Dr. Yaron Brook
As Wall Street struggles to digest President Obama’s proposed financial regulations, and as many economists predict tepid, if any, growth for the American economy during the next few years, one – very tiny – slice of the American economy seems impervious to general economic conditions: the sales of books by the late author and philosopher Ayn Rand. Indeed, as George Will reported in Newsweek a couple of weeks ago, 2009 was a banner year for sales of Rand’s writings; Atlas Shrugged, Rand’s magnum opus, sold more than 400,000 copies in 2009 – more than double the number of copies sold in any single year since its publication in 1957. This trend has been noted by a host of other observers as well – including writers for The Wall Street Journal, The Washington Post, and Forbes magazine. Even the left-leaning Campus Progress reported that “Randian free-market theory is experiencing a modern renaissance amongst nascent political thinkers.”
Curious about the roots of this “renaissance,” I reached out to Dr. Yaron Brook, President and Executive Director of the Ayn Rand Institute, who agreed to conduct an exclusive phone interview with The Vertex Blog earlier this month. During our discussion, Dr. Brook touched upon a variety of topics related to the financial crisis and some other topics as well.
I have included audio of the interview itself, as well as transcribed excerpts of the interview. Because I wish to give the views presented by Dr. Brooks a fair hearing, and because I believe that the issues he raises are important – despite some of my own questions and reservations– I have included almost the entire interview here and will post my reactions separately.
Interview With Yaron Brook, Part 1 (audio)
Interview With Yaron Brook, Part 2 (audio)
I. The Philosophy of Ayn Rand
JK (Jay Kraut): Would you like to take a minute or two just to describe the kind of work that the Institute does? Or the Ayn Rand philosophy for our listeners and readers who might not be completely familiar with her?
YB (Yaron Brook): Sure, Ayn Rand is probably best known as the author of the novels Atlas Shrugged and The Fountainhead… In those books, not only did she present what I think are thoroughly exciting stories, but she presented a new, unique philosophy, what she called a philosophy for living, for living life.
And the essential elements of that philosophy – she called it Objectivism – are that the world around us is what it is, reality is what it is. And that we have the capacity to know it, to know reality, to understand reality. That capacity is our reasoning faculty. It is through reason that we really learn about what the world is really like. Our senses are valid, and we get valid information, and we can conclude about what really is going on out there in reality.
…as an application for that, she was an individualist. She believed that we all think for ourselves…And that we should all live for ourselves, we should live to be happy. We should be rationally self-interested – not sacrificing ourselves to other people, not asking other people to sacrifice themselves to us, but really pursuing our rational self-interest. And that the only political system that was appropriate for people trying to pursue their happiness is capitalism. It’s a system in which government does not intervene in our lives – not in our economic life, not in our bedrooms – that leaves us alone to pursue our own life, our own happiness, our own self-interest.
II. In Defense of “Capitalism”
JK: With regard to capitalism, I’m sure you’ve read – I’ve seen definitely – over the past couple of years [the claim that] given the world’s economic situation, that it somehow has disproven capitalism or it has shown that true, unfettered capitalism is doomed to failure, as demonstrated by the financial meltdown of the last couple of years. How might the Objectivist philosophy, or someone who is proposing it, respond to such an accusation?
YB: I would argue that this has nothing to do with Objectivism. That claim is just ridiculous on its face, and it’s ridiculous for one simple reason. We didn’t have capitalism two years ago, so capitalism couldn’t have failed. What is capitalism? Capitalism means no government intervention in the economy, no regulation. That’s what free markets mean. It means free of government intervention.
And yet, two years ago, or five years ago, ten years ago, twenty years ago, there was massive government regulation in the economy – huge, particularly in those areas that experienced the financial crisis. So you can’t argue that free markets failed, that capitalism failed, when we didn’t have free markets, and we didn’t have capitalism before the failure happened.
JK: I’d like to ask you to expand on that, with regard to banks in particular. Would you say – in other words, in the banking system, what should have happened, let’s say, according to Rand? Meaning, all these banks took risks; they should have just failed, and that’s it?
YB: But even that’s not fair, right? Because banks are the most heavily regulated industry in the United States. You cannot start a bank without the regulators’ approval on the business plan, the management, the capital rate, types of loans you can issue. Every aspect of a bank is regulated. So, to begin with, banking is not a free market. It’s not capitalism. It is a heavily regulated industry. Surprise, surprise – we would say – heavily regulated industries screw up on a massive scale because of the regulation. Not because they’re free but because they’re heavily regulated.
