Economics in Ayn Rand’s Political Philosophy

In a previous New Ideal article, I explained how I came to write a chapter in editor Jonathan Hoenig’s A New Textbook of Americanism: The Politics of Ayn Rand. My chapter contains answers to seven of the forty-one questions Ayn Rand thought needed answering in order to explain the distinctively American approach to political philosophy. In my previous New Ideal article, I republished the part of my chapter that focused on fundamental political principles. Here, I’m offering the remainder of my chapter, examining some important economic topics.

And just in case you missed Elan Journo’s recent New Ideal article describing the book’s many valuable chapters, you should be aware that the book includes never-before-published material from Ayn Rand — eighteen pages of Rand’s previously unseen remarks given in a private workshop on ethics and politics that she conducted in 1971.

­On American Political Philosophy

By Onkar Ghate

In creating a new nation, America’s Founding Fathers created a new form of government with a new purpose. Individuals, they wrote in the Declaration of Independence, possess inalienable rights “to life, liberty, and the pursuit of happiness.” The function of proper government is “to secure these rights.”

At the close of the Constitutional Convention of 1787, in response to the question, “What have we got, a republic or a monarchy?”, Benjamin Franklin is reported to have answered, “A republic, if you can keep it.”¹

To keep it, what must we do? First and foremost, we must understand and be able to articulate and defend the principles that govern the distinctively American system of government. Ayn Rand’s purpose in starting her Textbook of Americanism, I think, was to help us gain this understanding. The questions and answers below, inspired by Rand’s incomplete project as well as her later writings on individual rights, government, and America, are in this same spirit.

[My first four questions and answers are omitted here. They can be found in my previous New Ideal article.]

WHAT IS THE PROFIT MOTIVE?

Perhaps the most radical idea in the Declaration of Independence is the idea that each of us has a moral right to the pursuit of our own individual happiness. There exist no unchosen duties that bind us to others and drain away our lives. We are not born in service to a king, a pope, our brothers, or the nation. Our lives are ours to make of what we will, by ourselves and for ourselves, dealing with other individuals only when both parties find it beneficial. The profit motive is an aspect of our right to the pursuit of happiness. It should be treated with the same respect and reverence.

To pursue happiness is to set out to achieve all the values you need to live and thrive. One thing obviously needed is wealth. Think of Robinson Crusoe. He has to build shelter, learn to hunt, and make his own clothing. If he does not succeed in creating wealth, he will die. It is produce or perish. The same is true if you live in a free society.

In today’s advanced economy, of course, we don’t have to produce directly all the things we need to live, but we still have to be wealth-creators, to create goods or services that we trade with others who are doing the same. Each of us brings to the market what he can produce and exchanges it for what he regards as more valuable. Both parties to the exchange expect to profit. That’s why we trade.

It matters not if you are an employer or an employee, a capitalist investor or a worker, one motive driving you is your financial well-being. If, say, you are a fast-food worker just hired by McDonald’s, your motives include financial gain. The money you are paid and all you can buy with it are worth more to you than the time and effort the job requires. And if you are the manager of that McDonald’s, you are also motivated by financial gain. By hiring an additional person, you expect to improve the restaurant’s bottom line.

Each individual’s pursuit of profit — his creation of wealth — is what underlies economic activity. The desire to earn a profit is the desire, not to steal or swindle your way to riches, but to make money. “If you ask me to name the proudest distinction of Americans,” one of the heroes of Rand’s Atlas Shrugged says,

I would choose — because it contains all the others — the fact that they were the people who created the phrase “to make money.” No other language or nation had ever used these words before; men had always thought of wealth as a static quantity — to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words “to make money” hold the essence of human morality.²

Although the phrase “to make money” did exist before America’s founding, it does capture distinctly American values.

As important as creating wealth is, it is not the only value life requires. Properly, the pursuit of profit is part of the pursuit of happiness. It’s not money for the sake of money, but money for the sake of life and happiness. The American dream is not to sit, Scrooge McDuck-like, on a pile of money, but to carve out a thriving, enjoyable existence for yourself and your loved ones. To create wealth is indispensable to this dream. To allow people to damn the profit motive, with no word of disagreement or protest on your part, is to allow them to damn your pursuit of happiness.

IS ECONOMIC COMPETITION BENEFICIAL?

Yes.

Competition is inherent to capitalism as one of the consequences of the system. Competition is a process of individuals and companies scaling ever-higher peaks in pursuit of profit. Eastman Kodak and others help bring photography within the reach of everyone, thereby enriching the lives of billions. Then an even better product is developed and commercialized, the digital camera, and customers move to it, now even better off. The fax machine improves business by increasing the speed and ease of communication, and millions use the device. Then it is displaced by something even more convenient, e-mail. Microsoft attracts the vast majority of personal computer users until Apple invents and commercializes its transformative devices, the iPod, iPhone, and iPad.

Don’t allow people to deride competition under capitalism as “dog-eat-dog,” as though one person’s gain comes at another’s loss. To be sure, as individuals and companies invent new processes and products, they thereby create different and better opportunities for trade. Whereas before you could exchange your hard-earned money only for film cameras (remember those?), now you can do so for digital cameras and smartphones. In every trade, both parties expect to profit; it takes place precisely because it’s win-win.

