The Curiosity Seekers: Modern Economics Is Irrelevant to Life

When I was an economics undergraduate in the 1980s, I learned an astonishing “joke” among economists: “Torture the data and nature will repent.” My professor, a Chicago School economist who studied under Milton Friedman, used the joke to illustrate how a clever economist armed with the tools of statistics can “torture” the data to reach any conclusion he wished. My professor was an “empiricist” economist.

The other type of economists I encountered taught my classes in Keynesian macroeconomic theory. They spun intricate, mathematical theories divorced from the real world. They were the “theorists.”

Both approaches resulted in “conclusions” that, if they had anything to do with reality, it was only by smuggling in a better approach. Otherwise, the questions asked and answered by these economists were as relevant to human life as the questions debated by a group of peasants standing around a well in the Middle Ages or by a group of scholastic monks peering down at them from their monastery up the hill.

Now we have an article entitled “International bright young things” (The Economist, 12/30/08), which highlights the best and brightest new economists, as selected by their mentors.

One who calls herself a “randomista” uses randomized trials to answer economic questions. She recently demonstrated that “mothers in the Indian state of Rajasthan are three times as likely to have their children vaccinated if they are rewarded with a kilogram of [lentil beans].” The article wonderingly asks, “[who knew] such a modest incentive (worth less than 50 cents) [would] make such a big difference?”

Another has “proven” that regressive inheritance subsidies [that means subsidies for those who receive inheritances] would “take the edge off…the uncertainty” that results from the “biggest roll of the dice in life [which is] the family you are born into.”

Yet another “shows” that government must provide enough unemployment benefits so that “[t]he unemployed decide that an unhurried job search is worth the extra cost of depleting [their additional funds].”

Armed with rigorous tools of statistics and mathematics, and powerful computers, these economists are spinning their wheels answering questions about… nothing.

But they are missing the most powerful tool, the one that will give them the proper method and purpose for their efforts. Without that tool, these practitioners of a vital science have become seekers of unimportant curiosities at best and diminutive statist nostrums at worst.

That tool is a rational philosophy. Every scientist is guided by a philosophy that tells him what is the proper subject of study and how that knowledge can be gained. Today's economists are sorely in need of a rational philosophy, one that will point them to subjects that are more than a handful of lentil beans in importance, and to research methods that are more effective at discovering enduring principles than the randomista's spin of the wheel.

A philosophy like that exists. See Ayn Rand and her philosophy of reason called Objectivism.

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I originally posted a version of this piece on the Harry Binswanger List forum.

Greenspan the Pragmatist

The article below is reprinted with permission from the Ayn Rand Institute. My comments follow.

Greenspan Has No Free Market Philosophy

October 24, 2008.

Washington, D.C. --Opponents of the free market are giddy at Alan Greenspan's declaration that the financial crisis has exposed a "flaw" in his "free market ideology." Greenspan says he is "in a state of shocked disbelief" because he "looked to the self-interest of lending institutions to protect shareholder's equity"--and it didn't.

But according to Dr. Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, “any belief Greenspan ever had in truly free markets was abandoned long ago. While Greenspan long ago wrote in favor of a truly free market in banking, including the gold standard that such markets always adopt, he then proceeded to work for two decades as leader and chief advocate of the Federal Reserve, which continually inflates the money supply and manipulates interest rates. Advocates of free banking understand that when the government inflates the currency, it artificially increases prices and causes booms in certain sectors of the economy, followed by inevitable busts. But not only did Greenspan lead the inflation behind the dot-com bubble and the real estate boom, he blamed the market for their treacherous collapses. Greenspan should have recognized that what he wrote in 1966 of the boom preceding the 1929 crash applied here: ‘The excess credit which the Fed pumped into the economy spilled over into the stock market--triggering a fantastic speculative boom.’ Instead, he superficially blamed ‘infectious greed.’

