Ayn Rand Response To Economic Crisis

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Permalink Reply by Chip on July 6, 2009 at 10:13pm

There's no need to wonder about this as there's plenty of information available on the web. Go to this page (http://www.aynrand.org/site/PageServer?pagename=media_new) and click on "ARC's Response to the Financial Crisis" for answers to your specific question.

A quick summary is that Objectivists believe in the complete separation of state and economics, but, as that is not currently our state of affairs, it will take work by rational government officials to mitigate and dismantle the current problems that have been created by government intervention.

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Permalink Reply by Nathan Andover on July 7, 2009 at 12:02am

Well, I visited the link and read a few of the articles. The impression I got was that it was all government's fault and so the solution is for government to get out of the market almost completely - if not absolutely completely according to some of the articles.

The problem I have with this is that there is no recognition from these Objectivist writers that the fault for the financial crisis can also be placed on private companies and individuals. Both government and private companies made huge mistakes that led to the current problems. By not admitting or recognizing the problems in the private sector, their answer is to reduce government and allow the private sector to be free to operate our economy.

The big banks made huge irresponsible bets in the derivatives market. The government did not force them to do this. If the banks were rational economic actors, they would have seen the risks in the investments they were making. However, the stock market told many private companies to keep chugging along. Many executives made short-term decisions based on inflating their stock price instead of making sound economic decisions for their companies.

Also, even if there was no government involvement in the economy, I think we still would be in a similar situation. China, Brazil,, India, etc... have rising economies with excess cash. The oil countries also have excess cash to invest and lend. America has been the destination of a lot of this money. Both to private banks and to the government itself. If there was no government involvement in the economy, the private banks would still be flush with cash from overseas investors. Americans still would have had access to large amounts of capital and the bubble still would have been growing until it burst.

To say that this was all government's fault, seems to avoid the facts. The government certainly wasn't innocent in this economic crisis, but neither were private companies and individuals.

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Permalink Reply by James Scott on July 8, 2009 at 11:11am

We seem to have two issues here.

The first is the question being asked which is should the government step in to try to limit the damages of an economic bust.

The second is whether government should be involved with the economy at all.

The answer to what government should do during an economic crisis is directly tied to the answer to the first question. Since Objectivists don't want governments involved in the economy, they also won't want them involved in solving an economic crisis.

This is where I don't agree with Objectivists. I think there is a role for government within the economy. I don't want a company like Enron to have the ability to manipulate energy markets while misleading investors. If there is a private way to accomplish this, I am ready with open ears and eyes, but government has been the main actor in providing this oversight. Unfortunately, the Bush Administration was closely tied to the Enron leadership and oversight was lax.

As Nathan said, there has to be a balance. If government control is too tight, there will be fewer boom and bust cycles, but there also will be fewer risks being taken with fewer innovations. If government control is too lax, then corruption will be rampant and boom/bust cycles will be more extreme.

Since I agree with the need for government involvement in the economy, I also agree with the ability for government to be involved in the solution to an economic crisis. Both in terms of prevention and in terms of crisis management.

In terms of prevention, I like policies that make public financial institutions both transparent and accountable. There should be limits and penalties for insider trading, misleading stock holders, etc... I also like limits on the extent of speculation in our financial markets. Companies shouldn't be able to make crazy short term bets to inflate their books and stock prices while knowing there is no way they will be able to repay their bets.

I also think something needs to be done about companies who knowingly inflate the price of a commodity in order to create a buying frenzy that can be cashed in before the bust. This is similar to the standard pump and dump stock scheme which is now illegal. There are reports that Goldman Sachs did this with oil prices last year. A barrel of oil is traded an average of 27 times in the financial markets before it reaches the consumer. Should everyone be forced to pay higher prices for oil because a financial company is operating a scheme to create short term profits for themselves. This type of speculation and artificial price inflation does not support the idea that capitalism produces accurate pricing from rational actors making rational decisions.

In terms of crisis management, I also believe government has a role to play. No matter what the reason is for the crisis, the situation usually presents itself where the public has stopped spending, businesses slow down due to no consumer demand, and this continues to spiral downward. If there are no jobs, people will spend less. If there is less spending, businesses will have to fire more people.

One way to counter this is to increase government spending to put a dose of demand in the economy. The alternative seems to be letting the economic spiral continue downward. I agree that there needs to be a certain amount of creative destruction to shed the excessses of an economy, but sometimes an economic crisis will sprial so far down that damage is being done that is well beyond the "creative destruction" of capitalist markets.

I think recessions are healthy for an economy, but I don't think depressions are. Depressions put the economy in danger both in the short term and in the long term. Too many depressions and people will be ready to scrap captialism all together. This would be a bad thing. I think capitalism is greatly assisted by a government that curbs its excesses. I don't want a government that is strangling economic acitvity, but I also don't want an economy that has no limits allowing corruption, destructive short term decisions, oligarchic wealth distribution, and wild swings of boom and bust. I don't think capitalism will remain as a viable economic system in the eyes of most people if it is allowed to operate without government involvement. In addition to the very good things capitalism presents, there must be a recognition of the bad side of capitalism in its pure form.

