Origin of Today's Financial Crisis
Ayn Rand's Atlas Shrugged vs. Karl Polanyi's Great Transformation
Mar 4, 2009
Mainstream media pundits are stepping over one another weekly in reaching for insights about the cause of the current financial crisis. One of today's favorite sources is Ayn Rand's last novel. Imagine a debate between Ms. Rand, born and educated in Russia, and Hungarian economic intellectual Karl Polanyi. Both immigrated to N. America, home to an interesting juxtaposition of their philosophies on social markets.
Atlas Shrugged
This 1957 novel gave birth to the term 'kilo pages' due to its length (over 1,000 pages). It advocated the power of the individual over society, which Ms. Rand deemed more important than society's power over the individual. It was a manifesto for advocates of the free market economy as a self-governing, self-regulating, all-balancing force. Ayn Rand may have been responding to a theory about the Great Depression published as "The Great Transformation."
The Great Transformation
This 1944 book examined the belief in "an all encompassing market that always and everywhere harmonized the actions of self interested individuals toward beneficial outcomes" which, according to its author Karl Polanyi, "could not exist for any length of time without annihilating the human and natural substance of society." Mr. Polanyi argued that such a utopia forgets that markets are human inventions; and, most importantly, that humans can be selfish creatures.
Current Financial Crises
Enter the self-enriched architects of Wall Street's current crisis. They packaged bad debts and sold them as equities. Bonuses earned by competitive executives were accepted by regulators who assumed market sensibility. Regulators failed to regulate. Executives failed to disclose the risk of investing in loans made systematically to people who could not afford them.
In this case, did the free market system harmonize the needs of the many with the desires of the few? Few would argue that the free market successfully regulated itself, especially after the Bush Administration began a bailout of failed companies the government could not allow to collapse. These institutions became too big to fail. This was due, in part, to lobbyist's increasing influence with lawmakers. The whole apple cart is officially out-of-balance.
Once the private-sector dismantled its industry's system of legislative checks and balances, markets careened off a dangerous cliff. As a result, every dollar of wealth created on Wall Street since 1997 was erased in the past year, except for the wealth paid out as bonuses to the architects of the crisis. Clearly the individuals that prospered did not assume the risk. It is now obvious that risk and reward were divorced. Investors were the last to receive this news.
Risk & Reward
In the words of an astute student of modern culture, markets are "subject to the same complexity as human institutions everywhere. No grand system flows from this thought. It merely returns the economy to the wonderful and tragic orders and disorders of human life", - David Franz, University of Virginia doctoral student.
A central tenant of 'free markets' is that risk and reward are married. The Obama Administration has begun the difficult task of re-inserting this axiom into our system of financial controls. Mr. Polanyi seems very wise to have pointed out 65 years ago that the market is anything but 'free.' While altruistic individuals certainly exist, can it be said that all individuals are altruistic?
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