“Should it be any shock that Greenspan now blames the free market for today's meltdown--rather than the Fed's policies, which fueled an inflationary housing boom, which rewarded reckless lenders and borrowers from Wall Street to Main Street? Greenspan didn't mention the word ‘inflation’ once in his testimony.

“Whatever Greenspan's economic philosophy is, it is not anything resembling a free market.”

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Galileo Blogs comments:

I agree with this editorial. Greenspan's testimony on Thursday and his track record in government, particularly as Federal Reserve chief, reveal that he has abandoned a proper economic understanding of capitalism, if he ever had one to begin with. It is difficult to imagine that the man who wrote an article in the 1960s advocating gold-backed money issued by private banks entitled, "Gold and Economic Freedom," in Capitalism: The Unknown Ideal is the same man who flooded our economy with cheap money (such as 1% interest rates), and then failed to acknowledge that such cheap money is the root cause of both the Internet and the housing bubbles.

Instead, he humbly sat before a Congressional witch-hunt committee and joined the chorus in declaring that "self-interest" is the cause of the economic meltdown. What explains Greenspan's meltdown? That is what I will explore here.

Greenspan's congressional testimony and the statements in his recent autobiography show that that it is unlikely that the man who penned the article, "Gold and Economic Freedom," ever properly grasped the principles of capitalism and the moral principles that underlie it, or else he abandoned those principles long ago.

In his autobiography, Greenspan made two interesting revelations. First was the ostensive reason he gave for abandoning the edifice of Objectivism, the philosophy developed by Ayn Rand, which he also advocated in the 1960s. His reason was that he could not understand how capitalism could be financed through voluntary means, i.e., without coercive taxation. The second revelation is Greenspan's declaration that everyone is motivated by a desire for the admiration of others. I will show how both of these views of Greenspan shed light on the collapse of his legacy which reached its apotheosis in the excoriation he faced on Thursday at the House hearings on the financial crisis. To start, I will sketch some elements of Objectivism.

Objectivism is the only philosophy that provides a proper moral foundation for capitalism. That foundation consists of the morality of rational self-interest, which is based on a scientific examination of the requirements of man's survival. Underlying the approach is a commitment to reason, the method of using logic and the evidence provided by our senses to learn what is true. Reason requires the ability to think in principles. (I recommend Ayn Rand's books, The Virtue of Selfishness and Capitalism: The Unknown Ideal, for further explanation. In particular, I recommend the articles in those books entitled, "The Objectivist Ethics," "Man's Rights," "What is Capitalism?", "The Nature of Government," and for the discussion that follows below, "Government Financing in a Free Society.")

The method of thinking in principles is what Mr. Greenspan apparently failed to properly learn. A principle, once properly understood, applies to all instances of a phenomenon. A key principle in Objectivism is the right to property. Properly understood, this means that any person who trades for or creates wealth, gets to keep it. No one, including government, has the right to violate the rights of a property owner by using force against him to take or harm his property or person.

Because government cannot use force against its citizens, this means that it is immoral for government to forcefully expropriate property through taxation, regulation, or any other means. No society truly respects the rights of its citizens if its government employs coercive taxation.

This argument begs the question that apparently tormented Greenspan of how government can possibly finance its expenses through a voluntary means. Ayn Rand answered this question in her short essay entitled, "Government Financing in a Free Society." Ayn Rand makes the case that a government can be practically financed through voluntary means, but only if government had already been shrunk down to its legitimate functions. This means that government would only be spending money on the legitimate functions required to protect individual rights, namely the police, the courts, and the armed forces.

In the context of today's government, this means abandoning all forms of "income transfers" and welfare spending, including Social Security, food stamps, agricultural and business subsidies, "pork barrel spending," and so on. All of these programs entail violating the rights of some individuals as their property is stolen from them and then transferred to other individuals. This widespread government theft that must stop before a system of voluntary financing could even be contemplated.

