Paean to pure unfettered capitalism

The works of Ayn Rand have become a huge socio-cultural phenomenon. This phenomenon is, currently, of significant and Ayn Rane - Credit Phylis Cerf -growing  political and economic importance in the US. Despite her lack of education  or experience in economics, social science, or political science, she was a remarkably successful novelist, whose ideas were formed by her early life in revolutionary Russia, which formed her anti-collectivist  political agenda.  Her three novels have sold 55 million copies, and her most influential book, Atlas Shrugged –– which sold 70,000 copies in its first edition — now sells 500,000 copies per year.. Her simplistic ideas have been widely accepted in conservative Republican political circles. In fact, despite the naivete of her theories, both the Libertarians and the Tea Party are essentially based on them. So who was Ayn Rand and why does it matter to serious academic scholars today?

* The following excerpt, slightly edited, taken from my most recent book “The Bubble Economy” (MIT Press, 2014)

Ayn Rand was a Russian, born Alisa Rosenbaum in Saint Petersburg, Russia. She was the daughter of a well-to-do Jewish merchant family who were impoverished by the 1917 Bolshevik Revolution. Despite her family’s sharply reduced circumstances she graduated from the University in Saint Petersburg. Moreover she managed to emigrate from Russia to the United States in 1926. Along the way she changed her name. Rand went to Hollywood, which was still wide open to newcomers in the movie business, especially those with Jewish connections.  There she wrote and sold several movie scripts and a novel, Anthem. Its anti-collectivist Orwellian theme was a love story set in a totalitarian society– reminiscent of 1984 –where individualism no longer exists and the word “I” is forbidden.  Her hero, a loner, rediscovers electricity, but is punished for this sin. A screenplay is currently being marketed, taking advantage of the fact that Rand’s books have sold 26 million copies, suggesting a large potential audience.

Rand also became politically active especially in opposition to Franklin Roosevelt’s “New Deal,” which she (and others) considered to be the first step toward a collectivist, totalitarian society similar to Marxism-Leninism as then practiced in the Soviet Union. Needless to say, she had no sympathy for the nuanced view of the Bolshevik Revolution, as expressed by Boris Pasternak in Doctor Zhivago.

Antecedents of Libertarianism

Later (1943) she wrote a more serious novel The Fountainhead, about a free-thinking individualistic architect—possibly modeled on Frank Lloyd Wright—who had to fight constantly against conventional (collectivist) wisdom (Rand 1943). Wright objected to her use of his biographical details. It was a best seller, with worldwide sales of 6.5 million copies, and was made into a successful movie that made the author both famous and wealthy.

In 1950, still living in California, Rand and her husband, Frank O’Connor, met with an admirer of The Fountainhead and student of psychology named Nathaniel Brandon, and his (then) girl-friend Barbara Weidman. They all became friends. But two years later, Rand split with O’Connor and moved from Los Angeles to New York City. In Manhattan she initiated a French-style “salon” where political-philosophic-economic issues were discussed with a group of youthful, idealistic followers, one of whom was Alan Greenspan.

Rand’s primary motivation, throughout her life, was fierce defense of individualism and opposition to “collectivism” in any form. The positive aspect of her thesis is that all human wealth, apart from natural resources, has been created by a relatively few creative geniuses (all capitalists, of course). I would set the role of natural resource discoveries  higher and the role of entrepreneurial inventors somewhat lower than she did, but so far I mostly agree.

Rand believed that invention is essentially associated with individualism, whence it cannot prosper in a “collectivist” society. There, too, I tend to agree. But Rand interpreted any government intervention in the idealized “free market” as collectivism, and there I part company with her. The very notion of a market implies government, if only for the purpose of enforcing contracts and preventing misbehavior, with all that implies in terms of police, lawyers, judges and so on. In her view, pure “capitalism is the only system geared to the life of a “rational being” and the only moral political economic system in history” (Rand 1967).

