Was Gordon Gekko a Roark?

Questions about Objectivism
21

A larger problem that’s more relevant perhaps to the current financial market is the existence of hedge funds, …

Today, only people with $1 million in invest-able capital can invest in hedge funds. I would like to see this limit removed. The vast majority of hedge funds are run by competent managers. Typically, they’re people who did well as mutual fund managers or some related profession, and decided they wanted to have more flexibility, less regulation and a % of return.

The real problem is not the hedge funds, but the government’s apparent willingness to shore them up if they run into trouble (as happened with “Long-Term Capital Management” – talk about a name that was the opposite of what they were doing!). That implicit government guarantee is what creates the so-called “moral hazard”. Now, the government is starting to regulate them more. In particular, pension plans, including government employee pensions are investing in hedge-funds – and usually insist that they will do it only if the hedge-fund agrees to certain additional SEC regulation. The SEC regularly checks up on such hedge-funds.

Of course there are corrupt people and incompetent people in business. Small-investors who cannot tell the good from the bad with some degree of confidence ought to put their money into CDs. Then, if business really wants that money, it will figure out ways to reassure the small-investor.

The S&L debacle is another example of the government guaranteeing something it ought not to guarantee, and basically telling the consumer not to worry about the risks, because he’s covered by tax-payer funds if things go really wrong.

The current trend in the U.S. is for money to move into “private capital”. That’s the paradox of regulation. At some point, some smart billionaires say: “to hell with the small shareholder, why do we need him?” Having him around provided some extra capital, but it also brought government regulation (Sarbanes Oxley is only the latest) and shareholder lawsuits. So, the current trend to take companies private in order to run them well. [Needless to say, even within this group of “private capital” companies, there are a few corrupt and incompetent ones; but it’s caveat emptor unless they really do something fraudulent.]

In summary, government regulation has created an environment where individual investors have a false sense of security when investing. In the short term, this makes more money available for investment. However, in the long term, it reduces the need to the small investor to be discriminating. The net effect is that the investor who is discriminating picks up part of the tab for the non-discriminating one.

22

Softwarenerd, you hit it right on the head. However I have to point out that given the global nature of today’s financial market, it would be extremely hard for any single government to investigate or regulate a financial entity like a hedge fund. There are simply too many ways for the fund manager to evade detection of any wrong doing or hide their assets. For a free market to work, it first requires an open access to information, which simply isn’t possible given our current system. On top of that, the risk of moral hazard increases as the amount of money to be made increases.

Another thing I’d like to comment on is your observation of the elimination of small investors. Given the absolutely enormous wealth discrepancy world wide (and even in the US), the top 5% of the world’s population can supply virtually all capital needs from any individual company. It’s simply faster, easier, and cheaper for a company to get funding through private channels than to go through a public bank. The problem with lowering the entrance fee for investing in hedge funds is that there isn’t really any incentive for the fund managers to do so, due to the increased transaction cost. The uneven wealth distribution is really the root of the problem.

Again, I’m ambivalent on this point. On one hand I believe in capitalism and a free market, on the other hand the alarming rate at which the wealth gap is increasing can do some serious damage to the very system that I believe in. Imagine a world where an average person has to work his entire life just to cover food and rent, and the few innovative and enterprising individual has to borrow so heavily from the wealthy that they are essentially just creating and producing to fatten the rich. It’d be different if wealth wasn’t inheritable. But the fact that it is means that there will be an entirely class of people that have no incentive to produce anything, and simply compound their wealth by hiring others to roll their money around and end up owning everything. Well – I guess that’s how the world already is, only worse.

I mean, right now I can make more sitting on my butt counting interest rates off of a million dollars in the bank than most families in the US. Now picture a world where I just sit on my butt all day, and whatever business venture or invention you come up with, because you used my money to create or produce it, I end up owning all of it. That’s not really the world I have in mind when I think of capitalism.

23

Moebius, claiming you are for capitalism and actually being for it are two different things. You are not for capitalism. I suggest reading Ayn Rand’s article, “What Is Capitalism?” This is a website for discussion of Objectivism after all.

If you have read it and still believe you are for capitalism, I would kindly suggest you consider that the following ideas you espouse are inconsistent with capitalism:

* the idea that an inequality of wealth is unjust

* the idea that regulation is necessary

* the idea that large concentrations of wealth are somehow harmful

* the idea that inheritances are wrong and should be outlawed

* the idea that a free market requires some mandated minimal levels of information disclosure

24

Moebius, claiming you are for capitalism and actually being for it are two different things. You are not for capitalism. I suggest reading Ayn Rand’s article, “What Is Capitalism?” This is a website for discussion of Objectivism after all.