The reason is not that hard to understand, and partially involves simple arithmetic. Government spending today consumes between 40% and 50% of gross domestic product. Such a heavy burden can only be financed through the expropriatory process of taxation. No voluntary system could work, nor would anyone be willing to make it work, if nearly half of his income went to fund every chiseler, con-artist, widow, orphan, sick person, and corrupt businessman around him. But if all such spending were eliminated, government expenditures would be an order of magnitude less expensive. They would probably consume just 1%-3% of gross domestic product. However, this state of affairs could only happen after a successful revolution in thinking has taken place over the span of decades, just as the original American Revolution did not happen until many decades after the first ideas underlying it were advocated.

This is the state of affairs that must exist for voluntary financing to work. Ayn Rand made this eminently clear in her article. Greenspan was part of a circle of students of Ayn Rand's in the 1960s. He spoke to her often and could have questioned her if any part of her argument was unclear.

Yet in his autobiography he blithely dismisses the edifice of Objectivism because of this single issue. His dismissal is off-handed. Unspoken but implied in his dismissal are the words, "But of course, how silly is it that anyone can take such an idea seriously." Well, anyone who has studied Ayn Rand's writings, seen or heard her speeches, or were so fortunate as to have known her in person, knows just how seriously Ayn Rand took all of her ideas.

Instead, what Greenspan reveals by his comment is that he did not take her ideas seriously, or perhaps more accurately, he did not take her ideas properly. By properly, I mean that he did not fully understand Objectivism as an integrated system of principles. The methodological essence of Objectivism (or any true body of thought), is that it is a statement of principles. Proper principles are validated by reference to facts and to each other.

Bearing that in mind, the issue of government financing is one of the last principles, i.e., the one furthest removed in time from all other aspects of her philosophy. It is almost an act of science fiction imagining at this point in time to demand that every last detail of a system of voluntary financing of government be worked out now before every other aspect of laissez-faire capitalism has been validated and put into practice.

The point is not that such a system of financing is impractical. It is practical. The philosophic case for it has been made, and the essence of its practicality is clear. For details read Ayn Rand's article, but I will just mention two points. First, with government properly confined to its legitimate roles, it would require very little money to be financed, compared with either the gargantuan level of today's government spending, or compared to the enormous productive potential of a future laissez-faire capitalist economy that would finance it. A future laissez-faire economy would be many times wealthier and more productive than today's hampered mixed-economy, and could easily provide the small amounts required to operate government's legitimate functions.

Second, Ayn Rand proposes at least one effective mechanism that would easily fund such a relatively small burden. That method is a simple fee paid for government enforcement of contracts. It would be calculated as a small percentage of the value of contracts. Enforcement of contracts is a core function provided by government in its role as protector of property rights. Such a voluntary fee, paid by those who want government to enforce their contracts, could fund all of government, including the courts and jails, and even a military.

Case made on this issue of the far future; today it is time to focus on more immediate issues such as the case for capitalism and against government intervention, which includes government manipulation of money (as discussed in Greenspan's article, "Gold and Economic Freedom") and all other interventions.

But Greenspan in his autobiography stated that he was unsatisfied with Ayn Rand's argument for voluntary financing of government, and this is the reason why he abandoned Objectivism.

Taking him at his word, this is a failure to properly understand and think in principles. If Greenspan were convinced of all the prior and more fundamental arguments for reason, and then for rational self-interest, and then how rational self-interest forms the moral base for capitalism, and then how capitalism is the only moral and practical social-economic system for man -- if he were convinced of all that, then how could he abandon it because he had reservations about Ayn Rand's thoughts regarding the voluntary financing of government, an issue that is last in this hierarchy of principles?

If Greenspan properly thought in principles, and properly understood the principles of capitalism, he would never have committed such an incredible thinking error.