When you look at the things that in our view caused the crisis – the Federal Reserve, because of loose monetary policy, Freddie and Fannie, and things like too-big-to-fail and deposit insurance – those are the things, those are the kinds of regulations and government intervention in the economy that caused the crisis.
Now, once the crisis happens, what should the government do – given that it caused the crisis and put all these financial, put all these investors and everybody at risk – is a separate question. In a truly free market, this crisis wouldn’t have happened. And even if a crisis did happen, you would never ask the question, “What should the government do”? The answer is nothing; let the market sort itself out. But we don’t have a free market. You can’t completely say, “Let the market sort itself out” because the Federal Reserve shouldn’t do anything, but it has been all the time. So, yes, in my view, the government shouldn’t have bailed out the banks. They should have let many of the banks fail. But that’s, you know…
JK: That’s after the fact¸ you’re saying…the real problem is the underlying system.
YB: Absolutely. It’s after the fact. And you can be a free-market person and make specific arguments about – given the fact that the government intervenes in everything, that it has to intervene when it causes systemic risk, which it did.
So I don’t think there was real systemic risk. I think they should have let, if they’d let Bear Stearns fail in January of ’08, a lot of this crisis, a lot of some of the elements of this crisis would have been mitigated. But that’s second-guessing a lot of what happened. The point is that the government shouldn’t have had its hand in the financial industry, in the mortgage industry, in the banks, to begin with.
III. Regulation
JK: So let me ask you a different hypothetical if you don’t mind. Given that the banking system is somewhat, or as you would say, “extremely,” regulated – what should happen with regard to – let’s say – derivatives? Meaning, should there be regulation of derivatives, should there be bank capital requirements, minimum liquidity requirements? Are these things necessary, given the system that we’re in? Or would it make sense not to have any regulation? It sounds like you’re saying it would make sense not to have any regulation at all.
YB: Given that you have deposit insurance, which I think underlies all the other regulations, and is probably the biggest villain, it’s what caused the S & L crisis, and it’s behind the whole too-big-to-fail, and it’s the real villain behind this crisis, to some extent.
Given that you have deposit insurance, and given the Federal Reserve is in control of the money supply, you have to have capital requirements. I don’t think you have to have very many regulations beyond that, but you have to have capital requirements. Now I’m not going to advocate for full capital requirements. I’m going to advocate for no deposit insurance. But if you have deposit insurance, then there should be capital requirements…
In a free market, banks would have a lot more capital, a lot more capital, by a factor of five probably, than they do today. You couldn’t run a bank in a free market with 10% capital requirements, or 8% if you’re a big bank. You’d have to have at least 50% capital, at least, to cover your deposits. So, the whole fractional-reserve system, the way it’s structured, the capital requirements are a complete perversion caused by government regulators. So, yes, banks need to hold more capital, but you’ll never get to that as long as the government has deposit insurance, and as long the government regulates. The only way to make the banks safer, to hold more capital, is to make them freer, and therefore make shareholders and, more importantly, depositors and bondholders, or insurance companies – somebody in the private sector – responsible for the capital of the banks. As long as it’s politicians, you will always have problems.
There shouldn’t be [derivative] regulators. The regulators can’t regulate derivatives. They are incapable of doing it. Any attempt would destroy the derivative market or create so-called unintended consequences that are worse than anything the free derivatives market can create. Regulators should stay out. The only regulations you should have on banks is – if you have deposit insurance – is capital requirements, and everything else should be left alone.
IV. Perverse Risk-Incentives and Too-Big-to-Fail
JK: Do you think we were better off, in some sense, before all these massive banks were public companies, such that the directors, and the principals were risking their own money more directly than other people’s money, or is that beside the point, according to what you’re saying?
YB: I think it’s beside the point because the real risk, the real problem here is the debt-holders, not the shareholders. You see, what happened here is – you know – Lehman Brothers paid themselves nice salaries, and nice bonuses, and everybody was very happy because they were making a lot of money. Shareholders got good dividends; some shareholders sold when the stock was doing really well. The shareholders don’t have an incentive, a clear incentive, to restrain risk-taking. Risk-taking, traditionally in free markets, is restrained by the debt-holders…Debt-holders have an incentive to control risk because they don’t benefit from the upside of risk-taking, and they suffer on the downside. And they own the company in bankruptcy, and they have to pick up the pieces. Shareholders benefit from the risk-taking because they benefit from the upside, and the worst they can lose is what they invested. They’re not going to be liable for the rest.
