Lion of the Blogosphere

The prophets: Ayn Rand and Adam Smith (libertarian economics part 2)

Libertarian economics, like other religions, has its prophets.

AYN RAND

The most important prophet, the equivalent of Jesus, is Ayn Rand.

Now I can hear some people saying that Ayn Rand is a novelist and not an economist, and that no one really takes her seriously. And she didn’t even consider herself to be a libertarian, she said she was an “objectivist” (whatever that means).

Nevertheless, her books have been more widely read than anything else related to libertarian economics. If a libertarianist politician is likely to cite anyone for inspiration, it is more likely to be Ayn Rand than anyone else.

As far as people taking her seriously, people take the Bible seriously even though it’s just as much a work of fiction as The Fountainhead or Atlas Shrugged.

Of her two biggest novels, Atlas Shrugged is the most dear to libertarianists because the message is easier to understand. Atlas Shrugged takes place in a dystopian retro-future where communists have taken over the government of the United States and all other countries; consequently the country and the world are going to hell (somewhat literally since the dystopian retro-future of Atlas Shrugged is the equivalent to Christianity’s Hell, a divine punishment for violating the laws of libertarian economics). Because of the evil policies of the communist government, what is potentially the greatest invention ever, John Galt’s free-energy perpetual-motion engine, cannot be developed and manufactured. (Except in Galt’s Gulch, a hidden valley in the Rockies where the heroes of the book go to form a perfect libertarian society free from government interference.)

The other lesson from Atlas Shrugged is that the value that people create is directly related to how much money they make. Thus when Hank Rearden, the billionaire industrialist leaves society to move to Galt’s Gulch, everything that his company was doing disintegrates, because all of his factories, and the engineers who worked from him, are useless without Hank Rearden to tell them what to do. (In the real world, big companies do just fine after their billionaire founders leave.)

ADAM SMITH

Adam Smith is the world’s first economist. He is to be given much credit for trying to scientifically understand and explain the economy of the 18th century.

Libertarianists believe that Adam Smith was a proponent of laissez-faireism because he explained that the “invisible hand” guides the economy in the absence of government regulation. To quote Wikipedia:

The invisible hand is a metaphor used by Adam Smith to describe unintended social benefits resulting from individual actions. The phrase is employed by Smith with respect to income distribution (1759) and production (1776). The exact phrase is used just three times in Smith’s writings, but has come to capture his notion that individuals’ efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society

It needs to be pointed out how vastly different the economy of the 18th century was compared to the economy of today. There was no electricity, no internal combustion engine, no land transportation faster than a horse, no long distance communications except for letters carried by horse-drawn carriages. The large corporations of today were impossible without those enabling technologies. The largest business enterprises of the time were what we would consider small businesses today. The kind of monopoly power that big corporations have today simply didn’t exist in the 18th century. As I’ve pointed out before, Michael Porter’s classic book “Competitive Strategy” is a better guide to understanding the modern economy than anything written by Greg Mankiw.

* * *

It should be noted that Adam Smith himself wrote in The Wealth of Nations:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Thus Adam Smith realized that without government interference, market participants will attempt to circumvent competition, and often succeed at it.

Written by Lion of the Blogosphere

October 8, 2015 at 12:01 am

37 Responses

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  1. My favorite economic text is The Little Red Hen.

    destructure

    October 8, 2015 at 1:24 am

    • This story is a communist fantasy in which the workers enjoy the full fruits of their labor, while the landlords, capitalists, and bourgeois get nothing.

