DEL.ICIO.USGreenspan admits free market has foundered
Monday, October 27, 2008
Whatever else you might say about the man, Alan Greenspan took his punishment like a grown-up.
Appearing before the House Oversight Committee last week, the former Federal Reserve chairman acknowledged that the anti-regulatory, hyper-free-market ideology that had served him well for 40 years — a philosophy that he literally learned at Ayn Rand’s knee — had in some ways been wrong.
And not just slightly wrong. The economic crisis has revealed a flaw, he said, “a flaw in the model that I perceived as the critical functioning structure that defines how the world works.”
Greenspan did not come easily to that confession, but the fact he came to it at all speaks well of his intellectual honesty. As a young man, Greenspan had been a member of Rand’s inner circle, absorbing her claims that altruism was evil, that taxes should be voluntary, that mankind had no responsibility to others and that “each man must live as an end in himself and follow his own rational self interests.”
“I am opposed to all forms of control,” Rand proclaimed. “I am for an absolute laissez-faire free unregulated economy. I am for separation of state and economics.”
The young Greenspan lapped up talk like that. In a letter in 1957 to the New York Times, he defended Rand’s philosophy. “Justice is unrelenting,” he wrote. “Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”
Time and experience eventually softened the harsh edges of that belief for Greenspan, but he never wavered in his opposition to regulation or in his belief that individuals, left free to selfishly pursue their own self-interests, would generate wealth and make markets self-correcting without the heavy hand of government.
That’s the part he got partially wrong, he said last week.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shock and disbelief,” he told the committee.
While Rand’s “objectivism,” as she called her philosophy, never attained the wide appeal she sought, many of its tenets and language have been absorbed into modern conservative economic theory. And Greenspan is far from alone in acknowledging that it has not held up well in current circumstances. As a result, issues long regarded as settled in American politics are about to be reopened.
“Over the past year, some of the critical pillars underlying market competition arguably have failed,” Greenspan admitted in a speech earlier this month at Georgetown University. “A worldwide debate on the future of globalization and capitalism is being intensified by the current crisis. Its resolution will define the world marketplace and the way we live for decades to come.”
That’s a potentially dangerous undertaking. In his Georgetown speech, Greenspan correctly defended the core importance of property rights, economic liberty and capitalism. As he noted, those concepts have proved essential to economic progress and should not be abandoned.
However, as he also noted, the only way to sustain political support for a capitalist system “is to continue to support market incentives that create jobs and to find productive ways to ease the pain of job losers.” He also took note of “the recent growing inequality of income,” a new problem that “requires insight into its roots, and policy action where appropriate.”
Ayn Rand, in other words, would not be pleased with her disciple. She liked to claim that her philosophy was based on hard-headed realism, the notion “that reality exists as an objective absolute.”
Well, the “objective absolute” that is reality has tested her philosophy and found it faulty, a ship of illusions that ran aground on the shoals of experience. The challenge for the next president and Congress will be to correct our course without steering us too far in the other direction.
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