With the publication of his masterful Wealth and Poverty in the early ‘80s, economic thinker and futurist extraordinaire George Gilder ascended to heights that most public intellectuals could only dream of. A hugely influential work covering how the individuals who comprise an economy grow, Gilder’s book even reached 1600 Pennsylvania Avenue such that he was the living author most quoted by Ronald Reagan.
Wealth and Poverty was read by this reviewer in 2004, and it’s always around for reference, not to mention as a source of regular quotation. Other than maybe the late Warren Brookes (his The Economy In Mind was released around the same time) or Robert Bartley (The Seven Fat Years), Gilder is arguably the writer whom my op-eds quote the most; Wealth and Poverty having massively influenced my thinking.
No stationary thinker, Gilder has continued to write on all manner of subjects since the publication of what remains his most important book. Gilder’s latest is Knowledge and Power, and while there are minor disagreements here and there, it’s an essential (the author properly rails against ‘stationary’ economies within) read for those eager to understand why the U.S. economy – full of the world’s most productive individuals – continues to limp along.
Gilder’s book to varying degrees decries the thinking of ‘defunct economists’ not just of the Keynesian and Marxist Schools, but also the Classical philosophy of the Smith and Ricardo variety; thinking historically seen by people sympathetic to Gilder’s viewpoint as the driver of an economic renaissance that began in the 18th century. To Gilder, economics is not about supply and demand, or even the incentives that have powered the Supply Side School which he helped revive, rather it’s about information.
Allowing for the possibility that one read of Gilder’s work doesn’t result in a truly knowledgeable review, Gilder seems to be saying that the economy is powered by “surprise,” by the entrance of previously unknown information that totally alters how we do things. To Gilder, profits and losses are the unexpected results beyond the basic interest rate that we can only achieve through experimentation; experimentation the author of information that regularly surprises us on the way to advancement.
Gilder regularly writes of high and low economic “entropy.” To put it into his words, the “economics of entropy describe the process by which the entrepreneur translates the idea in his imagination into a practical form.” Importantly, so that entrepreneurs can be creative, government must be a “low entropy” input. Government need only get the basics right, it need only offer “free trade, reasonable regulations, sound currencies, modest taxation, and reliable protection of property rights.” So true, and there lies the answer to our unimpressive growth under Presidents Bush and Obama. Government spending is a tax and both spent/spend a lot, trade has become less free, regulations (think Sarbanes-Oxley, Dodd-Frank, and Obamacare) have increased, and the dollar has been in freefall for twelve years. Economic growth is so easy, and the answer to the seeming riddle of low entropy creativity is the political class itself.
In the eyes of this reader money, as in a stable unit of account in terms of value, is easily the most important low-entropy economic input that will foster high entropy. Happily Gilder asks the important question here, specifically whether “the fundamental cause of the [financial] crisis was that the monetary system, alone among the structures of capitalism, lacks a low-entropy physical layer?” Absolutely it was.
Indeed, when money’s value is uncertain, investors who are tautologically buying future dollar income streams must reorient financial capital ever more into low-entropy ideas of the land, gold, rare stamps, and art variety. Somewhat oddly Gilder decries right wingers toward the end of the book for urging their audiences to “retreat from business” in order “to buy art, guns, and gold,” and while some of these advocates are truly unhinged, they’re in a sense saying what Gilder did early in the book about the problem of floating money. When it can’t be trusted, low-entropy, slow growth wealth (Gilder referred to it as “sinks of wealth” in Wealth and Poverty) benefits to the detriment of stock and bond income streams representing wealth that doesn’t yet exist.
Gilder’s reasoned analysis of the financial crisis will be addressed further on, but it can’t be stressed enough that the crisis was decidedly not the market correction (absent government intervention this correction would have been very orderly) of the rush to housing in 2008, rather the crisis was the rush to housing itself. The latter signaled very clearly a reorientation of limited capital into the consumption of existing wealth over intrepid investment in the concepts of the future.
