Month: November 2015

Rand vs South America

Ayn Rand tells this storyi. She claims to know the protagonist. This is a paraphrased version of what she wrote.

  • A factory in South America was operating at 45% of capacity. An “American” college kid was hired to turn things around. The kid noticed the wages were very low and decided the workers didn’t have enough incentive. He suggested paying by the piece. The wise, old factory manager told him it wouldn’t work, but agreed to try.

  • At first, productivity skyrocketed. But at the end of week three, having made what used to be a months salary, the workers went home and took a week off. When they returned, nothing could keep them from taking a week off each month. So the plan was discontinued.

To Rand, this is an example of the South American’s “anti-conceptual mentality… a passive refusal to think abstractly”ii. Taking time for one’s own interests, instead of earning more money in a factory, is a sign of a mental defect.

The idea that a healthy life requires time with family and friends, time to reflect or pursue social activities; or that people find such things interesting, exciting or even demanding is rejected by her philosophy as a symptom of the “neurotic… desire to escape from reality”iii which leads people to participate in “family picnics, ladies’ tea parties or “coffee klatches”, charity bazaars, vegetative kinds of vacation- all of them times of quiet boredom for all concerned, in which the boredom is the value” allowing them to avoid the “the new, the exciting, the unfamiliar” and the demands of “discrimination, judgement, awareness”iv.

Rand’s philosophy holds that “productive work is the central purpose of a rational man’s life”v. People should go to work because being productive is a goal in and of itself; productive meaning in the marketplace. It is not considered that the employees might now have the time for the productive activities of their own lives.

Rand sums it all up with the decision to stop the plan, implying it is a rational decision. The facts in the story indicate otherwise. The factory was operating at about half capacity, so the goal was to double the rate of production. Since the employer wanted to keep the new plan, the goal must have been achieved; which means an additional 50% more units were produced for the same amount of wages, even with a weeks worth of capacity still to be utilized. More employees could have been hired for the off week with the same high productivity plan. But, apparently the idea of people with time for themselves was so offensive; the factory went back to the old, less profitable system. The employer would rather make less money.

That the story doesn’t make sense, makes it all the more an expression of emotional reality, like a fairy tale or stories from myth or religion. The fabled employees’ sins were to reject her morality’s rewards and demands- the reward of a bigger paycheck and the demand of servitude. When the South Americans chose personal time off, they chose to be immoral. The immoral behavior was both halted and punished by taking away the increased wage.

Rand’s morality tale is well understood by workers in the US. “In a new survey conducted over the first few days of 2015: nearly 42 percent of Americans said they didn’t take a single vacation day during 2014…”vi

One survey found 40% will not take all the vacation days due to themvii for fear of job related consequences. These concerns are not all self imposed, “nearly a fifth of all managers…, said they considered employees who took all of their leave to be less dedicated.”viii Vacationing workers try to compensate; according to one survey, “three in five (61 percent) employees who have taken vacation/paid time off admit working at least some while on vacation.”ix

Fear is not the only reason for refusing time off. Much as in Rand’s fable, economic pressure plays a part. “Many full-time employed Americans get at least ten vacation days, and our survey shows only 13 percent of adult Americans could afford to actually take that many vacation days for the year.”x

Another reason is that Rand’s morality is shared by many people in the US. One study “…found that Americans have a complicated view of taking time off, often thinking of it as a guilty pleasure rather than a worker’s right.”xi Voters in Europe secured 20 to 30 days paid vacation by law, US voters have approved zero legally required vacationsxii. US citizens criticize political leaders for days off, to the point Barack Obama ran on a promise he would not take vacations.xiii Since his election, his vacation habits have been a contentious subject in the media.

i     The Missing Link, pg 37, Philosophy: Who Needs It, Ayn Rand, Signet, Penguin Group, 1984

ii      ibid

iii    The psychology of pleasure by Nicholas Brandon Virtue of Selfishness, pg 64, Signet, New American Library, 1964

iv     The psychology of pleasure by Nicholas Brandon Virtue of Selfishness, pg 65, Signet, New American Library, 1964

v      Objectivist Ethics, Ayn Rand, Virtue of Selfishness, pg 25, Signet, New American Library, 1964

Alan Greenspan 1.4 – Contradictory

In “Gold and Economic Freedom”,  Alan Greenspani wishes to show that “… under the gold standard , a free banking system stands as the protector of an economy’s stability and balanced growth”. However, Alan Greenspan’s examples of unregulated banking based on gold are contradictory.

Greenspan starts with banks generating money to make loans: “A free banking system based on gold is able to extend credit and thus create bank notes (currency) and deposits, according to the production requirements of the economy”.

When the economy is slow, “… when the business ventures financed by bank credit are less profitable and slow to pay off”; the banks: “curtail new lending,…usually by charging higher interest rates.”

