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Through Hayek and Beyond

Originally published at Law and Liberty

George Gilder has been a front-line conservative thinker at least since his 1979 Sexual Suicide. He had an international bestseller in 1981 with Wealth and Poverty (a Ronald Reagan favorite), and his 2013 Knowledge and Power defended an information theory of capitalism that was critical to the underpinnings of my last book in the same genre. He has now surpassed himself with the blockbuster Life after Capitalism

Life After Capitalism is a fundamental challenge to how we look at the world by finally escaping from the limitations of the rigidly deductive rationalism of both Newton and the Enlightenment, as well as any irrationally rigid theory of spontaneous order. Gilder has actually updated the essential epistemological division in philosophy, by rejecting what Nobel Laureate F. A. Hayek in the 1940s called “constructive rationalism” and supporting Hayek’s less dogmatic “critical rationalism.” Both of these critical rationalists stress the importance of reason and its limits; but Gilder takes this insight to a new level by rejecting constructivist limitations to human understanding altogether.

The critical message of the book is well summarized in Gilder’s conclusion regarding what economics and social theory generally must do to free themselves from the Marxian Left’s and Ricardian Right’s over-rationalized version of capitalism. Tomorrow’s capitalism, he says,

must escape the snares of determinism, the static sciences of existing expertise, the delusions of commodity money, the materialist superstitions of scarcity. It must embrace surprise and superabundance, it must recognize that creation has a creator and that economics is about knowledge, learning, and fulfilling our own creative role in the world.

Gilder begins his solution by questioning the fundamentals of modern economics, hitting both Left and Right. But his most direct challenge is to conservatives. He faults even Adam Smith for resting his foundations for modern economics on scarcity, demand, and “self-interest”—which Gilder explains “pejoratively” means “greed” or even “the root of all evil,” but “paradoxically is said to bring forth goods.” 

Not surprisingly, he concludes, most people do not think greed is a good thing, which is the reason why today’s welfare state version of capitalism is terminal. Capitalism promises to produce abundance by managing scarcity, and it has succeeded globally in increasing income and wealth. But today that abundance is called poverty “because it despoils the world” requiring that government-directed science control and reduce that abundance in order to save the planet.

The problem with traditional economics is its idea that the job of entrepreneurs is to manage commodity scarcity. But are these actually scarce? As Thomas Sowell emphasized, “the Neanderthal in his cave had the same natural resources at his disposal as we do today.” They are not scarce. The challenge is understanding natural resource commodities, not managing them under abstract self-evident principles. 

Economic growth comes from learning, from the accumulation of knowledge through experience, and from falsifiable experiments (including profit and loss in the marketplace, the testing ground for entrepreneurial experiments). Wealth is knowledge measured by money as time, which is what remains scarce when all else grows abundant. Time is the ultimate measuring stick of productivity, economic value, and abundance.

What remains scarce when all else becomes abundant are our minutes, hours, days, and years. Time is the only resource that cannot be recycled, stored, duplicated, or recovered. Time-prices [elaborated in the book by associate Gale L. Pooley] calculate the hours and minutes needed to earn the money to buy goods and services.

As Karl Popper made clear, Gilder argued, one must begin with the falsification of claimed hypotheses as the means by which real science operates. “What cannot be disproved cannot be counted as proved or even provable.” In what he called a heuristic process, Popper

showed that science could not consist of one monolithic system of proven or verified truths uncovered one by one over the course of time in logical progression. Newton’s law of gravity gave way to Einstein’s law of relativity, not as a logically implied or predictable next step but as a shocking revolt against the most firmly established propositions of physics.

We learn from exceptions to theories and actual failures based on new knowledge, Gilder continues. It is new learning that produces growth, which is by definition a surprise—even something “shocking,” such as the revolution from Newton to Einstein, which changed everything. In physics, we discovered that the atom was not a “massy unbreakable particle,” but “a complex arena of quantum information.” And the cell in biology turned out to be not a “simple lump of protoplasm,” as “long believed,” but “a microcosmic processor of information and synthesizer of proteins at supercomputer speeds.” 

We know now that no accumulation of knowledge about chemistry, biology, and physics will yield the slightest insight into the origins of life or the processes of computation or the sources of consciousness or the nature of intelligence or the causes of economic growth. As famed chemist Michael Polanyi pointed out in 1961, all these fields depend on chemical and physical processes but are not defined by them. The fundamental mistake of materialism generally and Darwinian reductionism specifically is that they are thoughts that deny thought. Thought is not material.

Rationalist analogical thinking needs to set some master principle to work back from, Gilder argues. In today’s digital world, however, data are opening up unknown futures requiring, he argues, an open mind not limited by a priori theoretical assumptions. The transformational container ship-box was not a consequence of a theory but a revolutionary change in thinking that exploded world trade. The digital “box” or “byte” mimics the container as a new way of non-deductive thinking for the brain. Today’s discovery of a graphene that has 200 times steel’s strength and is 1,000 times lighter, suggests leaving behind even silicon for a more carbon-based future.

Gilder argues that, unlike most other economists, Hayek understood the importance of dispersed rather than deductive knowledge and “that central planning fails precisely because it claims to know what it cannot, and therefore obscures surprise and cancels knowledge.” But “what he may not have fully understood is that economic incentives can neither explain creativity nor generate it, any more than physics can generate biology.” 

