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Restoring Capitalism: Why Atlas Shrugged

Posted: 11/21/11 03:46 PM ET

As the dysfunctional nature of our economy becomes ever clear more apparent, the media is appropriately focusing on the whether the ideas of economic thinkers from earlier eras can help to solve today's problems. Recently, NPR devoted a segment to the thinking of Ayn Rand.

The NPR segment quoted from an extensive television interview with her conducted by Mike Wallace in 1959, and now available on YouTube. As the segment noted, Rand is a hero to many Washington politicians who advocate free markets. In the Wallace interview, Rand said, "I am opposed to all forms of control. I am for an absolute, laissez-faire, free, unregulated economy."

The Washington establishment has, in fact, misinterpreted what Rand valued and what she would advocate today.

At this moment, what's relevant to our nation is not the laissez-faire policies Ayn Rand advocated in the late 1950's, as an outgrowth of her philosophical system (which she called "Objectivism"), but what the philosophy itself considered important, how these principles should be applied to our modern economy, and whether we believe implementing these ideas would aid the economy.

The central point Ayn Rand made in her interview with Wallace, which she stressed repeatedly, was that entrepreneurs and businessmen are the producers who create the goods and services that make our economy run. They deserve their wealth, are her heroes, and no one including the government has the right to take their property. As NPR notes, "In Atlas Shrugged, which Rand considered her masterpiece, the wealthy corporate producers are the engines of the American economy." In this fictional book by Rand, the economy starts to stagnate when these producers go into hiding, leaving behind what she calls "the moochers."

In effect, an important aspect of Rand's philosophy supports the central tenant of a functioning capitalist economy: Those who create the greatest societal wealth should be the most highly compensated.

This is a fundamental notion in any capitalist economy. It underlies one aspect of the American Dream and also explains the historic admiration of the American people for rich people. In general, (and before the Occupy Wall Street Movement), the prevailing ethos in America has been that rich people deserve their wealth because they have created societal value for all of us. Indeed, I suspect the vast majority of the American people believe do not begrudge the wealth earned by successful risk taking innovators like Michael Dell, Jeff Bezos, the late Steve Jobs, or Ross Perot.

This leads to a clear conclusion: Ayn Rand's philosophy is only anti-regulation because it is ultra-supportive of the capitalist ideal: The people who create the most societal wealth should receive the benefits of this contribution.

From this perspective, Ayn Rand's philosophy points out that actual capitalism is on life support in America today; not because of welfare programs, taxes, the social safety net, or government regulations, but for a very different reason: The highest paid people in America today create no real wealth for the society.

The financial industry, comprised of traders, hedge funds who exploit arbitrage opportunities, and "quants" who develop mathematical models to take advantage of minute inefficiencies in trading markets (for stocks, derivative securities of all types, commodities, and more) are now earning seemingly inestimable sums. Hedge fund owners earn billions of dollars annually and traders earn less than several million dollars a year are not, by Wall Street standards, real successes. Yet, they are all gambling in "a heads I win, tails you lose game." The outcome of all their efforts are high profits, but little, if any, new societal wealth.

Real societal wealth is anything that enhances the lives of those in our society; starting with basics such as food, shelter and medicine, while including almost any property a person can own or anything a person can experience, such as entertainment or greater convenience. Real wealth can be eaten, used, shared or experienced.

Profits cannot be eaten, and they do not provide shelter. As a consequence, it's essential to recognize that the creation of profits is often confused with the creation of real societal wealth. They are different. Profits are an accounting proxy we use for indicating whether wealth is created. But, like all proxies this one sometimes falls short. With regard to the financial industry, this proxy has failed the nation spectacularly.

The current issue of Foreign Affairs describes how a Wall Street firm spent $300 million to construct a fiber-optic cable connecting the Chicago Mercantile Exchange and the New York Stock Exchange, to shave "three milliseconds off high-speed, high-volume automated trades--a big competitive advantage" (Nov/Dec. p. 22). And, huge sums are now being spent to use technology to earn these profits. High frequency (i.e. computer driven) trading is now estimated to account for 75% of all buying and selling of U.S. equities. Does any of this add to our societal wealth?

