The philosophy of Economics has developed in odd ways in the past five decades, especially in the popular mind. In the academic world it remains a complex system bound by esoteric mathematics and subdivided into a number of different denominations—I was going to call them sects, and sometimes it seems as if that’s what they are, but let’s go with the word that has fewer religious connotations.
Start with the modern popular cult surrounding Friedrich Hayek. As David Sloan Wilson noted in an article in Evonomics, Hayek has been turned into a simplistic monster. “His books could fill a bookshelf and the commentary could fill a small library, but the monstrous version can only speak in two-word sentences: ‘Government bad! Market good!’ Likewise, the monstrous version of Adam Smith, the father of economics, can only say, ‘Invisible hand!’” Extreme simplification might enhance the broad acceptance of a doctrine, but it should not, in anything similar to that form, be used as a guide for government policy. Unfortunately, that’s often what has happened.
Likewise, the philosophy of Ayn Rand continues to raise its libertarian influence in the economic and political life of the United States. Among others, former Speaker of the House Paul Ryan and many members of the House “Freedom Caucus” (née the Tea Party) are known to be acolytes of both Hayek and Rand. In Rand’s case, however, we cannot complain that her philosophy has been greatly simplified. It always was an unsophisticated vision of economic systems, one that glorified the twin myths of the free market and the successful entrepreneur. In one novel, Atlas Shrugged, she even fantasizes about how economic “prime movers” or “creative minds” could cause a widespread collapse if they went “on strike”, thus fatally removing their unique and rare talents from the marketplace.
A modern example of Randian excess is our current idol-worship regarding business leaders. The media coverage of CEOs like Jack Welch, Steve Jobs and Bill Gates is generally reverent, with stories of their fiduciary and managerial successes far exceeding any mention of their significant faults. And, as befits coverage of what might be termed secular saints, the power of these men to influence events, and the positive outcomes of their executive efforts, are both highly exaggerated.
Let’s look, for example, at Microsoft and the continuing cult of Bill Gates, a devotion now transferred to the Gates Foundation. Gates is given credit for innovative excellence and creativity because his company, Microsoft, became a software industry powerhouse. However, Microsoft only succeeded because in the early days of microcomputers the business mainframe (and typewriter) hegemon IBM needed an operating system for their new desktop products. They wanted their own version of a system called CP/M. Digital Research, which developed CP/M, wanted to charge a royalty for it. So IBM turned instead to Microsoft, which modified CP/M and renamed it “PC DOS” (later to become MS-DOS). The fact is that IBM microcomputers using PC DOS were far from being the best options available at the time, but the IBM name and sales network quickly made the IBM PC the standard in the business world, which made Microsoft the leader in early operating systems.
That gave Microsoft both near-monopoly power in the industry and ample funding to extend it. In the first two decades of personal computers other companies developed several excellent and popular software products, including the word processor Wordperfect, spreadsheets Visicalc and Lotus 1-2-3, and the internet browser Netscape, among others. Following the strategy it used with CP/M, Microsoft copied these programs. They were not content with mere competition, however. They sabotaged Wordperfect and Lotus by making frequent changes in their operating system that interfered with the operation of those programs, encouraging users to switch to the Microsoft products Word and Excel. After they morphed from MS-DOS to Windows, which was a bad copy of the Macintosh interface, they undercut Netscape by offering their own browser, Explorer, for free with all new systems.
In short, the successes of Bill Gates and Microsoft did not occur because they were innovators or leading creative minds or because their product were superior. They simply parlayed an initial stroke of good fortune with IBM into a dominant position, one that they then used to steal market share from software produced by some of the best innovators. Yes, eventually their products did improve, but the status of Word and Excel and Explorer and Windows as industry leaders was always more a result of IBM’s market dominance than Microsoft/Gates supremacy.
The same pattern has been repeated throughout the history of capitalistic expansion. Anyone familiar with the biographies of our titans of industry—Rockefeller, Carnegie, Ford, Jay Cooke, Leland Stanford, among others—knows that their success was not a result of the uniqueness and creativity of their business plan, but because they benefited from a combination of factors like timing, political influence, luck, and, very often, a Microsoft-style model involving deliberate sabotage of both the infrastructure and the reputations of their competitors.
But as the Microsoft example shows us, we don’t have to look back to the nineteenth century to find examples of CEO “expertise” that was not beneficial. Look to the leadership of the dominant financial services in the first decade of this millennium and the rock-star CEOs who created the Great Worldwide Recession of 2008, including not only the ill-fated Lehman Brothers and AIG, but also Bear Stearns, Citigroup, Merrill Lynch, and others. The leaders of these institutions initiated the disaster decades before the collapse by advising (lobbying) the federal government to deregulate their industry, that is, to apply the Ayn-Randian solution by removing most of the depression-era controls that had successfully stabilized economic and financial markets for more than fifty years. Their advice, involvement, and campaign donations influenced Congress and the administrations of presidents Carter, Reagan, both Bushes, and Clinton. And their efforts led us to disaster.
None of them were deterred by the warning signs provided by events such as the savings and loan collapse of the late 1980s and the Enron scandal of 2000, both of which were made possible (perhaps inevitable) by deregulation. After even more restrictions had been cleared away, they vastly expanded questionable (and often previously illegal) activities—promoting risky mortgage and loan packages, bundling such packages into often mislabelled securities, purchasing investments with uncertain short-term financing, and expanding financial leveraging to extreme multiples. In most cases they continued this behavior for months after they knew that the system was seriously unstable, often promoting securities that they knew would soon be worthless. Would we really have been worse off if these economic leaders had gone on strike instead? Perhaps we should have followed the example of Iceland and prosecuted our financial wizards for fraud. Instead we encouraged their destructive behavior by treating CEOs with reverence and providing them with bailouts and exorbitant rewards.
No, it’s even worse than that, and it continues. By venerating the supposed genius at the top and giving them undue credit for the successes of their enterprises, we are not only encouraging the risky behavior of irresponsible egomaniacs. We are also ignoring the many layers of employees, all of whom also were involved in, and responsible for, the success of their corporation. Instead the CEO gets the credit and the massive rewards. The underlings? Their contributions are both unrecognized and inadequately compensated. During Jack Welch’s tenure as CEO of General Electric, more than 100,000 of them, a quarter of the GE work force, were fired. Meanwhile the congressional believers in the monstrous simplicity of Hayek/Rand pseudo-economic philosophy exacerbate the problem by giving the “prime movers” massive tax breaks and arguing, against all precedent, that the benefits will “trickle down” to the rest of us.
In this way we justify taking our societal resources and directing almost all of them toward the top strata. As a result upward mobility has virtually disappeared and the income gap, the economic divide between the upper ten percent and the rest of us, has gone from excessive to extreme. By the way, Friedrich Hayek predicted that would happen and did not consider it a positive outcome. It is past time for us to recognize that the truly essential members in our economy are the ordinary workers—from mid-level management down to the janitors, both in their roles as workers and as consumers—and to increase their incomes so that such people can survive and support a family without working two jobs at a time, as is now common. In short, it is time to try a “trickle-up” strategy.