Her core idea, later adopted by the Libertarians, was that “every person owns his or her life, and no person can own any other person’s life.” Her philosophical rejection of collectivism and totalitarianism morphed into a rejection of “socialism” and any social programs that involved any redistribution of wealth, namely the use of taxes to help the less fortunate—the “moochers”—at the expense of the creative and productive individualists like her heroes. She viewed voluntary altruism as harmless but involuntary income redistribution through the tax system as morally wrong. In her view, each person should do with his life whatever he or she wants, without any restriction except that he or she causes no harm to others (a sentiment similar to the Hippocratic Oath).

Alan Greenspan

Alan Greenspan appeared on the scene in 1952 about the time Rand came to New York. As a young man in the 1940s Greenspan had studied music at the Juilliard School in Manhattan. He did not serve in the military during WWII. He played the saxophone and clarinet and briefly toured with a swing band. In 1944 he enrolled at NYU and got a BS in economics in 1948 and an MS in 1950. He started in the PhD program at Columbia University, but dropped out in 1951 for lack of money for tuition. In 1952 he married painter Joan Mitchell, who introduced him to Ayn Rand. (The marriage to Mitchell only lasted a year.) The young and ambitious Greenspan became fascinated with Rand’s ideas and joined the regular Saturday evening salon at her apartment in Manhattan. (In 1954 Alan Greenspan joined ex-bond-trader William Townsend to become a partner in an economic consultancy, which changed its name to Townsend-Greenspan and Company (TG&C). In 1958 Greenspan’s partner William Townsend died and Alan Greenspan became sole owner of TG&C, which seems to have specialized in regulatory issues. During the next decade it picked up some influential clients, including JP Morgan and US Steel.

Together with Branden2 and Greenspan, Ayn Rand tried to create a consistent intellectual framework, which they called “objectivism.” In 1957 Ayn Rand’s third novel Atlas Shrugged was published. It was quickly dismissed by reviewers who objected to both her romantic style and her radical ideas. Time Magazine called it “a nightmare.” Sidney Hook, a well-known philosopher, panned it in the NY Times. (Alan Greenspan wrote a letter to the NY Times defending Atlas Shrugged from Sidney Hook’s review. Her hero, a mysterious personage called “John Galt,” makes a 50-page speech in the novel that achieved some notoriety among conservatives. It launched Ayn Rand’s entry into intellectual ultra-conservatism through a lecture series that became influential in the 1960s.

In 1958, after the publication of Atlas Shrugged, Ayn Rand and Nathaniel Branden created an institute (the Nathaniel Branden Institute) for the propagation of her ideas by means of taped lectures. They also jointly published the Objectivist Newsletter. The institute operated successfully from 1958 to 1968 with representation in as many as 60 cities until an acrimonious breakup in 1968 that was explained differently by the two parties. Yet after Rand’s death, Nathaniel’s wife Barbara Branden wrote her biography (Branden 1986).

The wreckage of the Nathaniel Branden Institute eventually led to the formation of the Libertarian Party. Its first candidate for the presidency of the United States (1972) was one of Rand’s most loyal followers. He was John Hospers, a philosopher at Brooklyn College whom she met on the occasion of a lecture there (Burns 1997). The Libertarians got 8,715 popular votes and one electoral vote from a Virginia Republican who split with his party and four years later ran for president as the Libertarian candidate. After the 1972 election Hospers moved to California where he became chairman of the Philosophy Department at the University of Southern California.

In 1968 it seems that TG&C was having financial difficulties. At any rate, its principal, Greenspan, took a job with the Nixon presidential campaign as director of policy research. In 1974 Nixon appointed Greenspan as head of his Council of Economic Advisors. (Ayn Rand attended the White House dinner). He stayed on as chairman of President Ford’s Council of Economic Advisors, during the brief Ford presidency (1975 to 1976), but went back to TG&C when Jimmy Carter was elected in 1976. In 1977 NYU gave him a PhD in economics without requiring a thesis. As soon as the Carter administration ended, Greenspan went back to Washington.

On February 10, 1982, President Reagan (a Rand admirer) appointed Alan Greenspan to his Economic Advisory Board. On December 16, of that year Reagan appointed Greenspan as chairman of his Commission on Social Security. When Volker resigned from the Fed, in 1987, Reagan appointed Greenspan to be his replacement.

