Tuesday, October 23, 2012

Ryan’s muddled thoughts are of Rand, Hayek

Vijay K. Mathur

Published in Standard-Examiner September 9, 2012  

Let me first briefly give you some background on both of these thinkers, who, according to media reports, have shaped Rep. Paul Ryan’s thinking on government and free markets. For more details on their views, you could read their books, "The Fountainhead" and "Atlas Shrugged," by Ayn Rand and "The Road to Serfdom," (1994), first published in 1944 by late Austrian economist and Nobel laureate Friedrich A. Hayek.

 Ayn Rand was born in Russia in 1905 and developed intense dislike of the Bolsheviks and communism. In 1926 she migrated to the U.S. Her two fictional novels contain some of her views about government’s role in society and on economic policies. NPR site (www.npr.org) presents an interview of Rand by late "60 Minutes" journalist Mike Wallace, in which she expressed her concept of "objectivism." She says this concept is a system of morality that is "not based on faith ... but on reason." She was totally against all forms of controls, including taxes, and a firm believer in laissez-faire with no government regulation. The economic concept of laissez-faire was first proposed by a group of French writers called physiocrats during 17th and 18th centuries.

Ayn Rand was completely opposed to any general welfare programs such as Social Security, Welfare, Medicare, Medicaid, and unemployment compensation. This ideology contradicts the U.S. Constitution, since Article I, Section 8 specifies that the Congress provide for national defence and general welfare. The idea of laissez-faire advocated by Rand, was a critical response to mercantilism during 17th and 18th centuries’ Europe, whereby the merchant class persuaded states to regulate the economy to serve their own self interests. It seems that they believed in individual rights and property rights but only so long as their interests were served.

Hayek admits that his controversial book is a political book. He severely criticized socialism, where means of production are controlled by government. According to him, socialism works against individual freedom and it "…means abolition of private enterprise, of private ownership of the means of production, and the creation of a system of planned economy in which entrepreneurs working for profit are replaced by a central planning body." He supported competitive markets and criticized planning. Hayek was as critical of conservatives as he was of liberals who advocated or sympathized with socialism. He states, "A conservative movement by its very nature, is bound to be a defender of established privilege and to lean on the power of government for the protection of privilege." This comment exactly fits what current GOP and Romney/Ryan have on their agenda.

The U.S. and democracies of Western Europe have neither laissez-faire nor socialism, as defined by Hayek. These are mixed economies where governments’ role in markets is complementary in nature rather than a substitute for private enterprise. Even China, India and many Eastern European countries are gradually moving away from socialism as Hayek envisioned. Rand’s and Hayek’s fears of socialism and ultimately totalitarianism are not based on reality of markets in the U.S. and other countries of Western Europe. Rep. Ryan’s notion of free markets and regulation is outmoded and indicative of muddled thinking on the role of markets and government. Research, since the days of Rand and Hayek, has shown that markets in some areas of the economy, without government assistance and/or intervention, do not work efficiently due to market failure problems.

Environmental quality, national defense, human capital accumulation (education), research and development and space exploration are some of the examples of sectors where markets break down. For example, if an oil refinery pollutes, it violates homeowners’ property rights when they suffer health problems or property damages. Therefore, unless government intervenes to force the refinery to internalize its cost of pollution in the price of oil, the refinery has no incentive to do so. One may argue that individuals could sue the refinery. That is a very inefficient way to solve the problem. A cost effective strategy requires the government to own property rights for air-sheds on behalf Americans and hence enforce those rights by pollution taxation or by creating a market for pollution rights.

Another example of market failure arises when there is a very high risk in providing a product or service, such as infrastructure development, space exploration, basic R&D and other public goods. The U.S. government role is also called for in providing services for the general welfare of its citizens, as the Constitution specifies.

Mr. Ryan must understand that Hayek’s ideas and especially Rand’s ideas on free markets must be tampered with economic reality of markets. It is the government that had to come to the rescue of markets in the Great Depression of 1930s and again in the great recession of 2007-08; regulations had to be implemented to restore the integrity of the financial system plagued by scandals.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.  He also writes blogs for the Standard-Examiner at http://blog.standard.net/economics,etc.

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