Ayn Rand doesn't understand economics

My last post, which discussed the silliness of claiming that a moral philosophy can be derived from "logic" or "science" alone, naturally reminded me of Ayn Rand. This prompts me to post an adapted excerpt from a discussion email I wrote a little more than a year ago, where I point out that Ayn Rand isn't the sharpest economic mind around.

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We begin with a basic question: do we need government? Ayn Rand answers that we do. No one can deny that some authority is necessary to maintain order, protect from invasion, and keep society functioning. This response, unfortunately, forces another question: how do we pay for government? Under Objectivism, any mandatory collection is unacceptable, since it ultimately relies on the coercive power of the state. We are left to pin our hopes upon "voluntary" funding.

How can a government, charged with guarding the liberty of its citizens, possibly support itself with only donors' largesse? Rand claims that there is no need to worry, since individuals will support their government for the same reasons that they "buy insurance." Yet I cannot see a whit of similarity between the two concepts. The proceeds from insurance are almost entirely private, while a donation I make to the state, after being spread throughout the military and law enforcement, will bring me only infinitesimal benefit.

In her essay "Government Financing in a Free Society," from The Virtue of Selfishness, Rand suggests two other voluntary means to support government: a lottery and a fee for protecting contracts.

These are both shockingly obtuse. After all, to be profitable at a useful level, a state lottery must deploy coercion, lest it be preempted by private competitors who needn't swipe a chunk of proceeds to run the government. And the contract fee's supposed effectiveness, as extolled by Rand, rests on a piece of argument so facile that it is hard to take seriously:

"When one considers the magnitude of the wealth involved in credit transactions, one can see that the percentage required to pay for such governmental insurance would be infinitesimal - much smaller than that paid for other types of insurance - yet it would be sufficient to finance all the other functions of a proper government. (If necessary, that percentage could be legally increased in time of war; or other, but similar, methods of raising money could be established for clearly defined wartime needs.)"

Gee, Ayn... why is so much wealth involved in credit transactions? Maybe because the costs of transaction are so low? Wouldn't your proposal, um, ruin that?

Rand's observations are immune to even the most obvious point in tax analysis: you can't estimate a tax's revenue from its current base, because that base inevitably changes from the incentives altered by the tax. Nowhere is this more evident than with credit transactions, which occur in such volume precisely because capital is so liquid, exchanging hands without any significant loss. Apply even a 2% tax (or "fee") and you will see the vast majority of transactions evaporate; after all, 2% is a sizable fraction of the stock market's average annual rise, and rational investors will keenly avoid paying it. In this scenario, with a drastically reduced pool of transactions, you'll then need to raise the rate to support government. This, of course, will lead to yet another dramatic reduction in liquidity, in a cycle that will only terminate when the economy is strangled into submission.

This is not a particularly complicated argument. When Ayn Rand spends a lifetime preaching the virtues of capitalism, her failure to consider such a simple set of consequences is shocking. And what of the transparently incoherent lottery idea? Or the failure to come up with a single workable way to fund government? Ayn Rand may sing the praises of reason, but she isn't very good at using it.

This isn't only an indictment of Ayn Rand. It is a crippling blow to her entire philosophical enterprise. Her ideas for "voluntarily" supporting government are lousy for good reason -- there is simply no realistic way to accomplish the task. When such a fundamental part of Objectivism's political program turns out to be impossible, there is no plausible recourse for its supporters.

Random philosophy note

I'm not well-read in philosophy, but I'd like to point out one point of view I find particularly strange: the idea that we can derive a system of ethics from science and logic alone.

Readers of this blog might be a little surprised -- aren't I a mathy, nerdy kind of guy? Indeed, and this is precisely the reason why I consider the "all ethics can be derived from science" position to be so bizarre. After all, anyone familiar with abstract mathematics knows that our choice of axioms -- our set of starting assumptions -- is critical. A seemingly innocent assumption, such as the Axiom of Choice, can have wildly unintuitive consequences, like the Banach-Tarski paradox and a well-order of the real numbers. Under the classical set theory axioms, a basic question like the Continuum Hypothesis is provably irresolvable. You can't get anywhere in formal mathematics until you have a very clear set of starting axioms. You have to make some basic choices about the structure of mathematics before you can make any logical derivations, and these choices matter. 