When it comes to investment, Gilder brilliantly argues once again for the element of surprise. With investment some good commercial ideas will be funded, some bad ones will similarly attract capital, but it’s only through the trial and error of investment that we attain the very information that powers the economy. There are so many examples here, but director William Friedkin was provided the funds to make a film that no one, including the soon-to-be-fired head of 20th Century Fox, thought had a real chance of success. But that’s why we play the game, and that’s why there can never a glut of capital. We must take risks. Of course The French Connection went on to win the Academy Award for Best Picture, and then Friedkin took home the Best Director statuette. It’s said that Pfizer’s blockbuster pill Viagra was the result of an experiment for a different kind of drug, and then supposedly chocolate chip cookies came about due to the desire of a baker who hoped the chocolate would melt into the cookie in the baking process.
Intrepid investing is the author of all advancement, but in order to get as much of it as possible, investors must have a sense that any future dollar returns will not be eroded by devaluation. Gilder references billionaire investor Peter Thiel and his assertion that “today’s advances seem puny” in comparison to advances of the past. All of this is so true, and returning to the tautology that investors are buying future currency income streams when they commit capital to the wealth of tomorrow, is it any wonder that technological, commercial and medical advances are small in modern times in a relative sense? Not really. Look at the gyrations of the dollar since 1971. The floating greenback has by definition restrained investment, and with it reduced, an economy powered by information has not been able to advance nearly as much as it would have were the dollar stable. We understandably love modern advances of the Apple iPhone, Google Glass, and cancer drug variety, but the unseen is how very much progress has been lost due to a floating dollar desired by economists. Put simply, a low-entropy stable dollar means more risk taking, and more leaps of economy-boosting knowledge.
That’s what was seemingly odd about Gilder’s assertion early in the book that the “late financial crisis was perhaps the first in history that economists actually caused.” Probably not. Gilder takes time in Knowledge and Power to skillfully skewer John Maynard Keynes and his modern followers of the Paul Krugman variety (“your income is someone else’s spending”), and it’s probably a better argument that nearly every economic malady of modern times has been authored by economists (their ideas transmitted through politicians who, if possible, are even more clueless) blinded by fallacy.
About the financial crisis, Gilder properly hits on a maturity mismatch within banks of low-entropy liabilities turned into long maturity, and high-entropy (debatable is whether housing loans are high entropy) assets, mark-to-market accounting (similarly debatable as investors quite simply no longer trusted bank balance sheets no matter their marks), the myriad government driven loans written from the “blind side” of capital, not to mention the Fed (Alan Greenspan, followed by Ben Bernanke) itself for inverting the yield curve. He concludes that the crash had a “clear and identifiable cause,” it being “capitalism without capitalists.” He surely has a point when it comes to housing in light of heavy governmental involvement in the sector. As he puts it so well, “If there is a government guarantee, it is not a real capitalist venture and there is no real owner and no real profit.”
All of the above is very true, but it seems the actual answer to the crisis can be found in something Gilder wrote in Wealth and Poverty; the coming quote the reason that this writer has probably quoted Gilder as much as any writer. Specifically, Gilder wrote about the high interest rate Jimmy Carter-era housing boom (lost on the right during George W. Bush’s failed presidency was how very much his economy resembled Carter’s) that, “What happened was that citizens speculated on their homes. … Not only did their houses tend to rise in value about 20 percent faster than the price index, but with their small equity exposure they could gain higher percentage returns than all but the most phenomenally lucky shareholders.”
Gilder of course asked the question of whether the cause of the crisis was floating money, and the point here is that the presidency of Carter proved just that per his scholarship. To this day the right point to low interest rates, the admittedly wrongheaded existence of Fannie and Freddie, and all manner of housing subsidies as the cause, but the simple factor behind the recessionary and crisis-like rush into housing was Bush’s mimic of Carter’s weak dollar policies. This isn’t to excuse the aforementioned subsidies for even a second, but if Bush pursues a strong and stable dollar a la Reagan and Bill Clinton, we’re not talking about a financial crack-up rooted in housing consumption today.
