Via Muse Free, I came across this article in the NY Times by Adam Kirsch. From the article

When Bennett Cerf, a head of Random House, begged her to cut Galt’s speech, Rand replied with what Heller calls “a comment that became publishing legend”: “Would you cut the Bible?” …
In fact, any editor certainly would cut the Bible, if an agent submitted it as a new work of fiction. But Cerf offered Rand an alternative: if she gave up 7 cents per copy in royalties, she could have the extra paper needed to print Galt’s oration. That she agreed is a sign of the great contradiction that haunts her writing and especially her life. Politically, Rand was committed to the idea that capitalism is the best form of social organization invented or conceivable…
Yet while Rand took to wearing a dollar-sign pin to advertise her love of capitalism, Heller makes clear that the author had no real affection for dollars themselves. Giving up her royalties to preserve her vision is something that no genuine capitalist, and few popular novelists, would have done. It is the act of an intellectual, of someone who believes that ideas matter more than lucre.

Anyone who has read and bothered to understand The Fountainhead should remember the scene where Howard Roark refuses a contract for a building to protect the integrity of his vision when that contract is the only thing that can save him from bankruptcy. When asked “Do you have to be quite so fanatical and selfless about it?” Roark replies “That was the most selfish thing you’ve ever seen a man do.”

Perhaps Kirsch missed it or perhaps he just took it as an unbelievable part of the plot. ”The plotting and characterization in her books may be vulgar and unbelievable, just as one would expect from the middling Holly­wood screenwriter she once was.” Either way he has no conception of what Rand meant by selfishness or capitalism. Kirsch should read this excerpt from The Fountainhead

“Dominique,” he said softly, reasonably, “that’s it. Now I know. I know what’s been the matter all the time.”
“Has anything been the matter?”
“Wait. This is terribly important. Dominique, you’ve never said, not once, what you thought. Not about anything. You’ve never expressed a desire. Not of any kind.”
“What’s wrong about that?”
“But it’s…it’s like death. You’re not real. You’re only a body. Look, Dominique, you don’t know it, I’ll try to explain. You understand what death is? When a body can’t move any more, when it has no…no will, no meaning. You understand? Nothing. The absolute nothing. Well, your body moves–but that’s all. The other, the thing inside you, your–oh, don’t misunderstand me, I’m not talking religion, but there’s no other word for it, so I’ll say: your soul–your soul doesn’t exist. No will, no meaning. There’s no real you any more.”
“What’s the real me?” she asked. For the first time, she looked attentive; not compassionate; but, at least, attentive.
“What’s the real anyone?” he said, encouraged. “It’s not just the body. It’s…it’s the soul.”
“What is the soul?”
“It’s–you. The thing inside you.”
“The thing that thinks and values and makes decisions?”
“Yes! Yes, that’s it. And the thing that feels. You’ve–you’ve given it up.”
“So there are two things that one can’t give up: One’s thoughts and one’s desires?”
“Yes! Oh, you do understand! So you see, you’re like a corpse to everybody around you. A kind of walking death. That’s worse than any active crime. It’s…”
“Negation?”
“Yes. Just blank negation. You’re not here. You’ve never been here. If you’d tell me that the curtains in this room are ghastly and if you’d rip them off and put up some you like–something of you would be real, here, in this room. But you never have. You’ve never told the cook what dessert you liked for dinner.
You’re not here, Dominique. You’re not alive. Where’s your I?”
“Where’s yours, Peter?” she asked quietly.
He sat still, his eyes wide. She knew that his thoughts, in this moment, were clear and immediate like visual perception, that the act of thinking was an act of seeing a procession of years behind him.
“It’s not true,” he said at last, his voice hollow. “It’s not true.”
“What is not true?”
“What you said.”
“I’ve said nothing. I asked you a question.”
His eyes were begging her to speak, to deny. She rose, stood before him, and the taut erectness of her body was a sign of life, the life he had missed and begged for, a positive quality of purpose, but the quality of a judge.
“You’re beginning to see, aren’t you, Peter? Shall I make it clearer. You’ve never wanted me to be real. You never wanted anyone to be. But you didn’t want to show it. You wanted an act to help your act–a beautiful, complicated act, all twists, trimmings and words. All words. You didn’t like what I said about Vincent Knowlton. You liked it when I said the same thing under cover of virtuous sentiments. You didn’t want me to believe. You only wanted me to convince you that I believed. My real soul, Peter? It’s real only when it’s independent–you’ve discovered that, haven’t you? It’s real only when it chooses curtains and desserts–you’re right about that–curtains, desserts and religions, Peter, and the shapes of buildings. But you’ve never wanted that. You wanted a mirror. People want nothing but mirrors around them. To reflect them while they’re reflecting too. You know, like the senseless infinity you get from two mirrors facing each other across a narrow passage. Usually in the more vulgar kind of hotels. Reflections of reflections and echoes of echoes. No beginning and no end. No center and no purpose. I gave you what
you wanted. I became what you are, what your friends are, what most of humanity is so busy being–only with the trimmings. I didn’t go around spouting book reviews to hide my emptiness of judgment–I said I
had no judgment. I didn’t borrow designs to hide my creative impotence–I created nothing. I didn’t say that equality is a noble conception and unity the chief goal of mankind–I just agreed with everybody.
You call it death, Peter? That kind of death–I’ve imposed it on you and on everyone around us. But you–you haven’t done that. People are comfortable with you, they like you, they enjoy your presence. You’ve spared them the blank death. Because you’ve imposed it–on yourself.”

