Once upon a time in a far off land of sea monsters and fairies, there was a man named Adam. Now Adam was not the First Man. He was, however, the first man in his society to write down his ideas of man controlling his own economic destiny without the heavy hand of kings. Adam was a moral man and wrote that one’s “enlightened self-interest” and innate moral code should guide him in all matters of money and commerce.
Yet man is a funny beast, Adam knew, and in case of a lapse in reason a guiding hand, “The Invisible Hand,” existed to override his less intelligent and unjust impulses. He put all of his fine words and moral sentiments down in a book that changed the western world. The Wealth of Nations was birthed in the same year of 1776 that a little rebel nation was born of its empirical British mother. America and Adam Smith’s free market capitalism grew up together.
Fairy tales inevitably have happy endings. Due to their simplistic nature, these tales usually close with, “And they lived happily ever after,” yet fail to finish the story. Adam Smith’s theory of “enlightened self-interest” presupposed an inner morality by its actors. Something many people simply don’t possess. His treatise was a tale of an idyllic world where the real story was yet to be written over the next two centuries.
Smith had a deep belief in a supreme intelligence that guided all things human and natural. When human reason failed, God or the Hand would intervene. Free markets according to laissez-faire capitalism’s father were dependant on a firm foundation of ethics. Smith wrote, “Markets could not flourish without a strong underlying moral culture, animated by empathy and fellow-feeling, by our ability to understand our common bond as human beings and to recognize the needs of others.”
Taking the “underlying” morality out of capitalism, Smith’s vision is unrecognizable. Without empathy, capitalism becomes the grotesque distortion revealed through the financial depravity of 21st century mortgage markets.
Two centuries after Smith’s theory went through bumps and starts, rejections and debate, it was embraced with gusto in another fairytale called, Atlas Shrugged, written by former Hollywood screenwriter Ayn Rand. In Rand’s lengthy and outdated sci-fi novel, protagonist John Galt is brutally electrocuted by the rulers of the “collective” hoping he will renounce his staunch belief in individualism over altruism. No matter what painful tortures he endures, he never fails to claim the moral superiority of self-interest.
The 1957 novel stirred up controversy between FDR adherents who believed economies and governments should serve the common good and materialists who believed as Rand did, that “selfishness” was a rational moral code to live by.
Rand’s radical theory was not so radical after all when seen in the big picture of American industrialism. Carnegie, Gould, Frick, Vanderbilt, Morgan and other 19th century moguls, dubbed Robber Barons, subscribed to a Darwinian theory of economy. The cream of money makers would inevitably rise to the top was their guiding principle. Near total anarchy dictated early industrial finance. Bribery, brutality and generally amoral conduct ruled the corporate roosts of the day. Yet despite this proven track record of destructive dog-eat-dog capitalism, Rand named it “virtuous.”
“Ayn Rand rejects altruism, the view that self-sacrifice is the moral ideal. She argues that the ultimate moral value, for each human individual, is his or her own well-being.”
Defining morality as “fundamental principles of right conduct“, Rands’ distorted understanding borders on sociopathic. Her complete lack of empathy and social obligation or conscience defies the modern view of “doing well by doing good.” So who really cares in the five decades since “Atlas Shrugged” for this clearly antiquated and hollow view? Why should any “enlightened” post-crisis citizen be concerned with an obviously flawed perspective? As remarkable as it may seem, everyone alive in America today is paying the price for this empty morality, simply because it was embodied in the High Priest of the Federal Reserve, Rand friend and student, Alan Greenspan.
In “Capitalism: The Unknown Ideal,” a collection of rants from Rand and her lovers, Greenspan writes, “It is precisely the ‘greed’ of the businessman, or more appropriately his profit-seeking, which is the unexcelled protector of the consumer. What collectivists refused to understand is that it is in the ‘self-interest’ of every businessman to have a reputation of honest dealings and quality products” that regulates the markets.
