Unleash the Mind
National Review
August 13, 2012
Link to Original Article
America’s
wealth is not an inventory of goods; it is an organic entity, a fragile
pulsing fabric of ideas, expectations, loyalties, moral commitments,
visions. To vivisect it for redistribution is to kill it. As President
Mitterand’s French technocrats discovered in the 1980s, and President
Obama’s quixotic ecocrats are discovering today, government managers of
complex systems of wealth soon find they are administering an industrial
corpse, a socialized Solyndra.
In
the mindscapes of capitalism, all riches must finally fall into the gap
between thoughts and things. Governed by mind but caught in matter,
assets must afford an income stream that is expected to continue. The
expectation may shift as swiftly as thought, but things, alas, are all
too solid and slow to change. The kaleidoscope of shifting valuations,
flashing gains and losses as it is turned in the hands of time, in the
grip of “news,” distributes and redistributes the wealth of the world
far more quickly and surely than any scheme of the state.
The
belief that wealth consists not chiefly in ideas, attitudes, moral
codes, and mental disciplines but in definable static things that can be
seized and redistributed—that is the materialist superstition. It
stultified the works of Marx and other prophets of violence and envy. It
betrays every person who seeks to redistribute wealth by coercion. It
balks every socialist revolutionary who imagines that by seizing the
so-called means of production he can capture the crucial capital of an
economy. It baffles nearly every conglomerateur who believes he can
safely enter new industries by buying rather than by learning them. It
confounds every bureaucrat of science who imagines he can buy or steal
the fruits of research and development.
Even
if it wished to, the government could not capture America’s wealth from
its one percent of the one percent. As Marxist despots and tribal
socialists from Cuba to Greece have discovered to their huge
disappointment, governments can neither create wealth nor effectively
redistribute it. They can only expropriate and watch it dissipate. If we
continue to harass, overtax, and oppressively regulate entrepreneurs,
our liberal politicians will be shocked and horrified to discover how
swiftly the physical tokens of the means of production dissolve into so
much corroded wire, abandoned batteries, scrap metal, and wasteland rot.
Capitalism
is the supreme expression of human creativity and freedom, an economy
of mind overcoming the constraints of material power. It is not simply a
practical success, a “worst of all systems except for the rest of
them,” a faute de mieux
compromise redeemed by charities and regulators and proverbially “saved
by the New Deal.” It is dynamic, a force that pushes human enterprise
down spirals of declining costs and greater abundance. The cost of
capturing technology is mastery of the underlying science. The means of
production of entrepreneurs are not land, labor, or capital but minds
and hearts. Enduring are only the contributions of mind and morality.
All
progress comes from the creative minority. Under capitalism, wealth is
less a stock of goods than a flow of ideas, the defining characteristic
of which is surprise.
Creativity is the foundation of wealth. As Princeton economist Albert
Hirschman has put it, “creativity always comes as a surprise to us.” If
it were not surprising, we could plan it, and socialism would work.
Schumpeter propounded the basic rule when he declared capitalism “a form
of change” that “never can be stationary.” The landscape of capitalism
may seem solid and settled and something that can be captured; but
capitalism is really a noosphere, a mindscape, as empty in proportion to
the nuggets at its nucleus as the expanse of the solar system in
relation to the sun.
Entrepreneurship
is the launching of surprises. The process of wealth creation is
offensive to levelers and planners because it yields mountains of new
wealth in ways that could not possibly be planned. But unpredictability
is fundamental to free human enterprise. It defies every econometric
model and socialist scheme. It makes no sense to most professors, who
attain their positions by the systematic acquisition of credentials
pleasing to the establishment above them. Creativity cannot be planned
because it is defined by information measured as surprise. Leading
entrepreneurs—from Sam Walton to Larry Page to Mark Zuckerberg—did not
ascend a hierarchy; they created a new one. They did not climb to the
top of anything. They were pushed to the top by their own success. They
did not capture the pinnacle; they became it.
In
the Schumpeterian mindscape of capitalism, entrepreneurial owners are
less captors than captives of their wealth. If they try to take it or
exploit it, it will tend to evaporate. Bill Gates, for example, already a
paper decibillionaire, commented during his entrepreneurial heyday that
he was “tied to the mast of Microsoft.”
If
Gates had tried to leave or substantially cash out at any time during
the early decades, the company would have plummeted in value more
rapidly than he could have harvested the funds. When the founders of
Bain and Co. attempted to cash out in 1991, taking $200 million with
them, Mitt Romney was faced with the likely bankruptcy of the firm. He
had to confront a Goldman Sachs effort to close it down. As the
once-lucrative company collapsed, Romney cut the share of his departing
partners in half in order to save his company and his reputation in
business. David Rockefeller devoted a lifetime of sixty-hour weeks to
his own enterprises. Younger members of the family wanted to get at the
wealth and forced the sale of Rockefeller Center to Mitsubishi. But they
will discover that they can keep the wealth only to the extent that
they serve it, and thereby serve others, rather than themselves.