Some economists openly wonders whether our financial services sector actually destroys, instead of creating, societal wealth. In December of 2008, Paul Krugman wrote in The New York Times (emphasis added):

"The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: the vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole....

We're talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America's G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing -- and it probably was -- we're talking about $400 billion a year in waste, fraud and abuse."

By late 2009, Krugman noted that the this view is now widely shared:

...after the debacle of the past two years, there's broad agreement -- I'm tempted to say, agreement on the part of almost everyone not on the financial industry's payroll -- with Mr. Turner's assertion that a lot of what Wall Street and the City [of London] do is "socially useless."

Yes, many financial economists have concluded that high speed trading and hedge fund arbitrage add to the efficiency of these markets. But, I wonder if they have quantified the value to our society of these benefits and compared them to the very real costs? As far as I know they have not. It's my understanding that they have only looked at the isolated impact of these activities on markets--not their overall impact on our society.

This system, with the highest rewards to those who create nothing, is antithetical to a capitalist economy. We have turned the underlying premise behind our entire economic system on its head. Now, those who create little, if any, societal wealth receive the most wealth.

Moreover, the wealth now inappropriately channeled to Wall Street is harming our society in a myriad of ways: Here are just a few of these negative effects: First, money inevitably leads to political power in the nation (through donations, lobbying, access, and more.) Inevitably, trading related money is now further distorting our capitalist economy by influencing legislation for its own anti-capitalist benefits.

Second, in a society where success is often defined by income (for better or worse) the talent the nation desperately needs to create real wealth is instead sucked up by the financial system and dedicated to arbitrage and other zero-sum activities.

Third, the speculative investments of hedge funds and other trading entities can have a dangerous destabilizing impact on markets, the prices of essential commodities (such as food and energy), and create systematic risk for the economy as a whole. In February of this year, Bloombergreported on the findings of a federal government report, stating:

"Hedge funds and insurers might threaten U.S. economic stability in a time of crisis, according to a report aimed at helping regulators decide which non-bank financial companies warrant Federal Reserve supervision."

Fourth, it's likely that billions of dollars of the limited resource of our nation are spent each year on infrastructure with no real societal value; all of which could instead be spent for productive uses. Fifth, pay scales throughout the society are thrown out of whack as other elites start to question whether they should be earning similar amounts.

Finally, the notion that all profits are good--whether they create real societal wealth or not--is consistently reinforced through the highly publicized example of Wall Street earnings and applied with the same harmful effects in other industries throughout the nation.

Ayn Rand would, I believe, argue that this absolute failure to enforce capitalist principles is exactly what she most feared: The emergence of a powerful group that produces nothing, yet manages to takes a large share of the societal wealth created by others. In her view, this inevitably leads a society to implode and self-destruct.

(Yes, Rand did not believe in altruism or any type of social safety net, and I am not addressing this aspect of her "Objectivism" philosophy here. But, it is worth noting that she opposed these programs for the same reason I am certain she would be horrified by the current channeling of wealth to financial firms: She believed that they were allocating the benefits of production away from the rightful beneficiaries. Whether we agree or not with these assertions, they are irrelevant to this discussion.)

I do, however, feel comfortable asserting that if she returned today Ayn Rand would consider eliminating the transfer of undeserved wealth to the financial sector to be a far greater and far more urgent priority than addressing her beliefs related to the social safety net.

Unless we address the destructive effects caused by making speculators and traders the highest earning class in our capitalist society, the economy will remain dysfunctional. In effect, the nightmare that Ayn Rand's philosophy anticipated for our economy is increasingly real; but because of the financial industry not the social safety net or taxes.

Here's a final thought: In Ayn Rand's Atlas Shrugged, the industrialists who create the real wealth of the society start to disappear as they go into hiding. The trains that make the society work, both literally and metaphorically, stop.

So, I have developed what we can call the Ayn Rand test of value: If securities traders and quants at investment firms and hedge funds started to disappear in large numbers tomorrow, would the trains that comprise our economy and society run better or worse?

This article in the fourth piece in my ongoing series Restoring Capitalism appearing at the New Deal 2.0 blog of the Roosevelt Institute.

