Tuesday, September 6, 2011

Book Review: Atlas Shrugged

While I bussed it to work (and back) over the summer I had the chance to slog through Atlas Shrugged (1957), my first taste of Ayn Rand. I would use a verb other than slog (I actually was anxious to keep reading), but at 1069 pages of small print, I don't know how else to describe it. First and foremost, it's a compelling story: by implementing uneconomic policies, Rand's USA slowly descends into poverty and anarchy. Late in the book I pressed on in morbid fashion, eager to see what destruction awaited. Ignoring her policy proposals and view of economics, I'd grade the novel as being worthy of immediate consumption. The characters are compelling; the writing is clear and not too flowery nor concerned with lengthy, but irrelevant detail; and the plot is original and well thought out. She does go overboard with repeated, and sometimes comically reverent asides about efficiency and how certain characters were or weren't contributing to society. In my daily tasks over the summer, I occasionally caught myself rating my efficiency and wondering how my particular scene would be narrated.

Over the last couple years many of the tea party have taken Rand as some sort of standard bearer. For those unfamiliar with Rand, she rails against the government's involvement in the economy and trumpets the free market, so she'd naturally be a tea party favorite. But rather than her current popularity signaling our countries slide into socialism, it's partially just the coincidence of a large recession (requiring increased government spending on social programs) occurring while a democratic president is in office. Tax rates are actually at their lowest levels in decades, for example. In terms of the economics in her book, Rand's ideology doesn't exactly look to be a roadmap back to a vibrant America.

For instance, take her views on taxes. In the book John Galt tells the government to take the tax rate down to 0%. What Galt and Rand forget is that the government could accurately be considered a large insurance company with an army. As the bulk of federal spending goes on Social Security, Medicare, and Medicaid, a tax rate of 0% would render most of the elderly and poor as destitute. Yeah, you could argue that these people would be able to invest the tax savings on their own and do better, but with the financial sector more interested in extracting rents than providing value these days, that doesn't look like it would happen. While, of course, private insurance companies are good at pooling risk, the recent health care debate has made it obvious that private health insurance often falls short (through fuzzy definitions, technicalities, and arcane rules) when people suffer a catastrophic illness. This isn't a health care post, but adverse selection also occurs in droves, as those who don't need the insurance (i.e., the healthy or young) don't buy it, thus driving up costs (in a spiral) for those who do.

In terms of monetary policy, Rand would prefer that the country have none. She was against the Federal Reserve and for the gold standard. We've discussed this elsewhere, but the gold standard would effectively give our country no monetary policy whatsoever, as the amount of currency in circulation would directly coincide with how much gold there is. As Matt Yglesias has said, this would effectively randomize the extent and timing of inflation: "Find a new gold mine somewhere: inflation. Aliens come to steal gold: deflation." It'd be like going back to the severe booms and busts of the 1800's (not that our recent situation has been all that great, but still).

Besides her specific proposals, the general relevance of Rand's work to our current situation is tenuous at best. Sure, the government (sadly) propped up the auto makers a year or two back, but the current debate over whether the government should enact further stimulus isn’t about protecting certain sectors or companies from competition. It’s about stimulating demand, by doing government-y things, like building infrastructure.

Read it because it’s a classic and a great story, not because you want to learn economics.


  1. Levi, can you explain how healthy and young people who don't buy health insurance drive up costs for everyone else? You can't get private health insurance unless you are healthy. It's not like you can wait until you're diagnosed with cancer to purchase a health insurance policy. I'd like more details on your theory.

  2. I think that when young and healthy people don't buy insurance, the pool automatically becomes more sickly and the insurance companies then charge everyone more as a result. This makes it more difficult for people who are barely affording health insurance, thus driving more (relatively) young and healthy people (as they would be the ones quickest to leave) out of the pool. And thus on in a feedback loop. That's how I understand it anyway. Check out the link on adverse selection.

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  4. Yes, but adverse selection doesn't take underwriting into account. Read towards the bottom of the adverse selection wiki page. The fact that underwriters look at medical records, and charge more (or in many cases, flat out reject) higher risks kind-of takes care of the adverse selection problem. At least that's how I've come to understand it.

  5. Yeah, I was wondering about the underwriting part. I'd be interested in finding some studies about it. I wonder, though, if the information asymmetry between insurers and insured is greater with health insurance compared to other types. This is just one anecdote, of course, but I've never had to get a physical to be on any health insurance plan. Have you? Perhaps this deserves more research and a future post.