It can’t be stressed enough that the financial crack-up of 2008 wasn’t the crisis; rather the crisis was what came before it that led to the crack-up. Gilder acknowledges as much with reference to studies showing that financial crises are in fact “growth spasms.” Per Gilder’s essential elevation of information to the top of the economic pyramid, what the broad commentariat deems “crisis” is in fact precious information entering the marketplace that is meant to correct all the economy-suffocating allocations of capital.
Gilder knowledgeably points out that bank bailouts were always thus, but it’s also certainly true that absent all this intervention, 2008 would have been rather quiet. Not only did the interventions rob the economy of information that would have forced a healthy adjustment (to this day we see a concerted effort from the Fed and the federal government more broadly to reflate housing), but the intervention forced investors to “predict the exercise of government power” (think Henry Paulson and Bernanke) over using real, market-based information to fix what was wrong. Gilder seeks a low-entropy government, but in 2008 it was anything but. No surprise that a serious financial meltdown revealed itself.
Would a gold-defined dollar end all bank collapses? Gilder rightly thinks it would not or, in his words, it cannot “end the intrinsic scandal that is banking.” He sees the latter as a function of the previously mentioned “maturity mismatch,” but there it should be said that a skilled banker would know well how to navigate the mismatch, not to mention that absent a federal lender of last resort a skilled banker would be able to access high-entropy funds amid periods when the mismatch appears perilous. It seems the only government action that would erase frequent banking flare-ups would be a truly low-entropy (and probably utopian) government that would make plain that the only banking regulation is one of if you fail, you will die on the way to being acquired by a financial institution better suited to navigate ever changing markets.
Gilder would no doubt agree as evidenced by his very enjoyable skewering of the fatal conceit that is regulation itself. Remember, this is a book that excitingly elevates information to the top of the economic pyramid, and as Gilder so wisely points out, “the more regulation, the less information.” Regulation on its face presumes that low-entropy individuals sadly placed in high-entropy jobs somehow have a hotline to the future. What a laugh. Instead, regulators make rules to correct surprises in our rearview mirror, at which point the myriad rules complicate everything such that information is opaque.
Gilder very happily takes out Bernanke for so naively blaming “a huge gap in the Regulatory System” for the problems that bubbled up in banks, and Bernanke said this despite banking easily being the most regulated sector in the U.S. But as Gilder notes, “regulation is mainly an effort to replace knowledge with power,” not to mention that even with all the rules, banking and the investing world more broadly are high-entropy areas full of surprises. For Bernanke to have presumed a regulatory gap was for our hapless Fed Chairman to have stated the obvious. Naturally regulators weren’t capable of divining the looming problems faced by banks. Indeed, if they possessed such skill, or once again a hotline to the future, those regulators would be earning billions in the private sector.
Taking this further, regulators are the equivalent of the last player picked for any team or, in Wall Street terms, they’re the very individuals who could not get jobs on Wall Street. As Gilder puts it, if the “world’s leading experts on risk” have no way of “predicting the future, how can government regulators help?” The answer is that they can’t, and because they can’t they’re always last to the scene of any accident. Regulators on their very best day serve to distract an economy’s achievers, and then when they inevitably fail their failures magnify forest fires that embarrassed governments pour gasoline on through more bailouts and more rules meant to fix yesterday’s problems.
Considering instances of “insider trading” that captivate the clueless in media and government, Gilder very happily asserts that “Less information means increased volatility and more vulnerability to outside influences.” Even those who correctly decry “insider trading” laws sometimes argue that company executives and employees shouldn’t transact based on up-close knowledge of the company for which they toil, but per Gilder’s broad narrative about information, what a shame this is. Enlightened governments would have no laws at all here, and if anything they would encourage those closest to a situation to transact with abandon. Here Gilder writes that by “excluding inside news from influencing the day-to-day movements of prices, the United States effectively blinds its stock markets.”
