Stephen Speicher

Greenspan discusses economics, and Ayn Rand

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There is an interesting article in today's Wall Street Journal, posted online, in which Alan Greenspan is interviewed. Greenspan discusses economics, world events, and the state of our country. But here are his comments involving Miss Rand.

A Long Conversation

With Alan Greenspan

October 13, 2006 11:24 a.m.

[...]

Ms. Cooper: For 30 years, you were friends with, and a disciple of, Ayn Rand, whose novels, Atlas Shrugged and The Fountainhead, portrayed capitalism as a moral force and successful business leaders as epic heroes. By that definition, there are many 'epic heroes' in this room today. How did her philosophy and work affect yours?

Mr. Greenspan: I met her when I was very young, in my mid 20s. At that time I was a strong proponent of logical positivism, a philosophy that asserts the primacy of observation in assessing the truth of statements of fact and holds that metaphysical and subjective arguments not based on observable data are meaningless. I was an empiricist -- if I couldn't measure it, it didn't exist. I believed that economics was simply an empirical field and that the economy could be forecasted econometrically.

Ms. Cooper: For those in the audience who are not economists…

Mr. Greenspan: The smart ones -- unlike us.

Ms. Cooper: Econometrics is the analysis of historical data to predict the future. Given that so many new phenomena and unpredictable events affect economic developments, judgment is often better than what a computer model would spit out.

Mr. Greenspan: Lucky for us, Ayn Rand showed me that my views were self-contradictory. From her, I learned that the economy is driven by psychology, values, attitudes, trust and other often-irrational and immeasurable factors. Rand showed me that judgment is a key ingredient in all economic forecasting and analysis. One cannot understand society as a whole unless you deal with all of it. Economics is more than a technical field. It is based on the whole spectrum of human decision-making and action. Econometrics is only part of the game. A good example of this is that to complete economic transactions, people must trust the word of strangers. This works because it's practical. I would likely have been a reclusive econometrician, spitting out bad forecasts, if it weren't for Ayn Rand.

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There is an interesting article in today's Wall Street Journal, posted online, in which Alan Greenspan is interviewed. Greenspan discusses economics, world events, and the state of our country. But here are his comments involving Miss Rand.

Steve, referring to your sig line -- "Ignorance is just a placeholder for knowledge" -- how long can that placeholder legitimately substitute for actual knowledge, when the person being considered has had almost 50 years to observe, consider, and learn, from the Fountainhead herself, yet this is what he takes away from the greatest thinker of the past 100 years.

This certainly explains his charge of "irrational exuberance" for the dot.com era. Having been there, I saw quite a bit of rational exuberance. He created an irrational environment himself, when he admitted that his intent was to be unpredictable (I don't remember the exact quote, but an interviewer said something like "... investors have no idea when or if you're going to raise or lower interest rates" and he responded, again in essence: "I hope they don't!").

It's sad, but also a relief, to understand just how fundamentally he misunderstood Rand and never really changed from the rationalist he started out as before he met Rand. He sounds more like Hayek, justifying Capitalism based on the impossibility of certainty. And, yet, Greenspan is worse, because he held the reins of "power" and used them to create uncertainty.

Thanks for the reference.

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It's sad ...

It really is sad. His lectures in the early 60s were so clear, without even a little hint of what was to come. And his forecasting business was a brilliant success at the time. Other than aliens sweeping down from the sky and replacing him with one of their own, I'll go with the explanation you gave.

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Whatever Mr. Greenspan's errors may be, I nevertheless appreciate the respect that he always seems to show for Miss Rand. I have never heard of him denigrating her or even focusing on any particular area of disagreement with her.

I have become so used to her detractors -- especially among some of her alleged "fans" -- spending so much of their time criticizing her banally, that I feel a certain benevolence toward Greenspan for that reason alone.

I'm sure someone here will correct me if I am wrong about him in this regard, but that's my 2 cents. Thanks, Stephen, for this interesting quote.

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Whatever Mr. Greenspan's errors may be, I nevertheless appreciate the respect that he always seems to show for Miss Rand. I have never heard of him denigrating her or even focusing on any particular area of disagreement with her.

In fairness, I think you are right about that. And Greenspan has often been asked about his connection with Ayn Rand. A number of years ago he was the subject of the A&E "Biography of the Year," and the show included a segment on Ayn Rand that was all favorable.

But, the context of the AR questions has usually been that of economics, so let's see what the more 'chatty' form of his memoirs hold when his book comes out next year.

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So let's see what the more 'chatty' form of his memoirs hold when his book comes out next year.

Somehow chatty and Greenspan just don't seem to go together in the same sentence. ;)

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A Long Conversation

With Alan Greenspan

October 13, 2006 11:24 a.m.

------------------

Mr. Greenspan:--------- Economics is more than a technical field. It is based on the whole spectrum of human decision-making and action. -----

Is he implying that economics is a substitute for, or the equivalent of, ethics? I always thougth that economics was a field of study of trade among men. Now it's a field that includes my decision to have children or not, whether or not I fall in love with someone, or my decision to sit at the computer or watch TV? What does he mean by economics is "based on the whole spectrum of human decision-making and action"?

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I once had clients that were CFPs or CFAs and they listened to every word that Greenspan had to say with reverance. I once asked a couple of them to read his writings in CUI and tell me what they thought. I wanted to know if they saw any differences between now and then. They all came back and said that his articles seemed just as sound as he is today! I asked a few questions which these people could not answer and decided never to invest with them. Although they were all wealthy I am going to put my money with someone that really understands economics and the market.

