Ayn Rand vs. Classical Economists

Ayn Rand’s case for capitalism stands in marked contrast to what might be termed the classical defense of capitalism. Throughout the past 250 years, proponents of capitalism predominantly have sought to justify it on purely politico-economic grounds—or by arguing that free, unregulated markets result in “the greatest good for the greatest number.” Ayn Rand regarded both as losing strategies.

“The classical economists attempted a tribal justification of capitalism on the ground that it provides the best ‘allocation’ of a community’s ‘resources,’” Rand wrote.¹ On her view, this approach is not only insufficient to defend capitalism, it ultimately undermines the quest for liberty.

The crucial problem with the classical economists’ defense, Rand argued, is that they either ignored moral questions altogether or attempted to defend capitalism on the same moral basis as collectivist social systems: altruism. “The basic principle of altruism,” she wrote, “is that man has no right to exist for his own sake, that service to others is the only justification of his existence, and that self-sacrifice is his highest moral duty, virtue and value.”² Although she agreed that laissez-faire capitalism is the most efficient politico-economic system—effectively ensuring “the greatest good for the greatest number”—Rand held that effective advocates of capitalism must emphasize that “capitalism is not merely the ‘practical,’ but the only moral system in history.”³

One example of the classical defense of capitalism is the work of Ludwig von Mises. Throughout the 1920s, von Mises resisted the advance of socialism by challenging its adherents, such as Oskar R. Lange and Abba P. Lerner, on politico-economic grounds. Even before publishing some of his most important works, such as Socialism, Liberalism, and Interventionism, von Mises powerfully critiqued key economic premises of statist systems in his 1920 article “Economic Calculation in the Socialist Commonwealth.”

In this paper, von Mises convincingly demonstrated that central planning is incompatible with rational economic calculation: The absence of price signals renders rational economic activity impossible and leads to the misallocation of resources. In a free-market economy, prices are determined by the law of supply and demand, and they fulfill two essential functions. First, prices convey information. If a certain material or good becomes scarcer, whether due to decreased supply or increased demand, its price rises, thereby providing entrepreneurs with information vital to making rational economic calculations and running their businesses successfully. Second, prices serve as incentives. Guided by the profit motive, rational entrepreneurs are incentivized to look continuously for investments that yield the highest returns.⁴

In a planned economy, price signals cannot fulfill either of these crucial functions because government planning replaces market coordination. Prices cannot convey information to businessmen because the central authority, having arbitrarily determined the “just” price of a given product or material, essentially prevents the law of supply and demand from impacting prices.⁵ And prices can’t serve as incentives because, being dictated by a central authority, they don’t reflect the value of products and services as determined by voluntary trade.⁶

Von Mises pointed out that solving either the information or the incentive problem will not suffice to make socialism work. In the first case, even if the bureaucrats were able to collect the countless pieces of information that price signals convey, a “socialist businessman” would nonetheless lack the incentive to produce. As von Mises put it:

When a successful business man is appointed the manager of a public enterprise, he may still bring with him certain experiences from his previous occupation, and be able to turn them to good account in a routine fashion for some time. Still, with his entry into communal activity he ceases to be a merchant and becomes as much a bureaucrat as any other placeman in the public employ.⁷

And in the second case, even if socialists could change human nature and incentivize people to produce with no desire for profit, the entrepreneurs would nonetheless lack the information necessary to engage in rational economic calculation. In von Mises’s words:

[E]ven if we for the moment grant that these Utopian expectations can actually be realized, that each individual in a socialist society will exert himself with the same zeal as he does today in a society where he is subjected to the pressure of free competition, there still remains the problem of measuring the result of economic activity in a socialist commonwealth which does not permit of any economic calculation. We cannot act economically if we are not in a position to understand economizing.⁸

Despite these crucial insights, von Mises took pains to emphasize that his politico-economic observations should be considered amoral. For instance, in the conclusion of “Economic Calculation in the Socialist Commonwealth,” he stated:

The knowledge of the fact that rational economic activity is impossible in a socialist commonwealth cannot, of course, be used as an argument either for or against socialism. Whoever is prepared himself to enter upon socialism on ethical grounds on the supposition that the provision of goods of a lower order for human beings under a system of common ownership of the means of production is diminished, or whoever is guided by ascetic ideals in his desire for socialism, will not allow himself to be influenced in his endeavors by what we have said.⁹

On Rand’s view, such a defense of capitalism is inadequate for precisely this reason: It makes no moral arguments against socialism and thus leaves those prepared to “enter upon socialism on ethical grounds” free to claim the moral high ground without opposition. In a 1946 letter to Leonard Read, Rand criticized von Mises’s professedly “value free” method, which focuses solely on practical considerations of whether a given aim can be reached by certain means. She addressed his methodology in her response to his book, Omnipotent Government:

The great mistake . . . is in assuming that economics is a science which can be isolated from moral, philosophical and political principles, and considered as a subject in itself, without relation to them. It can’t be done.

The best example of that is Von Mises’ Omnipotent Government. That is precisely what he attempted to do, in a very objective, conscientious, scholarly way. And he failed dismally, even though his economic facts and conclusions were for the most part unimpeachable. He failed to present a convincing case because at the crucial points, where his economics came to touch upon moral issues (as all economics must), he went into thin air, into contradictions, into nonsense. He did prove, all right, that collectivist economics don’t work. And he failed to convert a single collectivist.¹⁰

In a letter to Rose Wilder Lane, also written in 1946, Rand likewise criticized Henry Hazlitt. This time, though, she added an important qualification. She held not only that the classical economists’ approach is methodologically flawed; their separation of ethics from economics actually strengthens their opponents’ case for socialism. If proponents of capitalism do not defend it on ethical grounds, attentive readers might reasonably conclude that socialism is morally superior to capitalism. In Rand’s words:

I think that [Hazlitt’s Economics in One Lesson] is another case such as that of Ludwig von Mises. Hazlitt tried to divorce economics from ethics. He presented a strictly economic argument, telling how things work out, and carefully omitting to state why the way they work out is proper—that is, what principles should properly guide men’s actions in the economic field. . . .

This is an example of why I maintain that no book on economics can have real value or importance if economics are divorced from morality. When one attempts to do it, one merely spreads the implications and premises of the collectivist morality and defeats one’s case for the more thoughtful readers.¹¹

Rand emphasizes this in her anthology Capitalism: The Unknown Ideal, stating, “With very few exceptions, [capitalism’s classical defenders and modern apologists] are responsible—by default—for capitalism’s destruction. The default consisted of their inability or unwillingness to fight the battle where it had to be fought: on moral-philosophical grounds.”¹²

Yet, as Rand realized, the damage to the reputation of capitalism that “value free” economists caused was almost negligible when juxtaposed with the damage caused by those thinkers who attempted to defend capitalism on traditional, altruistic moral grounds. One exemplar of this latter group is Claude-Frédéric Bastiat. Bastiat took pains to stress the detrimental consequences of the supposed moral/practical dichotomy. Toward the end of his article “That Which Is Seen, and That Which Is Not Seen,” he laments, “[F]alse reasoning . . . causes nations to consider their moral and their material interests as contradictory to each other. What can be more discouraging or more dismal?”¹³

A fervent Christian, Bastiat based his ethical conclusions on a mystical worldview. “There is no religion which does not thunder against pomp and luxury,” he wrote. “This is as it should be,” and “things have been so admirably arranged by the Divine inventor of social order that . . . political economy and morality, far from clashing, agree.”¹⁴ Like many American conservatives today, Bastiat argued that capitalism must be defended on altruistic grounds. According to Bastiat, the moral man is supposed to spend his money not to selfishly acquire luxuries but to selflessly help the poor. A moral man, Bastiat contends,

is touched by the miseries which oppress the poorer classes; he thinks he is bound in conscience to afford them some relief, and therefore he devotes [his money] to acts of benevolence. Amongst the merchants, the manufacturers, and the agriculturists, he has friends who are suffering under temporary difficulties; he makes himself acquainted with their situation, that he may assist them with prudence and efficiency, and to this work he devotes [his money].¹⁵