Yes it does, and contrary to the absurd reasoning of the financial commentariat that “insider trading” only benefits the insiders (no, it benefits the whole economy for new information informing the direction of investment), Gilder finds that these highly vague laws in fact put more power in the hands of the insiders. He notes that Berkshire Hathaway and GE aren’t companies as much as they’re diverse assets, and any gains from these silly rules go to the “residual inside traders who are legally permitted to learn the intimate facts of the companies in which they invest.”
Scarily for an information-powered economy, these insider laws in Gilder’s words say “Don’t invest in anything you know about.” After that, how ironic that as companies go public they become even more opaque. Here Gilder brilliantly observes that when companies go public, they go private.
About the budget deficits which similarly captivate the commentariat, Gilder naturally shines. As he puts it so well, “History tells us that the threat to capitalism is not debt but socialism.” The latter can’t be stressed enough. For as long as this writer has been alive and sentient there have been prominent intellectuals proclaiming a dire future wrought by too much government debt. The problem is that Armageddon never seems to come, plus not asked enough is what’s so bad about investors cutting off profligate governments? Assuming the State of California defaults on its debt, does anyone think California-based companies like Apple, Google and Facebook will suddenly find it difficult to attract finance? Taking this further, since government spending occurs at the expense of high-entropy private sector capital allocation, wouldn’t we be much better off if investors ceased the purchase of that which funds so much capital-consuming waste?
About the above, readers will very much enjoy Gilder’s story of early 19th century England when its debt was 250% of GDP. History always repeats itself, and logically the David Stockmans of that era proclaimed a bleak future for the UK. In truth, England moved away in the direction of high-growth policies on the way to a staggering boom such that the much vaunted deficit shrunk to 100% of GDP. Lost on the deficit hawks is that a dollar is a dollar, and debt just another form of finance. That investors line up for U.S. debt signals that far from a looming crisis of non-payment, the deepest market in the world presumes that information-driven growth in the future will be grand enough that the deficits will be easy to pay off.
The bigger story, and one that most don’t see, is that the true crisis is the level of government spending itself. When governments consume there’s once again less in the way of growth capital to fund the high-entropy surprises that we all desire. Put plainly, the crisis here is the unseen a la the earlier point about floating money. What have we lost in terms of new software, transportation advances and life-saving cures thanks to the profligate ways of politicians?
All of which brings us to an area of disagreement with Gilder. It should be stressed up front that I’m very much in agreement with the author that the “human race triumphs through its cognitive elites.” To channel the late Warren Brookes, we’re blessed by the efforts of the relatively few. When you tax society’s skillful you reduce information-enhancing risk taking, plus you reduce the base of capital available for future investment that will reveal even more economy-boosting information. Taking this further, to tax away wealth isn’t to redistribute wealth despite what politicians assume. Wealth in my hands or Nancy Pelosi’s is not the same as wealth in the hands of Bill Gates, so when you expropriate wealth, you most often erase it.
All of the above said, Gilder writes that the “connection between lower [tax] rates and higher revenues is perhaps the most thoroughly documented yet widely denied proposition in the history of economic thought.” Here Gilder takes issue with a supply-side movement he feels hasn’t made this clear enough.
It should be stressed that there’s no disagreement with the author about the tautology that is the Laffer Curve. Where there’s disagreement is with the notion that supply siders haven’t promoted it enough. Yes they have, and that’s the problem. Tax cuts on income DO lead to more in the way of government revenues, supply siders opine on it regularly, yet rising revenues always and everywhere lead to much bigger government. The Laffer Curve is correct, but the revenue argument in this reviewer’s eyes has lost its luster.