      But in real life, the farmer and the miller get the biggest slices of bread, because they own the land, the seed, and the mill. The dog is given bread by them to enforce property rights in the barnyard. The cow is enslaved, just like the chicken, but given grain to produce a valuable commodity that the farmer enjoys and sells to the miller.. The cat and the rat are the lumpenproletariat, stealing and killing happily to survive. Meanwhile the iron law of wages dictates that the little red hen will only get enough bread to survive and produce the next generation of hens, no matter how much bread she bakes.

      another commenter

      October 8, 2015 at 8:50 pm

  2. Don’t forget to mention that sacred cow of libertarianism, “natural rights.”

    Melian Dialogue

    October 8, 2015 at 2:04 am

  3. You should also tackle the gold standard as the idols of libertarian religion.

    NotWesley

    October 8, 2015 at 2:28 am

  4. So much wrong here.

    Atlas Shrugged isn’t ‘retro-future.’ It was written to take place in the present day in 1957.

    The economic regulation in Atlas wasn’t an imaginary communist take-over of the government, it was all made up of actual present economic regulations. They’re unimaginable today because the reforms of the 1970s and early 1980s reversed America’s red decades. What was libertarian back then is just common sense today. That’s why today’s libertarianism doesn’t have much to say about economics.

    Also, Adam Smith wasn’t the first economist. Aristotle coined the word two thousand years before The Wealth Of Nations. Smith was the first modern economist whose work still matters.

    Also, there were huge corporations in the 1700s. The East India Company was comparable to major multinationals of today in scale relative to the world population of 1776.

    behiker57w

    October 8, 2015 at 5:31 am

    • I was also going to chime in on large corporations in that area like East India and Hudson Bay.

      What is significant about them is they enjoyed monopoly power via government fiat.

      It is not clear to me that this was a bad thing.

      karlub

      October 8, 2015 at 8:43 am

    • Rand is is probably the foremost chronicler of political psychology.

      Characters like Elsworth Toohey, Wesley Mooch, Dr Ferris and Kip Chalmers constantly reoccur on the world stage.

      In Greece you can see plenty of the characters from her novels strutting around constructing rationale why other peoples’ money should be spent by themselves.

      cluster of grapes

      October 8, 2015 at 2:48 pm

    • “They’re unimaginable today because the reforms of the 1970s and early 1980s reversed America’s red decades. What was libertarian back then is just common sense today.”

      Funny how that turned out

      chairman

      October 8, 2015 at 9:11 pm

      • “why is Central America still a basketcase?”

        The kind of people who live there.

        “Why is France in so much trouble?”

        Muslim immigration

        joeyjoejoe

        October 9, 2015 at 9:32 am

      • Lion edited my post to hide the cogent point that America in the 50s and 60s was the #1 oil producer and exporter, and the rest of the industrialized world had been wrecked. You can afford more socialism from such a privileged perch, same as Norway today. History in aggregate makes it rather clear that much regulation will strangle an economy. This idea that de-regulation lead to the 70s inflection point in the USA as far as household earnings and wealth — it’s just silly.

        joeyjoejoe

        October 9, 2015 at 10:48 am

      • I don’t recall editing anything recently.

        Lion of the Blogosphere

        October 9, 2015 at 12:02 pm

      • “Lion edited my post to hide the cogent point that America in the 50s and 60s was the #1 oil producer and exporter, and the rest of the industrialized world had been wrecked. You can afford more socialism from such a privileged perch, same as Norway today. History in aggregate makes it rather clear that much regulation will strangle an economy. This idea that de-regulation lead to the 70s inflection point in the USA as far as household earnings and wealth — it’s just silly.”

        Exports now account for a significantly larger percentage of GDP than they did in the 40s-60s.

        chairman

        October 9, 2015 at 7:18 pm

    • “The economic regulation in Atlas wasn’t an imaginary communist take-over of the government, it was all made up of actual present economic regulations.”. Right, the fantasy part is that all those regulations bring the United States to its ruin, instead of chugging along very nicely for decades as the richest and freest country in the world, one generation always better off than the last. Then, finally the red decades were swept away by genius libertarians, giving us the just and stable economy that we all enjoy so much today.