On Rand’s view, such a justification of capitalism is worse than amoral economic defenses.¹⁶ Whereas economists such as von Mises and Hazlitt avoid moral conclusions and so fail to defend capitalism convincingly, altruist/Christian economists such as Bastiat undermine capitalism by leaving their readers with a mess of contradictory premises. “Capitalism and altruism are incompatible,” Rand points out in “For the New Intellectual”—“they are philosophical opposites; they cannot co-exist in the same man or in the same society.”¹⁷

A passage from Hazlitt’s Economics in One Lesson vividly illustrates the detrimental effects of trying to justify capitalism on altruistic grounds. Inspired by Bastiat, Hazlitt analyzes the question of frugality versus luxury, one of the few passages in which Hazlitt touches upon moral issues.¹⁸ Taking up “the classic example that Bastiat used,” Hazlitt reaches the same conclusion as his predecessor, asserting that it is better to give “to charitable causes, including help to friends in need,” than it is to spend on luxuries for oneself.¹⁹ “The families who are helped by these funds,” Hazlitt contends,

in turn spend them on groceries or clothing or living quarters. So the funds create as much employment as if [he] had spent them directly on himself. The difference is that more people are made happy as consumers, and that production is going more into essential goods and less into luxuries and superfluities.²⁰

Rand dismisses the Bastiat/Hazlitt argument on both moral and politico-economic grounds. In her 1946 letter to Rose Wilder Lane, she wrote:

Hazlitt states that a virtuous, responsible man of wealth should donate to charity and should refrain from buying luxuries, because these take productive resources away from the manufacture of necessities for the poor. . . . That was really a crucial betrayal of our case. It is not true as economics, and it is wrong as morality. It is pure, explicit collectivism.²¹

On Rand’s view, either we uphold that man has a moral right to exist for his own sake and to spend his money according to his own preferences, or we accept that man has a moral duty to serve his fellow men and to use or relinquish his money according to their needs. In order to defend capitalism convincingly, Rand held, its advocates must both proudly assert man’s inalienable rights and vociferously reject unchosen obligations. As she put it in her “Textbook of Americanism”:

If you are an Individualist and wish to preserve the American way of life, the greatest contribution you can make is to discard, once and for all, from your thinking, from your speeches, and from your sympathy, the empty slogan of “the greatest good for the greatest number.” Reject any argument, oppose any proposal that has nothing but this slogan to justify it. It is a booby-trap. It is a precept of pure Collectivism. You cannot accept it and call yourself an Individualist. Make your choice. It is one or the other.²²

What many defenders of capitalism have in common is their focus on (the welfare of) the group. Their arguments ultimately rest on what Rand referred to as the “tribal premise.” The result of irrational and evil philosophical ideas, the “tribal premise” holds that man

is . . . the property of the tribe (the state, the society, the collective) that may dispose of him in any way it pleases, that may dictate his convictions, prescribe the course of his life, control his work and expropriate his products [and that he] is … born in bondage, as an indentured servant who must keep buying his life by serving the tribe but can never acquire it free and clear.²³

That premise, Rand emphasized, “is shared by . . . the champions of capitalism,” and it “disarms [them] by a subtle, yet devastating aura of moral hypocrisy—as witness, their attempts to justify capitalism on the ground of ‘the common good’ or ‘service to the consumer’ or ‘the best allocation of resources.’”²⁴ In order to defend capitalism coherently, its advocates must recognize that “it is this tribal premise that has to be checked—and challenged.”²⁵

Rand held that the starting point for the justification of capitalism is not the group but the individual, not men but man. In her words, “Mankind is not an entity, an organism, or a coral bush. The entity involved in production and trade is man. It is with the study of man—not of the loose aggregate known as a ‘community’—that any science of the humanities has to begin.”²⁶ The essential difference between Rand and other would-be defenders of capitalism lies in their views of the value of the individual. In contrast to the collectivist approach, which holds that the group is the unit of moral concern, Rand emphasized the importance and primacy of the individual.