If you have read it and still believe you are for capitalism, I would kindly suggest you consider that the following ideas you espouse are inconsistent with capitalism:

* the idea that an inequality of wealth is unjust

* the idea that regulation is necessary

* the idea that large concentrations of wealth are somehow harmful

* the idea that inheritances are wrong and should be outlawed

* the idea that a free market requires some mandated minimal levels of information disclosure

I think he may just be confusing the causes of the poor results of the worlds current mixed economies (decreasing middle class, increasing wealth disparities,etc).

I gather that he is, in fact, for capitalism but is mistaken in that he suggests those government fixes for government created problems.

Moebius, reconsider to what extent extreme wealth accumulation, in the US for example, is the natural result of capitalism. Consider whether heavy taxes on the middle and upper middle classes which are transferred to large companies in the form of, say, direct subsidies or the building of facilities, might be more responsible for the problems you reference.

25

Moebius, the reason all of these positions you espoused are inconsistent with capitalism is because they violate one’s right to property. The base of capitalism is the right to life and the right to property (which is a corollary of the right to life). That means you have the right to do what you want with your property, without forceful interference from any other individual or government. That means you can accumulate as much property as you wish (through trade, not force), you can disclose whatever information you wish to the people you do business with, you can bequeath your money to whomever you wish, no one can proscribe how you can use your property (i.e., regulate you), etc.

In terms of your dealings with other people, under capitalism you trade with other people. You exchange values that you produce voluntarily for values that other people produce. Force and fraud are outlawed as means of engaging with other people. That doesn’t mean that some people won’t steal or commit fraud, but it does mean that such actions are outlawed and will be prosecuted.

That is an extremely short summary of the essence of capitalism. Ayn Rand says it better, and more completely, in her writings, which I refer you to.

As for some of the examples you give, such as the savings & loan crisis, I will simply say that as a general principle, all major disturbances in the workings of the market are the result of government interventions. Government interventions which often are ostensibly made to solve problems, only create unforeseen problems. That was true with the S&L crisis, and was true of every other alleged crisis of capitalism, such as the Great Depression. However, before looking at such details, it is important to understand the basic question of “What Is Capitalism?” Thus, my recommendation of that article as a starting point.

26

Moebius, claiming you are for capitalism and actually being for it are two different things. You are not for capitalism. I suggest reading Ayn Rand’s article, “What Is Capitalism?” This is a website for discussion of Objectivism after all.

If you have read it and still believe you are for capitalism, I would kindly suggest you consider that the following ideas you espouse are inconsistent with capitalism:

* the idea that an inequality of wealth is unjust

* the idea that regulation is necessary

* the idea that large concentrations of wealth are somehow harmful

* the idea that inheritances are wrong and should be outlawed

* the idea that a free market requires some mandated minimal levels of information disclosure

You know, maybe I will. I think the main problem is that while in the long run the market does trend towards rational positions, in the short run it can be highly irrational. However, “short run” can in fact be a long, long time in the market, especially considering the length of the human lifespan is only some seventy odd years. As for the rest of your points:

* Inequity of wealth isn’t unjust in and of itself. At least not if those in the position of wealth are rational and believe in the free market – two big ifs.

* I used to think that regulation isn’t necessary, but I changed my mind due to high rate of irrationality and prudent predator behavior within the market.

* Again, large concentrations of wealth are not harmful – if the wealth holders are rational. It’s the same problem as monopolies, which while not inherently bad, can be exploited by looters. For instance, say I live on a small island nation, and I’m so wealthy that I own every single piece of real estate and all the food supply in the country. There really isn’t anything to stop me from charging predatory prices and having everyone else in the country live under virtual slavery – that is, unless some sort of regulation (ie. force) was involved, or if “reality” somehow catches up to my predatory behavior (whatever that means).

* Again, it isn’t the inheritance that’s actually at fault, although having a large amount of money over multiple generations often end up putting these economic resources into the hands of irrational people. Of course, this is only based on my own observations of the trust-fund babies I’ve known. If rationality wasn’t an issue, then it really doesn’t matter who holds the wealth since in theory it will flow towards where it is needed.

* I’m not sure about this last one. If information disclosure isn’t mandatory, there’s nothing a small investor can do other than place his money in the hands of large financial entities on faith alone.

So, I do believe in capitalism in spirit. But I also believe in the existence of irrationality and predatory behavior (which I guess is really the same things in Objectivism). I don’t live in a theoretical Randtopia where everyone is rational and living as man qua man.

27

I gather that he is, in fact, for capitalism but is mistaken in that he suggests those government fixes for government created problems.

Moebius, reconsider to what extent extreme wealth accumulation, in the US for example, is the natural result of capitalism. Consider whether heavy taxes on the middle and upper middle classes which are transferred to large companies in the form of, say, direct subsidies or the building of facilities, might be more responsible for the problems you reference.

This is possible, and probably true to some extent. However removing all regulation does not solve the moral hazard problems.

