Why didn’t a trillion dollar stimulus and a $700 billion TARP revive the American consumer and thus GDP growth?
Why couldn’t four years of zero interest rates and $2 trillion in additional Fed monetary reserves reflate the housing market?
Why can’t the government produce innovation through green energy subsidies, forestall crashes with its armies of regulators, or boost tax receipts by taking its fair share from the one percent?
Because all these policies misunderstand the fundamental nature of wealth, and thus of the modern American economy. “Even if it wished to,” writes George Gilder, “the government could not capture America’s wealth from its one percent of the one percent. As Marxist despots and tribal socialists from Cuba to Greece have discovered to their huge disappointment, governments can neither create wealth nor effectively redistribute it, they can only expropriate it and watch it dissipate. Under capitalism, wealth is less a stock of goods than a flow of ideas and information, the defining characteristic of which is surprise.”
Millions learned these lessons thirty years ago when they first read Gilder’s Wealth and Poverty, an international bestseller and blueprint for the Reagan revolution. I was 15 when I pulled the first edition off my father’s bookshelf. Paul Ryan, reportedly, read the book when he was 19. Turning on a dime after the the listless 1970s, Gilder’s idea that ideas and entrepreneurship drive the economy fueled two decades of supply-side policy and a worldwide boom of freedom and growth.
Wealth, however, in another of Gilder’s warnings, is too often taken for granted. Because it based on ideas, not stocks of goods, and because it is dependent on confidence in the future, it can vanish in an instant. The boom turned to bust as complacent American policymakers across the political spectrum forgot that the sources of wealth, such as hard work, invention, and policies that permit a free flow of information, must be constantly renewed.
In response to the Financial Panic of 2008, most policymakers and many economists, previously disposed to free enterprise capitalism, lost their heads and reverted to crude Keynesian type. Much of Washington forgot that “Government cannot significantly affect real aggregate demand through policies of taxing and spending — taking money from one man and giving it to another, whether in government or out. All this shifting of wealth is a zero-sum game and the net effect on incomes is usually zero, or even negative.” Now eminent economists like Robert Barro and John Cochrane are reaffirming what Gilder told us in 1981. And Gilder himself has updated Wealth and Poverty with “A New Edition for the Twenty-First Century,” including a new prologue and epilogue.
Thirty years ago Wealth and Poverty challenged not just the governing elite, whose policies had yielded an economy similarly feeble to today’s, but he also tweaked conservatives, who focused more on balanced budgets and trade ledgers, rather than innovation and growth, as the key metrics of economic virtue.
No, Gilder told the macroeconomists who gave us the 1970s, “This is a drama most essentially not of measurable money and machines, aggregates and distributions, but of mind and morale.” He explained the central importance of the creative and dynamic entrepreneur operating in an arena of uncertainty. He said technology was not coincident to economic growth but was its chief engine. Observing the knowledge economy of Silicon Valley, he said economics was not just about scarcity but abundance. Speaking of entrepreneurship and technology to the New York Times in 1980, Gilder insisted, “It’s what economic growth is all about.”
A decade later the brilliant Stanford economist Paul Romer formalized these ideas and delivered his seminal work on “Endogenous Technological Change,” which brought the increasing returns of technology to the center of the model and spawned a whole research field in “New Growth Theory.”
Gilder predicted the computer boom, and later, in his book Microcosm, the Internet, with greater specificity than anyone. “The microprocessor,” Gilder wrote in 1981, “shares an explosive logic with certain crucial technologies of the past, those transforming inventions . . . that transfigure an economy and extend the dimensions of the world . . . [T]he microprocessor does not operate within the confines of the existing industrial structure, but makes possible a new one . . . . [T]he chip . . . creates radical new capabilities applicable in all industries, including its own, making possible a vast diffusion of applied knowledge and technical logic.”
With uncommon insight, Gilder’s new prologue crystallizes the most complex and confounding conundrums of recent years.
What was the real cause of the Financial Panic?
Why were the bundlers and buyers of junk mortgages the politically-connected big banks while the chief critics and short sellers of the housing trade were mostly unknown (and often eccentric) managers of small, entrepreneurial hedge funds?
Where did conservatives go wrong? Just why is entrepreneurship so important? Is there hope for American capitalism?
Gilder (a friend and mentor) also restates a defining, contrarian, and still-too-little-understood theme of the original Wealth and Poverty. “By focusing on incentives rather than on information,” Gilder writes in the new edition,
free market economists have encouraged the idea that capitalism is based on greed. But greed, in fact, prompts capitalists to seek government guarantees and subsidies that denature and stultify the works of entrepreneurs. Greed, as I put it in Wealth and Poverty, leads as by an invisible hand to an ever-growing welfare state — to socialism. It is not the enlargement of incentives and rewards that generates growth and progress, profits for the entrepreneur and revenues for the government, but the expansion of information and knowledge.
The competitive pursuit of knowledge is not a dog-eat-dog Darwinian struggle. In capitalism, the winners do not eat the losers but teach them how to win through the spread of information. Far from a zero-sum game, where the successes of some come at the expense of others, free economies climb spirals of mutual gain and learning. Far from a system of greed, capitalism depends on a golden rule of enterprise: The good fortune of others is also your own.
Perhaps surprisingly, it was Ann Romney’s convention speech Tuesday night that finally defended Mitt’s business career — and grasped this Gilderian Rule of capitalism.
“I was there,” Mrs. Romney said, “when he and a small group of friends talked about starting a new company. I was there when they struggled and wondered if the whole idea just wasn’t going to work . . . . Today that company has become another great American success story . . . .”
“But,” continued Mrs. Romney, “because this is America, that small company which grew has helped so many others lead better lives. The jobs that grew from the risks they took have become college educations, first homes. That success has helped fund scholarships, pensions, and retirement funds.
“This,” she concluded, “is the genius of America: dreams fulfilled help others launch new dreams.”
Gilder could hardly have put it better himself.