But then, Kirsch probably won’t understand it anyway.

And while I am at it, consider this from Kirsch’s article

Rand’s particular intellectual contribution, the thing that makes her so popular and so American, is the way she managed to mass market elitism — to convince so many people, especially young people, that they could be geniuses without being in any concrete way distinguished. Or, rather, that they could distinguish themselves by the ardor of their commitment to Rand’s teaching. The very form of her novels makes the same point: they are as cartoonish and sexed-up as any best seller, yet they are constantly suggesting that the reader who appreciates them is one of the elect.

Mass market elitism? Talk about contradictions. Elitism, by definition, cannot have a mass market. Yet, Kirsch is desperate to label Rand’s ideas as elitist. Why?

My last post on Social Planning did not address the issue of externalities as well as I would have liked so I decided to write some more on it.

For the first part of the arguement, consider the example of a lighthouse from George Reisman’s book Capitalism: A Treatise on Economics (pdf version available here. Note: I have not read it fully). A lighthouse benefits all the ships that use its light whether their owners have paid for the construction and maintenance of the lighthouse or not. So there is no immediate incentive for any individual shipowner to pay. In such cases, it is claimed that lighthouses will be under produced. Reisman writes that ship owners could make their payments contingent on the payment of a sufficient number of other ship owners’ payments thus creating an incentive for everyone who wants a lighthouse to pay for it. These kinds of solutions do not figure in economic models based on the assumption that individuals act to maximize their utility, with no consideration for what effect their acts have in a wider context. This is simply not true. How would such a model explain the existence of this blog, activist groups, charities etc? Man is not homo-economicus. He is capable of a wider understanding of the world. Stripped of all the mathematics, the externalities arguement is essentially a claim that men are too short-sighted to act for their long term good. It is ironic that proponents of social planning use economic models based on short-sighted decision making to “prove” that the free market must fail and then use this “proof” to argue that people should elect a government which will magically not be hampered by short-sightedness. How do the votes of millions of short-sighted men result in an elite group that is not short-sighted? The fact is that governments voted into power by short-sighted men are far more short-sighted than any of the voters. Witness the incredible spending sprees that governments around the world are indulging in, with no thought of who, when and how will create the goods to support all the extra money being created and what will happen to the economy when the money is finally presented for consumption. Witness the fact that the liabilities of all social support programmes keep on increasing.

Secondly, as I mentioned briefly in my previous post, the solution suggested by the proponents of social planning – taxing/subsidizing – necessarily violates the property rights of individuals. Once the government has the power to violate property rights, a different kind of “externality” sets in. Henry Hazlitt describes the process

Special interests, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it. But the special interests keep on insisting on the scheme. Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained economists and public relations experts to propagate it in their behalf. The public hears the argument so often repeated, and accompanied by such a wealth of imposing statistics, charts, curves and pie-slices, that it is soon taken in. When at last disinterested writers recognize that the danger of the scheme’s enactment is real, they are usually too late. They cannot in a few weeks acquaint themselves with the subject as thoroughly as the hired brains who have been devoting their full time to it for years; they are accused of being uninformed, and they have the air of men who presume to dispute axioms.

Each time such a project gets through, it establishes a further precedent for the violation of rights. This leads to ever increasing government interference until government becomes nothing more than an unstable coalition of special interest groups. The proposed cure for economic “externalities” ends up creating a political “externality”.

I recently found the time to read Henry Hazlitt’s book “Economics in One Lesson” (available online here). The book conclusively demonstrates that any attempts to coerce the free market can only result in the short term gains of special interest groups at the expense of everyone else and that even these short term gains are more than canceled out in the long term. The value to me in taking the time to read it was not in learning anything particularly new but in knowing that a detailed and very well-written explanation of a number of statist ideas exists in one place. Hazlitt writes that all statist fallacies essentially consist of considering only the immediate and visible consequences of a particular policy while ignoring the secondary and not-easily-visible consequences – an idea that was expressed by Bastiat long ago in 1850.

