I intend to use this blog as a platform for my daily thoughts on a variety of topics. I welcome comments, objections, and questions.

Wednesday, February 18, 2009

The Cause of the Economic Crisis: Altruism

What caused this massive economic crisis that we are all suffering from? That’s the question on everyone’s minds. The common answer is that this was caused by greedy businessmen, Wall Street executives, or the most common explanation: that this is the ultimate failure of the capitalist system. The solution, therefore, is to abandon capitalism once and for all, impose stricter regulations on business, pump trillions into the economy, and have the government assume a large portion of control over essential industries such as banking. This will, supposedly, restore economic prosperity and bring the country back to normal. I argue, however, that the precise opposite is true. In the long-term, this philosophy will bankrupt this country (economically, socially, and morally). Most importantly, I am going to argue that it is altruism, not self-interest, and government intervention, not capitalism, which have caused this crisis. This will be a tad long, but please stick with it.

Ayn Rand believed that at the core of American values lies a contradiction that would one day explode: the ethics of altruism vs. the ethics of self-interest. Politically, our country was established as an organization designed specifically to protect self-interest and individual rights. It was your own responsibility to live a good life, and the government's job was to protect you from external force. Ethically, however, many believed in the obligation of altruism: that morality consists in sacrificing your own self-interest for the weak. Anyone who seeks money and success for their own benefit is evil; anyone who works solely for the benefit of others is good.

Gradually, Americans came to believe that if you did not voluntarily choose the moral path of altruism, the government should force it upon you. This belief came into prevalence under the Progressive movement of the late 19th and early 20th centuries, and came into full fruition under FDR during the Great Depression. Nevertheless, the majority of Americans tried to hold both of these principles at the same time: that everyone should be free from coercion, and that altruism should be imposed for the sake of the weak. The internal contradiction, of course, is that in order to impose altruism, someone must always be coerced. It started out small. Only the rich should be coerced through measures such as the progressive income tax. They do not really deserve their wealth anyway, and they can handle it. Obviously they do not have the same rights as everyone else to be free from force.

Over time, the amount of sacrifice required and the number of people made to sacrifice grew substantially. You have to sacrifice for the poor, you have to sacrifice for the elderly, you have to sacrifice for the sick, you have to sacrifice for war, you have to sacrifice for all of Europe, you have to sacrifice to bring democracy to other nations, you have to sacrifice for the entire world, you have to sacrifice for all future generations, you have to sacrifice for everyone and everything, for the sake of sacrificing, because it is the moral thing to do. We now live in a world where the government no longer exists to protect you from force, but to force you to sacrifice for whatever it deems necessary. Rather than living for your own happiness, you must provide for the happiness of others, regardless of cost. That cost is now in the trillions upon trillions of dollars, and it continues to grow. (See: and . And how efficiently is the government spending your stolen money? The Treasury Department currently estimates the total debt to be $10,759,016,081,652.99. This is an unimaginable sum of money, stolen from individuals to pay for the altruism imposed upon them against their will.

This debt is not something that just goes away. Every year the government “borrows” more money from the American taxpayer and the debt increases. The dollar continues to lose value. There is no concern over how such “borrowing” affects the individual. There is no discussion of what technological innovations never happened because of the massive amount of money successful businesses have to pay to fund these programs. There is no discussion of how many bright young stars simply shrugged their shoulders and gave up before they even began. Why strive for success and profit when it will only be punished and vilified?

This same philosophy of altruism in government spending programs caused the current banking crisis. The majority of people seem to believe that laissez-faire capitalism is the primary cause of the current crisis. However, the opposite is true. In a capitalist system, all banks are owned as private businesses, which have the same possibility of success or failure as any other business has. If the bank practices sound fiscal policy by investing well, they will generate wealth for both the people they invest in, and the individuals who put their savings in the bank. Everyone had to be careful who they gave their money too, for if they made bad choices in their investments, both they and their investors were subject to grave failure. In other words, every bank and every individual had to invest their wealth selfishly.

The consequence of this selfish investing was that some people were economically prosperous with quality banks, while others lost their savings with sub-standard banks. It is the very nature of reality that certain decisions are beneficial, and others are harmful. Part of the crux of the Progressive movement, however, was that no one should be subject to losing their savings because a bank failed to practice sound investment. In other words, the government should protect everyone from reality. And thus, the Federal Reserve was born. From then on, if a bank failed economically, it would be infused with government funds. These government funds, of course, were taken from individuals by the same justification as the rest of government spending: it is better for others as a whole if we impose altruism upon you. With the government-backed guarantee, banks were encouraged to spend everything they could get away with, regardless of the soundness of the investment. The inevitable result was that banks spent much more than they could afford and spent on dubious projects that they otherwise would never have made investments in. They no longer had a reason to fear failure if their investments did not work out. Within 20 years, the banking system as a whole collapsed and we had the Great Depression.

