Column on Greenspan versus Rand on Self-Interest

Greenspan versus Rand on Self-Interest

Tibor R. Machan

Nearly every time Alan Greenspan is written about in the media, his early
association with Ayn Rand is remarked upon. The impression is often left
that Greenspan holds the same views as Rand did, especially about the
ethics of egoism or selfishness.

Some will no doubt remember that Ayn Rand wrote a little book, The Virtue
of Selfishness, A New Concept of Egoism, in which she defended the idea
that everyone has a moral responsibility to strive to live successfully,
to achieve happiness in life. This does include one’s economic flourishing
but is by no means confined to it. Indeed, one interpretation of Randian
egoism is that everyone must first discover what would make him or her
happy and then seek to attain that goal.

When economists talk of self-interest—the way Alan Greenspan spoke of it
in his testimony on October 23rd to the House Committee on Oversight and
Government Reform—they have something very different in mind. What they
tend to mean by self-interest is a supposed inner drive we all have to
seek to further what we like, what pleases us, including, of course, our
prosperity. From this view they derive many of their conclusions
regarding the way people conduct themselves in the market place. So, for
example, Greenspan said that “Those of us who have looked to the
self-interest of lending institutions to protect shareholders’ equity,
myself included, are in a state of shocked disbelief.” To Representative
Henry Waxman’s question of whether his ideology pushed him to flawed
thinking that has contributed to the current financial fiasco, Greenspan
replied “Yes, I’ve found a flaw. I don’t know how significant or
permanent it is. But I’ve been very distressed by that fact.”

What exactly is the ideology that Waxman had in mind that supposedly
“pushed [Greenspan] to make decisions that you wish you hadn’t made”? It
was not made clear either by Waxman, Greenspan, or those who reported the
exchange in The New York Times. But it is fairly evident from the context
that they had in mind the standard neo-classical economic notion that
everyone always, automatically, pursues his or her self-interest which has
a substantial economic component to it. And this is supposed to be
especially so with Wall Street firms, including “lending institutions.”

In a less unnatural language the idea Greenspan gave voice to means
roughly that those who work in the lending industry would be motivated by
their professional responsibility to serve their clients properly, not
unlike it is expected that doctors, attorneys, psychiatrists or other
professionals do. But it is not part of this language that professionals
are driven to serve their clients competently, conscientiously. No,
outside of the social science of economics it is pretty much understood
that professionals can carry on properly, ethically, or fail to do so.
Indeed, their self-interest as professionals may well be neglected and
they may yield to act to promote other objectives, some of them at times
induced by various political pressures and contingencies.

For example, if politicians establish regulations that violate the laws of
sound economics, this can promote irresponsible conduct on the part of
professionals in lending institutions and throughout the widely integrated
market place. And this possibility was not at all touched upon by
Greenspan and others at the hearings although it was raised at an earlier
time.

It is true that the professional interests or objectives of lenders would
tend, in the main, to coincide with the best interest of their clients, as
this is true in other professional-client relationships, except when
various bureaucratic and political objectives interfere. But when
President Clinton and many others in Washington, D.C., insisted that
lenders ignore the standards of proper lending because adherence to them
would leave out a pretty sizable segment of the voting population from
among those who would receive loans to purchase homes, this changed the
economic dynamics considerably. It created incentives for both lenders
and buyers to act imprudently, rashly, wildly even, and the overall effect
of it all came to be the current fiasco just as had been forecast at the
time (and reported by, you guessed it, The New York Times—see Stephen A.
Holmes’ report on September 30, 1999, for example).

The ideology that Greenspan seems to have embraced is not what Ayn Rand
taught. Rand advised that we be prudent, strive for success, including in
our economic lives. She didn’t believe, as Greenspan and others seem to
have, that people, including “lending institutions,” will necessarily
pursue their self-interest. Had market agents followed Rand’s advice, this
fiasco would have been avoided. Greenspan himself should have studied
Rand more carefully.

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