[THS] Why Ayn Rand and Her Legion of Followers Are Hopelessly Wrong

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http://www.alternet.org/story/150740/why_ayn_rand_and_her_legion_of_followers_are_hopelessly_wrong?page=entire

Why Ayn Rand and Her Legion of Followers Are Hopelessly Wrong

The entire story of America's 19th-century railroad boom was the exact opposite of
what Rand's ideology imagines.
April 25, 2011  |


     “There are two novels that can change a bookish fourteen-year-old’s life: The
Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders
a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted,
socially crippled adulthood, unable to deal with the real world. The other, of course,
involves orcs.” – John Rogers, Kung Fu Monkey


The reviews of Atlas Shrugged (Part 1) are in, and “brutal” doesn't begin to describe
them. Phrases like "barely professional," "sterile and lifeless" and "watered-down,
uninspired bilge" abound in reviews that often say, "I don't much care for Ayn Rand's
ideas, but even she doesn't deserve this!" Even a positive review in Rupert Murdoch's
New York Post called the film, “a bit stiff in the joints and acted by an
undistinguished cast amid TV-movie trappings."

But sheer incompetence is what we've come to expect from ideologues, and a close
look at how the book's (and movie's) premise stacks up against reality can help
remind us why. Atlas Shrugged's rugged Randian individualist heroine, Dagny
Taggert, is a determined builder of super-trains who faces an endless parade of
corrupt bureaucrats, politicians and unions standing in her way. In reality,
supertrains were part of Obama's undersized stimulus package, which the Randian
right savaged with a vengeance. Republican governors across the land turned down
billions of federal construction dollars, with high-speed trains one of their favorite
targets for destruction. Even before taking office, Wisconsin's Scott Walker killed an
$800 million high-speed rail grant, a move estimated to cost the state around $100
million in preexisting commitments. They really don't like supertrains.

Who does like supertrains? Socialist Europe and China, that's who! Europe began
building them in the 1970s, and China started following suit two decades later. But
China's more recent efforts have made its initial forays seem quaint. It now has
almost 5,200 miles in service as of January 2011, with speeds ranging from 120 to
220 miles per hour. Another 11,000 miles are under construction thanks to substantial
funding from the Chinese government's economic stimulus program. They're building
supertrains about 100 times faster than Republican governors kill them here at home.

But it's not just the railroading present or future that Atlas Shrugged gets wrong.
After all, one well might argue, so what if a futurist fiction is, well, fictional? The real
problem is that really good futurism—fictional or not—has a strong grasp of at least
one significant aspect of the past, which it then projects forward in order to explore
in greater depth. Not so Atlas Shrugged, which gets the past utterly wrong as well,
as explained in detail in Railroading Economics: The Creation of the Free Market
Mythology (2006), by Michael Perelman, a professor of economics at California State
University, Chico.

To be sure, there were strong, vivid individuals involved in the history of 19th-century
railroad-building, Perelman admits. But market competition was the ruin of railroads,
for the simple reason that competitive pricing of freight rates made it impossible for
railroads to pay off the enormous initial costs of building them in the first place.
Massive waves of bankruptcies devastated the industry, until anti-competitive
measures were devised, first through collusion and monopolistic consolidation, then
through regulation— the latter largely the product of industry figures and industry-
friendly conservative economists.

It's a fascinating story, and proof once again that truth is stranger than fiction.
Perelman was happy to talk about it in detail with AlterNet.

“The railroad industry is very, very interesting because it's an extremely labor-
intensive industry and often there was a single promoter that was involved,” he said.
But these promoters were nothing like Rand's protagonists. As Perelman explain, they
were far more like Dagny Taggart's brother, constantly conniving with politicians in
order to get ahead.

“In our country the promoters were, more often than not, very corrupt people, and
their major goal was to try to find a way to manipulate the financial system, stock
holders and all,” he said. “There's a very famous work by Henry Adams--Chapters of
Erie--it was Henry Adams, along with his brother Charles Francis Adams, the
grandchildren and children of the two presidents Adams. It's very interesting about
how the financiers, Vanderbilt and Fisk, tried to first buy the legislature and then buy
judges in order to compete with each other to see who could get the contract to
build the railroad, which was based on stock valuations far in excess of the railroad.”

This was hardly an isolated case, he explained. “There were powerful individuals who
developed the railroads, but they did so only by getting huge amounts of support
from the government, mostly in the form of land grants. Sometimes governments
would actually float the bonds that would pay for the railroads. So it was hardly an
individualistic operation.”

What's more, Perelman added, “Much of the purpose of the railroads was to increase
the value of the land, so that what you do is get the land grant from the government
and then the value of the land would go up with the railroad....So I believe Southern
Pacific is still the largest private landholder in California.”