When the economy is good, “when banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly”. The loans have lower interest, “and bank credit continues to be generally available.”

His next paragraph creates contradiction. It presents the situation where different countries have the gold standard in common, and “there are no restraints… on the movement of capital”.

If a country has a liberal credit market, “interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries” and “immediately cause a shortage of bank reserves in the easy credit country… tighter credit standards and a return to competitively higher interest rates.”

As a result, “the economies of the different countries act as one… Credit, interest rates, and prices tend to follow similar patterns in all countries”.

Greenspan’s contradictions are:

  1. Banks cannot act according to the production requirements of their economy, as in his first example ; but must act according to the interest rates of the banks in his second example, in other gold standard economies.
  2. The banks in his first example could never have started or participated in their expansion with low interest, because the gold deposits would have fled to the countries in the second example.
  3. If the interest in all the countries started at parity; when the banks of the first example started charging higher interest, the gold would leave other countries and cause those economies to contract. To prevent loss of their gold deposits, the banks of the other countries would also raise their interest rates – causing their economies to contract. Either way, all the countries must contract their economies whenever one country raises interest rates.
  4. Wherever business starts to get better, banks cannot return to the previous low interest rates or they will lose their deposits to other banks. Economic growth will stop as soon as it starts.

 Greenspan fails to show how expansion or growth can begin. His first example of the creation of money starts with the economy already in full swing. When Greenspan’s gold standard economy contracts, the banks have no means to counter that. Instead, the banks wait for businesses to solve the problem, “and require… existing borrowers to improve profitability” without funds. They also “.. restrict the financing of new ventures…”. Both Greenspan’s examples of the individual bank and the multinational situation end with high interest rates and economic contraction.

In Greenspan’s ideal system, there is incentive to set high interest rates. Once high interest rates are in place, there is no way to lower them. Once in a contraction, Greenspan’s gold standard banks do not have the tools to begin expansion. They only have tools to slow the economy down. The contraction must continue. The ratchet only works in one direction.

Here is Greenspan’s statements in full:

“When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus under the gold standard , a free banking system stands as the protector of an economy’s stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-sol long as there are no restraints on trade or on the movement of capital. Credit interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.”

iGold and Economic Freedom, by Alan Greenspan, Pg 98, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

Alan Greenspan 1.5A, parts I & II

Alan Greenspan 1.5A, parts I & II

In his famous essay “Gold and Economic Freedom”, Alan Greenspan presents a gold based banking system.i The way currency is created conflicts with Ayn Rand’s philosophy.

Part I: The banks’ creation of currency. Part II: The conflict with Ayn Rand’s philosophy.

Part I:

Greenspan wrote: “… a logical extension… is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into gold… A free banking system based on gold is able to extend credit and thus create bank notes (currency) and deposits, according to the production requirements of the economy”ii.

Many people would not realize what Greenspan was talking about. And he doesn’t explain it. Greenspan is using a meaning of “deposit” most people don’t know, referring to a bank’s debt. Obviously, a customer’s deposit of gold wouldn’t convert to or substitute for gold.

This is one example of the procedure he described, according to his words:

Step 1: Extend Credit: The banker agrees to loan 900 gold oz to a Borrower, who will spend it on production requirements.

Step 2: Create a Deposit: The banker writes “900 gold oz” in the debt column of the bank ledger. The banker has “created” the bank’s deposit, without a customer deposit or any gold. He wrote down a debt the bank doesn’t owe.

Step 3: Create Bank Notes: The bank notes say the bank owes 900 gold oz, when the bank notes are redeemed. The bank notes document the the banks’ liability in the debt column, not gold. There isn’t any gold yet.

Step 4: Substitute Bank Notes for Gold: Instead of loaning gold to the Business, the bank substitutes the bank notes. The bank retains the loan agreement, a claim for future payments of 900 gold oz plus interest.

Step 5: Convert Deposit into Gold: The value of the loan, 900 gold oz plus interest, is recorded in the asset column next to the banks’ deposit in the debit column.

The result of the process is that the banker, “… holds claims to gold rather than gold as security…iii”.

The process is essentially the same with or without considering reserves.

Greenspan’s “banking system based on gold” prints money that is not backed by gold. They artificially “create” deposits and loan the result, paper money secured by paper claims; which he says “… enables the banker to loan out more than the amount of his gold deposits…iv”.

What Greenspan describes is current banking practice. Greenspan was reassuring bankers that the gold standard wouldn’t change their procedures.

Part II: Greenspan contradicts Rand’s philosophy.

