Atlas and Economics

Atlas and Economics
by Edward W. Younkins

Text of a talk delivered October 6, 2007 in Washington D.C., in celebration of Atlas Shrugged’s 50th Anniversary sponsored by the Atlas Society.

Atlas Shrugged is widely recognized as a masterpiece of philosophy and of literature. However, not so widely recognized, but equally true, is that Atlas Shrugged is an economically literate novel that provides economic enlightenment. Based on an analysis of reality, it is well-informed on economics and can be viewed as a treatise on political economy providing a literary treatment of proper economic principles, concepts, issues and themes. This great novel portrays a growing crisis of interventionism and systematic government failure and presents a thorough defense of a totally unregulated market system. In her literary passages, Ayn Rand is able to teach the lessons of market-oriented economics in a far more memorable and engaging manner than what can be found in books and articles on economics.

To begin with, Atlas Shrugged masterfully depicts the role of individual initiative and creativity in economic progress. Rand shows, especially through Galt’s strike, that the mind is the fundamental source of wealth and profits. It is the thinkers who are the true creators of wealth and who are crucially responsible for prosperity. It is capitalists, industrialists, and entrepreneurs such as Hank Rearden, Dagny Taggart, Ken Dannagar, Ellis Wyatt, and Midas Mulligan who reshape the world by being prime movers in the marketplace. These top individuals in the pyramid of ability contribute much more to prosperity than those at lower levels in the hierarchy. It is the competent thinkers and doers who create wealth and promote human economic prosperity through innovation and the creation of new enterprises. It is these self-actuating rational valuers who propel the world and sustain it. Much of Atlas Shrugged is a study of the great producers who have the ability to see, to make connections, and to create what has not been seen before. Atlas Shrugged makes a convincing case that (1) the mind is at the root of the creation and maintenance of wealth; (2) the passionate producer is the prime mover and visible hand in markets; and (3) the rational, purposeful, and creative character of the human person is reflected in the act of material production.

In his “Money Speech” Francisco explains that money is made possible only by men who produce. Money is a tool of exchange which presumes productive men and the results of their activities. Wealth is thus the source of money. Money is the effect, rather than the cause, of wealth. The money that a person holds symbolizes production that has already occurred and that has been judged as valuable by other people. When an individual takes money as his reward for his work he does so in order to exchange it for products and services made possible by other individuals.

Atlas Shrugged in general and Francisco’s speech in particular emphasize that it is production which initiates demand for other products and services - - production is the source of demand. Atlas Shrugged thus portrays and explains Say’s Law of Markets which states that supply constitutes demand. Production is primary and is a precondition to consumption. An individual can only demand products and services from others if he has previously successfully marketed his own products and/or services. People who consume need to produce in order to obtain money that can be exchanged for other products and services.

Francisco explains that money is, or should be, an objective standard of value tied to reality in order to act as an integrator of economic values. An objective standard tied to reality requires an objective commodity such as a unit of gold. Gold is the means of preserving wealth and value. Money prices based on such an objective standard accurately express people’s judgments regarding the value of goods and services. Francisco makes clear that this role of money is eroded by inflation. Inflation extinguishes the signaling function of money prices. He says that the debasement of money, through the substitution of paper for gold, is the road to the downfall of society.

In Atlas Shrugged the reader is able to see how regulations in a mixed economy are actually made. Rather than to advance the so-called “public interest,” in reality regulations frequently further the private financial interests of political insiders at the expense of others. Political interest groups lobby for contradictory measures and the government grants favors to those who have the most votes, political pull, or influences at any given moment in time. A good example in Atlas Shrugged is the “deal” through which the Anti-dog-eat-dog Rule and the Equalization of Opportunity Bill result.

The Anti-dog-eat-dog Rule ostensibly imposes a ban on “destructive competition” granting seniority to the oldest railroad operating in a given region of the country. Although the stated reasons for the rule are to recognize historical priority and to avoid a transportation shortage, its real purpose is to put Dan Conway’s superb Phoenix-Durango Railroad, Taggart Transcontinental’s competitor for the Colorado freight traffic, out of business. The result is the sacrifice of one of the most productive members of the National Alliance of Railroads (Conway) to further Taggart’s less productive company.

James Taggart uses his political friendships with steel producer Orren Boyle to influence the National Alliance of Railroads to pass the Anti-dog-eat-dog Rule. In turn, Boyle employs Taggart to use his influence in Washington in order to strip Hank Rearden of his ore mines delivering them in turn to Paul Larkin who would provide Boyle with the first chance to obtain the ore.

Boyle agrees to provide the votes needed in the National Alliance of Railroads and in exchange Taggart uses his Washington connections to pass the Equalization of Opportunity Bill which forbids any one person or corporation from owning more than one type of business concern. This, of course, prevents Rearden from owning the mines that supply him with the resources that he needs. In order to preserve the steel industry, “as a whole” (i.e., to save Boyle’s company), Reardon is stripped of his ore mines which are placed in the hands of someone else who will give Boyle first priority for the ore. Although the stated rationale for the Equalization of Opportunity Bill is that it is unfair to permit one individual to own several business enterprises, the hidden agenda is to allow Boyle’s Associated Steel to compete with Rearden Steel. The result is the sacrifice of Rearden’s productive firm for Boyle’s
unproductive company.