Tales of corruption are only the warmup story, however, as Perelman turned to the
heart of the matter. “The next problem with railroads—this was what was discussed
in Railroading Economics—is that railroads are infeasible in a market economy,
because under perfect competition railroads would be charging a price comparable
to the cost of carrying one more ton or one more pound of freight.”

How low is that price? So low that railroads just love to brag about it.

“There's an ad, I think it's for CSX railroad on NPR from time to time, where they talk
about carrying a ton of freight, I think 400 miles, I don't remember the number, on a
gallon of fuel,” Perelman said, “So you can see that the cost of carrying a little bit
extra freight is almost nothing. So if you have two railroads competing at the low
price of operating a railroad--which has a very, very heavy fixed cost-- [they] will go
bankrupt.”

Nowadays that's not going to happen. But in the good old days, Perelman recalled,
“this is what happened to the railroads -- they went bankrupt with frequency, so
much so that in A Christmas Carol, Scrooge had his first nightmare, if you recall, that
he had bought American bonds that were based on railroads, which meant that they
were worthless because of this competitive problem.”

Of course Ayn Rand must have hated A Christmas Carol, so she might not have
known that. But Scrooge was hardly alone. An enormous amount of British capital
was lost in American railroad bankruptcies, which is why Scrooge's nightmare was so
believable. Ironically enough, Perelman notes, it was JP Morgan who played a key
role in ending the railroad's ruinous competition, while his father played a key role in
creating it.

“Morgan's father, Junius Morgan, represented British investors, and many of them
were ruined. They moved their capital to the United States, after having suffered
loses in Latin America, and the United States seemed to be a safe harbor.” But that
"safe harbor" proved illusory. “The loses were almost inevitable, until they managed
to avoid competition by going through railroad consolidations,” which is where J.P.
Morgan stepped in.

“J.P. Morgan came along and coerced the railroads into accepting a consolidation --
he managed to control much of the railroad system in the United States. And once he
did that, the same logic pertained for most heavy industry, and you had a major
depression in the late 19th century, called 'The Great Depression' at the time. And
the only response to that was to avoid competition, and have the government
regulate the railroads, through the Interstate Commerce Commission, run by the
railroads.”

In short, the whole story of America's 19th-century railroad boom was the exact
opposite of what Rand's ideology imagines. “Other than having the stock promoters,
who were out there creating the whole idea of the railroad, the individual—the real
individual, not the corporate individual—was pretty much absent from the scene,”
Perelman concluded.

But there's another sense in which railroad individualism was a myth.

“The purpose of the railroad also wasn't individualistic, in the sense that the railroad
wasn't designed to serve individual consumers,” Perelman pointed out. “It was to
open up new markets and create new networks—it was the railroad network that had
the ability to move freight from one place to another over long distances, and that
made it possible to have large-scale industry in the United States. Again, this wasn't
an individual consideration. It was something that made the United States economy
much stronger by virtue of creating those networks.”

By way of analogy, he added, “It would be comparable to building the Internet, and
saying that what you're doing is serving an independent consumer. But the Internet
itself would be worthless except to have other people at the end of the line in
communication.”

Being real life, there were further twists and turns to this story, which only take it
further and further from the black-and-white simplicity of Rand's worldview.
“Ironically, this began because of a protest movement by farmers, who were
outraged that there were very, very high rates for short runs, and relatively low rates
for long runs,” Perelman explained. “They thought that was evil. They wanted to
eliminate that kind of behavior, which they called price discrimination, so in response
to this you got the Interstate Commerce Commission [ICC].”

But their protests only succeeded in helping the surviving railroad industry as well.
“The railroads realized that it would have to be run by people with expertise in the
railroads, it would give them greater control over markets. And in this way the
dangerous completion of the market would be eliminated and they would be free to
make a profit.” And thus was born ICC, part of the first wave of Progressive
regulation, in response to a Populist revolt, but providing enormous benefits to J.P.
Morgan and his associates, the last men standing after countless railroads had gone
bankrupt due to free market competition.

If Perelman's book were only about the actual history of railroads in America, it would
easily be a more fascinating and surprising read than Atlas Shrugged. But there's
another whole level of contradictions layered on top of that history. One of the main
points of Railroading Economics is that conservative economists at the time developed
a very clear-eyed understanding of the ruinous nature of free market competition.
And yet, in the end, they ended up helping to solidify the free market myth. So I
asked Perelman to discuss the broad outlines of how this came about.  Once again,
it's a story with its share of unexpected twists and turns.

“At the time, the academic world mostly consisted of church-run universities. All the
Ivy League schools with the exception of Penn had a church connection,” Perelman
began. But this hardly made them otherworldly. “The churches relied on donations
and because American industry occurred relatively late, the donations tended to be
from merchants who were interested in trade, and therefore wanted unrestricted
markets.”