  1. Bank reserves, Greenspan vs Brandon
  2. Inflation, Greenspan vs Rand

II.1:Bank reserves, Greenspan vs Brandon

Many people incorrectly think banks loan part of the customer’s deposit and keep part as a reserve. For example, Nathaniel Brandon, a psychologist writing in the same book as Greenspan’s essay, published by Ayn Rand,

“… Banks do not have unlimited funds to loan; they are limited in the credit they can extend by the amount of their gold reserves.”v

Mr. Greenspan, a trained economist, is clear that is not the case,

“This enables the banker to loan out more than the amount of his gold deposits…vi”. “… holds claims to gold rather than gold as security…vii”. Greenspan contradicts Brandon.

Many people think a gold standard will regulate the supply of money. For Mr. Brandon, the requirements of production must be within how much gold already exists,

“On a gold standard… the supply of money and credit needed to finance business ventures is determined by objective economic factors… the principles governing money supply…viii”

In Ayn Rand’s philosophy, the “objective” economic factor in this case would be the presence or absence of the physical gold.

Mr. Greenspan says gold based banks do the opposite, as they

“create bank notes (currency) and deposits, according to the production requirements of the economy.”ix Greenspan contradicts Brandon.

For Mr. Brandon, the limited supply of gold money tells banks to slow down business activity:

“… in response to the shrinking availability of money… funds are more difficult to obtain… curtailment and contraction of business investment.x ”

For Mr. Greenspan, slow business activity tells banks to limit the supply of money,

“But when business ventures financed by bank loans are less profitable and slow to pay off, bankers soon… curtail new lending… restrict financing…xi ” Greenspan contradicts Brandon.

Once Greenspan is deciphered, the meaning is highly controversial for people who think a laissez faire gold economy automatically does the right thing; that is – the amount of gold available is what determines “the production requirements of the economy”; that people shouldn’t decide production requirements and create currency to match. The idea that money has to be deliberately manipulated to make the economy work is offensive to them. Many people who want a gold standard, want it because they think it prevents human interference with the natural order of things.

Those people are strongly represented in the fan base for Ayn Rand. Greenspan didn’t want to offend them. But he also had to reassure bankers that Objectivism was on their side. So he used technical terminology that regular folks wouldn’t recognize and simply left out any explanation of actual practices.

II.2: Inflation, Greenspan vs Rand

Greenspan advocates “created bank notes” generated by extending credit, based on debt.

This contradicts Rand, who wrote,

“The most disastrous loss… is the loss of the concept that money stands for existing, but unconsumed goods.”xii

Rand disapproves of

“…paper money which is used as a claim check on actually existing goods- but that money is not backed by any goods, it is not backed by gold, it is backed by nothing. It is a promissory note issued to you in exchange for your goods to be paid by you… out of your future production.xiii” “… this dear readers is the cause, the pattern, and the outcome of inflation.xiv”

Rand denigrates what Greenspan advocates. Bank notes are also called promissory notes. The ones the Borrower spends are created out of nothing, cost the banker nothing and are backed by nothing except the future production of the market, which must generate enough income for the Borrower to pay the loan. Yet these promissory notes are in the marketplace competing with actual gold. It is the definition of inflation in a gold economy.

Rand’s philosophy requires money to represent savings from past production. Money based on future production is a major violation. Rand and Greenspan contradict each other.

Rand was wrong when she said,

“Only one institution can arrogate to itself the power legally to trade in rubber checks: the government. And it is the only institution that can mortgage your future without your knowledge or consent: government securities (and paper money) are promissory notes on future tax receipts, i.e., on your future production.”xv

Greenspan asserts the bank based on gold can do the same thing. Merchants and communities don’t have knowledge of, or consent to, the risk these bank notes represent. Greenspan contradicts Rand.

Ayn Rand authorized the publication of Greenspan’s contradictory essay in her magazine and book as appropriate for her economic philosophy; therefore, Ayn Rand contradicts herself.

iGold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

iiPg 97 and 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

iiiPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

ivPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

vPg 78 Common Fallacies About Capitalism, by Nathaniel Brandon, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

viPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

viiPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

viiiPg 78 Common Fallacies About Capitalism, by Nathaniel Brandon, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

ixPg 97 and 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

xPg 78 Common Fallacies About Capitalism, by Nathaniel Brandon, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

xiPg 97 and 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

xii133 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

xiii133 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

xiv128 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

xv129 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

Rand contradicts herself 1.9

Rand contradicts and violates her own philosophy of epistemology.