 
 
 

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11:31 AM on 11/28/2011
You wrote: "This leads to a clear conclusion: Ayn Rand's philosophy is only anti-regulation because it is ultra-supportive of the capitalist ideal: The people who create the most societal wealth should receive the benefits of this contribution."

There is no such thing as societal wealth. Ayn Rand did not or would not advocate for any kind of compensation or benefit for those who create their own wealth. Her only argument is that they should be left alone by society and government.
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RobertHenryEller
a micro-bio hp can handle
03:01 AM on 11/27/2011
Thank you for this piece. I hope that the low number of comments does not reflect low readership, but I fear that is indeed the case.

I have been trying to make this case, comment by comment, since the crash in 2008, when people on both sides of the argument started invoking Rand, and misinterpreting her.

I won't say that most people should read Rand, because many might not like her style. But she clearly always advocated capitalism with the assumption that real products and services delivered real value to the customer in exchange for what they paid. It was only on this assumption that she defended producers right to the profit from their efforts.

Rand would have recognized people like Jobs and Gates as capitalists. She would not have recognized the heads of Goldman Sachs, AIG, etc., as capitalists, but only as profiteers, taking as much as they can while giving as little as they have to.

Rand would have been against bailing out the banks, and would have insisted on letting them go bankrupt. She believed in the downside as well as the upside for real capitalists.

Restoring real capitalism should be the ultimate goal of OWS, and all Americans who understand and appreciate what real capitalism is. It is the practice of that capitalism that delivered past prosperity, as well as a more reasonable distribution of wealth, and would again, if we can return to it.
11:22 AM on 11/23/2011
Your perspective taken in the writing of this article is commendable. You found a way to connect my fellow randroids and I with the people who are currently hating on wall street. Kudos to your ability to communicate the importance of responsibility for self and for highlighting the disappearance of integrity in trade.
However, in clear opposition to your request that this must not be brought up, it must be stated that I still disagree with the any use of force instigated - esp. by the government. But digress I do. Sorry. Bravo to a refreshing breath of air on the huff...

To excellent health, prosperity and happiness,
> Davey...
11:03 AM on 11/23/2011
This article should have stopped after about the fifth paragraph. I disagree that, if alive today, Ayn Rand "would consider eliminating the transfer of undeserved wealth to the financial sector to be a far greater and far more urgent priority than addressing her beliefs related to the social safety net." Now *that* is speculation that adds no value.
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fuel4thefire
07:09 PM on 11/22/2011
Capitalism DOES NOT guarantee our rights nor any other economic system. The Constitution and its attendant amendments guarantee our rights as citizens of the United States of America.

The Declaration of Independence: "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed;"
12:32 PM on 11/22/2011
There is no "societal wealth". Just like there is no "societal thought", "societal voice", or "societal life". Wealth is created by the individual through labor or investment of capital and therefore belongs to the individual. These whole article completely misrepresents Rand's views, either because the author is lazy (it's not that hard to find what Rand really thought) or he uses Rand's name to get attention.

The authors bemoans the "outrageous" salaries of hedge fund managers, traders, and whatnot in the financial industry and it does not occur to him to inquire who and why agrees to pay all those salaries. For every voluntary transaction there are TWO parties involved. They BOTH benefit from that transaction, otherwise they would not agree to it.

Someone here has already mentioned it but the huge sums of money being made is just a consequence of the Ponzi-type economics on the world scale. Money supply is not backed by the actual goods and services. Fiat currencies, fractional reserve banking, governmental loan guarantees and quantitative easing by the Fed to name a few are the reasons.

The implosion of the credit bubble is near. Is it gonna be Greece or Italy, or something else? Government, in the long run, always makes the economy worse. The more it stays out the better the economy will be.
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fuel4thefire
06:43 PM on 11/22/2011
The impending implosion will come as a result of multiple factors: (i) failure of highly leveraged Credit Default Swap Derivatives Market estimated at $621 trillion (ii) social upheaval in EU countries who will, and are pushing back against austerity imposed by the ECB and the IMF who are imposing conditions that would privatize vast public assets and undermine democracies (iii) interconnection of EU banks (plural) and U.S. banks which makes the contagion effect very real.
08:15 AM on 11/23/2011
I totally agree.