While Atlas Shrugged was not admired by academics during its first decade, it still sells 500,000 copies per year and is now widely used in classrooms. (In fact Paul Ryan, head of the House Budget Committee and 2012 vice presidential candidate, is an open follower of her theories. Indeed he allegedly requires every one of his staffers to read the book.)

Paean to unfettered pure capitalism

Personalities apart, Ayn Rand’s ideas are based on a very selective reading of the ideas of early economists, including Adam Smith (“self-interest”)3, David Ricardo (“free trade”), J. B. Say (“laissez faire”), and John Stuart Mill (Smith 1976 [1776], Say 1821 [1803], Mill 1848). Mill wasn’t much of a writer of quotable text. However, he wrote in his famous essay On Liberty: “The sole end for which mankind are [sic] warranted, individually or collectively, in interfering with the liberty of action of any one of their number, is self-protection.” But he went on to write that we should be “without impediment from our fellow creatures so long as what we do does not harm them, even though they should think our conduct foolish, perverse or wrong” (Mill 1869). The italics are mine.

The problem with that statement by J. S. Mill is that the possibility of unintentional harm (in the form of externalities) is not considered. The very existence of externalities in economics was in fact not really acknowledged by theorists until the emergence of welfare economics as a minor topic within the field in the 1920s, and even then, only in terms of rather trivial examples (Pigou 1920; see also (Kapp 1950; Baumol 1967).

Ayn Rand’s first nonfiction book was The Virtue of Selfishness, a paean to unfettered pure capitalism (Rand 1964). In that book she saw no need for social norms or a society of any kind. It was as though every person could (and should) be an independent, self-sufficient pioneer or rancher in the wilderness, but that the cavalry should always be near at hand to drive off the Indians. Later she edited a collection Capitalism, the Unknown Ideal including a number of her own essays, along with three essays by Alan Greenspan and two by Nathaniel Branden (Rand 1967). In one place, she recapitulated Mill, again without considering the possibility of externalities and unintentional harm:

“”The proper functions of a government are: the police, to protect men from criminals, the military forces to protect men from foreign invaders and the law courts, to protect men’s property and contracts from breach by force or fraud and to settle disputes among men according to objectively defined laws.” (Rand 1967, p. 47)

In other words, Rand saw no need for a society that would offer public services such as roads, public health, education, or research. In her view and that of the Libertarians, all of those services are either unnecessary and should be eliminated, or should be privatized or voluntary.

She has no explanation of how the London Fire or the ebola epidemic could be controlled by private actions. She does not explain how the public health service or the public school system could be privatized, or how they could have been created in the first place. It is no coincidence that her emphasis on the legitimacy of military force to protect men from foreign invaders is now applied by the United States to terrorists and jihadists located in countries far away. “Defense” has morphed into the use of force to kill “enemy combatants” and “protect American interests” around the world.

A few pages later (p. 49) she says that “the most infamous piece of legislation in American history” is the Sherman Anti-Trust Act (1890).4 She (and others, including Greenspan) criticized the legislation for ambiguity as to what is, and what is not, legal behavior. The fact that the law in its original form had almost no applications (except against a labor union, the ) testifies to that weakness. In the next few pages she cited a number of inflammatory statements (all by corporate lawyers) as to theoretical possibilities. For instance, she suggested that an executive might be put in jail for setting his prices too high, according to “some bureaucrat” (  “intent to monopolize”), too low (“unfair competition”), or for selling at prices exactly the same as competitors (“collusion” or “restraint of trade”).

Why so much venom directed at a law with so little practical effect? Why the total lack of any recognition on her part that monopolies do cause harm (by keeping prices too high), as all trained economists know, or should know? Why no recognition that “restraint of trade” can actually hurt people? Why is it that, in her imaginary world, only the tycoons deserve legal protection but not the little guys they run over on their way to the pinnacles of success?

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About the author:

ayres bw smallRobert Ayres’s career has focused on the application of physical ideas, especially the laws of thermodynamics, to economics; a long-standing pioneering interest in material flows and transformations (Industrial Ecology or Industrial Metabolism); and most recently to challenging held ideas on the economic theory of growth.

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