More than the book itself, what is interesting to me is the fact that the fallacies in statist ideas have been exposed long ago (Hazlitt’s book was published in 1946 and Hazlitt himself takes no credit for being original) and yet these ideas continue to be widespread among the general public as well as among trained economists and policy-makers. In fact, the financial crisis we are seeing at the moment is the inevitable result of some of these same fallacies (more on that in future posts) and the alleged cure is more of the same. The inescapable question then is: Are statist ideas really fallacies or mere rationalizations? Are they really held out of genuine ignorance and/or confusion or is there some other explanation? Hazlitt seems to think that they are genuine fallacies caused by the fact that the immediate consequences of interventionist and coercive policies are all too obvious while the secondary and long term consequences are not so obvious. I think that is a far too charitable view. It is inconceivable to me that simple arguments cannot be grasped by trained economists or intelligent laymen. Hazlitt also mentions how the paid spokesmen of special interest groups are able to drive out “dis-interested” writers simply because of their dis-interest (a mechanism also discussed by Zakaria in his book The Future of Freedom). While this is certainly part of the reason why special interest groups can control the government, it does not explain the support for statist ideas among the dis-interested public.

As an example, a few days back, I had a long and futile argument with some colleagues about the ineffectiveness of statist policies. Now these colleagues are certainly intelligent enough to grasp the fallacies inherent in statist ideas. Moreover they have no reason to support such ideas for any special interest. Yet they continue to defend them. And inspite of any concessions they may have made during the argument, I am sure that the same points will come up in the next argument. As one of them put it, (paraphrasing) “I am not opposed to capitalism, but I am a socialist at heart.” To me, that is the source of the persistence of these fallacies. Altruism is totally incompatible with the working of the free market. But as long as it is accepted, no amount of rational argument (such as the ones in Hazlitt’s book) can genuinely convince a person that collectivist and socialist ideas always achieve the opposite of their stated purposes.

Hazlitt shows how raising prices of a particular product (whether by tarrifs or other methods) to create employment penalizes all the consumers of that product (the public interest?), how lowering prices of a particular product drives out all the marginal producers (the disempowered?) and also creates shortages so that only those with more purchasing power can afford the product, how minimum wages cause unemployment by preventing people whose services are worth less than the minimum wage from being employed at all (the most needy?), how rent controls raise the rents in new buildings enormously (housing for the poor?) while simultaneously removing all incentive for (or even ability to) improve/repair existing buildings, how inflation – necessitated by deficit spending to fund all the welfare programs – essentially acts as a tax whose impact is felt highest by the poor etc, etc, etc… not to mention that all these measures also reduce the total product of the economy (the public interest?)

But the point is that the cure suggested by all these fallacies – regardless of any evidence – the free market, where every individual is free to pursue his own interests and is not legally responsible for the “welfare” of others is morally unacceptable to the altruists, and no amount of merely economic arguments can change that.

Simply Capitalism (feed) is a new blog on business, economics and free enterprise.

Here is an excerpt from their first post

Today, we live in a mixed economy made up of both semi-free markets and government controls. We live in a culture that views business and businessmen as a necessary evil. While the ability of capitalism to bring general prosperity is begrudgingly acknowledged, big business and naked “greed” are routinely blamed for the country’s problems. Calls continue for more government controls and regulations to fix a “broken” system. We think this view is flawed.

When it becomes difficult to determine which effects are due to government interference and which are due to free market influences, our goal is clarity and proper identification. When we hear calls for pragmatism and “balance” in our approach, our goal is to find the principles that illuminate the proper course of action. When we see a system of political pull and coercive government replacing a system of merit, productivity and voluntary trade, our goal is to defend the individual rights that make the latter possible once again.

Among its contributors are two bloggers I have regularly followed for some time

Galileo Blogs, author of Property Rights and the Crisis of the Electric Grid

Kendall Justiniano who also blogs at The Crucible

I am looking forward to getting new insights and good discussion on this blog. Highly recommended for anyone who wants a better understanding of the economy.

In a comment on my previous post “History is not the case against collectivism”, Mark asked

I also just realized, that a system/ideal can be judged from a moral standpoint separately from a history: then is it possible for an ideology that is inferior from a moral standpoint to actually succeed in history?

The question is important enough to deserve a post of its own, so here goes.

A judgement based on history(and nothing else) is a consequentialist judgement. It is based on a consideration and evaluation of the consequences. It is of the form “X is good (or bad) because what followed X was good (or bad)”. The problem with such a judgement is that consequences do not necessarily indicate causality. To arrive at causality, one needs a theory that explains why X led to the consequences. Consider an example: Dictatorship is bad because the Soviet Union collapsed after several dictatorships. To which someone might say: Dictatorship is good because Singapore (or China) is doing well under one. An appropriate theory of market behavior and the difficulty of determining prices without markets can be invoked to explain the collapse of the Soviet Union. But what if a ‘wise’ dictator is able to replace (if only partially) the market with his commands? Would his dictatorship ’succeed’?