It's the same with morality. First, you have to set down some basic axioms, and this process will inevitably involve subjective human judgment. Perhaps you think you can circumvent this by calling upon evolutionary biology or some other science, but even then you're axiomatizing the assumption that evolutionary biology should matter in moral philosophy, which is hardly a core logical principle. After you choose your axioms for moral evaluation, of course, then you should use science and logic to draw normative inferences, but you can't claim that you "started" with basic logic. That just doesn't make any sense.

Sarah Palin knows nothing (if you didn't already know...)

My god. Next to Sarah Palin, Joe Biden is a model of clarity and understanding:


Watch CBS Videos Online

This is the most damning Palin gaffe of them all. Usually, when I hear about a Republican candidate's foolishness, a little devil's advocate pipes up in my mind to explain it in a favorable light. When Palin failed to identify the "Bush Doctrine" in her Charlie Gibson interview, it's possible that she was legitimately confused which Bush-specific worldview he meant: preventative war, or spreading democracy in the Middle East? When she couldn't name a specific newspaper that she's read, it's possible that she was ambiguous because of the paralyzing fear that a truthful answer (say, the New York Times) would be spun against her in the media echo chamber. Even in the latter part of this video, where she can't manage to name a single Supreme Court case other than Roe vs. Wade, it's possible that she is overwhelmed by the variety of potential answers, and concerned about the political consequences of singling out any single decision to condemn. These explanations are ludicrously charitable, of course, but they're possibilities.

But her clear failure to understand the importance of the "right to privacy" in constitutional law demonstrates an astonishing lack of knowledge about even the most basic legal debate. For anti-Roe, pro-life conservatives, the implicit right to privacy cited in Roe (and earlier, Griswold) is an object of universal derision, and statements about privacy serve as a proxy to evaluate politicians' and justices' positions on abortion. In her response -- a vacant assent to the right to privacy, followed by a return to unrelated, prepackaged soundbites after Couric's challenge -- Palin shows that she knows none of this, making unequivocally clear that she does not have the depth of understanding in national policy that we all expect from a possible president. 

There is no excuse for her performance. She's just clueless.

Stop moralizing about the economy

Matt Zeitlin offers some spot-on criticism of pundits' tendency to view the economy as a morality play:

Because of the interconnectedness of the financial system, when one type of security goes down, it can take entire banks with it. And this is where Sullivan’s argument gets dangerously stupid. When banks fail and/or lose confidence in each other, everyone is affected, even if they themselves never invested in those mortgage -backed securities. Anyone getting a loan (or, more accurately, not getting a loan) is being adversely affected by the financial crisis. What exactly did restuarant owners - who will have a much harder time getting credit because their two biggest banks are leaving the market - do to deserve what’s happening to them? What about the employees of GE? Their commercial paper costs have gone up .4 points, which translates to $360 million “in costs straight off GE’s bottom line.” And if that’s happening to GE, just imagine what’s happening to everyone else.

The economy isn’t a morality play. For better or for worse, we all sink or swim together. No need to put up a smoke-screen of self-righteous moralizing as an excuse for stagnant growth, decreasing wages and unemployment.

There is never any reason why recessions should happen. It's fashionable to talk in moralistic terms about "creative destruction" or "purging the excesses from the economy," but no one has ever offered a compelling argument for why involuntary unemployment and idle capacity are either necessary or beneficial. Why should workers and factories that were perfectly productive in March shut down in December, only to return to work a year later? We have all the technology, physical capital and human capital we had a few months ago. Why, exactly, must the economy now be doomed to decline?

A recession is the ultimate market failure. First, there's the sheer waste: unnecessarily idle workers and enterprises, who could be creating value for others, are left to do nothing. Worst of all, however, the losses are heavily concentrated among the unemployed population, making recessions far more painful than a first glance might suggest. 

The Paulson plan is far from perfect, but it offers a chance to limit the onset of financial collapse and prevent an unnecessary and unacceptable decline in the real economy. If it costs anything at all, the price will be far below the headline $700 billion figure, and even that unfathomable amount is just 5% of our $14 trillion economy. Nothing should be more upsetting to policymakers than the needless rise in unemployment that we have already seen, and they should be willing to take drastic steps to avoid further pain.