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Permalink Reply by Chip on July 11, 2009 at 12:58pm

Yes, Objectivists believe in the complete separation of government and economics. I won't try to convince you of why that is the proper form of government now, but will simply state that there are free market solutions to all of the problems mentioned here, including boom and bust cycles, working conditions, irrational risk taking, and trade/cash imbalances. The solutions include how a free market would respond to correct some of these situations and prevent others from happening in the first place. Besides these technical answers, a defense of the separation of government and economics involves understanding the moral basis of capitalism. Obviously another big topic, so I need to stay focused here or this will become a treatise.

My purpose in this post is to respond directly to the logical fallacies about Objectivism in Nathan's original post and repeated by James in his comments.

1) "I believe [Objectivists] would have done nothing since they don't believe in government involvement in the economy other than to protect private property rights."
It is true that this is the ideal state of government described by Objectivists. We are obviously very far from this ideal now as the government plays a significant role in many industries; including the financial markets, housing, and health care. From what premise do you draw the conclusion that, once statists put these types of policies in place, an Objectivist would not support taking action to remove them? If we had rational politicians in office today they could take action to both stop the current downward spiral and reverse the overall progression towards big government that caused it. Objectivists would support these actions. Instead we've seen actions that have not fixed the problem and moved us further in the direction of what caused it in the first place. This is why Objectivists are against the current actions of our government, not becasue they are agasint action as such.

2. "Would an Ayn Rand supporter really encourage the country to go through a depression in order to stay true to their economic philosophies?"
This type of ad hominem attack has no place in a rational chat about economics. It rests on the conditions that a free market leads to a depression, Ayn Rand supporters agree with this conclusion, and Ayn Rand supporters will stay committed to an idea that does not work in practice. On point 1, we obviously disagree and could discuss that here. On point 2, you know we disagree, but still imply that we don't. And on point three, Objectivism specifically rejects this type of attitude. Ayn Rand colloquially referred to her philosophy as "a philosophy for living on Earth." By this she meant having a set of principles that are effective in guiding our actions to create a good life for ourselves in this world. So would Objectivists cling to an idea that would lead to depressions? Definitely not. So how can they keep promoting their ideas in these tough economic times? Because capitalism did not fail. A mixed economy with strong elements of government control did. And that brings us back to the economic debate at hand.

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Permalink Reply by Nathan Andover on July 11, 2009 at 4:05pm

Ok, I agree that Objectivists would want to do something while the economy is in a downfall. I shouldn't have equated opposition to an economic stimulus plan with doing nothing.

I'm surprised that the idea of doing something is to get government out of the economy while the economy is spiralling downward. A person would have to be really sure of their philosophy and economic theory to execute the Objectivist plan. Of course it also matters how much Objectivists would try to separate the government from the economy during an economic crisis.

I don't agree with the idea of removing democratic oversight and involvement in the economy at any point. I think capitalism needs to be balanced by democratic forms of government involvement.

I don't mind "rational" politicians making "rational" decisions about what works and what doesn't work in terms of government involvement. (Although one of my problems with Objectivist philosophy is the idea that people are able to make rational decisions that will lead to a well functioning economic system. People are not rational. We are emotional, greedy, lazy, easily swindled, and rarely logical. This might be a good topic for a separate discussion.) I am more than open to ending any government program that does more harm than good. There should be an open and ongoing debate about this.

I would like to hear more about Chip's idea that there are market based solutions for some of capitalism's problems. Even without government involvement, I think capitalism and market based decision making leads to several problems. This is a tough point to make in this paragraph and probably also needs its own discussion thread.

I guess my main approach for now would be citing history. It wasn't the market that stopped abusive labor practices, it was government regulation. It wasn't the market that stopped rampant pollution by companies, it was government intervention. It wasn't the market that stopped insider trading and pump and dump schemes, it was government intervention. In all of these cases, the "market" told companies to make as much profit as possible by using cheap labor, dumping pollution instead of paying to process it or avoid it, and manipulating the stock market. Maybe these things would have been solved by the market at some point, but I'm glad government took action instead of waiting.

Even in the best economy, I don't support the idea of completely separating government from the economy, but I really don't support this idea during a potential deep recession or depression.

I asked the question, "Would an Ayn Rand supporter really encourage the country to go through a depression in order to stay true to their economic philosophies?" because I think the economy will get worse in the short term unless government takes action. I think it is a very reasonable question to ask.

I would rather have an Objectivist leader do nothing rather than taking Objectivist action during a recession. I think not spending government stimulus money to create demand would in itself lead to a worsening economic climate, but taking steps to remove the government from the economy would have terrible short term effects.

If an Objectivist leader, with the goal of improving capitalism and the economy, were to start removing government intervention during an economic crisis, I think the economy would worsen much more in the short term. The damage done would depend on the size and speed of the Objectivist leader's plan. If the plan involves cutting government involvement such as unemployment benefits, medicare, social security, etc... then these actions would make the depression worse.

The Objectivist leader would be betting that the objectivist philosophy of removing government from the economy would lead to a more robust and stable economy in the long-term, but the country would suffer through a deeper recession in the short term with the long term benefits up for debate.

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Permalink Reply by James Scott on August 2, 2009 at 9:09am

Interesting conversation. Thanks Nathan and Chip for participating.

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