Throughout Atlas Shrugged, both the government and liberal politicians say that people must sacrifice for the public welfare. Atlas Shrugged illustrates the depraved consequences of following the principle of need rather than the principle of productivity and of adhering to the communist slogan “From each according to his ability, to each according to his need.”

For example, the State Science Institute does not want Rearden to put his new metal on the market because of the “social damage” it will cause to steel producers (like Orren Boyle) who can’t compete with him. When Rearden says that he does not worry about other firms, the State Science Institute attempts to bribe and eventually to threaten Rearden to keep his new metal off the market.Rearden understands that true corporate social responsibility is to make profits for the owners while respecting the natural rights of individuals.

Then there is the story of the destruction of the Twentieth Century Motor Company due to the results of the Starnes heirs’ small-scale socialist experiment. Illustrating the consequences of communism in practice, the employees as a group vote to decide the needs of each worker as well as the expected production of each laborer based on an assessment of his ability. The story of this company shows that when earnings are cut off from production, incentives diminish, productivity plummets, and bankruptcy results. It thus serves as a precursor for the ultimate fate of a country as a whole that is heading toward collectivism.

In addition, there are the Colorado Directives which are intended (at least officially) to help with the national emergency by forcing Colorado to share the suffering. These directives were due to the efforts of economic interest groups who wanted the industrially successful state of Colorado to force its profitable firms to redistribute their earnings. Of course, these laws put Wyatt Oil and other firms out of business and wiped out the Rio Norte Line. Ultimately, these destructive directives hastened the retirement and disappearance of many Colorado industrialists who had created enormously productive enterprises and who had been forced to carry less competent businessmen along with them.

We also encounter the Railroad Unification Plan and the Steel Unification Plan. The Railroad Unification Plan was James Taggart’s desperate scheme to keep Taggart Transcontinental from going out of business by means of existing off its competition. The plan provides that the total profits of all railroad companies be allocated according to the number of miles of track each owns instead of according to the amount of service that each supplies. Then there is the Steel Unification Plan which would bankrupt Rearden. The Steel Unification Plan is patterned after the Railroad Unification Plan. All of the steel companies’ earnings are to be rewarded according to the number of furnaces each owns. Because Boyle has a great many idle furnaces he would be paid for almost double his actual output. In turn, Rearden would be paid for less than half of his actual output. Both the Railroad Unification Plan and the Steel Unification Plan require companies to produce “according to each one’s ability” with the profits to be allocated “according to each firm’s need.”

Directive 10-289 provides the knockout punch to economic freedom in Atlas Shrugged. Its purported purpose is to stop the country’s economic decline by freezing the economy in its present state. The directive employs comprehensive central government planning to freeze the status quo. It actually allows top government officials and politically-connected businessmen to retain power and enhance their own control of the economy. This directive mandates that all workers remain at their current jobs, that no business is permitted to close, and that all patents and copyrights be “voluntarily” turned over to the government. It also forbids the introduction of new products and innovations and requires firms to annually produce a number of goods identical to the number produced during the preceding year. In addition, the directive freezes all wages, prices, and profits, and requires every person to spend the same amount of money as he did in the preceding year. Of course, given that appeals for exceptions can be made to the Unification Board, such government control inevitably leads to the buying and selling of economic favors.

Galt’s Gulch (also known as Mulligan’s Valley and Atlantis) sharply contrasts with Directive 10-289. Atlantis is a microcosm or model of a free society enshrouded by the collapsing interventionist one. This paradigm of a free society consists of a voluntary association of men held together by nothing except every man’s self-interest. Here productive men who have gone on strike are free to produce and trade as long as they observe the valley’s customs. In this secret free society each individual is unencumbered in the pursuit of his own flourishing and happiness.

As we have seen, Atlas Shrugged contains a great deal of economic content. In it Rand provides a literary description of economic institutions and conditions within a particular context. She is able to explain the proper principles and workings of a free market system. Rank skillfully illustrates the cause and effect relationships of events in a society’s economy. As a lesson in economics, Atlas Shrugged illustrates the necessity to analyze the immediate and long-term, direct and indirect, and intended and unintended consequences of a governmental action or policy. Rand explains that the mind is the source of well-being and that the mind must be free to invent and produce new products and services. Atlas Shrugged illustrates that government intervention discourages innovation and risk-taking and obstructs the process of wealth creation. It also demonstrates that wealth is not causeless and that by removing the cause (i.e., the mind) the strike removes the effect (i.e., wealth). Capitalism is thus shown to be the only moral economic system because is protects a man’s mind, his primary means of survival and flourishing. Atlas Shrugged is a powerful tool to educate, persuade and convert people to a just and proper political and economic order that is a true reflection of the nature of man and the world properly understood.

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