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.