Now, what happens with too-big-to-fail? With too-big-to-fail, and with deposit insurance, the debt-holders are made whole when the company fails. They have no incentive to monitor risk. And therefore nobody’s watching the risk. Shareholders don’t care that much about risk because they’re benefiting when times are good. And debt-holders don’t care about the risk because the government is going to bail them out if the company goes bankrupt. And that’s the only risk they really care about anyway. So, again, it’s really government policy that is behind the kind of behavior, the risk-behavior we’re seeing on Wall Street. It has nothing to do with free markets.
V. The Role of Bankers in the Economy
JK: I have one last question…more from a philosophical standpoint, in Rand’s philosophy. This is just something I noticed. I was wondering if she had written anything in particular about bankers, just because, it seems like the heroes in her two most famous stories, they’re not necessarily financial people. They’re builders, railroad executives, steel company executives, mechanics, architects, inventors. So, how would she view the whole financial industry? How necessary are they to the economy, and are they really the true capitalists that she revered?
YB: Well, in Atlas Shrugged, there are two characters that are key to this. There is the good banker [Midas Mulligan], who is in Galt’s Gulch [the haven of the true capitalists], and there is the real bad banker – the banker with “a heart of gold,” he’s called – like Freddie and Fannie and other bankers who are forced, or voluntarily, to make loans to anybody who “needed” the money. And the real banker, the good banker, was modeled after J. P. Morgan and only gave money to people he respected and believed in their business plans.
So I think she [Rand] had a huge amount of respect for pure bankers. For bankers who are trying to make money by issuing loans, thinking about investments in terms of their true long-term profitability. To the extent that bankers and financiers are rational and long-term, she would have a huge amount of admiration for them. She certainly admired many things about J. P. Morgan. To the extent that they are short-term, try to manipulate the political system for their benefits, to the extent that they are like some of these mortgage bankers who came in and lead people to take whatever loans, not caring about whether they could pay them back or not, she would view them as villains.
Maybe the best example of a heroic businessman is John Allison. I don’t know if you’re familiar with him, the former CEO of BB&T.
JK: BB&T, Yeah, he’s an Objectivist, right?
YB: Yeah, and I think she would have a huge admiration for him. And in general, I think that she would admire Wall Street. Put aside that fact that, because of regulation, they are forced to be short-term. The whole functioning of the stock market, the whole way in which capital is allocated, is as good as it can be in the mixed economy, given the constraints of government.
The other type of financier that I think she would have huge admiration for is venture capitalists, up in Silicon Valley.
VI. The Relevance of Ayn Rand
JK: Why do you think Ayn Rand continues to capture the imagination and the attention of the American public particularly today?
YB: Sure…I think the reason is the financial crisis and the Bush administration’s – and then the Obama administration’s – response to it really reflected the primary challenges facing this country today. And that is, the battle between freedom and statism, the battle between collectivism and individualism, and in a moral sense, the battle between rational self-interest and altruism. And these are really the themes of Atlas Shrugged. And these are really the ideas presented in Atlas Shrugged. And I think that they illustrate, concertize, in a way that nothing else does, the real battle that is going on in American society, the philosophical battle that is going on in American society today. And she did it 52 years ago, which I think to many people is astounding because much of what is in the novels is happening around us today. So I think people are intrigued, and people are captured by this ideological struggle that’s in the book, that is happening all around them right now.
JK: Thank you very much. This was Dr. Yaron Brook, President and Executive Director of the Ayn Rand Institute. Dr. Brook, thank you so much for really a fascinating interview.
To hear the complete interview, use the links below:
Interview With Yaron Brook, Part 1 (audio)
Interview With Yaron Brook, Part 2 (audio)
Twitter
Facebook
Blogroll Link Update
If there were no regulations, wouldn’t there be a serious problem of adverse selection? Wouldn’t banks and wall street just have too much of an advantage in terms of overall knowledge and knowledge of how the system works that it would autmotically cause bad results for investors, who obviously don’t have as much information or know how?
Amir,
If you only read this interview (I have not yet listened to the complete version), it might seem that the grounding of Rand’s opposition to government regulations is pragmatic. Not so. She identifies politics as an extension of ethics in the context of the life of an individual into the context of that life in a society of men.
The Objectivist ethics regards as prerequisite to the pursuit of the life of a human being autonomy in the application of reason to action to achieve the values that will enable the maximization of that life. The extension of that ethical mandate into the social context requires a government that will guaranty the rights to life, liberty, property, and the pursuit of happiness to every individual. Recognizing that the only enemy of such autonomy is physical force, one can summarize the task of an Objectivist government to be as follows: to guaranty that all human interrelationships be voluntary by mandating that
No person shall initiate the use of force or threat thereof to gain, withhold, or destroy any tangible or intangible value of any other person who either created it or acquired it in a voluntary exchange.