A political ideal is a moral ideal, not an economic one. A political system is an economic/organisational structure that attempts to realize political ideals. A political ideal of economic equality leads to a political system of communism (example: The Soviet Union). A political ideal of ‘equality of opportunity’ or ’social justice’ leads to a political system of socialism (example: India until the 90s). A political ideal of national superiority leads to a political system of fascism (example: China). A political ideal of liberty leads to a political system of capitalism (example: the early USA).

Only political ideals can be judged morally. The construction of a political system is a matter of science (political, legal etc…), not of morality. For example, whether to have a presidential system, or a parliamentary system; whether the tenure of elected representatives should be 4 years or 10 years; whether copyrights should be granted for 20 years or 50 years; whether the minimum voting age should be 18 years or 21 years; etc.. are not moral questions.

The success of a political system is the extent to which it achieves its ideals. Just as the construction of a political system is a scientific matter, the evaluation of its success is a scientific matter. It involves analyzing the relevant historical facts with an appropriate theory of causality. It is like measuring the efficiency of an equipment.

There is no such thing as the success or failure of a political ideal.Ideals do not succeed or fail. They are accepted or rejected. While the failure of a political system might cause some people to reject (or at least question) their ideals, the failure does not prove that the ideals are wrong. As long as one still holds the same ideals, the failure of a particular political system is simply useful empirical data for constructing a better political system.

Now coming  to the question “Is it possible for an ideology that is inferior from a moral standpoint to actually succeed in history?”

Consider some concrete cases:

The political ideal of economic equality is an impossible ideal. Men are not equal in their abilities or their experience and nothing can make them equal. No political system that holds economic equality as an ideal can ever succeed and none ever has.

The political ideal of equality of opportunity is also an impossible ideal for the same reason. No political system can ever achieve it. But since, equality of opportunity is a less extreme ideal than economic equality, systems which attempt to realize it merely cause economic stagnation and not collapse.

The political ideal of national superiority is a fuzzy ideal (like all collectivist ideals). Because of its collectivist nature, it can never be defined or understood precisely. Depending on how it is defined, political systems that attempt it may or may not succeed. If winning the maximum number of gold medals in an Olympics is a measure of national superiority, then China’s political system succeeded. If achieving a high economic growth rate is a measure of national superiority, then China’s system has succeeded.

So my answer to Mark’s question is:

As long as its political ideals are not impossible to attain, a political system can succeed even if it is not moral. Of course, that raises the question “How does one decide what ideals are moral and what are not?” My upcoming post on my case against collectivism should answer a part of that question.

American Chronicle has an interview with Jason Miller. In answer to the question “What is that (sic) you consider your purpose on Earth to be?” he says:

It’s multi-faceted and complex, but if I distill it to its essence and put it succinctly, my primary purpose on Earth is to strive for two causes: animal liberation and socialism.

Defending socialism, he says:

Socialism hasn’t had the ghost of a chance to take root, let alone flourish. Pitted against the militaristic, economic, and propagandistic might of capitalism, each attempt to tear down and rebuild socioeconomic and political structures along more egalitarian, rational, just and democratic lines has been destined to severe malformation or failure.

Miller’s worldview – responsible for all the experiments in socialism in the last century – might have been understandable at the beginning of the 20th century. Today when even communist regimes like China and Russia have accepted that it is false, it is nearly impossible to understand. Yet, there it is. And Miller is not alone.

I have been publishing Thomas Paine’s Corner since 2004. In 2006 I merged TPC with Cyrano’s Journal Online and became Cyrano´s associate editor, maintaining my site as a semi-autonomous section of CJO. I’ve devoted countless hours and worked strenuously to create and maintain a publishing platform for radical writers, ideas, and organizations. Since Patrice Greanville, our editor-in-chief, and I place a high premium on our independence, we accept no advertising or sponsorship. Hence, we derive zero income from our endeavor. It actually costs us to keep the site operational. At last count, Thomas Paine’s Corner had had almost 2 million visitors in four years. So it’s been worth it. (links dropped)
Aside from that, I lead a vegan lifestyle, petition, protest, shun consumerism, distribute pamphlets, work with homeless shelters, boycott, network with other radicals, make personal financial sacrifices that enable me to make meaningful donations to organizations that haven’t been co-opted by the corporatocracy, like Paul Watson’s Sea Shepherd and Michele Pickover’s Animal Right’s Africa, and engage in some direct action. (links dropped)

