Market Economics and the Conservative Movement

George Gilder
George Gilder - Philadelphia Society Address
June 1, 2004

The following speech was given by Discovery Institute Senior Fellow George Gilder to The Philadelphia Society at their national meeting in Chicago, Illinois on May 1, 2004.

This is a great celebration. Forty years of the Philadelphia Society devoted to the concept of ordered liberty under God. Through this it reconciles the two great themes of conservative thought: free markets and transcendent order; economic freedom and cultural stability. Bill Buckley caught this reconciliation very early in his first book, God and Man at Yale, an attack on the atheistic socialism, which was taught at Yale during his time there. He focused on the atheism as much as the socialism. They both reflected the same fundamental disorder or fallacy.

Midge Decter, your new president, led me through a crucial transition of a book project I was doing called, The Pursuit of Poverty at the time. And, The Pursuit of Poverty was transformed into Wealth and Poverty under Midge's guidance. Crucially, when she gave me a prepublication copy of Jude Wanniski's, The Way the World Works. And he grasped the supply side but perhaps not the deeper links to transcendent order. And the key focus of Wealth and Poverty was to reconcile these two, sometimes conflicting, branches of conservatism.

Now, at the Discovery Institute, with my friend of 40 or more years, Bruce Chapman, we are again carrying this essential concept of ordered liberty, this reconciliation of cultural conservatism and economic conservatism forward with the focus on my part on science and technology, the implications of the new findings in science and technology for a deeper understanding of the themes of ordered liberty.

I think there've been two great findings of twentieth century thought that are deeply relevant to this theme of ordered liberty and politics in society; two great scientific findings. One is Information Theory. Now, Information Theory was conceived by Claude Shannon at MIT and Bell Labs in the late 1940's. He was focusing on determining how much information could be transmitted down a particular communications channel. And the key insight was that information, real information, consists of surprise and he measured surprise in terms of what he called entropy as an analogy to a concept in physics. The crucial insight was that information is not equilibrium but disequilibrium. Information is not predictable data. Information is unexpected data. Information is news-what you don't expect. A crucial insight of Information Theory, absolutely central, is that it takes a low entropy carrier to bear a high entropy message. In other words, you have to have a predictable carrier in order to bear a lot of information. And that's why virtually the entire information economy rides on the electromagnetic spectrum on world wide webs of glass and light. As a form of electromagnetic energy, light is perfectly predictable. It's predictable sign waves. The key to transmitting lots of information is to have a perfectly predictable vessel of that information.

Although this information theory was designed for communication systems it also applies fully to economic systems. What you need is economic systems that are predictable; that can bear a lot of the good news, the unexpected boons of human creativity. Creativity always comes as a surprise to us. If creativity was not surprising you could plan it and socialism would prevail. But surprise is what defines creativity. It is news. It is unexpected data. In order to have an environment that can result in the surprises of human creativity you need to have a predictable, stable environment of law; stable law, stable families, stable money, stable property. These are essential to a productive economy. So, Information Theory is an absolutely vital finding that underlies almost the entire information economy-does underlie the information economy. And it also fully supports the Philadelphia Society's concept of ordered liberty, which combines the low entropy of order with the high entropy of creativity. The crucial point, however, is that an economy is an information system not a material system. So, it's ruled by the laws of information not by the laws of matter. And that is a critical insight.

The second key discovery about information during the twentieth century was Kurt Gödel's demonstration and Gödel's proof that no mathematical system is coherent or self-sufficient in itself. Any mathematical or logical system is necessarily dependent on premises beyond itself and irreducible to the system. In other words, Gödel's proof sustains the second great theme of ordered liberty of transcendent order under God. And, indeed, Kurt Gödel imagined that he was proving the existence of God. You can read a lot about Kurt Gödel without understanding this fact. My daughter, who's just written a 300,000 word book on physics that's just been accepted by Knopf in New York—my 25-year old daughter—discovered this about Gödel in the course of researching her book on Entanglement Theory, but I won't go into that.

