(Non-)Buyer's Remorse

Thursday, November 12, 2009

A friend from Houston emailed me a link to an article titled, "Capitalism's Fundamental Flaw," at Forbes. Its author, Sramana Mitra, grew up in pre-liberalization India, and once:

... embraced Ayn Rand as the one who best articulated a philosophy that rang true to my naturally entrepreneurial mind. Capitalism, meritocracy, individualism, self-correcting market economics, innovation, excellence, integrity, fairness, work-ethic, justice--many of the values that I worship are also those that Rand celebrates in her fiction through her unforgettable characters.
Fair enough: Ms. Mitra no longer "embraces" Ayn Rand. At least she admits what many libertarians and a self-proclaimed "Objectivist" here and there will not. I'll give her that much.

But I have an interesting question to ask. Did Mitra ever embrace Rand in the sense of fully grasping her philosophy on the inductive level? Based on her description of that philosophy and her reasons for rejecting it, I think the answer is: No.

In her next paragraph, Mitra complains that the "flaws" she now sees with her "deeper understanding of how capitalism works today" are unlikely to "correct themselves." Already, there are several flags. While it is true that capitalism is self-correcting (more on this shortly), this is an economic description of what happens under capitalism, and is neither fundamental to grasping the nature of capitalism nor even for making a case for it. (It is also worth noting here that there is no capitalist economy in the world today: Mixtures of free market elements and state controls are properly called, "mixed economies.")

Capitalism, as Ayn Rand herself put it, is, "a social system based on the recognition of individual rights, including property rights..." Its justification lies in the fact that for man, the rational animal, to survive and prosper, he needs to be able to profit from the use of his own mind and trade with others. The only system that gives him the opportunity to do so is capitalism. All other systems involve the forcible transfer of wealth, and so are ultimately not conducive to man's survival. Implicit in the recognition that one must be free from threats and harm from others is the acknowledgment that nobody else owes one a living.

It is this last fact that Mitra loses sight of as she builds her case for rejecting the philosophy of Ayn Rand and, with it, capitalism. She starts out talking about self-correction in the field of venture capital and even gives a succinct outline of how that market self-corrects: "Investors and limited partners come to realize that funds are not performing, and they pull the plug on them. Non-performing funds die, those that do well survive, new funds crop up..."

Mitra gets the problems with the auto industry partially right, although she should have mentioned the government's role in setting up GM's failure, from putting its muscle behind the labor unions to distorting the automobile market via such measures as fuel efficiency regulations. Nevertheless, she does at least refuse to stand behind the government bailout of GM. Whether GM fully "deserved" to go bankrupt (or would have even gotten to such a brink under actual capitalism) is an interesting question that Mitra leaves unasked.

It is when she discusses banks, however, that a fundamental flaw in Mitra's grasp of Objectivism becomes readily apparent. Mitra complains that the behavior of "looters" and the government's response to same has resulted in, shall we call it, a "cycle of economic violence."
The government has intervened to save many of them, and now, these bailed out banks want to hand out billions in bonuses to their non-performing employees. Capitalism gave way to welfare economics, and now the government has to intervene further to limit these looters from behaving badly by imposing taxes and regulations. A whole messy cycle that brings me to the core "bug" in the system that Rand once sold me on...
Mitra neglects the government's role in setting up the current economic mess, but that is actually not the fundamental point at which she goes wrong. Here is where she goes wrong:
[T]here is another less obvious bug in capitalism that I don't believe regulation can quite handle. It is the fundamental flaw that our celebrated system rewards speculators much more than creators. A relatively junior hedge-fund manager or a bond trader on Wall Street makes a great deal more money in his career than Charles Kao, who invented the basic physics making optical communication a reality. Dr. Kao, now 73, won the Nobel Prize this year, but his net worth would not compare favorably with that of George Soros.

Yet, who added the real value? Soros or Kao?
Mitra answers (b), apparently failing to notice that "(c) both" is an option, which blows my mind coming as it does from a entrepreneur, and one who has studied Ayn Rand to boot.

Implicit in the question of value, as Mitra may recall, is the question of a value-er. Kao identified facts of reality in physics, but these facts were and would remain value-less to large numbers of people were they left undiscovered, unpublicized, and unapplied. True, Kao discovered some things, many beyond the abilities or determination of most people to grasp.

But how would any inventor or scientist offer anything of value to the general public? He'd have to build a prototype, manufacture a product, and sell it. For all of these steps, the inventor has to convince others that his idea has enough merit that the man on the street will eventually be receptive enough to pay for it out of his own pocket. This is no trivial proposition! (I'm sure Orville and Wilbur Wright endured plenty of ridicule for tinkering around with airplanes in their time...)

All of the steps from discovering a theory to implementing it in marketable ways require information about things such as business, intellectual property law, and markets that few scientists are likely to have, and sums of money, which few scientists will have had time away from their studies to earn. The errors in his political thinking aside (and assuming, arguendo, that Soros's fortune comes only from sources actually possible under laissez-faire), individuals like George Soros are rare indeed: They combine financial resources with business knowledge (or the ability to locate needed business knowledge) and make it available where it might not otherwise be.

Nobody owes anyone else a living. That includes John Galt when he needs a means to market his famous motor and Midas Mulligan when he needs a productive way to invest capital he has sitting around doing nothing.