Why is it important that some people are so hopelessly deluded, especially when they form an extremely small and democratically insignificant minority? First, because ideas matter, especially in a world which has very little respect for them. Those who have strong and consistent ideas - whether right or wrong – along with a strong purpose to advance them will always succeed in doing so, especially when most people believe that principles are simplistic, ideology is outdated and each issue must be decided on a case by case basis. Only those who have consistent principles can provide the standards by which any particular issue is to be judged. Those who have consistent principles set the terms of the debate. The pragmatists do the shouting and think they have won. Ayn Rand wrote

The men who are not interested in philosophy need it most urgently: they are most helplessly in its power.
The men who are not interested in philosophy absorb its principles from the cultural atmosphere around them—from schools, colleges, books, magazines, newspapers, movies, television, etc. Who sets the tone of a culture? A small handful of men: the philosophers. Others follow their lead, either by conviction or by default.

Second, as an advocate of laissez-faire capitalism in politics and thus being in as small a minority as Miller is, it is important to realize that history needs to be interpreted to serve as evidence for or against a particular political theory. And in a very complex world, it is possible to interpret it in many different ways. Since laissez-faire capitalism (or anything close to it) has not existed for a good hundred years anywhere in the world, and since pure socialism is impossible to put into existence, merely pointing to history as evidence for the success of capitalism is not enough. Any defence of capitalism must include moral arguments along with economic theories and interpretations of history.

Finally, as a tactical matter, it is incorrect and therefore damaging to label the statist and welfarist policies of most politicians today as socialist. They are not. Miller’s worldview is what socialism means. And fortunately, very few people subscribe to it. Many people share some of the moral ideals of socialism implicitly. But they also believe in personal responsibility, individual freedom and free enterprise (however inconsistent there beliefs may be. Calling them socialist when they explicitly reject socialism (as Miller’s frustration shows) is not the best way to reason with them.

Following the recent financial crisis, there have been three kinds of reactions in general

The socialists are on a rampage denouncing capitalism, free enterprise, greed and the profit motive. It is difficult to miss a note of glee in their screams. It is almost as if the financial crisis and the alleged role of capitalism in causing it helps them get over the failures of socialism. However loud their screams may be, socialism is so completely discredited today that their screams are irrelevant.

A small number of free market advocates are using principled arguments about the working of the free market and the nature of government interference in the economy to interpret the crisis as a failure of the unfree market. However well reasoned and sound their arguments may be, these are not the men who run things today and the immediate impact of their ideas is going to be small.

The most interesting reaction is the one by the pragmatists. They claim that the financial crisis demonstrates the failure of deregulation and that what is needed is better regulation, more in line with the modern realities of today’s markets. They claim that the focus of the debate should be not whether regulation is needed or not, but what sort of regulation is required. They reject any principled arguments as “just theory”. What is interesting about their reaction is that they are the ones who were in charge of the situation the whole time. These are the people who “believe” in free markets and the gold standard and fiscal discipline and claim to be protecting capitalism. By doing what? By chairing the federal reserve. The blatant contradictions do not bother them. After all Bernanke is supposed to have said “There are no atheists in foxholes and no ideologues in financial crises”. Even after a century of failed attempts at regulation, these pragmatists are still searching for better ways of regulating the economy. There is an old saying that goes “When you find you have dug yourself into a hole, the first thing to do is to stop digging”. But perhaps that too is “just theory” for these pragmatists.

Sadly, more regulation and more crises is what we are going to get, atleast until pragmatism gets discredited. For that to happen however, we need to learn that the way to get out of a crisis is not to renounce principles, but to discover, understand and practise them. Understanding the ideas in these piecies would be a good beginning.

Summary

Fareed Zakaria’s book “The Future of Freedom – Illiberal Democracy at Home & Abroad” is a critique of democracy. Zakaria notes that democracy is not the same thing as constitutional liberty. He notes that democracy is a process of selecting governments whereas constitutional liberalism is about selecting government’s goals and refers to the Western tradition of seeking to protect an individual’s autonomy and dignity against coercion. Drawing examples from history and from around the world, he argues that societies that had liberal institutions, the rule of law and protection of property rights were able to turn into liberal democracies, whereas in societies that did not have such institutions, democracy allowed tyrants, demagogues, dictators and autocrats to cement their power. He argues that the presence of the church as an independent authority from the state helped in preventing concentration of power and allowed liberal institutions to develop. Similarly he argues that the political strength of the landed aristocracy in England was good for liberty as it helped to institutionalize property rights and kept the monarchy weak, while the political strength of the state in France was bad for liberty as it kept society dependent on the state.

