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Gilder's Triumph: Knowledge And Power

By: Rich Karlgaard
Forbes
June 26, 2013


Link to Original Article

This story appears in the July 15, 2013 issue of Forbes.

IN EARLY 1966 the Dow topped 1000 for the first time. In August 1982 the Dow was at 777. The apparent 22.3% loss in value over 16.5 years was actually much worse when adjusted for inflation–figure a 70% haircut, excluding dividends.

Within the 1966-82 bear market were four recessions: 1970, 1973-74, 1980 and 1982. The 1973-74 recession was brutal, with stocks down 46% and unemployment touching 9%. This bleak period covered the resignations of Spiro Agnew and Richard Nixon.

Recovery from the 1973-74 bust was spotty. High inflation sucked money into nonproductive assets such as gold and silver. In July 1979 Jimmy Carter threw in the towel on his own presidency, giving a speech so dismal it became known as the malaise speech. Months later the Boston Globe said of another Carter idea: “More mush from the wimp.”

Sound familiar?

Two books of the early 1980s helped snap America out of its malaise. One, cited in my Nov. 19, 2012 column, was In Search of Excellence by Tom Peters and Robert Waterman (HarperCollins). The authors debunked what we might call McNamarism. Named after Robert McNamara, the idea was that smart, well-trained, efficiency-seeking and highly analytical managers could run, heck, anything. McNamara and his whiz kids at Ford Motor presided over the successful Ford Falcon and the disastrous Ford Edsel. Both cars fit the McNamara mold: utilitarian and soulless–the product of a system, not a brilliant designer.

As Lyndon Johnson’s Secretary of Defense, McNamara escalated the Vietnam War while simultaneously taking it out of the hands of its generals and commanders. The system, you see, was king.

Authors Peters and Waterman spotted the flaw. Systems analysis succeeds only in a closed system, free of game-changing technology and rule-bending entrepreneurs. By the 1970s McNamarism was failing in business. Competition outside “the system” was emerging in the form of revived German and Japanese economies; by inventions, such as the microprocessor; and by startups, such as Federal Express, Southwest Airlines, Microsoft and Apple.

The other early 1980s book that changed the game was Wealth and Poverty by George Gilder (Basic Books). It became the book most frequently cited by President Ronald Reagan and turned systems analysis, as applied to economics, on its head. Any systems-analysis view of a struggling economy, at any given time and under all circumstances, will show the chief problem to be lack of demand. In a closed system this would be true. If capital and inventory were plentiful while consumer income stagnated, then the fix would surely be obvious: Get more money in the hands of consumers! Print more money! Redistribute more income! Whatever it takes.

But in Wealth and Poverty Gilder showed that the problem has always been a lack of supply. And here’s the key: not a lack of the same supply; rather, a lack of a new, inventive and entrepreneurial supply that meets consumers where they live and takes them to new heights. Focus on the supply-side entrepreneurs, who will deliver these goods, not the demand side, said Gilder. (Steve Jobs said the same thing when explaining why he eschewed market research: “People don’t know what they want until you show it to them.”)

Gilder’s supply-side case in Wealth and Poverty expressed itself politically as a return to more laissez-faire economics and socially as a return to the time-tested virtues of family and faith. But over time the supply-side case, as Gilder saw it, was hijacked by pundits and politicians who confused supply side with simply cutting taxes–and those were Gilder’s allies. The foes of supply-side economics called it “trickle-down economics.”

Gilder, age 73, is now back with a new book, Knowledge and Power (Regnery), based on information theory. I will say that Gilder’s newest is his best–the book of the year, maybe of the new millennium. I’ll be referring to Knowledge and Power in coming issues. Meanwhile, buy it and read it so we can compare notes!




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