Hard as it may be to believe, Alan Greenspan was once a young radical of sorts — a radical for capitalism. In his New York youth, he fell in with novelist Ayn Rand and her salon. She used to make fun of him for a flubbed first impression, in which he tied himself in a philosophical knot and appeared to be unsure whether or not he, personally, existed.

But Rand came to like young Greenspan. He was smart, eloquent, and committed to the free market. The Objectivist Society gave him a platform in a 1966 book containing his (and Rand’s) essays called Capitalism: The Unknown Ideal.

Given the man’s sad performance in his Congressional testimony recently, in which he tied himself into worse knots than he did in Rand’s salon, I wanted to quote from some of the far better arguments he advanced as a young man — about how government regulation causes precisely the kinds of breakdowns we’ve seen recently.

“It is precisely the ‘greed’ of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer,” Greenspan wrote in an essay called The Assault on Integrity. “What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product…

“Government regulation is not an alternative means of protecting the consumer. It does not build quality into goods, or accuracy into information. Its sole ‘contribution’ is to substitute force and fear for incentive as the ‘protector’ of the consumer. The euphemisms of government press releases to the contrary notwithstanding, the basis of regulation is armed force. At the bottom of the endless pile of paper work which characterizes all regulation lies a gun. What are the results?

“To paraphrase Gresham’s Law: bad ‘protection’ drives out good. The attempt to protect the consumer by force undercuts the protection he gets from incentive. First, it undercuts the value of reputation by placing the reputable company on the same basis as the unknown, the newcomer, or the fly-by-nighter…. Second, it grants an automatic (though, in fact, unachievable) guarantee of safety to the products of any company that complies with its arbitrarily set minimum standards. The value of a reputation rested on the fact that it was necessary for the consumers to exercise judgment in the choice of the goods and services they purchased. The government’s ‘guarantee’ undermines this necessity; it declares to the consumers, in effect, that no choice or judgment is required — and that a company’s record, its years of achievement, is irrelevant…”

The explosion of small shops selling subprime mortgages would seem to lend credence to this idea. Why not take out a mortgage from someone whose method of advertising is yellow signs on telephone poles? After all, the government regulates mortgages, right? So how risky can it be? And unfortunately, as the explosion of Fannie Mae and Freddie Mac show (though Greenspan wasn’t writing about them at the time) “Government regulations do not eliminate potentially dishonest individuals, but merely make their activities harder to detect or easier to hush up” — especially when Fannie and Freddie are doing their best to buy off Congress.

The young Greenspan had a clarity in his vision. But in his testimony before Congress last week, Greenspan allowed the current market finger-pointing psychology to get the best of him. He spoke of being in a state of “shocked disbelief.” He called for more regulation, and under questioning from Rep. Henry Waxman, said he found a “flaw” in his belief that markets were self-correcting. It’s unclear what that flaw is — anyone who bought stock a few weeks ago is up a lot, there are some great deals on housing to be had at the moment, and Greenspan himself noted that the recent panic is going to make all of us more conservative than any government regulation could.

But even if he made his point more nuanced than the headlines shouted, it is unfortunate that Greenspan chose to give any ground to statists such as Waxman and his cheerleaders in the mainstream media who were quick to seize on the idea that Greenspan was denouncing laissez-faire. Because the truth is, despite the recent Economist cover about “Capitalism at Bay”, capitalism remains as much an unknown ideal as it was in 1966 when Rand and Greenspan published their book.

I pay a marginal tax rate of greater than 60%. Is that capitalism? Is it capitalism that the government forces me to pay 12.4% of my income for retirement income insurance (i.e. Social Security) when I am perfectly capable of saving by myself? Sarbanes-Oxley has created jobs for thousands of accountants who might otherwise be doing more productive things — is that capitalism? Medicare and Medicaid eat up an increasingly large percentage of the health care economy — is that capitalism? Fannie Mae and Freddie Mac socialized risk and privatized gain, causing much riches for their excutives and their Democratic allies in Congress — is that capitalism? Desperately ill patients have to fight, fight, fight to try experimental drugs that haven’t yet run the multi-year FDA gauntlet — is that capitalism? Our government is about to loan billions of dollars — seized from productive people — to the unproductive auto companies. Is that capitalism? American corporate farms feast on an array of subsidies, our government is subsidizing the burning of food (corn) to make fuel, and our Supreme Court (in Kelo) gave the OK to the seizing of private property for any government purpose whatsoever. Is that capitalism?

Unfortunately, this election doesn’t give us a good choice on this matter. President Bush has presided over the nationalizing of banks and insurance companies, and over a massive expansion of federal spending. Sen. John McCain is talking about buying up mortgages. It’s small comfort that Sen. Barack Obama would be worse.

Unfortunately, we seem to have lost sight of any idea of the consumer responsibility that Greenspan talked about. People are happy to make money when the housing market and stock market go up. They do not ask questions about exactly why your mortgage payment would be so much lower if you refinance. This election is very likely to result in half of Americans being taken off the income tax rolls entirely, thus giving us a majority of people who are looking more for what the government can give them rather than being concerned about a proper stewardship of resources. We’ve lost our self-efficacy, our self-reliance. I realized this the other day when I read a result of a Freelancers Union survey that found that 79% of independent workers would like to buy into their state unemployment insurance schemes. Yes, most of us would rather pay a tax than do what we could on our own (save the maximum of $10,400 that 26 weeks of $400 unemployment benefits checks comes out to).

I do not know how this election will turn out. But I do know that, as Kimberley Strassel wrote in her Wall Street Journal column this morning, the GOP is doomed unless it stops being Democrats-lite, and makes a coherent argument for “lower taxes, more opportunity,” and embracing anyone who “doesn’t like anyone telling them what to do.” Personally, I think those of us who care about the free market need to invest time and resources in making a coherent argument for real capitalism and sharing it with as many people as possible. It’s an unknown ideal, but when parts of it are tried, more wealth is created (which then winds up being spread as entrepreneurs hire people) then under any other system we’ve tried.

But unfortunately, I think we are about to see yet another massive expansion of government. That’s too bad, because as Greenspan wrote, “the possibility of individual dishonesty applies to government employees fully as much as to any other group of men. There is nothing to guarantee the superior judgment, knowledge, and integrity of an inspector or a bureaucrat — and the deadly consequences of entrusting him with arbitrary power are obvious.”