Ayn Rand Did Not Understand Capitalism

On October, 1957, Ayn Rand’s novel Atlas Shrugged first appeared. It was greeted by one reviewer with what I regard as the supreme put-down in the history of literary criticism: “This is the worst American novel since The Fountainhead.”

It is a conceptually confused novel. It was offered in the name of individual liberty, yet its description of how capitalism works is so wrongheaded that it undermines what Rand regarded as a call to economic liberty. I can think of few books that have more completely misunderstood how capitalism works. It has always baffled me that anyone who understands the nature of the capitalist system would find much in this book to praise.

The book’s theme is this: the captains of industry are intellectually gifted people who are the source of the capitalist system’s productivity. There are very few of them. At some point in the future, they bond together by their commitment to the defense of liberty of thought and personal creativity. When they see that the political deck is stacked against genius and creativity, they retreat from society to hole up like Butch Cassidy’s Hole in the Wall Gang. They hole up in a Colorado valley, not in Wyoming. Without their presence, society begins to break down. The government’s mismanagement brings everything to a grinding halt. The closing image of the book is a train wreck, which was the result of lame-brained government officials. This train wreck symbolic of both social decay and discontinuity.

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Fact: It was not government that destroyed passenger trains. It was the airplane. This was no discontinuity. It was a steady process that was far advanced in 1957. Why Rand used a train wreck as her symbol of discontinuity is unclear to me. Why not a plane crash?

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I can imagine no more confused description of capitalism and the battles we faced in 1957 and still face today. The captains of industry are not high-minded intellectual giants. They are people with the peculiar knack of making money. This knack is ultimately personal and unique. It cannot be taught. It cannot be reduced to formulas. Entrepreneurship is the ability to forecast the economic future and then allocate resources so as to meet consumer demand. This is the thesis of Ludwig von Mises in Human Action. The works of Mises’ student Israel Kirzner best explain the uniqueness of the entrepreneurial knack.

Far from being intellectual giants, successful capitalists display above-average intelligence, but genius is as rare among them as it is in all other above-average IQ populations. They share no common traits, other than the ability to find ways to exploit the ignorance of their competitors regarding future supply and demand. High-minded? Hardly. Adam Smith described them well in 1776: ready to collude together against the public interest whenever they can get the state to provide them with a monopoly through state coercion.

Consumers pay them for only one thing: their ability to deliver the goods at a low prices. Capitalists stand ready at any time to get the state to skew the conditions in their favor. Smith did not have one good word to say for businessmen as a class. He distrusted their motives completely. But Rand treated them as if they were heroes under siege by the state. Better to see them as ideological trimmers laying siege on their competitors and consumers alike by means of the state’s collusion with them.

Rand did not understand entrepreneurship. She did not understand that society-transforming entrepreneurship is not about doing great, creative things. It is about doing little, unconventional things for 250 consecutive years. It is not about rugged individualism. It is about using the prevailing system to make a buck any way you can, and then stay out of jail.

Consumers are in charge. They don’t make capitalists rich because businessmen are ideologically pure or heroic defenders of property rights. Consumers hand money over to them to get what they want. Capitalists respond to incentives. The main incentive is money, not the applause of the public for a job ideologically well done.

We get what we pay for. We pay for delivery of the goods in the situation at hand. We need not fear that Atlas will shrug. We should instead fear that he will pay off some key politicians to get an edge against the ever-fickle, ever-demanding consumers: us.

The heart of the free market’s competitive order is the threat of replacement. Sellers fear replacement by other sellers. Consumers fear replacement by other consumers. Producers look over their shoulders and think, “If I could just shut these guys out of the market.” Consumers look over their shoulders and think the same thing about rival consumers.

For every captain of industry ready to retire, there are a dozen or more up-and-coming hot-shots ready to replace him. The free market rewards captains of industry with huge benefits. The idea that there are only a few of these people, and their departure into Colorado could in any way undermine the creativity of entrepreneurs, is ludicrous. There are always smart, innovative people ready to replace retirees, no matter why they retired.

Whatever appeal the novel has had to budding capitalists, it is utterly misguided. It misrepresents the motives of the captains of industry. It also misrepresents their crucial ability: not ideological purity but rather the ability to make a buck.

Sellers are ready to sell the country’s freedom in exchange for an edge against other sellers. Consumers are ready to do the same against other consumers. Meanwhile, the great economic goal of special-interest group politics is to keep competition out of the marketplace. This, politics has done with great skill.

Rand described a great discontinuity: the retreat of the creative elite from participating in the capitalist system. She ignored the obvious: the creative elite in capitalism is in it for the money. “Show me the money” is their universal mantra. The greatest discontinuity that we face today is the discontinuity imposed by a government-licensed central banking cartel that has lured entrepreneurs into high-risk projects. How? With false signals: low interest rates produced by fiat money rather than thrift. The threat is not that Atlas will ever shrug. It is that he will lift the earth too high, stagger, and then drop it without warning. His looming problem is not shrugging. His looming problem is a hernia, followed by a slipped disc.

For information about economics, current events, and a lot of other cool stuff that you won’t find anywhere else, go to  www.GaryNorth.com

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