Rand claims “Modern Philosophers” are attacking her ideas with their “…favorite category (and strawman)… “The Borderline Case.”.. Modern Philosophers’ favorite examples of this “problem” are expressed by such questions as:… “If you had never seen any swans but white ones, and then discovered a black one, by what criteria would you decide whether to classify it as a “swan”, or to give it a different name and coin a new concept?”…”

First, Leonard Piekoff provides the guidelines of Rand’s Objectivist Epistemology:

“Since a word is a symbol for a concept, it has no meaning apart from the content of the concept. And since a concept is an integration of units, it has no meaning apart from its units. The meaning of a concept consists of the units which it integrates, including all the characteristics of those units.” (italics in original)

“Observe that concepts mean existents, not arbitrarily selected portions of those units. There is no basis whatsoever- neither metaphysical nor epistemologically, neither in the nature of reality nor of conceptual consciousness- for a division of the characteristics of a concept’s units into two groups, one of which is excluded from the concepts meaning.”

“Metaphysically, an entity is: all of the things which it is. Each of its characteristics has the same metaphysical status: each constitutes a part of the entity’s identity.”

“Epistemologically, all the characteristics of the entities subsumed under a concept are discovered by the same basic method: by observation of these entities.i”

Mr. Piekoff emphatically tells us. A concept such as “swan” is the whole package. You can’t just pick out one thing about the swan and say it doesn’t count. The all-black bird is a different thing from the all-white bird and requires a name of it’s own, according to Objectivism.

Now for Ayn Rand’s response to the “strawman” of the Black Swan:

“In the case of black swans, it is objectively mandatory to classify them as “swans,” because virtually all their characteristics are similar to the characteristics of a white swan and the difference in color is of no cognitive significance.”

Rand says the answer is “objectively mandatory”, but she ignores her own philosophy that a word sums up the entirety of the concept’s observed characteristics. She arbitrarily decides to disregard a characteristic, an act Peikoff describes as “without basis in metaphysics, epistemology, the nature of reality nor of conceptual consciousness”. The statement that the difference in color is of no cognitive significance ignores the thousands years history of citing the swan’s white color as it’s most important featureii, the Conceptual Common Denominator, to use Rand’s termiii.

Rand also ignores historical facts, because the issue of the Black Swan is not a strawman. Black Swans presented an actual “problem” for scientists. In 1697, Europeans first encountered a Black Swan in Australia. Scientists decided to coin a new concept and give the bird it’s own monotypic genus “Chenopis” instead of classifying it in the genus “Cygnus”. In other words, not a swan. Apparently, the color had cognitive significance for those scientists. For 90 years this opinion held, until John Latham determined that it was indeed a swan and it’s genus was changed.iv The scientific deliberation shows that Rand’s facile pronouncements come from ignorance.

Rand contradicts and violates the criteria of her own philosophy for categorizing observations. Rand falsely accuses “Modern Philosophers” of creating a strawman. Rand makes ignorant pronouncements about a subject that took scientists 90 years to decide.

i Pg. 133 Analytic/Synthetic Dichotomy by Piekoff , Intro to Objectivist Epistemology, Mentor, New American Library, 1967

iihttps://en.wikipedia.org/wiki/Black_swan

iii Pg 18 Intro to Objectivist Epistemology

iv https://en.wikipedia.org/wiki/Black_swan

Rand contradicts herself 1.8

Ayn Rand’s philosophy proves her concept of Capitalism is false and invalid.

According to Ayn Rand’s Objectivist philosophy, a true concept must be observed before it is thought. If there is not an example in the real world, the mental concept is false and invalid.

“…concepts represent classifications of observed referents…”i

”There are… invalid concepts, i.e. … without referents…”ii

“Truth is a product of … identification… of the facts of reality”iii

“All truth is a product of logical identification of the facts of experienceiv

According to Ayn Rand, Capitalism is an “unknown ideal”v. A Capitalist economic system has “never yet existed, not even in America”vi.

If concepts must be observed and Capitalism has never been observed, then Capitalism is not a concept.

If truth is real and Capitalism has never existed, then Capitalism is not true.

If truth must be experienced and Capitalism is unknown, then Capitalism is not true.

If concepts without referents are invalid and Capitalism does not have a referent, then Capitalism is an invalid concept.

Therefore, Ayn Rand’s philosophy proves Ayn Rand’s concept of Capitalism is false and invalid.

Sources:

Introduction to Objectivist Epistemology, New American Library, Mentor edition (paperback) 1979 Library of Congress # 78-71454

Capitalism: The Unknown Ideal, New American Library, Signet edition (paperback) 1967 Library of Congress # 66-26772

i Introduction to Objectivist Epistemology, Definitions, pg 62

ii Introduction to Objectivist Epistemology, Definitions, pg 65

iii Introduction to Objectivist Epistemology, Definitions, pg 63

iv Introduction to Objectivist Epistemology, The Analytic-Synthethic Dichotomy pg 158

v Capitalism: The Unknown Ideal

vi Capitalism: The Unknown Ideal, The Objectivist Ethics, pg 33