My bottom line disagreement with the Objectivist position of pure capitalism is the epistemological nature of man. I don’t believe in men as inherently rational beings. Everything else follows from this on out.

28

My bottom line disagreement with the Objectivist position of pure capitalism is the epistemological nature of man. I don’t believe in men as inherently rational beings. Everything else follows from this on out.

That’s interesting. It was the same argument used against the idea of self-rule during the American Revoltion. The answer of course, is that if people are not rational enough to make decisions for themselves, then neither are the people who happen to be in power. So if a market cannot be regulated because of the irrationality of the masses, then that prohibition goes doubly for the aristocracy holding swords.

29

…the epistemological nature of man. I don’t believe in men as inherently rational beings. Everything else follows from this on out.

Do you think that men can be rational, if they are operating under some type of system, whatever that might be?

30

That’s interesting. It was the same argument used against the idea of self-rule during the American Revoltion. The answer of course, is that if people are not rational enough to make decisions for themselves, then neither are the people who happen to be in power. So if a market cannot be regulated because of the irrationality of the masses, then that prohibition goes doubly for the aristocracy holding swords.

Yeah, it does goes doubly for the people in power. Frankly I don’t have a very clear idea on the nature of man, which was what got me interested in philosophy and particularly Objectivism in the first place. However I’m starting to think that perhaps the nature of man isn’t really so much a philosophical question as it is a scientific one. I believe that while individual human beings are most rational, a mass of people can oftentimes be highly irrational. All sorts of strange group think behavior begin to surface when a lot of people get together. You see these type of things in settings as small as an office brain storming session, where while individually people may actually have some valuable ideas, when you get them all together only the most vocal or forceful orators’ voices get heard. This is possibly a something that we’re genetically predisposed to do, a relic of our mammalian past. Maybe not.

31

Do you think that men can be rational, if they are operating under some type of system, whatever that might be?

I think men are fully capable of being and often are rational. But just as often they are not, whatever their philosophical inclinations. It’s not so much that the epistemology of Objectivism is wrong, but rather I feel like it’s incomplete. I think Objectivism accurately describes a part of what we are as man, but not in its totality. Furthermore, I don’t believe that rationality is the ultimate and only requirement to happiness. To put it another way, I think that Ayn Rand is the ultimate spokes person for the left hemisphere of the brain, which is only more or less half of what we are.

32

I think men are fully capable of being and often are rational.

That is all that is required for humans to benefit from freedom. As you will discover when you read further, Ayn Rand never says that all men are rational. She only states that men are capable of rationality. Further, she identifies that man’s means of survival is rationality. So, if men wish to survive and survive well (i.e., achieve happiness), they must choose reason. To the extent they don’t, they suffer.

Ayn Rand’s acknowledgement that a portion of men do not behave rationally is why she holds that governments are necessary to enforce and protect rights. Governments exist to protect rational men from irrational men, whether they are criminals or foreign armies.

Man requires freedom to produce the values he needs for his life. Everything he needs for his survival and well-being must be produced using reason – clothing, shelter, food, etc. Capitalism is the system based on individual freedom. It is no coincidence that it is the most productive economic system ever instituted by man. Observe the explosion of wealth in England after the Industrial Revolution of the 1700s and in the United States after the Industrial Revolution of the 1800s. Observe the explosion of wealth in China and other parts of the world. Yes, China is a mixed economy with strong elements of state control. However, it is not the presence of the statist elements that has led to wealth creation, but rather their gradual removal and the introduction of elements of freedom. Compare Taiwan and Communist China side-by-side 20 years ago. Taiwan was far wealthier than Communist China. The same people, the same culture, even (in part) the same language, but a huge difference in the standard of living. What was the difference? The difference was the much greater economic freedom in Taiwan.

None of those creations of wealth depended on some sort of utopian vision of the perfectly rational man. None of those creations of wealth required that every person be rational. They only required that enough people were rational and that the systems respected (to a meaningful degree) the right to life and property of the citizens. Protected property rights ensured they had the freedom to produce.

As for alleged failures of capitalism, it is important to understand capitalism conceptually before looking at specific instances of how the world’s economies work today. All of today’s economies are mixed. They have elements of freedom and elements of controls. Whenever you see widespread economic disasters (e.g.: the Great Depression, the savings & loan crisis, hyper-inflation in Weimar Germany, the “stagflation” of the 1970s, etc.), you always have to ask yourself: What accounts for this phenomenon? Is it the free element of the economy, or is it a result of government intervention?

In every instance I have examined, it is always the result of government intervention. It can be the result of government control and manipulation of the money supply (e.g.: the Great Depression, German hyper-inflation, the savings & loan crisis, the 1970s stagflation), regulations that distorted the incentives businesses face (e.g.: the savings & loan crisis), or price controls (the 1970s stagflation). Quite often, these economic dislocations have several causes, such as the 1970s stagflation, where I cite two causes: inflation of the money supply and price controls.