But that's not exactly what they got, as Perelman explained the next twist. “The best
university education in the world, was in Germany. So the people who became the
most important economists in the late 19th and early 20th century were virtually all
educated in Germany,” Perelman said. Which, of course, was not just academically,
but also industrially more developed than the US at the time.

“In addition,” Perelman noted, “they were respectful of Marx's work. Even though
they did not agree with his politics, they agreed with some of his analysis, because
Germany was looking at the world not from an individualistic perspective, but from
the perspective of community, because the German objective was to create a state
out of all these mini-states which represented what came to be Germany.”

Thus, much as foreign students today come to America and return home profoundly
influenced by American pre-occupations, the same thing happened with American
students in Germany. This occurred around the same time that Otto von Bismark was
consolidating the German state, controlling competition and creating the first full-
scale welfare state as part of a conservative nation-building project, which sought to
preempt the most popular socialist ideas in order to implement them in a way that
stabilized and reinforced Germany's established social and economic order.

Along similar lines, one of Germany's leading economists at the time, Adolph Wagner,
a conservative nationalist, coined what's now known as "Wagner's law"—which states
that the development of an industrial economy will be accompanied by an increased
share of public expenditure in GNP.  In short, the intellectual world that would-be
American economists encountered in Germany was a far cry from what they had
previously known in America.

As a result, Perelman continued, “They came back to this country dissatisfied with the
kind of market-oriented economics that was being taught, and they founded
something called the American Economics Association, which is the dominant
economic association today. But it was designed not to support market economics,
but to build something more like the German system, which was very, very
successful, which was based on restrictions of competition, that competition was
destructive, it was wasteful, competition was destructive and competition was
wasteful, because it represented a duplication that was unnecessary.”

Yet, once again, the seemingly straightforward story soon became more complicated
again, Perelman explained. “At the same time, these same people wrote the definitive
texts arguing that perfect competition was the way the economy worked, and accept
it. And the question arises: 'Why would these people write two different versions?'”

Why indeed? Anyone who's ever marveled at the pre-Murdoch disconnect between
the Wall Street Journal's news coverage and its editorial pages will not be entirely
surprised at Perelman's explanation. “The answer is there were two different
dialogues. One was with the workers, who were very upset with the world they were
seeing, and the other dialogue was with powerful people, especially people like
congressmen and senators, who would have the power to regulate or deregulate big
industries.

“So on the one hand, they wrote to the powerful people, markets don't work,
markets are destructive, markets are duplicative, give us free reign to organize this
stuff as we see fit, more or less modeled on the German system of cartels.” This was
their equivalent of the Journal's reality-based business news coverage.

“The other dialogue was with workers--'You're getting exactly what you deserve,
markets are fair, markets work perfectly,' and of course, the second version is the
one that became dominant,” Perelman explained, much as the Journal's editorial
page promotion of “supply side economics” became dominant in the Reagan era,
despite sharply reversing 35 years of declining debt-to-GDP ratios.

As a result, Perelman said, “The American Economic Association now is just a
mouthpiece of conventional type of economic thinking, even though the people that
we're talking about—one was the leading railroad economists of the country, Arthur
Hadley, who was also President of Yale University, [others included] names like John
Bates Clark, Charles Francis Adams, the presidents' grandson and son—these were all
people with deep understanding of railroads and how they worked, and all were
universally skeptical about markets.”

All this would be far more than enough to put the kibosh on Rand's fantastical
imagination of the 19th century as some sort of golden age of free market
competition—a fantasy shared by wide swathes of the right, from Ron Paul's
obsession with the gold standard to Michael Orlovsky's infatuation with Victorian-era
charity, the seed that gave birth to George W. Bush's oxymoronic “compassionate
conservatism.” But Perelman's analysis has two additional basic points that make this
history even more compelling in terms of contemporary impact.

First is that the problem of fixed costs encountered by the railroads applies to virtually
all major industries. Second is that an additional level of anti-competitive logic that
kicks in with “post-industrial” information age technology, including, but not limited
to, vertical integration—something we see exemplified in the issue of net neutrality.

Taking them in order, Perelman explained, “The railroad problem was common with
all major industries, it was the same pressure to avoid competition, through creation
of trusts, cartels, and monopolies. This is the same problem, because the competition
would cause prices to go to the cost of producing one more. And what you get with
modern technology is the cost of producing one more unit is very, very small, relative
to the fixed costs.”

This was even quite clear in the late 19th century. “The fixed costs in railroads for
capital was very, very important, I think about two-thirds of all capital investment at
the time was in railroads. Morgan was also instrumental in taking over the steel
industry, with Carnegie. He took over AT&T, which was another capital-intensive
industry, which had virtually no cost of carrying one more conversation over the
wires.”