However you don't give the underlying reasons. I will:

(i) the CDS market is so huge because the financial system contains so much money to be insured against default. And, that is because of the fiat currency, fractional reserve banking, government guarantees of the loans that the private investors would never make. It will fail because the money insured is not backed by anything of real value.

(ii) the public has no assets, just like there is no "societal wealth". There is some wealth that was forcefully taken from the individuals who produced it. The democracies have undermined themselves when they spent the money they did not have (or, the pretend fiat money that was never backed by any real goods or services) . Upheaval and whatever else is coming is a consequence.

(iii) Agree here.

P.S. With the serious stuff out of the way the title post is the funniest one involving Ayn Rand on the web. Instead of, like the most lefties, saying how mean and heartless she was this one actually argues that Rand would support intervention into the free market to create more "societal wealth". Ha, ha.
11:57 AM on 11/22/2011
You are scary. Who is going to decide what is beneficial to society? A government agency perhaps?

I really hope that you reconsider the idea that you presented here.

Long live free market capitalism!
10:22 AM on 11/22/2011
"If securities traders and quants at investment firms and hedge funds started to disappear in large numbers tomorrow, would the trains that comprise our economy and society run better or worse?"

We had the opportunity to run that experiment in 2008. Apparently the foreseeable results frightened the ruling class across party lines and led to the bailout in the midst of a presidential campaign.

I've started to wonder if we'll look back on this in another decade and realize that they did the right thing, despite all the current grievances against the decision.
12:36 AM on 11/22/2011
Wall Streeters MOVE money around and a lot of it sticks to them.

They take crazy, ridiculous, extreme risks because their money is made in the MOVEMENT of money (brokering the financial transactions) and NOT the actual financial transactions themselves.

Put simply, Wall Streeters make money on handling the financial transactions no matter what the eventual outcome.....while the actual investors take all the risks and make or lose money.

The Wall Streeters don't have any skin in the game unless they decide to invest and then they have inside knowledge.

AND from what we have seen, IF they get into trouble, the government (aka taxpayers) will bail them out.
It is a sweet deal.
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JohnDonohue
10:42 PM on 11/21/2011
Nope.

Who is the "eliminator" in the above statement? Government. There is no case to be made that Ayn Rand would consider it legitimate for government to confiscate funds earned through voluntary trade, or favor laws forbidding such trade. Further, she would not go soft on the confiscation of funds by force to be distributed by government (a non-voluntary exchange) for safety net.

While regulation/forbidding market exchange and coercive safety net would receive the requisite denunciation in full force, it would pale in comparison to her condemnation of the destruction of money and free markets though Keynesianism, the Progressive movement, fiat money, punitive taxation, creation of two permanent classes (where previously they did not exist): 1) a large population permanently on 'social income'; and 2) a compost heap of fake money which supports the "aristocrats of pull" in business and government.

She knew that any non-productive traders -- any of them that could not produce real value in a free market -- would be destroyed in five minutes if the enabling fake-capitalism were removed. She also knew that in such a free market, sharp traders and creative financial wizards indeed deserve every penny of every dollar they make. She would "suggest" you remove the gun you introduced in this article.
08:39 PM on 11/21/2011
I've never seen Ayn Rand more misquoted and her philosophy more misunderstood and distorted than right here on Huffpo. In Ayn Rand’s philosophy the capitalist ideal is not “...the people who create the most societal wealth should receive the benefits of this contribution.” To that statement, Ayn Rand would say there is no such thing as “societal wealth.” All wealth is produced by somebody and therefore belongs to somebody, i.e. individuals. The Capitalist ideal, according to Ayn Rand, is not societal wealth but freedom...from which flows individual rights. Capitalism is the only system that recognizes individual rights: the right to life, liberty, property, and the pursuit of happiness, among others--that you have the right to exist for your own sake, that you are the means to your own ends, not the means to the ends of “society” or any one else. Capitalism recognizes that man is not a sacrificial animal...an indentured servant made to produce for others, or the “common good,” or in this case, the “wealth of society”. Wealth accrues to those who produce something of value, regardless of what form it may take. Also, to say that “profits cannot be eaten” is asinine. That’s like saying you can’t eat your paycheck....no sh**. A paycheck, like profits, is simply a medium of value storage...to be traded later for something you need--like food.
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LunaPark
Don't believe it until it's officially denied
09:59 PM on 11/21/2011
Wow, thank you for posting your response. Well done!
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fuel4thefire
06:52 PM on 11/22/2011
All wealth is not produced. In the investment banking industry fees are charged for making a transaction by the investor. Those fees are not the result of production, but of a service rendered. Additionally, bonuses are earned by the agents who facilitate the transactions. Neither case are production related. Nothing is made, manufactured, or created in a tangible 'plastic' form. Investment banks are not commercial banks. They do not exist for the common good, but for profit, for returns on investment. Also, debt is a form of slavery, thus those in debt are a kind of indentured servant who work to pay off the debt.