As for individual examples of malfeasance, a prior poster (Aequelsa, I believe) raised the important question of asking why government officials should be any different from other people. In fact, because all people share the same natures, the incidence of unethical behavior should be similar between government officials and private actors. The difference is that government officials can do far more harm when they are immoral than a private individual can. They can cause far more harm because they can force people to bend to their will. The damage caused by a single corrupt businessman, no matter how corrupt or skillful his deceit, can only go so far.

Consider some examples: Mao Tse Tung’s economic mis-management that resulted in the deaths of many tens of millions of people versus the corruption of [insert name of businessman you believe to be corrupt] who cost investors tens of billions of dollars, which is a minuscule fraction of the total capital owned by investors. It should be easy to think of many more examples.

As for regulation, the argument for it has a basic, flawed premise which is that the regulator knows more or is more ethical than the person being regulated. That premise is false. A capitalist society has laws against fraud, just like it has laws against murder, etc. It is an unreal and unfair standard to say that capitalism is flawed because there are unethical people. Unethical people exist in any society, but the damage they can do is much less in a capitalist society. Furthermore, only capitalism frees the producers to produce, thereby creating abundant prosperity and a good life for man. No alternative system does that.

For a more personal look at regulation, I may suggest a short essay I wrote here.

Read the whole book, Capitalism: The Unknown Ideal, of which the essay “What Is Capitalism?” is a part. It will address many of the questions you are raising.

33

Galileo, look, I agree with everything you said. Particularly the bit about how the reason we need a government is to protect the rational men from the irrational men. My very complaint was the fact that as it stands, our system is not doing a good job at all protecting us from predatory behavior. You’re equating my complaints about our current system with me saying that capitalism has failed, which is simply wrong. Capitalism is a concept that I whole-heartedly agree with in spirit. What I have a problem with is the actually system with which we practice this concept. And yeah, you’re right, not a single country on earth right now have a true capitalist system. But then again, I don’t the a pure capitalist system would work simply because it would require zero predatory actions and/or an absolute enforcement rate.

Again, the bottom line disagreement is the epistemological nature of man. To me, a prudent predator is much closer to man’s nature than a Howard Roarke. That is, a being that is mostly rational (the rate differs from man to man), but sees mostly in the short term (given our limited life span and inability to know the future), and would try to get away with some predatory behavior from time to time if they think they might get away with it (depending on their evaluation of risks/rewards). Because of this, we need a government to enforce the rules. And because the government is made up of people, you still have the exact same problems with unethical behavior. The only solution is to design a system that is capable of monitoring and regulating each other should reason be breached – for instance, a democratic (or some approximation thereof) government where the government monitors the people while the people in turn monitors the government.

34

Moebius,

Whether men are “prudent predators” or rationally selfish or altruists depends on the philosophy they uphold. What do they think is moral? What is their ideal? There is no inherent quality of man that determines his morality. He has to learn a morality, correct or incorrect, in order to live or attempt to live. Ayn Rand has said that man is born tabula rasa. He has to discover the principles of living, as opposed to lower animals that have instincts to guide them.

The dominant philosophy of an age will determine the ethical principles that most people live by. In the Middle Ages the dominant philosophy was Christianity, and people ran around in hair shirts chastising their flesh or they were conquerers demanding that others sacrifice to them. Sacrifice of the individual was the order of the day. Capitalism could not and did not emerge in such an era dominated by mass irrationality.

Contrast that with a more rational subsequent era, the Enlightenment. In the Enlightenment, men learned that they could peaceably live with each other, with each person rationally pursuing his self-interest. The economist Adam Smith captured this idea when he said that it was not from the good will of the butcher, the baker and the candlestick maker that we got our meat, bread and candles, but from their pursuit of their self-interest. Adam Smith and others showed that each person pursuing his self-interest would not lead to chaos. Rather, it would result in growing productivity and an abundance of wealth enjoyed by all.

His ideas were proven correct by the subsequent experience of the 1800s when this did happen when capitalist principles swept across much of the world.

A new laissez-faire capitalism will not emerge again in a vacuum. It will require acceptance of the precursor philosophical ideas to capitalism, such as the efficacy of reason, the objectivity of reality, the validity of the pursuit of rational selfishness, etc. (Ayn Rand eloquently makes this point. This contrasts Objectivism with Libertarianism, which does not identify the philosophical basis of capitalism.) When these ideas are more thoroughly understood in a new Enlightenment, we will see the statist elements of the world’s economies gradually repealed, just as they were in the 1800s across America and Europe. Recall the drama of England’s repeal of the Corn Laws in the 1840s, when that country unilaterally eliminated significant import duties, ushering in an era of global (largely) free trade and wealth creation. Similar repeals of bad laws will happen again and, in fact, are happening here and there in this country and others, especially in places like China, Eastern Europe, Ireland, etc.