Supply siders clearly understand that government is most often a barrier to growth, yet they advocate tax cuts that expand that barrier. This isn’t to say that tax rates shouldn’t come down, because they should. It is to say that supply siders need to be more aggressive about seeking tax cuts so large that they actually reduce the federal government’s revenue intake. So yes, deficit worrying is pointless on its best day, but at the same time the size of government is a crisis itself for the high-entropy growth that’s smothered due to its size. Tax cuts are a wonderful thing, but the argument that one of their wonders is higher government revenues is no longer credible.
Other disagreements include Gilder’s correctly sanguine view of “fracking” and other energy extraction techniques. No doubt all of this is good, but Gilder doubtless knows that oil today is only expensive insofar as the dollar is cheap. The right and supply siders correctly lament taxation out of one side of the mouth, then they call for (this doesn’t describe Gilder) the U.S. to become “energy independent.” The problem here is that while Google and Microsoft can move their assets of the mind anywhere, we can’t move Marcellus or Prudhoe Bay. Fracking is exciting, but if a weak dollar illusion leads to the U.S. becoming Saudi Arabia West, it’s fair to presume that the end result will not please supply siders. Wealth that is immovable can be easily taxed. It would have been useful had Gilder commented more on this given his proper elevation of the mind economy over the physical.
About government being a low-entropy aspect of the economy, no argument with Gilder there. That said, his book reveals a dislike of libertarians that is not only odd (many, including this libertarian want much the same), but that totally mis-characterizes the movement as full of anarchist cranks. Gilder’s description of libertarians is very foreign to a writer who knows them well.
Regarding President Obama, Knowledge and Power reads somewhat as a bash on him that exonerates his predecessor. Not defending Obama’s failed presidency for even a second, but the facts are that he at least initially escalated Bush’s wars, maintained Bush’s tax levels through 2012, signed excessive spending bills as Bush did, continued Bush’s bailouts of banks and carmakers, re-appointed Bush’s cruel ‘blessing’ in the form of Bernanke, and worst of all, his Treasury merely resumed the Bush Treasury’s weak dollar policies. That Bush wasn’t properly linked to his successor in Obama was unfortunate.
About small businesses, Gilder makes the oft-repeated assertion that they create all the jobs. Surely he knows that’s not true. Taking nothing away from the genius of venture capital and entrepreneurialism more broadly, a major reason that small businesses create the jobs they do has to do with them clustering around big business that constantly destroy redundant work with profits in mind so that new ones can be created.
Lastly, Gilder explicitly ties the failure of modern economics to individuals like Adam Smith, David Ricardo, Hayek, etc. This didn’t ring true. He suggests that Smith accepted the stationary economy as inevitable, but my read of The Wealth of Nations was that Smith warned against just that. As Smith put it early on in his essential book, if the wealth of a country “has long been stationary, we must not expect the wages of labour very high in it.” Far from an endorsement of it, Smith was calling for dynamism.
Gilder questions Friedrich Hayek’s “spontaneous order” as evidence that the Austrian viewed economic growth as random, but it seems Hayek was saying much as Gilder does today; that a free economy will foster investment that leads to the high-entropy and by definition spontaneous surprises elevated by Gilder himself. Gilder correctly mocks the modern musings about limits to growth promoted by Robert Gordon (add Tyler Cowen to this embarrassing list), but then implicates Smith and Ricardo for much the same. The latter is hard to countenance, and then Henry Hazlitt (another ‘defunct’ economic thinker) expertly squashed such a notion in his classic, Economics In One Lesson.
It should be noted prominently that the disagreements listed are in no way meant to minimize what an important book Gilder’s written. He’s put together another essential read that can be summarized by a quote from Wealth and Poverty that happily makes it into Knowledge and Power. Gilder wrote long ago that “It is the leap, not the look, that generates crucial information.” Yes it does, and to foster more leaps the federal government must do as George Gilder says whereby it taxes us much more lightly, spends less, regulates lightly (I would say not at all), opens borders to trade, and returns the dollar to its sole purpose as a stable measuring stick that fosters exchange and investment.