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Is he implying that economics is a substitute for, or the equivalent of, ethics? I always thougth that economics was a field of study of trade among men. Now it's a field that includes my decision to have children or not, whether or not I fall in love with someone, or my decision to sit at the computer or watch TV?

I don't think that's what he means.
What does he mean by economics is "based on the whole spectrum of human decision-making and action"?

Von Mises did name his magnum opus Human Action, so the phrase itself isn't something new or inherently wrong. Maybe Greenspan has something similar in mind. Maybe he's refering to behavioral finance.

In the context of the interview, he seems to be saying that he previously had looked at economics as a purely mathematical field, which it isn't.

How many dot com businesses, for instance, started without a clear business plan or roadmap to profits, yet received investor funding?

How many investors buy high (out of fear that else they "will never get in") and sell low in a panic?

How many fads -- cabbage patch dolls, beanie babies, -- lead to prices bid up to high levels, then crash to nothing a few months later?

Why do some stocks skyrocket, with wide press coverage, only to fall back to earth soon after, while excellent but not trendy companies have low P/E stocks that very gradually appreciate?

Why did the news reports about Alar (a pesticide used on apples) causing cancer suddenly cause associated companies' stocks to plummet before the facts were in -- and when they were, the prices came back up? Or, even more recently, why did Motorola's stock dip significantly when fears of cell phones causing cancer make headlines -- and then the price gradually came back up?

Such things as these are, in my view, driven more by psychology and emotions than by rational economic calculation. I think economic thinking, in the short term, has to account for such psychological phenomena; in the long term, good business practices, freedom from government intervention, and rational thinking drives out irrational behavior.

I think an idea along these lines is what Greenspan had in mind.

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Is he implying that economics is a substitute for, or the equivalent of, ethics? I always thougth that economics was a field of study of trade among men. Now it's a field that includes my decision to have children or not, whether or not I fall in love with someone, or my decision to sit at the computer or watch TV? What does he mean by economics is "based on the whole spectrum of human decision-making and action"?
Thomas Sowell, in his book "Basic Economics", defines economics as the study of the use of scarce resources which have alternative uses.

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Von Mises did name his magnum opus Human Action, so the phrase itself isn't something new or inherently wrong.

To emphasize your point: I recall from Von Mises's Human Action and possibly his Socialism that he regarded economics as a branch of a more general science. He (and perhaps others) called that general science "praxeology." Philosophically, the Greek word praxis means "action" (but, interestingly, its original meaning was business done on a trading voyage). Thus, praxeology is the science of (human) action. Perhaps that is where the title of his magnum opus came from. If I recall correctly from reading done decades ago, introductory pages of Human Action discuss praxeology as background for the remainder of the book.

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Is he implying that economics is a substitute for, or the equivalent of, ethics? I always thougth that economics was a field of study of trade among men. Now it's a field that includes my decision to have children or not, whether or not I fall in love with someone, or my decision to sit at the computer or watch TV? What does he mean by economics is "based on the whole spectrum of human decision-making and action"?

Paul, I think he was contrasting his new view of economics with his prior view of economics as econometrics. In other words, he learned from Rand that economics is about people, rather than a subset of statistics. Interesting then that later on he was still viewed as someone very focused on obscure data sets.

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Is he implying that economics is a substitute for, or the equivalent of, ethics? I always thougth that economics was a field of study of trade among men. Now it's a field that includes my decision to have children or not, whether or not I fall in love with someone, or my decision to sit at the computer or watch TV? What does he mean by economics is "based on the whole spectrum of human decision-making and action"?

Believe it or not, economists have actually written papers and books with such analyses in mind, examining human actions and their consequences far beyond the normal scope of standard economics (or market economics). Take the book Micromotives and Macrobehavior by the Nobel-prize winning economist Thomas Schelling. I have only read a few passages of it here and there while I was browsing through a bookstore, but from my brief skimming I discovered that it sought to explain by means of economic models such social behaviors as traffic congestion, racial segregation and even the consequences of selecting the gender of one's children. He's a pioneer of game theory, so this is no surprise. But the fact that he's a very prominent economist is hardly comforting. Alan Greenspan is not unique in this belief that economics is "based on the whole spectrum of human decision-making and action."

Properly, economics studies markets--social systems consisting of rational human agents producing and trading values to promote their self-interest. Thus economics encompasses every aspect of the market, including its structures, its mechanisms, and its foundations. Also, everything that can affect the market, such as government policies and irrational behavior, technological progress and economic competition, is therefore subject to economic analysis. Now, any decision and action can affect markets, so conceivably economics can study such things as your deicision to have children, to watch TV or to surf the Internet. However, it cannot study such decisions and choices per se along with their consequences for you and society in general. When such choices are considered with respect to their consequences on the market, such as the profitability of your cable company, or your ISP, or producers of baby products, then and only then do they properly fall under economics. I doubt, however, that Alan Greenspan meant that by his statements.

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Somehow chatty and Greenspan just don't seem to go together in the same sentence. ;)

For something in excess of an $8.5 million advance on his book, I suspect he will be 'chatting' things up. :)

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For something in excess of an $8.5 million advance on his book ...

Sounds like the publisher is guilty of irrational exuberance. ;) The government should do something about that...

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