She did so on the basis of her conclusions in the more fundamental branches of philosophy. In order to understand what social system is best for man, Rand pointed out, we must understand man’s nature and the nature of the world in which we live.

Like other animals, in order to survive, man must attain certain values: food, water, shelter, and so on. Without these values, he dies. Man’s nature thereby sets his standard of value: The good is that which promotes his life, and the evil is that which hinders it.

Unlike other animals, though, man is endowed with reason, which enables him to solve the problems of survival and increase his standard of living, whether by taming and using fire, building aqueducts, fashioning clothing, constructing shelter, inventing language, or using concepts to retain and communicate his ever-expanding knowledge. But reason is a faculty of the individual. As Rand wrote:

There is no such thing as a collective brain. There is no such thing as a collective thought. An agreement reached by a group of men is only a compromise or an average drawn upon many individual thoughts. It is a secondary consequence. The primary act—the process of reason—must be performed by each man alone. We can divide a meal among many men. We cannot digest it in a collective stomach. No man can use his lungs to breathe for another man. No man can use his brain to think for another.²⁷

So, to live, man must use his mind to create the values on which his life depends. He must consider the whole of his life and act to secure his own long-term, rational self-interest. Rand held that this fact had been obscured by the ethics of altruism, which leads people to a corrupted view of what “selfishness” means. Most people wrongly equate a selfish person with a cruel narcissist who manipulates and exploits others. In Rand’s words:

The meaning ascribed in popular usage to the word “selfishness” is not merely wrong: it represents a devastating intellectual “package-deal,” which is responsible, more than any other single factor, for the arrested moral development of mankind.

In popular usage, the word “selfishness” is a synonym of evil; the image it conjures is of a murderous brute who tramples over piles of corpses to achieve his own ends, who cares for no living being and pursues nothing but the gratification of the mindless whims of any immediate moment.²⁸

But “the exact meaning . . . of the word ‘selfishness,’” Rand emphasized, “is: concern with one’s own interests.”²⁹ And, in fact, it’s not in anyone’s interest to become a murderous brute. That leads only to pain and misery.

Likewise, Rand highlighted that altruism had wrongly been elevated to a moral ideal. In marked contrast with selfishness, altruism demands that man must selflessly concern himself with the interests of others. As Rand put it, “Altruism declares that any action taken for the benefit of others is good, and any action taken for one’s own benefit is evil.”³⁰ Rand argued that most people, lured by the idea that altruism is tantamount to benevolence toward others, wrongly equate a selfless altruist with a kind benefactor who compassionately supports his fellow man. What altruism means, though, is that man has a duty to sacrifice himself and his personal interests for the sake of others. “Do not confuse altruism with kindness, good will or respect for the rights of others,” she wrote. “The irreducible primary of altruism, the basic absolute, is self-sacrifice—which means: self-immolation, self-abnegation, self-denial, self-destruction—which means: the self as a standard of evil, the selfless as a standard of the good.”³¹

By perverting the notion of “selfishness” and extolling the idea of “self-sacrifice,” the altruist philosophers effectively set up a false binary. As Howard Roark, the hero of Rand’s novel The Fountainhead, put it, they “forced [man] to accept masochism as his ideal—under the threat that sadism was his only alternative.”³²

“To redeem both man and morality,” Rand stated, “it is the concept of ‘selfishness’ that one has to redeem.”³³ In contrast to the altruist philosophers who allege that a selfish man is guided by his emotions and unscrupulously exploits others, Rand’s ideal man is the rational egoist who strives to realize his highest potential by projecting personal aims into the future and giving form to his ideas. “[N]either sacrificing himself to others nor sacrificing others to himself,” Rand’s virtuous egoist is an independent individualist who respects the rights of others.³⁴

Which brings us to politics: The crucial concept that bridges ethics and politics is “rights.” On a desert island, the question of rights would not come up. Only when an individual deals with other men does the issue of rights become important. “‘Rights’ are a moral concept,” Rand emphasizes,

the concept that provides a logical transition from the principles guiding an individual’s action to the principles guiding his relationship with others—the concept that preserves and protects individual morality in a social context—the link between the moral code of a man and the legal code of a society, between ethics and politics.³⁵