Greenspan's failure to think in principles is revealed by the other comment he made in his autobiography. He said that everyone is essentially motivated by a desire for admiration by other people. Again, if he understood The Fountainhead and Atlas Shrugged, he knew that this idea is exactly what Ayn Rand denounces. Ayn Rand makes it clear that a person should be motivated solely by his evaluation of what is in his rational self-interest. Therefore, a person must have integrity for his principles. Therefore, the only admiration a person may value is that from people he himself admires, i.e., people who share his values.

But in his autobiography Greenspan states that one seeks the admiration of others, implying that the admiration of "the public" is a good thing. From which members of the public does he want his admiration, from the congressmen who grilled him at Thursday's hearing, such as Representative Henry Waxman? These are the same men who unbelievably denounced "deregulation" as the cause of the current economic crisis (which was actually caused by regulation), and who have demanded (and enacted) caps on the salaries of executives as part of the solution because "greed" and "selfishness," according to them, are the true causes of this crisis. Are these the people from whom Greenspan seeks admiration? Or is it from magazine editors, such as the Newsweek editors who placed him on the cover of their magazine as a member of "The Committee to Save the World"? Or, is it from Bob Woodward, the author of the glowing biography that calls him Maestro? Are these people, all of whom have always thought capitalism and self-interest are dirty words, the ones he wants admiration from?

Ayn Rand has colorful characters such as Peter Keating and Ellsworth Toohey in The Fountainhead, and James Taggart in Atlas Shrugged, and many others, who demonstrate in negation that a person must be of self-made soul. Just where is the soul of Greenspan?

In the final analysis, I believe that Greenspan never did properly think in principles. As a result, he allowed flawed ideas to gradually creep into his thinking so that the young man who circulated with Ayn Rand and wrote his brilliant economic essays in the book, Capitalism: The Unknown Ideal, never really grasped those ideas, and eventually allowed their opposite to germinate in his mind. The particular name of Greenspan's failure to think in principles is pragmatism.

The result of Greenspan's pragmatism was the sad spectacle of this seemingly broken 82 year old man knuckling under to the ignorant Congressional bullies. These are the same bullies who used their podium to hound many great, and not-so-great, captains of industry. They are the same bullies who hounded yesterday the man who could have been their defender. He is the man who either sold his soul, or never properly built it, and therefore gave it away in the pursuit of admiration from those who read Newsweek and vote for Representative Waxman. Yesterday, he sat crucified by these same people.

If I display contempt for Greenspan, it is only because I am jealous of someone who had such an unparalleled opportunity to learn from the great thinker Ayn Rand, and who squandered it and ultimately did worse. He sat at the foot of the congressional inquisitors and agreed with them that "self-interest" is the cause of the current crisis. In that moment, one can almost envision him holding a tattered newspaper in the rain, with a dirty boot print stamped over the face of someone he once claimed to have admired. However, instead of that being Gail Wynand holding the newspaper image of Howard Roark in the movie version of The Fountainhead, it is someone else kneeling in the rain holding a tattered newspaper. A different face appears on the front page.

One must never sell his soul, but to avoid doing that, one must build it on a foundation of properly understood principles.

Ignorant Billionaire Fashions Noose

Karl Marx once said, “The last capitalist we hang shall be the one who sold us the rope.” Bill Gates has been selling long stretches of that rope lately. In his speech today at the World Economic Forum, a gathering of leading businessmen, politicians and aid officials, Bill Gates said, “We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well.” He went on to exhort fellow business leaders to devote their personal time and energy to finding ways of helping the poor.

Admittedly, Gates calls on executives to serve “a twin mission” of “making profits” while simultaneously “improving the lives of those who don’t benefit from market forces.” Just how businessmen are to make profits in regions, such as the Third World, that have essentially outlawed market forces is not explained.

Gates’ premise in these statements is that capitalism serves only the rich. Moreover, capitalism, on its own, is incapable of benefiting the poor.