While it is true that government regulations create more problems than they solve, that is not why they are wrong. Rather, it is because they violate that central principle — they constitute an initiation of force by the government in the name of one group of individuals (the majority) to interfere with the autonomy of another group of individuals.
So the opposition to regulations (and taxation too) is first above all a moral position. And not just coincidentally, the moral position will be in the long run also practical too, as Mr. Brook is explaining in the post above.In a truly free society, equalizing in any way a disparity of knowledge between insiders and outsiders would be a most profitable service to provide, and there would doubtless be many competitors offering it
I am a little disappointed that Dr. Brook did not mention the necessity of having a gold standard. It is the manipulation of the value of money (prices & interest rates especially) that I think contributes most of the harm to a mixed economy. It is like measuring length with a rubber yardstick. That gold is sitting around in Ft Knox and the Federal Reserve vaults when it should be in our pockets and used as money.
MichaelM,
Thanks for some more explanation. It seems like an incredibly interesting concept (aside from whether you agreed/disagree with it). In an unchecked economy, you mentioned how there’d be a service to sort of equalize the disparity. I just worry that in such an environment, there would be nothing to stop companies from hiding information (after all, there are no laws about what you would need to release or show investors) or collusion between a bank and an information providing service. Obviously any system has flaws, as we can see from the past few years, but it seems this philosophy sounds amazing as an ideal, but tough in the real world. As an accountant, I see a lot of how companies report numbers and share information, and even with regulation, there’s so much you can do with the numbers. I couldn’t imagine the type of tricks you could pull in a completely free market.
Amir,
There is no such thing as “good in theory, bad in practice”. Theories and ideals are definitions of what is right in the real world. If the application of a theory turns out to be “tough in the real world”, then the theory could not have been good.
Yes companies could do anything they want with their books, records, information, policies, and relations with their stockholders (excepting fraud of any kind). But who would invest in one that could not provide independent certification of all of these by companies and institutions with flawless track records (something no government has ever achieved). Do you think no accounting firms would leap at the chance to fill the void left by elimination of government regulations?
Also, be careful when applying the principles of this philosophy to do so in the proper context. No truly free market will ever occur until a majority of the populace grasps the issue of freedom v. force as the Objectivists do. When and if that would occur, the culture would be quite different from the present one. I contend that a culture dominated by people whose virtues are derived, defined and proven rather than just accepted from an authority on faith alone will be more apt to practice them — virtues such as rationality, independence, honesty, integrity, productiveness and pride.
In the meantime, for those like most of us who will not live to see that day, Objectivism provides a depth and breadth of understanding that equips one to live a rational life in an irrational world.
Amir, free market doesn’t mean that government is gone. The free market would still need government to enforce contracts and defend liberty.
Amir raises a good point. Information about the financial standing, accounting practices, management and more are all parts of what an investor looks for in comparing one company to another, one place to invest one’smoney vs. another. So, this information is a needed service.
On the one hand, companies that offered open and honest disclosure would have a competitive advantage to attract capital funding over those that didn’t. Any company whose announced information turned out to be in error or dishonest, would probably never attract investors again.
On another front, the free market would generate information agencies, accrediting agencies, auditors, quality testors, all those folks whose information would be available at a fee. And, those industries which submitted to the high standards of such agencies would, again, have an advantage over those which refused or failed to do so. Then, the competition between such information agencies would reinforce the success of those whose degree of accuracy and honesty and could not be bought off my the companies they were auditing over those information agencies that were not so meticulous and fastidious.
In general, one can say that, in a fully free market, anything that constitutes a need by those who want to wisely spend or invest their money is a need that will find a supplier. . .for a fee.
Background? Economists such as Ludwig von Mises and George Reisman. Historians of American economic history are numerous, but I recomment, The Capitalist Manifesto by Andrew Bernstein. Rand’s ethical argument, in brief, is that, if you hold life (especially yours) as a value, you must leave the mind free to guide actions, since the mind is the source of all the goods and services which human beings need in order to live. Illustrated well in her high-action novel, Atlas Shrugged.
I find it refreshing when Yaron distinguishes the course of action necessary in a mixed market economy from that of a free market. It’s important to reinforce the basic premise that the toleration of pragmatism breeds the NECESSITY for pragmatism.
This should always be when considering when discussing compromises to the principals of our political/economic structure for the purpose of ‘practical circumstances that otherwise could not be achieved.’