The reason I say all this is that I agree with you in part. Capitalism does not exist in a philosophical vacuum. A certain level of rationality is required among a significant portion of people (in particular the intellectuals) for it to come into existence and stay in existence. However, that is far different from what you said: “I don’t [think that] a pure capitalist system would work simply because it would require zero predatory actions and/or an absolute enforcement rate.” Predators, bad actors, evil people existed in all eras of human history, including the Enlightenment and the Christian Middle Ages. The mere existence of some evil people does not obviate the ability of capitalism to function. Why would that be so?

Furthermore, given the existence of the “prudent predators” you refer to, what is the alternative to capitalism that is superior? Is it socialism, where prudent predators in government have the ability to use force to impose their economic ideas on everyone? Is it a regulatory state, where prudent predator regulators can use the policing power of the government to impose their arbitrary regulations on everyone? In a capitalist society, the damage that a prudent predator could do is severely limited, because the prudent predator does not have the power of the state backing him up. Therefore, his harm is limited to the people he can persuade to participate in his fraud, or the people he is able to steal from. That is far different from a regulator who can impose a regulation that can completely wipe out a scientist’s life work (e.g.: an FDA regulator not approving a drug). Or a regulator who can destroy the lifework of a businessman by imposing an import duty or a price control that destroys his business (e.g.: New York city landlords under rent control). Or, say, steal the wealth of millions by increasing taxes in order to “redistribute” wealth (e.g.: the U.S. where taxes now consume some 40% of GDP).

The examples of the damage done by prudent predator regulators are multifarious and dwarf the damage that individual prudent predators can do in a capitalist society, where he is constrained by the principle of individual rights and the policing powers of government that puts lawbreakers in jail.

In a more dramatic non-economic sense, consider the number of people killed by Charles Manson versus the number of people killed by Pol Pot or Adolf Hitler. Can one have any doubt that a Charles Manson, if he controlled the levers of government, would have endorsed a murderous program such as Hitler’s? However, in a society based on individual rights, such as ours, his damage was far more limited. What an individual evil person can get away with in a laissez faire capitalist society, based on individual rights, is very limited.

Prudent predators have existed throughout history. I do not think it is an “essential” characteristic of man. Nevertheless, the only system that severely limits the harm they can do is capitalism. Variations of non-capitalism have been the norm throughout history until relatively recently, when capitalism first emerged. That long prior history of man is very bloody, indeed.

The only way to get capitalism, to minimize both the number of “prudent predators” and the harm they can cause is if a significant number of people, in particular the intellectuals, accept a rational philosophy. Many people did accept reason in the 1700s and 1800s. The result was a near laissez-faire capitalism and an explosion of prosperity. The same thing will happen again. The battle is philosophical.

By the way, I have another book recommendation for you, that treats the subject of capitalism from a broad theoretical, historical and economic perspective. It is The Capitalist Manifesto by Andrew Bernstein. It is a good companion volume to Ayn Rand’s Capitalism: The Unknown Ideal. On the economics of capitalism alone, there are plenty of good books, such as A Treatise on Political Economy by Jean-Baptiste Say, the writings of Frederic Bastiat, and Economics in One Lesson by Henry Hazlitt.

35

I absolutely agree that a capitalist free society is the best possible system conceptually, and that for it to actually work, what is required isn’t so much an elimination of all predatory behavior, but rather a critical mass of generally rational people.

Again, the problem here is when predators are in a position of power. I think there is some truths to the cliche “power corrupts”. Wealth in a sense translates into power, and you can use it in a way similar to force, whether directly or indirectly. I think this is the real problem with an extreme concentration of wealth – it’s not a problem when the wielder is a rational being, but it’s a danger to society when he isn’t. What we need is a regulatory power like a government to ensure punishment of any predatory behavior. Here we run into two problems: the difficulty of regulation in the current globalized environment, and the extremely close ties between the political and financial elites. Every single complaint I have essentially comes down to these two issues.

36

I absolutely agree that a capitalist free society is the best possible system conceptually, and that for it to actually work, what is required isn’t so much an elimination of all predatory behavior, but rather a critical mass of generally rational people.

Again, the problem here is when predators are in a position of power. I think there is some truths to the cliche “power corrupts”. Wealth in a sense translates into power, and you can use it in a way similar to force, whether directly or indirectly. I think this is the real problem with an extreme concentration of wealth – it’s not a problem when the wielder is a rational being, but it’s a danger to society when he isn’t. What we need is a regulatory power like a government to ensure punishment of any predatory behavior. Here we run into two problems: the difficulty of regulation in the current globalized environment, and the extremely close ties between the political and financial elites. Every single complaint I have essentially comes down to these two issues.