Long before it is finally measured in transactions, the knowledge that constitutes wealth is not manifested in an invisible hand or a spontaneous order. It comes from learning by doing, by refining manufacturing techniques in the light of experience, and by the explicit and arduous processes of exploration and production, ideas and experiments. … It is not only scientific knowledge, nor is it truly even scientific knowledge. It is knowledge that can enable and endure the translation into practice. It is intricate and elaborate, experimental and rigorous, tacit and codified, enabling the production of goods and services over time. Manifested in valued products from a Bugatti or a microchip or a software package or a side of beef, this is the knowledge that is wealth. 

The failure of determinist deductive reasoning provided by an all-knowing scientific expert or theorist at the top is most clearly exposed by considering the heart of the economy—money. Gold was replaced by expert analog management by the Federal Reserve manipulating a fiat dollar currency on “principles” that produce the “money” for the world. But the Fed itself seems to be confused today, and the rest of the world is looking for alternatives.

As an active investor himself, Gilder describes well today’s replacement fiat system managed by the Fed for the whole US banking and world trading system. As he reports, managers now use superconductors to run spontaneous currency spot and foreign trade markets in microseconds, with a flow 600 million times faster than the old fiber optics system. Exchange rate risks are basically removed. 

The volume is enormous. The Bank for International Settlements in:

April 2022 identified a flow of some $7.6 trillion a day, more than a third of all US annual GDP every twenty-four hours. This represented an increase of roughly 50 percent since 2016’s total of $5.1 trillion a day. The 2022 total signified currency transactions throughout the year and around the globe at a rate of more than a billion dollars every second. Judging from the numbers reported by the London City desks, it is now approaching $10 trillion a day. 

This in theory sounds like the floating currency “dream” of bringing even large foreign banking and corporate exchange desks into the process of providing a world market for money. What is not to like, Gilder asks? Well, profitable arbitrage with little risk running to trillions of dollars a week sounds good but this whole system is actually a “tax on enterprise.” Ten “leviathan” banks in Western countries transacted 77 percent of this arbitrage business. When the rest of the world economy collapsed in 2008, the ten still profited by $21 billion because of their arbitrage advantage, and Gilder’s belief that by then Fed and US Treasury monetary policy had de facto nationalized the Wall Street Banks. This shift of value from entrepreneurs to politicians, banks, and bureaucrats creates what Gilder describes in his book title as “Life after Capitalism.”

Gilder argues that if government controls the money supply without independent limits, no real market exists. Hayek in fact held that fiat money was the “root and source of all monetary evil.” While gold is a natural resources commodity, its commodity aspect is very secondary and misleading about its real value as an independent measure for a trusted money. Throughout history and up to today, gold extraction increased in volume slowly, which made it a scarce and not easily manipulated measure separate from the trading system. This made it trusted as an objective outside measure even in analog times, and since John von Neumann and others’ insights in the 1930s about a digital world, these qualities have become even more essential.

Fiat money simply operates on faith, until historically it loses it. Gilder believes that gold retains the proper character as an independent measure for money but for that very reason, he believes, today’s bankers would be unwilling to return to it. Unlike traditional banks which every day must fight the inherent analog problem of their managed numbering systems that are so subject to unceasing outside “hacks” to discover and exploit the system used. Blockchain is a possible gold substitute when it has no managed numbering system to be infiltrated. Web 3.0’s expected blockchain with immutable, unique, time-stamped transactions and automated “smart contracts” could solve that fiat money problem. Yet, the assumption of scarcity is the starting point for today’s economics, so its model of “unconstrained demand and limited supply” will ignore 3.0 as long as possible.

The whole idea of economic scarcity produces a zero-sum situation, where all gains by one player mean losses for another. Gilder argues that this “materialist superstition” that all human ventures are governed by material limits is what constrains us today. From this implicit zero-sum view stem all the perpetual crises that uphold today’s “emergency socialism,” especially in the crucial finance sector, where foreign exchange markets are “73 times the size of all markets in the real goods and services that they measure.”

This materialist superstition insists that any limits to prosperity or productivity, indeed all economics or scientific investigation, are material limits. Gilder argues all such over-rationalized systems are doomed. The only real limits are the limits of time and understanding.

From the point of view of a determinist universe, viewed from an omniscient perspective, beyond time and space, there can be no surprises, no information, no profits or losses, no unexpected returns. In the idiom of economics, timelessness fosters “perfect competition.” Perfect competition implies and requires perfect information beyond time. With perfect information—no surprises—all profits and losses vanish. All factors of production are compensated in proportion to their contributions. What creates information and surprise, profit and loss, is the passage of time. Time reveals the past and conceals the future. 

Gilder does not have all of the answers to revive capitalism, but he is turning us in the right direction.

Donald Devine is senior scholar at the Fund for American Studies. He is the author of The Enduring Tension: Capitalism and the Moral Order, new from Encounter Books, America’s Way Back: Reclaiming Freedom, Tradition, and Constitution, and Political Management of the Bureaucracy. He served as President Reagan’s director of the U.S. Office of Personnel Management during his first term and can be followed on Twitter @donalddevineco1.