The crucial political question, according to Rand, is whether a government ensures that a man may live according to his nature. “The social recognition of man’s rational nature—of the connection between his survival and his use of reason,” Rand wrote, “is the concept of individual rights.”³⁶ For a society to be moral, Rand held, it must protect individual rights. Because capitalism is the only system that does, it is the only moral politico-economic system.³⁷

Further, protecting individual rights is the only legitimate purpose of government, which it does by “barring . . . physical force from social relationships.”³⁸ “Men,” Rand emphasized, “have the right to use physical force only in retaliation and only against those who initiate its use.”³⁹ By always safeguarding and never infringing man’s rights, a proper government recognizes and protects man’s ability to act on his nature as a rational being—to act on his own judgment, free from coercion, so long as he does not violate the equal rights of others. “To recognize individual rights,” Rand highlights, “means to recognize and accept the conditions required by man’s nature for his proper survival.”⁴⁰

Because man needs to keep and use the fruits of his labor to survive, one of the most important functions of government is the protection of property rights. In Rand’s words:

The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. The man who produces while others dispose of his product, is a slave.⁴¹

Taking all these considerations into account, Rand defined capitalism as “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”⁴²

She pointed out that altruism ultimately undermines the case for individual rights. In her words, “America’s inner contradiction was the altruist-collectivist ethics. Altruism is incompatible with freedom, with capitalism and with individual rights. One cannot combine the pursuit of happiness with the moral status of a sacrificial animal.”⁴³ If one takes “the greatest good for the greatest number” or “the common good” as one’s standard—as utilititarians do—one may violate individual rights and commit any atrocity, including theft and murder, as long as one can make the collective believe that such an approach is in the public’s interest. Rand unpacked this point in her “Textbook of Americanism,” writing:

If you consider [the slogan of “the greatest good for the greatest number”] moral, you would have to approve of the following examples, which are exact applications of this slogan in practice: fifty-one percent of humanity enslaving the other forty-nine; nine hungry cannibals eating the tenth one; a lynching mob murdering a man whom they consider dangerous to the community.

There were seventy million Germans in Germany and six hundred thousand Jews. The greatest number (the Germans) supported the Nazi government which told them that their greatest good would be served by exterminating the smaller number (the Jews) and grabbing their property. This was the horror achieved in practice by a vicious slogan accepted in theory.⁴⁴

This is why Rand concluded that “[a]ny group, any gang, any nation that attempts to negate man’s rights, is wrong, which means: is evil, which means: is anti-life.”⁴⁵

In sum, Rand agreed with the classical economists that capitalism does result in “the greatest good for the greatest number,” writing, “If concern with poverty and human suffering were the collectivists’ motive, they would have become champions of capitalism long ago; they would have discovered that it is the only political system capable of producing abundance.”⁴⁶

Yet despite her agreement with the classical economists on this point, Rand held that their defense of capitalism is inadequate and ultimately dangerous because of its implicit acceptance of the “tribal premise.” In contrast to both the utilitarian and the Christian economists who focus on the welfare of the group, Rand focused on the needs of the individual, on the facts of reality and human nature, proving that “capitalism is not merely the ‘practical,’ but the only moral system in history.”⁴⁷

Bastiat was right in arguing that “political economy and morality, far from clashing, agree.”⁴⁸ But this is true only when one adopts a proper morality, one derived from the facts of man’s nature and the requirements of his life. Defending capitalism on altruistic grounds—or skirting the issue of morality altogether and implying support for altruism—seriously undermines the case for capitalism, infecting men with “the belief that the moral and the practical are opposites.”⁴⁹ To harmonize morality and political philosophy, nothing less than Ayn Rand’s ethics of rational self-interest will do.

About Martin Hooss

Martin Hooss is a fellow and instructor at Objective Standard Institute. He holds a master’s degree in English literature and classical philology from Trier University, and another in philosophy, politics, and economics from CEVRO Institute.

View all articles by Martin Hooss →