On the contrary. It is the existence of such regulatory power that enables the politically-connected wealthy to influence legislation and regulations to suit their ends. If government has the power to tax and take property from one person to give to another, then people will step forward and attempt to influence government to transfer property to them. If the government has the power to regulate, people will step forward and attempt to influence government to enact regulations that will hurt their competitors and help their business interests. Corruption is fostered when government has the power to regulate. Remove the power to regulate, confine government’s role solely to the protection of individual rights – i.e., confine government to the delimited role in laissez faire capitalism – and the opportunity for corruption is severely circumscribed.

Regulation breeds corruption. Eliminate it and corruption is minimized.

Think of concrete examples of this principle. For example, if there are no antitrust laws, some wealthy businessmen (e.g.: the CEOs of Oracle and Sun Microsystems) cannot use those laws to hammer their opponent (e.g.: Bill Gates of Microsoft). If the government cannot impose tariffs, a domestic steel company cannot use the government to impose tariffs against a foreign steelmaker it competes against. If the government cannot subsidize businesses, a wealthy football team owner cannot force everyone through taxes to pay for his new stadium, or a group of farmers cannot lobby government to force everyone to pay above-market prices for corn and grain. If the government cannot provide welfare payments, politicians cannot corruptly and cynically purchase votes from the masses by offering them bread and circuses. Etc.

People may want to corruptly influence government to do these things, but if government lacks these powers, it cannot do them.

37

Here’s an interview with Barry Diller (a CEO who is always interesting to listen to) on the topic of corporate executive compensation, corporate regulation and competitiveness. FT probably does not keep these videos available only for long. Scroll through the videos lists to the right. There’s more than one with Diller.

38

No, I don’t work in a boiler room. But I do work in Taipei, and not on Wall Street. And I certainly don’t consider the situations I described the norm, although it does happen on a frequent basis.

It’s just a fact that the people on Wall Street are experts at fleecing and taking advantage of ignorant people. Look to the Savings and Loans scandal in the late 80’s as a serious example of how a few firms on Wall Street can single handedly bleed the nation for something like USD$150 billion (most of which ended up subsidized by the US government) and caused the huge government deficit and the recession of the early 90’s.

And I’m not even talking about the morality of what they do, which I guess can be argued either way. But they can and do do real damage to the economy. I’m not criticizing capitalism, or the stock market itself, but rather the way large financial institutions practice their craft.

A larger problem that’s more relevant perhaps to the current financial market is the existence of hedge funds, who are private, oftentimes unregulated, and lack transparency, yet commands absolutely enormous amounts of capital. Their existence pose potential systemic risks to the market due to their sheer size and often risky strategies when combined with the fact that they’re notoriously difficult to regulate. They are also able (and often do) to practice insider trading in a virtually undetectable fashion. If you honestly think I’m wrong about what I said about the deception and misinformation regularly practiced by large financial entities, look no further than the 2006 investigation by the U.S. Senate Judiciary Committee into the links between hedge funds and independent analysts. It’s a real problem, and it can have a serious effect on a capitalist society.

I agree that you shouldn’t base your opinion only on the things you read in the papers. But keep in mind that these things are generally extremely hard to prove in the court of law given the global nature of today’s financial market, and for every actual investigation you read, there are many, many more cases that are simply not practical to prosecute due to the difficulty of gathering evidence. There are simply too many things I observe on the job that are completely inexplicable unless some sort of collusion (between large financial institutions, analysts, and/or the corporation themselves) was involved. And I mean, this is discounting the really obviously illegal stuff like Enron or WorldCom.

If you continue to deny the prevalence of the corruption within the system or the problems it poses, then there really isn’t much that I can say to convince you. Take my words for what it is and make up your own mind about what the market is really like. These are just the sort of things I see based on my own experience working in the field.

I agree that this manipulation does take place. Absolutely. But I contend that this is just part of the dissemination of information in the market place. The fact that some people are experts at it and most are not is just a fact of life. You just don’t like it that some people are just really really good at what they do. Remember, by definition, 50% of the people are below average intelligence, no matter how many people go to college!

39

to the OP:

At first glance, Gekko may appear to be an Objectivist-style capitalist, but he is not.

A good in-movie quote from him declares that “money is not created or destroyed, simply transferred”.

He also said “I do not create, I own”

His attitude strikes me more as a Wynand instead of a Roark.

40

This is substantially dated now, and OT from the original discussion, but nevertheless here’s my 2c. As to the original topic, RedMartian is correct: Gekko is a Wynand, not a Roark. Snerd is also correct in that someone of Gekko’s ability wouldn’t be the kind of prat and parasite as shown in the movie.