      Ayn rand appears to have had a fantasy about getting laid by rough, working class guys who turn out to be idealistic geniuses. John galt is workin’ on the railroad until he follows dagny taggart into a railroad tunnel and has rough sex with her then he leads a revolution. Howard Roark is laboring in a quarry until dominique francon decides to be raped by him. Then he gets a big contract because his genius is finally recognized. It seems to be a variation on the frog prince fairy tale. I guess it wouldn’t be much of a story if the roughneck types that rand favored just turned out to be high proles who enjoyed powerboats and cold lager.

      another commenter

      October 8, 2015 at 9:45 pm

  5. According to libertarian ideology, Volkswagen’s emissions fraud couldn’t have happened. A competitor in the private sector would have immediately uncovered the deception. But none did.

    Mark Caplan

    October 8, 2015 at 8:45 am

    • Government programs force private options out of the market. Not because they’re better or less expensive but because they’re mandatory. Take public education for example. Per student spending averages $19,552 in New York. Would most parents send their children to a New York public school if they had the option of spending that $19,552 at a private school? I doubt it. But they don’t have that option. They’re forced to pay taxes. Then they can either send their children to the public school in their district for “free” or pay $20K to send their children to a private school. Faced with that choice, most parents choose “free” even though they would have never chosen it if that government funding had been given to them as a voucher. So the mandatory nature of government has forced many private options out of the market.

      I don’t think any libertarian would say that a competitor would have uncovered the deception. I do, however, think that a private body established to regulate emissions would have uncovered it had government programs not forced private options out of the market.

      destructure

      October 8, 2015 at 3:21 pm

    • You couldn’t possibly know that.

      J1

      October 9, 2015 at 10:30 am

  6. yeah, that must be the reason US was poor and struggling in those red decades from the 1950s through the 70s whereas nowadays it is as close to an earthly paradise as it possibly be. Especially Baltimore and Detroit…

    The most famous quote from Smith is about the distributed egotism (of the butcher, baker and brewer all following their own interests) leading to general wellfare.
    But the second most famous is probably the one about the fragility of a free market, namely that those businessmen will immediately try to form cartels and hinder the free competition. Smith was much smarter than most of his modern followers.

    nomen nescio

    October 8, 2015 at 8:56 am

  7. Ayn Rand collected Social Security and Medicare.

    Peter

    ironrailsironweights

    October 8, 2015 at 9:20 am

    • Yes, and she would have said, ” I was coerced into putting my money into the fund, so getting money back from the fund cannot be considered mooching.”

      njguy73

      October 8, 2015 at 10:11 am

      • I’d agree with her. That’s my money, not the government’s.

        J1

        October 9, 2015 at 10:31 am

    • …indeed

      That leftist trope is so overplayed. Good response.

      KKKryptocracy

      October 8, 2015 at 3:23 pm

    • She collected Medicare to save on health care expenses so that she could protect her savings from the money she earned from her writings. In other contexts people would consider that a shrewd financial move.

      advancedatheist

      October 8, 2015 at 7:41 pm

  8. Adam Smith also wrote, a Theory of Moral Sentiments, which is about the conditions needed to create a high trust society. This should be required reading for anybody who wants to understand Wealth of Nations. A high trust society described in Moral Sentiments is a necessary precondition for capitalism.

    His Wealth of Nations, which primarily functions as a critique of mercantilism, doesn’t make sense outside of trade between high trust societies. Put another way, mercantilism is superior to capitalist trade between nations in low trust, diverse, societies.

    Libertarians ignore the morality parts by just assuming they exist in their aspergy models. Once morality of a high trust society is simply assumed to exist, then all efforts of the society to maintain its high trust show up as economic loss in libertarian models.

    Adam Smith shouldn’t be a hero to modern libertarians. A theory of moral sentiments exposes all libertarian misreading of Wealth of nations.

    As for Rand, her novels also assume the high trust society, but her heroes and heroines give long speeches about how to work within this society but in which nothing is said about how to create or maintain this society. The various looters and wreckers are acting in their own best interests after all.