The key point is that every logical system and ultimately all logic is reducible to mathematical propositions and is dependent on premises beyond itself. And order is necessarily transcendent. It's not reductionist and that is the critical insight. It is hierarchical, not reductionist.

So, this means that the world began not in a primordial soup, it began-"In the beginning was the Word"-not a primordial soup. These divergent themes of conservatism: ordered liberty and transcendent order really have been fully and deeply confirmed by the most important scientific discoveries of the twentieth century. A lot of conservatives sort of adopt an intuitive resistance to the discoveries of science without a full grasp of how deeply they affirm conservative insights and how leftist scientism—this sort of materialist reductionism—has been completely overthrown by the twentieth century scientific discoveries.

So, information is disequilibrium not equilibrium. This is one of the problems of much economics because economists always tend to favor equilibrium. They seem to believe that somehow the correct system is always in balance. But, I believe that science tells you that economies should have balanced law, families all these property rights and stable money. But the basic forces of growth are disequilibrium. The effort to reduce economics to equilibria is deadly and destructive. I think it took a long time for the Republican Party really to recognize this fact. For a long time the Republican Party resisted lower tax rates in the name of a totem of a balanced budget from the time of Hoover through Eisenhower and Nixon and Ford. Equilibrium economics prevailed. It wasn't really until Ronald Reagan that we had a president who reconciled these two great principles of ordered liberty and brought disequilibrium to the fore.

A couple of years ago I gave a speech to the Philadelphia Society exposing a lot of myths about Ronald Reagan's regime—he did not reduce spending, of course. Most people know that. But, more important he understood that economics is not a zero sum proposition. You lower the rates and the regulations and render them more predictable and stable and you get more revenues and more creativity—entrepreneurial creativity. There is a popular conservative half-truth that is worth confronting. That half-truth is that the burden of government is represented not by tax rates but by spending levels. This seems like an innocent misconception that somehow the best way to calculate the burden of government is by the total spending levels.

But this is a profoundly wrong proposition. Indeed, it is only with low tax rates that a nation can sustain the levels of spending necessary to support the defense and national security that is necessary to defend ordered liberty. For the entire 40 years of the Philadelphia Society's existence countries with low or declining tax rates have been able to increase their government spending three times faster than countries with high or rising tax rates. If you want low absolute levels of government spending the best thing to do is to enact high tax rates and oppressive regulations because these will succeed in suppressing the surprises of entrepreneurial creativity on which human triumph always depends.

Today, just before I left for this meeting I picked up the latest copy of Regulation magazine, which is the Cato Institute's publication. Emblazoned across the cover of this magazine was an attack on Bush's tax cuts. Said they caused terrible disequilibrium and they would ultimately be deeply destructive to the economy. And the problems these tax cuts would cause, according to Cato, were a budget deficit, implicitly a trade gap, a social security and generational catastrophe.

All these assumptions which a supposedly libertarian organization could propound and emblazon as their key insight cover story are just totally misconceived. This article implies that balance is good for trade and budgets and stuff. Balanced tires or a balanced diet—they're deeply desirable. But a balance of trade or a balanced budget is not necessarily desirable at all. Indeed, a trade gap signifies a capital surplus. It means that people want to send us money. It means they trust the stability and order of the U.S. economy. You can see how this works when you realize that one-third of global GDP is in the United States. The United States generates fully one-third of global GDP. But the market caps of our companies represent 57% of global market cap. In other words, people all over the world want to invest in the United States and this is because the United States has the most stable environment for investment. It has the deepest and most creative capital markets. It's got the largest and most liquid stock markets and it has the rule of law, we hope, rather than the rule of lawyers which threaten it.