Zakaria picks several examples of countries around the world that tried to democratize too early – before developing the necessary social institutions, or before becoming sufficently wealthy – and failed. He also notes that the wealth necessary for a liberal democracy must be earned wealth and not the wealth obtained from taxing a canal or exporting oil.

Regarding the Middle East, Zakaria denies that there is anything specific about Islam that makes its followers more susceptible to authoritarian rule. He also rejects the idea that Islamic terrorism has anything to do with poverty in the Muslim world. He notes that until the 1940s and 1950s, Arab countries seemed to be doing better than several other newly democratizing ones. Instead he blames the total failure of politics in the Arab region for the rise of radical Islam. He writes that with no free press and no political parties, mosques became the place to discuss politics, and the language of opposition became the language of religion. He also notes that the Arab states have allowed free reign to the most extreme clerics to give themselves legitimacy.

Regarding the American political system, Zakaria writes that since the 1960s all of America’s political institutions have democratized. He cites several examples – the selection of candidates by primaries instead of party decisions, the campaign finance laws that made candidates dependent on fundraisers, the expanded number of sub-committees, the changing of rules to allow unlimited number of bills, the open committee meetings and recorded votes and the system of referendums and initiatives. He describes how all these changes have opened up politics to the influence of special interest groups and lobbyists and how democracy has defeated itself with all its institutions being controlled not by a majority but by a variety of highly motivated minorities and special interest groups.

Zakaria goes on to describe the deep changes that democratization has caused even outside politics. He describes how religious figures like Billy Graham and Jerry Falwell have toned down religion to make it appeal to the masses. Zakaria writes that in general, members of professions such as law, medicine and accounting were public spirited individuals who operated on high standards and these standards have deteriorated with time. He blames this on the changes made to make these industries more open and competitive such as the decision to allow lawyers to advertise and to allow accountants to charge contingency fees. He writes that the internet frenzy destroyed the separation between the bankers and the researchers in the banking and brokerage industries, opening up conflicts of interest and perverse incentives. He writes that the central shift underlying these changes is the role of the elites. He writes that while elites in the earlier days saw themselves as elites and recognized their responsibilities, today’s elites are a bunch of smart college graduates, who are not conscious of their elite status and thus enjoy power without exercising responsibility. He writes how a school such as Groton which once emphasized character over achievement in its students now focuses only on achievement. He describes how in the movie “Titanic”, the first class passengers are shown to scramble into the small number of lifeboats, whereas in the actual accounts of survivors, the “women and children first” convention was observed almost without exception among the upper classes. He writes “The movie-makers altered the story for good reason: no one would believe it today.”

In his concluding chapter Zakaria writes that the 20th century was marked by the regulation of capitalism and the deregulation of democracy and that both experiments overreached. He writes that whenever a problem arose, the solution was more democracy and more regulations. He writes that the way out of the problems is to delegate democracy to mostly autonomous entities, that are limited by democracy but shielded from political pressures. He writes that the institutions and attitudes that preserved liberal democratic capitalism, built up over centuries are being destroyed in decades and if these trends continue, democracy will face a crisis of legitimacy. He finishes with “Eighty years ago, Woodrow Wilson took America into the twentieth century with a challenge to make the world safe for democracy. As we enter the twenty-first century, our task is to make democracy safe for the world.”

Comments

Zakaria’s critique is very welcome today in an age where democracy is often seen as unquestionably good and historically inevitable. The numerous examples he draws clearly show that it is neither. His description of the state of American politics and the role of democracy in causing it is well presented with concrete examples. He makes a number of good points in this book. And yet, there is something missing in his analysis. There are atleast three distinct phenomena that he refers to as democratization – the way people select their government and the increased amount of power that elected representatives have, the way people make economic decisions and the increased importance these decisions have in shaping the economy, and the shift from “high culture” to “popular culture”. While these phenomena are certainly related, they should not be lumped together under a single concept, especially considering that the purpose of the book is to examine the problems with democracy. It is only the first phenomenon that can accurately be called democratization. Including the other two phenomena under the same concept makes the concept useless for analytical purposes – something that Zakaria himself warns about at the start of the book.

Consider these phenomena in more detail.

Political democracy:
All over the world, government powers and policies are increasingly being determined by popular opinion (or atleast what is seen as popular opinion). Politics is increasingly seen as a struggle for inclusion and representation and not as a means to achieve a proper social organization. The focus is increasingly on ‘who gets to make decisions‘ and not on ‘what decisions are made and whether they are legitimate‘. In the absence or weakening of any limits on political power, government necessarily become corrupt, illiberal and dysfuncional. Special interest groups take over such a system and dominate all policy making. This is a problem inherent in democracy and Zakaria does well to illustrate this.