Another thing I’d like to comment on is your observation of the elimination of small investors. Given the absolutely enormous wealth discrepancy world wide (and even in the US), the top 5% of the world’s population can supply virtually all capital needs from any individual company. It’s simply faster, easier, and cheaper for a company to get funding through private channels than to go through a public bank.

A problem I have with this - and with others comments on the matter - is the idea that only enormous corporate behemoths are the way to go. Certainly there are economies of scale, but precisely for that reason they will be discounted and the rates of return achievable will be lower than on lower scales of economy. Smaller scale investment is simultaneously riskier and more expensive in absolute terms, but with intelligence it is actually more lucrative. You’re all forgetting that a very large chunk of the economy consists of small businesses who have no connection with major securities markets. They are funded by personal equity, bank debt, and private loans. Free up investment law and market institutions and more people will be able to take part in these.

The importance of hedge funds is being overstated. They aren’t necessarily the only way to go. Institute laissez-faire and there will be a much broader range of possible fund types, and there will be a MUCH closer correlation of risk to return. All investment types will converge to the same one risk-return spectrum - for the technically savvy, that means all investment types will converge to having a similar Sharpe ratio. Different fund types invest at different ranges within that spectrum. Higher returns will only come either at higher risk or through genuinely superior ability. A hedge fund that lives up to its name is just one that has either a certain range within that spectrum and try to improve its Sharpe ratio in a certain manner (technical stuff involving offsetting positions in different maturity markets etc). Unless the manager truly is of superior ability, under laissez-faire that fund simply wont outdo other investment types.

Besides, changes are happening already. Hedge funds have proliferated substantially in the last few years and now regulators are actually afraid of massive overshoot. They are worried that fierce competition among them will drive down returns and encourage them to practice ever riskier behaviour. Naturally I discount some of the regulators’ fears, but the fact remains that hedge funds and their investors no longer have it easy.

Nevertheless, Snerd is correct. Institute proper laissez-faire and more people will have access to broader types of investments, all of which will have steadily reducing costs to run. But that will also further demonstrate my point - the rush to invest in behemoths will further drive down their rates of return, opening up more opportunities for smaller investments in more lucrative businesses. That includes more opening up of funding possibilities to smaller busineses that wont gain access to the national liquid capital markets. For example, in a laissez-faire future I can see various funds offering CDO’s and other securitised invesments that focus on SME investment, a market sector presently locked up by the banks through immoral banking law.

The problem with lowering the entrance fee for investing in hedge funds is that there isn’t really any incentive for the fund managers to do so, due to the increased transaction cost.

Reduce the restrictions for funds and invesments of all types and what the managers of hedge funds may want becomes irrelevant. They will have to actually do as good as or better than comparative investments in their range on the risk-return spectrum. How any given fund arranges its fees structure will just change the way this is calculated, nothing more.

The uneven wealth distribution is really the root of the problem.

No. The problem is the restrictions against investment that hinder the smooth adjustment of all investment types to the normal risk-return spectrum.

Again, I’m ambivalent on this point. On one hand I believe in capitalism and a free market, on the other hand the alarming rate at which the wealth gap is increasing can do some serious damage to the very system that I believe in. Imagine a world where an average person has to work his entire life just to cover food and rent, and the few innovative and enterprising individual has to borrow so heavily from the wealthy that they are essentially just creating and producing to fatten the rich.

Under proper capitalism as we advocate this is not going to happen, for two reasons.

Firstly, you are implicit holding the common fallacy that wage levels are correlated to the concentration of ownership of capital. I don’t think that fallacy is unique to Marxism, but it is certainly one of the key tenets in it regarding the alleged law of the progressive immiseration of the proletariat. The reality is that there is no such connection. There does not have to be competition among larger numbers of employers versus smaller numbers in order for wages to be kept up. Wage levels are the product of the total productivity of real capital, and will increase as the amount of capital per capita increases. The more capital that is built up per capita the higher that wages are going to go. No amount of concentration of the ownership of that capital is going to change that one little bit. Of course, the upshot of this is that as the real wages go up the proportion that is discretionary goes up. That in turn allows for greater savings on the part of everyone, which permits the accumulation of accelerating amounts of capital which itself accelerates the increase in real wages. The real issues are: 1) whether productivity outstrips population growth (which today isn’t a problem); 2) the degree to which people are inclined to save and invest from their discretionary income in preference to consumption; 3) whether people who do want to invest have access to investment markets. The rich can do nothing about the first two, and attacks on the third is attacks on capitalism itself, so there goes your concerns about capitalism as a system because it would be the lack of capitalism that is the problem.

