory of emotions right? Well, it just so happens that ARCHNBlog has already answered this question. That post concluded as follows:

[The Objectivist] view of emotions … has been refuted by research done in cognitive science, neuroscience, and evolutionary psychology. These sciences have discovered that animals (including human beings) have "primary emotions," which are "innate" and "preorganized" and which depend on limbic system circuitry in the brain. They have discovered that emotions are critical in thinking, so that the notion that "man can live exclusively by reason," when accompanied by the additional notion that "emotions are not tools of cognition," misrepresents what actually happens in cognition. Human beings are not blank slates. Their emotions are not programmed into their “subconscious” by their conscious minds. That view is no more credible than would be an astrological view of emotions. On naturalistic assumptions, emotions are and must be the product of evolution. They are tools of survival, forged in the evolutionary furnace.

Objectivism & History, Part 3

Metaphysical presuppositions 2. Objectivism rejects what Peikoff labels eclectic theories of history—i.e., those theories that assume the existence of multiple factors affecting the course of history. Objectivism insists that philosophy is the decisive factor in shaping the actions and events of history. As Peikoff explains near the end of Ominous Parallels:

The complexity of human society does not make it unintelligible, not even when it is a society torn by contradictions and in the process of collapse—unless one views the collapse without the benefit of philosophy. Such a procedure means: viewing the symptoms of a disease without knowing that they are symptoms, or that they have a unifying cause.

The metaphysical implications of this view is that reality is so constituted that it is explicable by an ultimate cause. Indeed, this is one of the more controversial implications behind the Objectivist view of knowledge as hierarchical. Reality conveniently allows itself to be explicable within a hierarchy of concepts, with the widest concepts explaining all the lower concepts in the hierarchy. Objectivism tries to evade these metaphysical implications by insisting that this hierarchy is purely epistemological. But in the form it takes in the Objectivist philosophy of history, it is unclear that the metaphysical implications can be carelessly swept under the epistemological rug. Peikoff assumes that as long as you view the complexity of human society with “the benefit of philosophy,” it must be intelligible. Every symptom, Peikoff assumes, has an identifiable unitary cause. This assumption cannot be made on epistemological grounds alone. Unless one assumes that reality itself in fundamentally intelligible, Peikoff’s epistemological assumptions are entirely gratuitous.

The trouble with these unstated metaphysical implications is that they are not fully consistent with realism, that is to say, with the belief in an external substantive world existing in its own plane, with a movement, origin, and destiny of its own, apart from what we may think or fail to think of it. Peikoff’s argument for a single cause of history implies that reality must be intelligible—as if reality exists or was created for our personal cognitive convenience. That is not an assumption the truculent and uncompromising realist can ever make. “A really naked spirit [i.e., a mind without a priori presuppositions] cannot assume that the world is thoroughly intelligible,” wrote one such truculent realist, George Santayana. “There may be surds, there may be hard facts, there may be dark abysses before which intelligence must be silent, for fear of going mad.” At most, the intrepid realist can only assume that reality is partially intelligible, that it is say, that we can know what is necessary for our survival and genetic reproduction. Whether the rest of reality is intelligible can only be discovered empirically; it cannot be assumed a priori.