The fact that Soros is richer than Kao or (to use a better example) a Mulligan is usually richer than a Galt -- under capitalism -- is not a flaw, but a consequence of a virtue of capitalism: Division of labor, which is what allows someone good at finance to work in finance and someone good at theoretical physics to work at theoretical physics. The reason a financier will generally be wealthier than a great physicist is because, generally, a financier is better able to offer more value to more people at any given moment than a physicist. (For example, he can offer the same kind of help to a chemist, a biologist, and a tinkerer in a garage, while the physicist either has a marketable idea or he does not.)

Mitra's former idol, Ayn Rand, was famous for invoking the phrase, "Check your premises." It sounds like Mitra would do well to consider that advice before condemning her apparently unexamined purchase as defective.

-- CAV


Francis Luong (Franco) said...

Thanks for a good read.

Gus Van Horn said...

You're quite welcome, sir!

Andrew Dalton said...

Long ago on another blog, someone noted that an "ex-Objectivist" is usually someone who never got the epistemology.

You can tell by the nature of their criticisms -- typically they involve some variant of the theory/practice dichotomy, intrinsic or subjective value, gross violations of hierarchy, and so on.

Gus Van Horn said...

True. And here, note the intrinsic value ascribed to the market "self-correcting" to an arbitrary standard.

Anonymous said...

I agree with the complaint that a Soros is richer than a Kao. Many of the Soros of the world have learned to circumvent competition and rig the system the way unions have traditionally done. For example, a CEO getting a 200 million dollar payout. The Kaos of the world are often backward in human relations, making them easy prey for the "dishonest" Soros of the world. Still, this is a complaint about immorality (legal theft) rather than capitalism itself.

GDW said...

Another reason, I think, why it's just that the financier, generally, makes more money off of a product than the scientists behind it are the differences in the nature's of the two types of labor; and thus their different psychological affects.

A financier is less directly connected with physical reality than a scientist or inventor is. He's still just as connected with reality per se (ie: the same level of objectivity is required to filter another's ideas through one's philosophical structure as it is to observe physical phenomena and integrate them into correct ideas), it's just that, emotionally, he can't get the same depth of satisfaction from it. The pleasure the financier experiences is similar to the scientist's in that he is using his own philosophic knowledge in the judgement of an idea just as if he had discovered the philosophical structure needed to do so. However, because he actually did not discover that philosophical structure, it can never be as spiritually rewarding to simply use it in order to validate one particular facet of one particular man's identity that he's considering investing in than it is to discover a broad, timeless fact about the nature of man and/or inanimate matter by oneself.

To compensate for this, he needs a higher level of wealth. This enables him to experience a higher quantity of less profound experiences, and thus reach an overall level of emotional satisfaction which is quantifiably identical to the level the philosopher or the physical scientist receives simply from having done his work.

Gus Van Horn said...


I suspect that you really mean that you agree IN PART with the complaint about Soros being richer than Kao.

To the extent that Soros is richer due to taking advantage of the welfare state, I agree with the complaint.


You touch on something I thought of when I posted this, but chose not to elaborate on, and it's actually a very important point that many non-Objectivists might find shocking to hear from a proponent of Rand's philosophy, but you are absolutely right: The rewards for work are NOT all monetary. Things like satisfaction with a job well done, and the thrill of discovery are very important.

Thanks for bringing that up.


Steve D said...


"Did Mitra ever embrace Rand in the sense of fully grasping her philosophy on the inductive level?"

This is absolutely the correct question to ask and I agree with your answer. Thanks for pointing this out!

One thing I've noticed over the years is that most people have a hard time with inductive reasoning. Even though it is the basis of all our knowledge few people practice this consistently. I think this is the major intellectual reason why many very intelligent people do not accept Objectivism. It's also one of the major reasons why science is considered so mysterious by a large number of people.

What can we do about this? - well whenever discussing philosophy or science, never fail to stress the method (as you did above). With respect to science it is not so much a body of knowledge but a very effective method for understanding the world. As far as Objectivism is concerned I believe Rand made this same point stressing that epistemology must come before politics (and economics).

You can read entire essays criticizing Rand without seeing any mention of her metaphysics or epistemology.

In the comments to a previous post I made the point that the idea of anarchism was the was the result of not using inductive reasoning correctly or not using it at all. Mitra’s error is another example of this same type of error. Both arguments fail by epistemology but at least the anarchists get most of the ethics correct.

Keep hammering on the epistemology! This is a key point to having general acceptance of a fully rational philosophy.

“Things like satisfaction with a job well done, and the thrill of discovery are very important.”

What I love about being a scientist is finding out some new piece of knowledge about the world before anyone else!


Gus Van Horn said...

"It's also one of the major reasons why science is considered so mysterious by a large number of people."

This caused me to make an interesting further connection: Most people do not regard philosophy as actual knowledge, but most do have some respect for science, since it produces (more easily-appreciated) results.

One consequence is that many people will react to the arguments of a philosopher by dismissing them out of hand, while if someone succeeds in sounding "scientific," he will often be taken at his word. (The whole global warming package deal is a good example: Socialism is being piggybacked on a consensus from the field of climatology.) In neither case is the potential new knowledge being evaluated inductively.