Secondly, under laissez-faire governments would not be borrowing anywhere near as much as they are today, if they would even be borrowing anything at all. Get rid of government debt issues and you get rid of ‘risk-free investments.’ The want of risk-free investment means the want of effort-free investments. Eliminate the former and you eliminate the latter. That means rich people can no longer blindly through stacks of cash at government securities and get a guaranteed (if low) return they can count on as a base income while sitting on their backsides doing naff all. Oh nonono, now they will have to actually have and use investment ability - or pay others for it, which will lead to those others building up their equity. Like the rest of us, the rich will have to invest on the same risk-return spectrum, and they can either like it or lump it. They’re going to have to work for and EARN IT, just like the rest of us. If that were in place I would not be even remotely concerned if they get richer because they will actually be producing value to do so. Even as the system stands today it is getting harder for the rich to earn effort-free incomes, and I see this accelerating. Many rich people are actually earning their high incomes fair and square, while others are benefiting from immoral laws that are steadily having the grounds beneath them questioned and undermined.

It’d be different if wealth wasn’t inheritable. But the fact that it is means that there will be an entirely class of people that have no incentive to produce anything

Inheritance has diddly squat to do with anything under laissez-faire. Again, amongst other wrong-headed assumptions you’re assuming that wealth automatically means at least some ability to gain effort-free income. The truth is that if the heirs do not have the same ability to create the value that they have inherited then they will lose it. Furthermore, institute laissez-faire and even if the heir is just barely capable of maintaining the wealth then that heir will only be operating at the low end of the risk-return spectrum. Smarter non-heirs people may be poorer but they will be able to operate at higher ranges, and will accumulate capital faster than the dumb heir will.

Many old-money rich are opposed to laissez-faire for precisely these reasons. They actively support interventionist policies and high income taxes because they want to guarantee that their bloodlines will stay wealthy without effort and have them shielded from capital build-up by the poor and smart. Pretty disgusting for multiple reasons, but none of the harm stems intrinsically from them being rich and wanting to passing wealth on to heirs.

and simply compound their wealth by hiring others to roll their money around and end up owning everything.

If there is sufficient true capitalism, the hired people of superior ability will build up equity and eventually go into business for themselves. They will increasingly demand higher cuts of the increased profits they make for their clients, which will accelerate the process. So, unless the heirs do have the ability, then no the old-money rich simply will not end up owning everything - without ability, they will either stagnate or lose everything!

If there is not sufficient true capitalism, you do realise that the very same corruption that you are positing would lead to concentration will itself actually counteract that concentration!? “Rich people will hire smart to roll their money around…” who, then, is beholden to whom in this set up? Who is in a better position to shaft the other here?

And in any event, what I said about the continued accumulation of capital holds. Real wages, and hence discretionary incomes, will continue to rise. The only way the rich can stop that is to drive down real incomes by force through the active prevention of the use of high technology and capital equipment. The only thing that would stop a populace from revolting against that in due time is an extremely wacked out religion.

Well – I guess that’s how the world already is, only worse.

Where capitalism is growing, that is where your vision is collapsing. There are other causes of problems, such as how welfare programs destroy incentives to save etc, but again that’s the lack of capitalism that’s at fault and not caused by the mere existence of great disparities of wealth or the ability to inherit great wealth etc.

I mean, right now I can make more sitting on my butt counting interest rates off of a million dollars in the bank than most families in the US.

In inflation adjusted real after-tax terms, yeah right. Your actual net return from living off interest totally without effort would be of the order of 1% or less - and it will actually go negative every now and then. Ten grand doesn’t exactly afford you a cushy lifestyle these days. Anything higher and you’d have to earn it by finding real value to invest in and help bring to material fruition through trade. If you can do that then you’re not harming anyone (you’re actually benefiting others but that’s neither here nor there), and rather than worthy of condemnation you’d be worthy of congratulation.

Of course you could have say $50m in financial capital and get a return of circa $500k per year, but that still means the lion’s share is going to those who use the funding to produce with. That those who borrow may instead be wasting it on consumption (which is what is happening with the bulk of government borrowing) is not your fault.

Now picture a world where I just sit on my butt all day, and whatever business venture or invention you come up with, because you used my money to create or produce it, I end up owning all of it. That’s not really the world I have in mind when I think of capitalism.

That’s because Galileo was correct: your vision is grievously flawed. The amount of capital floating around worldwide is increasing (even if the US populace is squandering theirs on consumption). Demanders of capital are getting access to it on ever improving terms from suppliers. You wont be able to sit on your arse like a potentate on high getting a kick from watching petitioners beg for venture capital, nor will you be able to demand high returns that outstrip those normally associated with that risk level. No, you’re going to have to compete with other capital suppliers for the opportunity to get in on these investments. You’re going to have to get on your feet and work, and the higher the return you want the more work you’re going to have to do and risk you’ll have to bear. Even without full capitalism this is is what is increasingly coming to pass, and it’s only going to get stronger.

JJM