Economic changes (“consumerism”): 
In the last few decades the bargaining power that “consumers” enjoy has risen steadily. We have come a long way from Henry Ford’s times (“You can have any color as long as it’s black”). This is a result of technological progress and has almost nothing to do with democracy. The only connection it has with (political) democracy is that it makes democracy more dangerous and its ill effects more catastrophic. It is impossible for people today to know about the workings of the global economy in any sort of detail. Which makes it impossible for the government (whether democratic or not) to control or regulate the economy effectively. Zakaria does not discuss these issues much and incorrectly labels this phenomenon as part of a process of democratization.

Rise of popular culture and the decline of values:
In the last few decades, high culture has declined and popular culture has risen. Zakaria uses a quote by Seabrook to describe this process “The old cultural arbiters, whose job was to decide what was ‘good’ in the sense of ‘valuable’ were being replaced by a new type of arbiter, whose skill was to define ‘good’ in terms of ‘popular’…” This decline of high culture goes hand in hand with a general decline in values – people no longer have rigid standards for judging behavior, the word ‘judgemental’ has become a perjorative and a good number of people would assert that there are no objective values. Zakaria does a good job of describing the symptoms of this trend. However he does not even attempt to examine its causes. But without an understanding of these causes, there is no way to reverse the ill-effects of democracy. Consider Zakaria’s proposed solution – the creation of autonomous regulatory bodies such as the US Federal Reserve (which he considers a success and seems to hold in high esteem). Today we see that the Federal Reserve has not been able to prevent a catastrophe and there is strong evidence to suggest that the catastrophe was in fact its own creation.

It is clear from the book that Zakaria is troubled by the general decline of values and that he respects the older value system, atleast in a general sense. He writes

It is easy to mock the Anglo-American elite, with its striking air of high-minded paternalism, born of a cultural sense of superiority. But it also embodied certain values – fair play, decency, liberty, and a Protestant sense of mission – that helped set standards for society…When powerful people acknowledge that there are certain standards for behavior, they limit their own power, however indirectly, and signal to society, “This is what we strive for.”

and a couple of pages earlier describing the decline of the elite status of the WASPs (White Anglo-Saxon Protestants)

As America became more diverse, open, and inclusive over the twentieth century, the WASP establishment faced a dilemna: it could maintain its power and refuse to allow new entrants into its sanctuaries, or it could open up to the new rising non-WASP members of society…But in the end the WASPs opened the doors to their club… Therein lay the seeds of the establishment’s own destruction… The WASPs made this move partly because they were pushed, but also because they knew it was the right thing to do. Confronted with a choice between their privilege and their values, they chose the latter.

If this description is correct, there is a paradox. The elite chose their values over privilege and yet this choice helped in the decline of their values. This paradox is at the heart of all of man’s problems. It has plagued people throughout the ages. The way out of this paradox is a code of ethics that is geared to man’s life, here on earth, by which the moral is also the practical and which when practised results in both material and spiritual reward – the code of rational egoism.

The complete expression of the constitutional liberal democracy that Zakaria wants to protect is a system of capitalism and it can only be protected with an explicit moral base. Although Zakaria presents a quite insightful analysis of the workings of democracy and its problems, he does not discuss the foundations of politics at all, and without it, his book is incomplete.

Note: This post can also be found on desicritics.org with an independent comments section.

In view of the fact that the United States political/economic system has turned into a mostly illiberal and highly regulated democracy, the question “Is capitalism inherently unsustainable?” deserves attention.

Politically, capitalism is a form of social organization based on the recognition of individual rights. Economically, it is a system where owners of capital exercise their property rights to trade with each other voluntarily, thus establishing a free market. The freedom refers to the principle that no individual or group (including the state) may initiate the use of force against anyone else. The implementation of this principle requires a proper social organization - a legal system to resolve disputes and a police force to prevent the initiation of force and implement the decisions of the legal system.