And finally, it is the United States Declaration of Independence that states, " We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed;"

The Constitution and its attendant amendments guarantees our rights, not capitalism nor any other form of economics.
06:03 PM on 11/21/2011
Well, no. Wealth is not necessarily *immediately* physical. Banks create wealth by routing capital to the most productive enterprises. This is a supremely valuable thing to do. At stake is whether capital (money) goes down the drain to fund things like Solyndra and failed dot-com ventures, or whether it goes to fund the production of value to consumers, such as Apple, Amazon, Google, and Facebook.

I knew Ayn Rand well. She did *not* share your view. One of her heroes was a banker. Consider this from Atlas Shrugged:

============================
Midas Mulligan had once been the richest and, consequently, the most denounced man in the country. He had never taken a loss on any investment he made; everything he touched turned into gold. "It's because I know what to touch," he said. Nobody could grasp the pattern of his investments: he rejected deals that were considered flawlessly safe, and he put enormous amounts into ventures that no other banker would handle. Through the years, he had been the trigger that had sent unexpected, spectacular bullets of industrial success shooting over the country. It was he who had invested in Rearden Steel at its start, thus helping Rearden to complete the purchase of the abandoned steel mills in Pennsylvania. When an economist referred to him once as an audacious gambler, Mulligan said, "The reason why you'll never get rich is because you think that what I do is gambling."
===========================
09:35 PM on 11/22/2011
Mulligan understood the businesses and people he was investing him. He's more akin to a venture capitalist, picking out talent and breakthrough technologies. Which of Rand's protagonists mirrors a modern-day derivatives trader?
05:48 PM on 11/21/2011
Most Objectivists would agree that our financial system is at the very least fascist. It is easily one of the most regulated sectors of the economy and the Fed has complete control of the money supply. There is no free market in money.

"Money cannot function as money, i.e., as a medium of exchange, unless it is backed by actual, unconsumed goods."
“Hunger and Freedom,”
The Ayn Rand Letter, III, 22, 3
06:06 PM on 11/21/2011
Yes, banking today is, like most businesses, deeply entrenched with government. But the attack was not based on that, so I replied to the article's basic idea: that only direct physical production is wealth-creation. My point is that the aiding of wealth-creation is itself wealth-creation.
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04:38 PM on 11/21/2011
Pretty good article.

No fan of Ayan Rand, however, you have to give credit-where-credit's-due.

"Capitalism" was never specified as a form of economic system in the Constitution and neither was "socialism", but, if "capitalism" is defended, by some, as whatever it takes to make a buck".

...then let's scrap it.

Otherwise, the United States should denoune the revolutionary war, apologize to the monarchy and rejoin the colonies under the British East India Co.
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Tony Duhon
usually just s.m.h........
06:38 PM on 11/21/2011
Seems the only thing needed scrapping is the deviant securities trading. Just make it illegal. Bring investing 100% back to actual stock trading and investing into American businesses that create and DO stuff. I'm extremely over-simplifying...but...it's a start.
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08:11 PM on 11/21/2011
You're right.

However, once Glass-Steagall is restored, and I'm hoping it will be, Investment Banks will be pretty much wipe out, because pensions and retirement accounts will be gone too.

Therefore the government will have to inaugurate a credit system, one that doesn't rely on the bond market, to make the great investments necessary to rebuild the economy.