Sadly, the two decade Fed Chief did not see the “fundamental flaw” in his model until after the financial system collapsed in the fall of 2008. “I made a mistake,” he told a stupefied Congress.
Rand, who personally experienced the Bolshevik Revolution and savage Soviet rule, believed the only way man could survive was to rule over himself. Greenspan bought the concept hook, line, and sinker, and did nothing as the competing self-interests of market moguls collided in a cataclysmic explosion heard round the world. We are still paying for his “mistake” and the unfortunate indoctrination of his belief in “self-interest” as sole market regulator. Too bad for America and the world that Alan Greenspan, with his naïve view of the innate genius of selfishness, was pulling the purse strings in the early 21st century.
The trouble with theories is that while they may be poetic on paper, in practice they often fail miserably. The Great Collapse of the U.S. financial system beginning with the government “sale” of Bear Stearns to rival JPMorgan and the 24 months of bailouts since prove that Rand’s theory of self-interest is inherently flawed. In October 2008 as former free market cheerleader U.S. Treasury Secretary Paulson orchestrated the greatest government bailout in history, it was clear that capitalism was dead on arrival. Paulson’s request for $700bn (now growing into the trillions) was in effect a “do-not-resuscitate order” for Smith’s doctrine.
How did we get here, free marketers ask? What went so terribly wrong that self-preservation turned into the ugly face of self-destruction?
Leaving God or Divine Providence out of Smith’s theory, the treatise does not stand. It becomes the “survival-of-the-fittest anything goes” economic system that we know all too well. Smith’s theories were embraced by self-confessed atheists Milton Friedman, Rand, and Greenspan. With the absence of a higher power (the Hand) the theory is flat and requires expertise in behavioral psychology rather than economics.
Smith was brilliant for his time. All was new and exciting in 18th century Scotland, but two-hundred-year- old theories need adjustment for our times. Pure self-interest in reality is a dangerous beast capable of enslaving free people and impoverishing whole nations with impunity. The Protestant value system of Smith’s underlying morality is sadly missing in any modern practice of self-interested capitalism. Honor no longer has value in modern finance, nor does reputation matter enough to prevent deplorable acts of legal theft. Self-sacrifice as taught through the world’s religions is laughed at and ridiculed as unnecessary, even “evil,” by Rand and Greenspan. No one needs to sacrifice any of their personal needs or wants, proselytized Rand. The greedy took her words as the green light they had been waiting for. Aha! They thought, now we can climb our way ruthlessly to the top and name it virtue.
“Reason” was Rand’s God; only reason is not a thing set in stone, it is merely subjective to the individual. I can reason one thing and you another. We can be locked in a debate of rational thinking and remain worlds apart. Rand’s hero Galt declares, “To think is an act of choice. The key to what you so recklessly call ‘human nature,’ the open secret you live with, yet dread to name, is the fact that man is a being of volitional consciousness…the connections of logic are not made by instinct.” No, they are indeed not instinctual. Logic is the product of the human mind. Human beings can rationalize anything- holocausts, suicide bombings, ethnic cleansing, slavery, child abuse, women’s subjugation, and economic tsunamis. Modern minds need to recognize that if we harm others in our society, we are in fact harming ourselves too. That “logic” was left out of the economic tsunami that killed America capitalism.
Leaving emotions and morality out of social structures like our economy defies our very humanness. The mind leads us in the world, yet it betrays us too. In our quest for perfect freedom, we forgot the fact that as humans we are far from perfection. We need a socially conscience legal framework to protect us from the destructive blind spots in our own logic.
Self-interest has to include a reasonable empathy for the greater society we operate in. If our theories don’t establish the necessity as Smith wrote to “understand our common bond as human beings and to recognize the needs of others,” they are not worth the paper they are printed on.
Fairy tales are nice, but they are after all only real for fairies.
Monika Mitchell is the Executive Director and Editor-in-chief of Good Business International, Inc. (GoodB). She writes regularly for the Good-B Blog.