Economically, capitalism (the free market aspect of it) is the only system that has ever worked in practice – economies have resisted collapse to the extent to which elements of free markets were present. This fact is partially recognized today in the sense that a free market is held to be valuable but fragile and in the sense that total state control of the economy has been thoroughly discredited. The success of free markets is not surprising. In a free market, every individual exercises his own judgement and takes responsibility for the consequences. Good judgement necessarily wins in such a system. As the economy grows in size and complexity, better and more specialized judgement is required for success, making it impossible for the state to control the economy effectively. Although it is certainly difficult to predict the results of a particular decision in the higly interdependent and complex economies of today, the complexity is its own defense as long as the market is free. In a complex economy, the effects of a bad decision are larger and more widespread and can be noticed earlier than would be possible in a simple economy. As long as people are free to make their own decisions, they can distance themselves from the bad decisions and minimize their risks. But when the economy is regulated, the effects of decisions are artificially suppressed by penalizing good decisions and rewarding bad ones. This is true irrespective of the kind of regulation imposed. Consider some examples. When the state puts a cap on the price of a particular commodity, thus reducing the profits of the producers, it makes production less attractive for newcomers, raises the barrier to entry, encourages monopolies, keeps supply short and removes the possibility of the price being lowered by competition. When the state bans insider trading or short selling of stocks, it prevents the spread of information that would otherwise happen. When the state lowers interest rates, it reduces the value of good investments and raises the value of bad investments. A regulated economy is more stable in the short run, but the stability is spurious. It is achieved by constantly changing the rules of the game to equalize results. Regulation is like a teacher’s policy of awarding similar grades to students irrespective of their performance, reducing the motivation of the brighter students and instilling a false confidence in the duller ones. The students from such a class fail when they encounter a world outside the teachers influence, the brighter ones because they never learned to work hard, the duller ones because they never learned to work well. When the damage done by regulation goes beyond the ability of the state to control, the results are catastrophic (as we see today). The short-term stability from regulation comes at the price of a certainty of a catastrophic collapse, something that is unlikely (though not impossible) in a free market. It is not free markets but regulation and the mixed economy that is completely unsustainable. Free markets are inherently stable in the long term, simply by virtue of the fact that good ideas work.

Politically, however, capitalism is unstable. The success of capitalism depends on a proper understanding of individual rights – most importantly property rights. This is impossible without a sound philosophical grounding – most importantly ethics – and difficult in any case. When the state enacts laws that violate someones rights, it turns from a protector of men into a looter. Unlike the action of the free market which corrects itself, violation of rights turns a difficult problem – how to objectively define and protect rights – into an impossible one – how to dispose of loot in a just manner. These difficulties exist even when a state recognizes its role as being limited to a protector of individual rights. They are enormously compounded when this recognition is absent. A state that actively oversteps its role is fundamentally corrupt and the corruption inevitably increases. Left to itself, such a state necessarily degenerates into an autocracy, constantly expanding its powers and violating rights, until its economy collapses and the state is forced to change its political principles. But a collapse does not necessarily mean that capitalism will be established (The example of Russia is a case in point). Establishing and even maintaining a system of proper well defined rights requires active, principled and continuous effort. As Thomas Jefferson put it “The price of freedom is eternal vigilance.”

However unstable the political aspect of capitalism may be, it is the only system that is proper to man – the only system that recognizes that man requires freedom to succeed, that the standard of truth is reality and not consensus, that the proper purpose of man’s life is his happiness, that the proper principle for interaction among men is trade, and that the standard for mutually beneficial trade is profit. Just as sustained effort is required to achieve any goal that man may set for himself, sustained effort is required to keep a society capitalist – effort to understand a proper code of ethics, to understand the principle of rights, to apply these principles to concrete situations, to establish and maintain objective laws based on these applications and most importantly to reverse or correct any mistakes that might be made along the way.

This post was written as a response to a comment that capitalism is unsustainable because of an innate desire for security in most men. The claim about the desire for security might well be true. However it is not these men who make the world or set its terms. The world is made by the men of vision who dare to think and plan beyond the short term – by the scientists who spend years on their research, by the businessmen who invest their money without expecting returns for several years, by the activists who can project a better future, and most importantly by the philosophers who devise theories and set the direction of the activities of men. Capitalism has declined not because of a desire for security, but because the principles underlying it have never been fully understood, and consequently the effort to sustain it has either been absent or misguided.

In the wake of the collapse of financial markets, a number of people are asking “Is this the end of capitalism?” But what is capitalism? Are the current political/economic systems really capitalist? Here is a dictionary definition of capitalism:

an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

While this definition makes no mention of any political system, it implies a political system that does not have the powers to engage in economic activity. Clearly such a political system does not exist today. The US economy, commonly regarded as capitalist runs on a fiat currency, the price of credit is decided by a central banking system, investments and production are controlled by antitrust laws and regulatory authorities, prices are controlled by tariffs and subsidies, distribution is controlled by federal grants and welfare schemes. This is not a capitalist system by any stretch of the imagination. That it is so regarded is only an indication of how little the concept is understood.

The collapse of the financial sector of the US economy is not a failure of capitalism but a failure of centralized control of credit. The crisis is commonly projected as a liquidity crisis. But the loss of liquidity is just an effect. The cause was the bad credit provided to unwise borrowers by setting artificially low interest rates. The responsibility for the crisis clearly belongs to the federal reserve. What we are witnessing now is not the end of capitalism. Capitalism ended about a century ago when the world switched to an elastic fiat currency. What we are witnessing is another demonstration that credit-based elastic unreal money necessarily leads to catastrophic failures.

Update: I have a more detailed post about Capitalism here