(Non-)Buyer's Remorse

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