    Rotten

    October 8, 2015 at 9:42 am

  9. “If you don’t read Ayn Rand at 20, you have no heart. If you believe Ayn Rand at 40, then you have no brain.” Atlas Shrugged contained some of the most heavy handed didactics via straw men I’ve yet seen: a few pages in, the cardboard cutout commie strawmen were going down faster than one could count and I decided I’d had enough. Anthem was more to the point and good enough, but the fact was it cribbed from an earlier post-apocalyptic short story “The Place of the Gods”.

    Sanjuro

    October 8, 2015 at 9:55 am

  10. George Orwell had the best understanding of human nature and modern society that goes beyond anyone else. In 1984 he almost perfectly describes all the bad parts of humanity– I’m tempted to simply paste the whole book!

    “Now I will tell you the answer to my question. It is this. The Party seeks power entirely for its own sake. We are not interested in the good of others; we are interested solely in power. Not wealth or luxury or long life or happiness; only power, pure power. What pure power means you will understand presently. We are different from all the oligarchies of the past in that we know what we are doing. All the others, even those who resembled ourselves, were cowards and hypocrites. The German Nazis and the Russian Communists came very close to us in their methods, but they never had the courage to recognize their own motives. They pretended, perhaps they even believed, that they had seized power unwillingly and for a limited time, and that just round the corner there lay a paradise where human beings would be free and equal. We are not like that. We know that no one ever seizes power with the intention of relinquishing it. Power is not a means; it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship. The object of persecution is persecution. The object of torture is torture. The object of power is power. Now do you begin to understand me?”

    “There will be no curiosity, no enjoyment of the process of life. All competing pleasures will be destroyed. But always — do not forget this, Winston — always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face — forever.”

    “What can you do, thought Winston, against the lunatic who is more intelligent than yourself, who gives your arguments a fair hearing, and then simply persists in his lunacy?”

    “Obedience is not enough. Unless he is suffering, how can you be sure that he is obeying your will and not his own? Power is in inflicting pain and humiliation. Power is in tearing human minds to pieces and putting them together again in new shapes of your own choosing.”

    I highly recommend reading it to anyone who hasn’t.

    jjbees.

    October 8, 2015 at 10:41 am

    • Indeed. If Leon were really looking for a novelist that represented libertarian sentiment then he should have highlighted Orwell. 1984 and Animal Farm do far more for me than anything by Ayn Rand. My feelings on Rand are… Meh.

      destructure

      October 8, 2015 at 3:33 pm

  11. The most widely known and accepted Libertarian of our time is likely Ron Paul. Even though he was technically a Republican, he is known to be a full and true Libertarian in heart and mindset. 10 times more people could name him than could name anyone who actually ran for the Libertarian Party. What did Ron Paul think of Ayn Rand? He named his son after her, just like in a certain religion many followers name their sons after “The Prophet”.

    Apex

    October 8, 2015 at 11:18 am

  12. In Atlas Shrugged it’s not just the founders/CEOs who go on strike but the “men of the mind” in general. Big companies fall apart because competent people down the line leave too. And Rand didn’t argue that the value people create is directly related to the money they made in all cases. She’s got the world’s greatest philosophy professor working as a grill man in the book.

    Dave Pinsen

    October 8, 2015 at 11:31 am

  13. Years ago I tried reading one of her books, I can’t remember which one, and found it such pretentious unreadable crap I gave up after maybe 100 pages.
    I cannot begin to understand why everyone has a (metaphorical) bone for her.

    Peter

    ironrailsironweights

    October 8, 2015 at 11:34 am

  14. “Libertarianism” now covers alot of strands of thought (its dominance of intellectual discourse stands in contrast to the performance of libertarian candidates in elections).

    “Libertarian” can mean “keep government to a minimum”. There used to be an entirely good word to describe this strand of thinking, “liberalism”. This is what liberalism still means in Europe. Unfortunately, in the American context, “liberal” means “in favor of political measures meant to help Black people”, so another word was needed for being in favor of minimal government.