But the logic also applies to 20th century industries as well. “You see it in terms of the
airlines, because the cost of putting me in a seat and carrying me to New York, when
you have an empty seat in an airline is 15 or 20 bucks, but if they airlines only get 15
or 20 bucks, then they go bankrupt. So now you pay more than that, just for
luggage, which costs almost nothing to carry to New York. Competition doesn't
work.”

Indeed, airlines have repeatedly suffered major crises ever since the deregulatory era
began under Carter, and then kicked into high gear under Reagan. But even airlines
are a somewhat antiquated technology, compared to what's come after them, as
Perelman considered next. “Now, when you go to even more modern
technology—let's say telecommunications—if you had real competition in the
telecommunications industry, not just a few big companies, then, of course, prices
would go down to the cost of carrying one more unit, and we'd see that
telecommunications would be virtually free. So, we don't have competition.”

What has happened with telecommunications impacts a wider range of older
information technologies as well. Just as railroads worked to integrate the entire
industrial order of their day, telecommunications has a similar impact today,
accelerating the impact of an underlying logic that would eventually have caught up
with all of them anyway—though perhaps not with such devastating speed.

Thus, “It becomes even more extreme in industries where the cost of one more unit
is free or virtually free. Then you need to have intellectual property to prevent
markets from working their magic. So you see, every time the US economy slows
down, you see an intensification of intellectual property, as a way of pumping up
profits.”

This brings us to Perelman's second point. “Net neutrality takes this a step further, in
that not only are you eliminating market-type competition, but it would be almost  as
if you would  give the railroads or the airlines the ability to discriminate on their
preferences, so for example the airlines would have the right to tell obese people
they can't fly, because they cost more.”

But that's only the beginning. “It's even worse because, in terms of net neutrality,
you have have what's called 'vertical integration', that is you have the same people
supplying the pipelines in addition to what they put over the pipe. And so there you
have an even more extreme degree of control. Because not only can they regulate
the price, but they can regulate the quality of the service they deliver to force people
to move toward what they want to sell.”

He went on to give Comcast as an example, saying, “The absence of net neutrality
means that can give preference to their own product, and to the exclusion of other
people's products. And then when you have only a few content providers, big
content providers, that would mean it would squeeze out everybody except the very
very biggest [content providers] who can afford to pay the freight.”

As a result, Perelman concludes, “There we've moved two steps from competition,
from competitive conditions, something that was not even imagined by people writing
about this problem in the 1890s.”

The negative impacts may be familiar to today's young users—many of them “cyber-
libertarians” as described in Paulina Boorsook's classic survey, Cyberselfish: A Critical
Romp Through the Terribly Libertarian Culture of High Tech —but the historical and
ideological connections are only dimly perceived, at best.

 Finally, I asked Perelman about the question of how to construct something
different—both a different understanding of economics and a system that reflects
that understanding.

“The first step would be for people to understand what the present is, and we're not
making very much progress,” he said.  “People don't understand the nature of the
economic system, they don't understand the nature of the financial system, and we
seem to have lost the core types of organizations that could give us a framework in
which we could share ideas and develop ideas. We have to build those from the
ground up. It's a very, very difficult challenge.”

I asked about Wisconsin, the upsurge of pro-labor activism there, in contrast to the
much more atomized way in which labor usually functions in America. Did he regard
this as a sign of hope, a potential opening?

Perelman was hesitant. “I don't know how much of an opening there was with the
election in Wisconsin for the Supreme Court, just maybe the push-back isn't as strong
as we might hope.” What's more, he went on to argue, in the past progressive forces
were institutionally much broader and more diverse. “You not only had unions, you
had strong socialist parties, a strong Communist party before, you had—and
probably the groups that would have strongest potential would have been the
churches. So if you went back to the late 19th century, there the churches we mostly
very progressive, churches who would stress things like justice.  That kind of church
movement was weakened, the labor movement was weakened, every kind of social
movement has been, as you said, atomized.”

“Even when the attack is so crude and clumsy as it was in Wisconsin, you might have
a majority that opposes it, but you don't have a strong movement,” Perelman said,
“and even when you have a strong movement, after you win, the next step is more
difficult.  What do you do? Obviously, that's the question: Afterwards, what do you
do?  There I would point to Egypt. They won a surprising victory, a shocking victory,
I don't think anyone could have predicted, and yet, again, what happened afterward
is that it looks like it's questionable there will be real change.”

Just because he has a deep sense of how difficult our situation is doesn't mean he's
devoid of hope, however.  “So, it requires a long-term vision, and we have to develop
a combination of courage and patience,” he said.

“It will be very difficult. And yet—and yet—when people start doing this, and can feel
a sense of success, as long as they don't expect an immediate victory that's going to
change the world, then there will be a sense of fulfillment that will make it seem very
worthwhile.  But that's a hard sell at this point for a lot of people.”