But what about Eastman Kodak, as it watches its previous customers switch from buying film to buying digital cameras, or Microsoft, as it watches its previous customers buy iPads running iOS instead of laptops running Windows? Surely they and their employees are victims of capitalism’s “cut-throat” competition? Absolutely not. First, and most important, Kodak and Microsoft exist because of the free, competitive marketplace capitalism creates. These companies came into being and prospered by offering something new and better. No company (or individual) is a victim of the very conditions that made its success possible. Second, no company owns its customers; customers are not property stolen from a business. In terms of its customers, all a company “owns” is the right to create goods and services and offer them for sale to willing buyers. And this right neither Kodak nor Microsoft have lost. If potential customers now find a better deal elsewhere, they can and should take it. You cannot lose that which you did not possess in the first place.

Moreover, under the competitive fires of capitalism, in which new ideas are constantly being forged, new products, new manufacturing techniques, and new forms of business continue to emerge. Anyone who is willing to put in the effort can learn and grow. Individual by individual, we can and do learn to incorporate the new ideas, products, techniques, and forms of business management created by others into our own work and activities. Each of us becomes more and more productive. We all profit.

Under capitalism, in short, products, companies, and entire industries are created and then displaced by something still better, all through individual, mutually beneficial transactions. The freedom to compete in the marketplace, which entails the possibility of sometimes being out-competed, is in the interest of every productive American. Competition’s benefits are enormous. It is not to be disparaged or surrendered.

WHAT IS THE MEANING OF THE LAW OF SUPPLY AND DEMAND?

Prices in a free market are determined not by the arbitrary desires of buyers or sellers or of government bureaucrats, but by voluntary action operating under the law of supply and demand.

Economically, the law says that the price of a good will be adjusted so that the quantity supplied in the marketplace and the quantity demanded will be equal and in harmony. Consider a simple illustration. Suppose you had a magic wand and tomorrow raised the price of a dozen eggs from three dollars to nine dollars. At this price, many families would find eggs too expensive in comparison to other food options and would purchase fewer each week. The quantity demanded would fall. Egg producers would find themselves with too many unsold eggs sitting on store shelves: the quantity supplied would far exceed the quantity demanded. But egg producers, knowing that they could sell their eggs at a lower price, which would attract additional buyers, and still make a profit, would choose to lower the price of eggs to three dollars.

Now suppose that instead you used your wand to lower the price of eggs to fifty cents. At that price, many families would find eggs so cheap in comparison to other options that they would buy more. Eggs would fly (no pun intended) off the store shelves and many willing buyers would be met with empty shelves when they tried to buy eggs. The quantity demanded would exceed the quantity supplied. But in the face of quickly emptied store shelves, egg producers would choose to raise the price of eggs, knowing that they could sell the same amount of eggs at a higher price and thereby boost their profits. The price of eggs would rise back to three dollars. A market-clearing price is reached when quantity demanded equals quantity supplied.

Morally, the meaning of the law of supply and demand is threefold. First, the law rests on the profit motive. Second, the law acknowledges that supply must precede demand; production must come before consumption. Third, the law recognizes that the economic value of your product is not what you or the government decrees it to be, but what others are willing to exchange for it.

In a capitalist system, prices are set by individuals at a level that both parties find beneficial. You would rather have a dozen eggs than the three dollars in your wallet, and so you make the trade. The egg producer would rather have the three dollars than the eggs. Both of you profit; neither is a victim.

When prices are not set by the law of supply and demand — when, for instance, the government forcibly lowers the price of rental apartments or raises the minimum wage — someone is victimized. Under rent control, many landlords find it unprofitable to rent and withdraw their properties from the market (or never build them in the first place), thus the shortages of attractive, livable spaces that prospective tenants experience in rent-controlled cities. With a higher minimum wage, employers find it unprofitable to hire inexperienced, low-skill workers — and these workers find it increasingly difficult to get a job.

Second, the law of supply and demand acknowledges that your ability to create wealth determines your ability to demand. The goods or services you produce and sell are what bring in the money you can then use to buy other goods. Your supply precedes your demand. The law, in other words, permits no free lunches. When government manipulates prices, however, it does so precisely to hand out a free lunch. When, say, it imposes tariffs on imported steel, and thereby restricts supply and raises the price of steel domestically, it does so to give domestic steel companies a profit they did not produce and do not deserve.

Third, the law of supply and demand recognizes that the economic value of what you produce is no higher and no lower than the amount others are willing to exchange for it. No one can force his arbitrary desires on others. An egg producer might feel that eggs are a super food worth nine dollars a dozen, but he cannot enact his desire into law. A commuter might feel that four dollars for a gallon of gasoline is absurd and that there ought to be a law against it, but he, too, cannot enforce his whim. All the egg producer can do is refuse to sell eggs and instead go into some other line of business; all the commuter can do is refuse to buy gas at four dollars a gallon and instead bike to work.

In short, the law of supply and demand treats each of us as independent, sovereign individuals with the right to be motivated by profit, with the responsibility to produce and earn our own way, and with the need to reach voluntary agreements with the individuals with whom we wish to deal. Morally, the law represents the operation of justice. The attempt to circumvent it is the attempt to circumvent justice.

Have a question? Send it to us.

1. The Records of the Federal Convention of 1787, ed. Max Farrand, vol. 3, appendix A, p. 85 (1911, reprinted 1934).
2. Atlas Shrugged, (New York: Signet, 2007 mass market paperback edition), 384.