So, the way to think of this is: a foreigner with a dollar can do two things with it. He can buy an American good—buy an apple exported from the United States, for example—or he can buy an asset in the United States. If he purchases the apple, he eats it and we don't have it anymore. If he purchases the asset in the United States, we keep it. And he registers a deeper commitment to America than he does in buying an apple, or a side of beef or any other kind of American product. When we begin to run a trade surplus I begin to worry. The last real trade surplus we had was about 1978 and that was in the midst of a terrible crisis when people no longer trusted the American dollar or the reliability of American economic leadership under the Carter years and Ford years, unfortunately.

The budget deficit is a similar proposition. The budget deficit is 500 billion dollars. That's not nice on the surface but it's dwarfed by the increase in American assets that has simultaneously occurred as the deficit increased. While the budget deficit increased to 500 billion dollars we had a five or six trillion dollar increase in assets. One of the problems with many economists is they can count liabilities but they can't count assets. They're one-armed economists, as they say. The net assets of American households now are some 42 or 43 trillion dollars. The gross assets are 52 trillion dollars. The assets of the total economy is over 70 trillion dollars. In the context of these huge asset numbers the 500 billion dollar deficit in the federal budget is actually a trivial factor. It's dwarfed by changes in the value of assets. Indeed, the balance of payments is governed chiefly by capital movements in the modern economy. Capital can move much more quickly and readily than can goods which face all sorts of obstacles of distance. So it's capital movements that drive it. And if the United States has a favorable environment for capital we will tend to thrive regardless of the budget deficit of this order.

But, if the United States has bad and destructive economic policies it won't matter what kind of budget balance we achieve at the same time. It's not just overseas holders of dollars who will try to sell them but domestic holders of dollars. The idea that there's something special about Chinese or Japanese who hold dollars that differentiates them from Americans who hold dollars is misconceived. George Soros and Warren Buffet can sell dollars just as fast and as efficiently as anyone in China or Japan or Europe. What's critical is to maintain the institutions of ordered liberty in the United States.

The social security crisis in America is similar. What it essentially means is we're living longer. That's the essence of it. And that's a good thing, entirely. As we live longer and are healthier we can be more productive for more years. And the solution to the problem of productivity among old people is really information technology. You can do indoor work with no heavy lifting in the contemporary economy. Even if your sight and hearing is deteriorating you still can, with the advances in contemporary technology, continue to be a productive contributor to the U.S. economy. So, this sort of catastrophe theory that there'll be too few workers to support old people as time passes is just a misconception. Indeed, a further solution, of course, is Professor Harburger's, which is implemented in Chile of allowing a great private pension component to the social security system. And you hope that ultimately the private system with thrive enough to render the public deficit irrelevant.

So, the real solution is entrepreneurial creativity, which is a force of disequilibrium, "creative destruction," said Shumpeter. This is a great era of entrepreneurial creativity in the United States. The latest data is fascinating on this subject. The proportion of total jobs, which represents self-employment or limited liability corporations as a share of total employment has risen from 5% in the middle 1980's; only 5% of all jobs in households surveyed were self-employment or individual proprietorships. During the 1990's it rose to 9%. Today during the first years of 15% capital gains taxes and 15% dividend taxes, 31% of all employment and households surveyed is self-employment and entrepreneurial employment of this kind.

One of the problems with the dismal science, what makes it dismal is that economists always tend to ignore the entrepreneur. And, thank the Lord, the entrepreneurs ignore the economists. So, we can get some of the life and surprise of disequilibrium.

The triumph of the entrepreneur is ultimately a moral triumph as well as merely a material triumph. Because, he ultimately is an information agent. The essential rule of enterprise is the golden rule. The good fortune of others is always your own. That's the fundamental principle of capitalism. Where you get rich by serving others and where you, above all, hope that others succeed. Where always the biggest untapped market is the poor. The billions of people around the world who are now at last ascending toward the bounties of ordered freedom that the Philadelphia Society upholds. It's not greed or self-interest but the service of others that propels the advances of capitalism. Equilibrium economics is an economics of death. Disequilibrium, entrepreneurial economics, the economics of surprise and creativity is the economics of life. The key message of ordered liberty is "choose life."

Thank you very much.