Ayn Rand

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.



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 "Objectivist"), 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 real 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 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):


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 was now widely shared.

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, providing the highest rewards to those who create nothing, is antithetical to a capitalist economy. 


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.


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, Bloomberg reported on the findings of a federal government report, stating:


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.




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 originally appeared at New Deal 2.0. Copyright 2011.