Alan Greenspan was once in agreement with Ayn Rand’s economic philosophy, and even wrote a few famous articles on the subject in her book, Capitalism: The Unknown Ideal. Because of this, most people recognized Greenspan as an advocate of laissez-faire capitalism. When he came to chair the Federal Reserve therefore, everyone equated his policies with that of laissez-faire. The confusion is understandable, as under his watch, he lifted a large portion of the regulations controlling the amount of capital infused into the banking system by the federal government. These regulations were lifted on the premise that pumping as much capital as possible into the economy is the most beneficial to the country as a whole. This is NOT laissez-faire capitalism, but rather government-backed cronyism. Banks are not subject to the consequences of competition and the possibility of failure, but are “free” to act as impulsively and irrationally as they want. This system in no way resembles a free market. The result was the same as what happened before the Great Depression. Banks started spending wildly, investing in enterprises and properties that a regular business would not have touched with a 10 foot pole. The inevitable result of all this reckless spending was a major crash.

So what is the proposed solution? Not to restrict the amount of money guaranteed to banks by the government, but to drastically increase it! These banks that have done such a horrible job of investing are now being given even more money, once again with no consequences when they invest poorly. This is the very definition of lunacy.

But it’s not just failed banks that the government thinks should exist under this system. Other companies that have failed to invest wisely are given billions of dollars in free money, with little to no conditions on how that money is to be used or how the company will drastically change its business model to prevent the same crash down the line. In fact, GM and Chrysler are already seeking another $39 billion in addition to the $17.4 billion they have wasted. What gives them the right to this money and what will they do differently in a few months to out-compete better companies?

The moral principle that we are now operating on is, the more you fail, the more money you should receive from the federal government; the more you succeed, the more money the federal government should take from you. This is the very essence of altruism. Is this not the most perverse inversion of justice that one can imagine? If you look at where money in the stimulus is going, all of it is to programs and businesses that the current government deems to be essential. But no one is asking, what right do they have to decide who is "saved" and who is destroyed? What is essential, who is it essential for, and for what?

Let's look at our future, after this stimulus package goes through. Let's even assume that it does result in an increase of GDP and a decrease in unemployment in the short-term. Massive government spending of this kind is nothing besides a massive redistribution of wealth. Yes, unemployment goes down, but the jobs created are simply stolen from other areas and people. The money that a successful business would have used to expand their operations and hire new people is simply moved to a failing business and failing people. Yes, GDP goes up, but which individuals benefit and which fail? Those businesses and individuals that have enough political pull to get money succeed at the expense of the most successful of businesses that had "a little extra money."

More importantly, what kinds of people are going to arise from this crisis, and what kinds of people are going to give up? If you've worked hard and honestly your entire life, only to see failure rewarded and your success punished by even more taxes and government regulation, wouldn't you be tempted to give up? If you saw failures getting rich off the government dole, while successful businesses struggle to make a profit, what incentive would you have for going into business? Which kind of businessman will be more successful in this climate: The honest worker or the man who knows how best to yield political pull?

The few of you who have made it this far are probably asking, what would I do differently? The most important thing we can do is realize that we cannot have our cake and eat it too. We cannot have both a thriving capitalist country and a quasi-socialist welfare state that takes care of everyone. This crisis is living proof that contradictions cannot exist. Either we live as a socialist state, where everyone is coerced to act in the interest of society, or we live as a free country, where everyone makes their own choices and lives for their own happiness. If you want to spend your time and money for the cause of others, that is your choice. In plenty of cases, I would say that’s a worthwhile and self-interested choice. But it should be just that, your choice.

The solution to this crisis should begin with the dismantling of the massive regime that imposes altruism upon you every day. It’s not only immoral, but the country simply cannot sustain it economically. The most important thing we can do is completely overhaul the banking system. For all of the reasons I described, the Federal Reserve System is doomed to failure. Even if the government drastically increases the conditions by which it infuses money into the economy, banks will still continue to make bad investments. As long as banks are not subject to the conditions of reality like every other business, this problem will continue. For those of you thinking that the government should therefore take total control over the banking system, I urge you to look at historical examples of state-run economies such as Soviet Russia. The current state of banks in the world is so drastically bad that they will probably require the government to temporarily assume all debts, but what’s a few more trillion? What we need is an eventual return to a private banking system, subject to the same market forces as all other businesses. For the interest of time, I will refer you here to Capitalism: The Unknown Ideal, particularly the essay, “Gold and Economic Freedom”, written, ironically enough, by Alan Greenspan.

Along with a private banking system, I believe that all government spending should be drastically slashed, and we should move on a course back towards a free market. What I am about to say next, however, will likely surprise all of you based on everything I have just written. To help pay for the government assumption of bank debt, and to get us closer to a financial budget that makes any kind of logical sense, I believe it necessary to temporarily raise certain taxes. During World War II, everyone in the country was mobilized in the war effort. We were all asked to contribute what we could to help build machinery and raise revenue for the war. I could argue about our involvement in Europe and the immorality of the draft, but the analogy I am drawing here is essentially the same. It is time to ask everyone for a similar mobilization, but NOT for the sake of expanding government power and responsibility further, but rather for liberating ourselves from the terrible mistake we’ve made in allowing the government this much control.

Thank you for reading, and I hope that my perspective has been of interest. Please feel free to leave comments for discussion. As a further note of interest, I highly recommend that you read both Atlas Shrugged and Capitalism: The Unknown Ideal by Ayn Rand.