Restoring Capitalism: Why Atlas Shrugged

As the dysfunctional nature of our economy becomes increasingly 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 1950s as an outgrowth of the philosophical system 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 statement Ayn Rand makes in her interview with Wallace which she stressed repeatedly  is 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 tale, 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 tenet 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 do not begrudge the wealth earned by successful, risk-taking innovators like Michael Dell, Jeff Bezos, the late Steve Jobs, or Ross Perot.

In effect, 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, Rand’s philosophy points out that real capitalism is no longer enforced in America; 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 while traders who 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, but also 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.” 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 percent of all buying and selling of U.S. equities. Does any of this add to our societal wealth?

Some Economists openly wonder whether our financial services sector actually destroys, instead of creating, societal wealth. In December 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 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 going 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 in return.

Moreover, the wealth now inappropriately channeled to Wall Street is harming our society in a myriad of ways: First, money inevitably leads to political power 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 and 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, Bloomberg reported 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 our nation’s limited resources 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 “Objectivist” 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, Rand would consider eliminating the transfer of un-earned 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 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 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?

About Bruce Judson 9 Articles

Affiliation: Yale School of Management

Bruce Judson is a Senior Faculty Fellow at the Yale School of Management, and the author of the forthcoming book, It Could Happen Here: America on the Brink, which will be released by HarperCollins on Oct 6, 2009.

Judson is a bestselling author, a successful entrepreneur, and one of the nation’s leading experts on how technology has transformed the workplace. His interest in economic inequality, and intense study of its implications, arose from his experience in seeing how the benefits of the technological revolution were being divided within the nation.

Judson holds a JD from the Yale Law School and an MBA from the Yale School of Management. He was the Co-founder and Editor-in-Chief of the Yale Journal on Regulation and a Senior Editor of the Yale Law Journal.

Judson’s books have been selected by multiple entities in the “short lists” of the best business books published in the year of their release, and his previous book, Go It Alone!, is believed to be the only non SBA book ever recommended on the learning home page of the Small Business Administration’s Web site.

Visit: Bruce Judson's Blog, Website

1 Comment on Restoring Capitalism: Why Atlas Shrugged

  1. The thing you are forgetting is the First principle behind Ayn Rand’s philosophy. While you are correct in stating that the financial markets add little social value, the answer is not to regulate them. The answer would be to let those that would fail, FAIL. By bailing them out, we have LEGITIMIZED them.

    When a free market is truly working, everyone is free to make their own financial decisions, but more important than the simple ability to choose is the IMPACT of the choice. Now, we know, if we make bad decisions, we can protest and the government will help us out. Not everyone is suffering because of this recession/depression: only those who failed to anticipate the consequences of their action. There are plenty of people who recognized the fragility of A)the housing market and B) the financial markets who did not suffer nearly as severely. The first principle is that when you know there is no safety net, you will use your brain more. And trying to impose a safety net is not only ineffective, as you have seen over the last few years, but also a direct challenge to the PRODUCERS of society.

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