    However, some libertarians go so far in their rejection of government that they pretty much become anarchists. I have seen the term “market anarchist” used, which is appropriate to the other strand of anarchism, “anarchio-syndicalism”, which envisage co-opts instead of business enterprises as carrying out the functions of government.

    Most of the self-proclaimed “liberatarian” commentators I’ve seen, including Tyler Cowen and probably Ayn Rand, are really positivists (https://en.wikipedia.org/wiki/Positivism/).

    Then there is a strand of libertarian commentary which are really just advocacy/ apology for corporations, though corporations themselves are government chartered entities, that legally and practically function as agents of the government. There is actually a political term for this, “corporatism”, which is actually as far from (classical) liberalism as you can get, but corporatists now like to disguise themselves as libertarians.

    Ed

    October 8, 2015 at 11:42 am

  15. Fountainhead is FAR superior book to the endless Atlas Shrugged. Atlas adds nothing new to what Fountainhead said.

    fakeemail

    October 8, 2015 at 12:51 pm

  16. Libertarians are making a serious error in assuming the enemy has the same goals and wants as them. Their idea of a good life is different. Orwell in that passage had most of the enemy figured out except this: they are not smarter, they are not really intelligent at all. Socialists are willing to live in a hole with squirrels as long they are the leader. Power is a responsibility. It is a force unto itself. Government power in the wrong hands will kill everyone including those who try to wield it. These buffoons like Granny Hillbilly Hillary and Frat brat Jeb Boosh don’t have the mettle to wield real power. Like Mickey Mouse when he puts on the Sorcerer’s hat in the Sorcerer’s Apprentice, they have no idea of what they are doing. Power is a terrible thing. It is a double edged sword which can slice both ways and kill friend and foe if not wielded by a competent swordsman. You cannot run from Socialists, you have to face them. They are all cowards. When a Real Man stands up they will scurry like rabbits from the Huntsman’s hounds.

    Joshua Sinistar

    October 8, 2015 at 2:58 pm

    • Orwell was a socialist.

      chairman

      October 8, 2015 at 9:07 pm

      • Actually he was a disillusioned socialist. He was a True Believer in the Marxist Fairy Tale of equality and redistribution, but when the Soviet Union jailed dissidents like Solzhenitsyn who decried the purges and obvious economic inequalities of party leaders like Stalin, he began to see it was all a lie. He still had the ideals, but Marxism is all a Big Lie. There is no freedom, no equality, or even justice. The Pigs live high on the hog, and the workers are worked to death like horses who are sent to a glue factory after they are no longer productive. There Ain’t No Such Thing As A Free Lunch. People pay, one way or another.

        Joshua Sinistar

        October 8, 2015 at 10:29 pm

      • Josuha Sinistar is a moron and reactionary who openly worships Nazism. Everything he says about the USSR is grossly exaggerated, an outright fabrication, or based on White Russian propaganda. It’s hilarious that people like him now idolize Putin a man with lifelong Soviet convictions who identifies as a chekist a member of the Bolsheviks espionage and police force.

        redarmyvodka

        October 8, 2015 at 11:32 pm

  17. The distributionist policies of many northern European countries, strong protection for labor unions that characterized the enormous boom post-WW2 throughout the entire developed world, and counter-cyclical government spending are all commonly characterized as “socialism,” draw their support from branches of broader socialist legacy and have nothing to do with Soviet repression.

    chairman

    October 8, 2015 at 11:03 pm

    • This should have been a response to this post:
      “Actually he was a disillusioned socialist. He was a True Believer in the Marxist Fairy Tale of equality and redistribution, but when the Soviet Union jailed dissidents like Solzhenitsyn who decried the purges and obvious economic inequalities of party leaders like Stalin, he began to see it was all a lie. He still had the ideals, but Marxism is all a Big Lie. There is no freedom, no equality, or even justice. The Pigs live high on the hog, and the workers are worked to death like horses who are sent to a glue factory after they are no longer productive. There Ain’t No Such Thing As A Free Lunch. People pay, one way or another.”

      chairman

      October 8, 2015 at 11:04 pm


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