This premise is dangerously wrong. A clear-headed reading of economic history, a clear understanding of economic science and, most importantly, a proper understanding of philosophy, will prove the correct point. Economic history tells us that capitalism is the only system that radically lifted the standard of living of the poor, such that today’s poor in Western, industrialized, semi-capitalistic countries are far wealthier than even the rich of the Middle Ages or ancient times. Their lifespans have more than doubled, they have comforts such as air conditioning and heat and entertainments such as television and the Internet that no one could have imagined in ancient times. These advances did not materialize out of thin air. Rather, they were the result of capitalists who made billions by inventing and selling the life-enhancing and labor-saving devices that improved human lives, such as vaccines, mass-produced automobiles and food, and electricity. High on this list is the benefit of mass-scale, low-cost computing that Bill Gates himself helped to pioneer.

Economics tells us that all wealth must be created by profit-seeking businessmen, or at the very least by self-interested individuals pursuing their own benefit. Without profits, businessmen lack both the incentive and the means to create. Factories are not built out of thin air, nor are salaries paid out of thin air. The accumulated capital borne of profits pays for the creation of factories and the goods those factories produce.

Bill Gates is also ignorant of philosophy. Philosophy teaches us that certain conditions are required for men to exert the effort required to produce goods. Specifically, production depends on having secure property rights, which means the right to make an unlimited profit. Together, philosophy and economics teach us that one man’s gain is another man’s gain, if everyone deals with each other through the principle of trade. This means that no one can use force to steal the wealth of another. Underpinning the right to property and the principle of trade is every person’s right to his own life, which means the right to use his own mind to produce the things he needs, without interference from others.

Bill Gates is not explicitly calling for stealing the wealth of the rich in order to give it to the poor. He hopes, somehow, that businessmen can serve “a twin mission” of “making profits” while simultaneously “improving the lives of those who don’t benefit from market forces.” But isn’t that what businessmen already do today, at least to the degree to which countries respect property rights and allow them to earn a profit?

What Bill Gates is calling for, without explicitly naming it, is for businessmen to give away their wealth and personal energy the way he has to corrupt Third World countries where it is all but impossible to earn a profit. Where businessmen can serve the twin masters of making a profit and helping the poor, they are doing it already. They do it simply by selling their goods for a profit. Isn’t that what Coca-Cola or McDonald’s or Microsoft (to name three products widely enjoyed by both the poor and rich in Western societies) are already doing in Europe, the United States and Japan?

Capitalists are not selling products in Africa because they are subject to the arbitrary vagaries of dictatorial governments that will steal their wealth at every opportunity. They will steal their wealth through arbitrary and confiscatory taxation, nationalizations, inflation and, endemic throughout the Third World, Mafia-style extortion and bribery demanded to do business. Property rights are an unheard-of concept in the Third World. They are violated every day, egregiously, with one consistent result: massive poverty and frequent episodes of death due to disease, starvation and mass murder.

The only cure for all this is one thing: capitalism. But capitalism is what Bill Gates is setting out to destroy whether he intended to or not. Bill Gates is destroying capitalism by smearing it with the Marxist falsehood that it only serves the rich and does not help the poor. Bill Gates cited a laundry list of books that have influenced him, some of which are quite good, such as the writings of the economists Adam Smith, Julian Simon and Hernando de Soto. However, the one author who best explains the roots of capitalism, and therefore the roots of prosperity, is the one not mentioned: philosopher/novelist Ayn Rand. I would commend to him, at a minimum, her novel Atlas Shrugged, and her collection of essays, Capitalism: The Unknown Ideal, if he wishes to learn what it truly takes for individuals and societies to become wealthy.

What Bill Gates doesn’t get is that wealth is only created through the productive efforts of businessmen. Businessmen and everyone who benefits from their products – i.e., all of us -- need capitalism, the system based on the recognition of the right to property and its root, a man’s right to his own life. Bill Gates just doesn’t get it, and the world is poorer as a result.