Where Ayn Rand Was Wrong
"From each according to his ability, to each according to his need" creates a world where need is rewarded and ability is punished, profoundly screwing up the incentives for everyone involved. That's not what Ayn Rand got wrong - that's what she got right. The thing is, what she proposed - laissez-faire capitalism - also has the incentives wrong.
I'll talk about it one reason at a time; it will take me a lot of time to really understand all the issues involved. But here is one thing I saw right away when I read "Atlas Shrugged": Ayn Rand seems to think that in the environment of free competition, money and Quality go together. Meaning, that the way to make more money is to make a better product, and vice versa. And this is simply not true.
For example, suppose you create a new kind of material for shoes, which is extremely light and comfortable. What do you do with it? Do you hire the best designers and create a collection of beautiful shoes, of various styles and colors? No way! Well, eventually, yes - but not at first. At first, you hire the best designers to come up with the ugliest shoe imaginable; and then you market it like crazy. People buy it, and it becomes a real hit - because it's extremely light and comfortable, due to your new material. And then, after a year or so, you make a huge marketing campaign and release a slightly less ugly shoe; and guess what? People pay you again! Which was the whole point of the exercise. Now, after a few months, you can make new campaigns, which offer mind-boggling improvements like more colors; people will upgrade again; and eventually, after a couple of years, you can finally release all these beautiful collections that you were keeping. And of course, people upgrade again.
We see this a lot in all kinds of businesses - software, gadgets, whatever. You don't make money by making the best product that you can - you make money by making product that does one thing really well, and deliberately sucks in some other aspects, which you can then gradually improve in order to rake money on upgrades.
Another example: suppose you make refrigerators, and you have the technology to create a really reliable fridge, one that will keep working for 30, 40 years. Do you really want to do that? The answer is - no, you want to sell refrigerators that will break after 10 years. Because, you see, that way you'll simply sell more of them. A friend of my dad, an engineer who once worked for a huge refrigerator company, once told us over dinner how he and other engineers in his company had many meetings trying to come up with a way to make the fridge break after 10 years. It wasn't that easy… (Btw., turns out there's a book on the subject: you can read about it here).
And finally, an even more unsettling example: suppose you're a dentist. A guy comes to you with a problem. Which solution will you prefer to recommend him: the cheap option or the expensive option? Now, the free market philosophy goes like this: you should always recommend the better option for the client, because:
1) The client will compare offers from multiple dentists, and choose the best one.
2) The client will tell his friends about how you treated him, and they will assess you accordingly.
So eventually, the reasoning goes, if you honestly go with what's best, you will have more clients and therefore more money.
But in many markets it simply doesn't work that way, for many reasons:
Firstly, clients need to work hard in order for competition to breed quality. All the reasoning of the free market philosophy makes assumptions about the behavior of clients, which don't necessarily hold. How many dentists an average person will visit before deciding with which one to go? How often does an average person change dentists? More importantly, an average person does not have the means to objectively assess the quality of the service he received. OK, suppose the doctor solved his problem, but how can he know that it was indeed the best or cheapest option? Especially if you throw in some psychological factors, like:
1) People tend to believe they got what they paid for; and,
2) People don't like to admit to themselves that they made the wrong choice
And you get that clients will usually be satisfied even when they are being scammed. Throw in the fact that the market is simply big enough for everyone… and you'll get that scamming clients is a dominant strategy!
I'm not saying that all dentists are always trying to scam people; what I'm saying is that Ayn Rand's reasoning about how competition breeds quality isn't always correct, and, in particular, could lead to some wrong conclusions about the best economic policy. While the same reasoning I described holds for dentists as well for car mechanics ("You just need more blinker fluid"), in the former case the wrong incentives are much more important, in my opinion. After all, this is health we're talking about. So, yes, unlike Ayn Rand, I believe health care should be in the public sector: the income of doctors should not depend on the treatment they prescribe to specific patients.