All those Republicans feeling lost in their "wilderness years" – and desperately trying to recapture some of that old Reagan mojo in time to avert another debacle in 2016 – should take some time out to read George Gilder's latest message of hope and enlightenment on the true sources of economic progress, "Knowledge and Power. "
Gilder's Reagan-era best-seller, "Wealth and Poverty," was a path-breaking synthesis of supply-side economics and a devastating critique, based on personal reporting inside America's ghettos, of the failure of liberal government.
Handed out by the Gipper himself to all the members of his cabinet at their first meeting in 1981, "Wealth and Poverty" went beyond the incentive theories behind most conservative – and even supply-side – economics to talk about the spiritual dimension of free markets. Capitalism, Gilder famously announced, is based on giving. The driving force behind all economic growth, he insisted, is the entrepreneur, the individual who takes risks beyond all rational calculations of self-interest. He is motivated not by greed and the hope of outsized profits, but by imagination and the drive to create, a drive he pursues despite the often overwhelming odds against him. As Gilder summed up, "Capitalism asserts that we must give long before we can know what we want and what the universe will return."
Not surprisingly, leftist economists scoffed. But it was too much for many on the right, as well, schooled as they were in Adam's Smith's deterministic view of the economy as a "Great Machine," transforming entrepreneurial greed as if by an "invisible hand."
Reagan, however, loved it. There's a reason Gilder was the Gipper's most-quoted economist. Reagan never wholeheartedly bought into any of the prevailing economic theories of his time. He could, and did, talk cogently about incentives, tax wedges and the critical role of supply versus demand. But his understanding was also simpler and more profound than that.
Look at the words he used to talk about the economy. They were words like "faith," "hope," "dreams," "imagination" and, yes, "charity." He spoke of people who labored hard to give back to their communities – not as the left would have it, with the excess profits of their greedy enterprises – but with and through their work, which Reagan described as both noble in itself and ennobling of those who participated.
At the center of it all for Reagan – as for Gilder – were the entrepreneurs. For Reagan entrepreneurs were heroes to be celebrated. They were quintessentially American and unconstrained by liberal academic beliefs in any so-called "limits to growth." "There are no walls around the human spirit," Reagan declared. He knew that the truth is written in our hearts, not in our heads, and that homo economicus isn't fundamentally a rational creature maximizing self-interest but – at least at his best – a creative channel of the spirit.
It's true that Reagan cut taxes to give everyone a break. For him, keeping taxes low and reducing the burden of government was a moral principle as well as good governance. But those tax cuts didn't power a 20 year boom because they increased consumer spending. The produced unprecedented growth and ignited the computer revolution because they left more capital in the hands of entrepreneurs so those entrepreneurs could innovate new technologies and drive progress beyond the steady-state zero-sum stagnation of establishment economics.
In the 30 years since "Wealth and Poverty," Gilder moved on from economics to a deep immersion in the physics of the silicon chip ("Microcosm), electromagnetic spectrum ("Telecosm"), and the information theory – elaborated by Claude Shannon – that underlies it all.
In "Knowledge and Power," Gilder returns to economic theory with a grand synthesis of all these subjects, showing how information theory not only explains how computers work and why Qualcomm's CDMA transformed telecom (producing growth in capacity three times faster than Moore's famous doubling of computer capacity every 18 months), but also explains underlying requirements of truly free markets.
Information as defined by Shannon is surprise, the unexpected:
[O]nly surprise qualifies as information. This is the fundamental axiom of information theory. Information is the change between what we knew before the transmission and what we know after it.
And all real economic growth is powered by the innovative surprises – the addition in real information – that entrepreneurs bring to the equation. Just as in telecom, however, you need a carrier, or channel, with as few surprises as possible – an economic environment of stable money, regulatory restraint and property rights – to enable new entrepreneurial information to be transmitted.
Ranging beyond economics to burst apart deterministic models in the sciences themselves, from physics to biology and genetics, "Knowledge and Power" is a much needed antidote to our new malaise economy and once again shrinking future. Machines, after all, don't grow or self-replicate (at least outside science fiction). But the information, mind and spirit is constantly creative.
Reagan knew that. It's why freedom wasn't a slogan to him, but the core of his understanding of the world. It's why he didn't accommodate determinist dogmas – whether Soviet or Keynesian – but dedicated his life to overturning them. He would see the political opportunities contained in this book and turn them into a winning agenda. Hopefully some one of our candidates for 2016 will be able to do the same.