Most
of America’s leading entrepreneurs are bound to the masts of their
fortunes. They are allowed to keep their wealth only as long as they
invest it in others. In a real sense, they can keep only what they give
away. It has been given to others in the form of investments. It is
embodied in a vast web of enterprises that retains its worth only
through constant work and sacrifice. Capitalism is a system that begins
not with taking but with giving to others.
For
this reason, wealth is nearly as difficult to maintain as it is to
create. Owners are besieged on all sides by aspiring spenders—debauchers
of wealth and purveyors of poverty in the name of charity, idealism,
envy, or social change. Bureaucrats, politicians, bishops, raiders,
robbers, short-sellers, and business writers all think they can invest
money better than its owners. In fact, of all the people on the face of
the globe, it is usually only the legal owners of businesses who know
enough about the sources of their wealth to maintain it. It is usually
they who have the clearest interest in building wealth for others rather
than spending it on themselves.
Nevertheless,
even while dismissing the charge that the “rich” indulge in a carnival
of greed, we have not fully explained the reasons for their great
wealth, much less justified it. Some apologists will say that Mark
Zuckerberg’s Facebook billions, for example, are a reward for his
brilliant entrepreneurship and software coding, while penury is just the
outcome of alcoholism and improvidence. The saintly social worker and
even the president of the United States, for that matter, earn modest
salaries by comparison, and they are neither improvident nor necessarily
less brilliant than Mark.
But
that whole line of argumentation is beside the point. The distributions
of capitalism make sense, but not because of the virtue or greed of
entrepreneurs, nor as inevitable by-products of the invisible hand. The
reason capitalism works is that the creators of wealth are granted the
right and the burden of reinvesting it. They join the knowledge acquired
in building wealth with the power to perpetuate and expand it.
Entrepreneurial
knowledge has little to do with certified expertise, advanced degrees,
or the learning of establishment schools. The fashionably educated and
cultivated spurn the kind of fanatically focused learning commanded by
the innovators. Wealth all too often comes from doing what other people
consider insufferably boring or unendurably hard.
The
treacherous intricacies of software languages or garbage routes, the
mechanics of frying and freezing potatoes, the mazes of high-yield bonds
and low-collateral companies, the murky lore of petroleum leases or
housing deeds or Far Eastern electronics supplies, the multiple
scientific disciplines entailed by fracking for natural gas or
contriving the ultimate search engine—all are considered tedious and
trivial by the established powers.
Most
people consider themselves above the gritty and relentless details of
life that allow the creation of great wealth. They leave it to the
experts. But in general you join the one percent of the one percent not
by leaving it to the experts but by creating new expertise, not by
knowing what the experts know but by learning what they think is beneath
them.
The
competitive pursuit of knowledge is not a dog-eat-dog Darwinian
struggle. In capitalism, the winners do not eat the losers but teach
them how to win through the spread of information. Far from being a
zero-sum game, where the successes of some come at the expense of
others, free economies climb spirals of mutual gain and learning. Far
from being a system of greed, capitalism depends on a golden rule of
enterprise: The good fortune of others is also your own. Applied to both
domestic and international trade and commerce, this golden rule is the
moral center of the system. Not only does capitalism excel all other
systems in the creation of wealth and transcendence of poverty, it also
favors and empowers a moral order.
Richard
Posner, now an eminent judge, was one of my inspirational sources for
the idea that capitalism is inherently favorable to altruism. “The
market economy,” he wrote, “fosters empathy and benevolence, yet without
destroying individuality,” because for an individual to prosper in a
market economy he must understand and appeal to the needs and wants of
others. As a result of my seizing the verboten flag of “altruism” from
his hands and waving it at the head of the supply-side parade, Ayn Rand
devoted much of her last public lecture to a case against my ideas. I
hugely admired Rand, who flung her moral defense of capitalism in the
face of Soviet terror and socialist intellectual tyranny. But toward
Christian altruism she indulged an implacable hostility, stemming in
part from her own simplistic atheism and in part from her disdain for
the leveler babble of sanctimonious clerics.
Most of the world, then as now, was engaged in one of its periodic revulsions against capitalist
“greed” and waste. Lester Thurow of MIT was proclaiming a “zero sum society,” where henceforth any gains for the rich must be extracted from the poor and middle classes. William Sloane Coffin, the formidable Yale chaplain, was inveighing against capitalist orgies of greed and environmental devastation. Howard Zinn and Noam Chomsky were denouncing Western capitalism for displacing American Indians and condemning Israelis for displacing Palestinians (rather than praising the settlers in both countries for reclaiming and redeeming wastelands and hugely enlarging the populations they could support). Edward Said was conducting his Columbia classes (fatefully introducing the works of Frantz Fanon to future president Barack Obama) on Western psychological colonization and hegemonic evisceration of the entire Third World.
“greed” and waste. Lester Thurow of MIT was proclaiming a “zero sum society,” where henceforth any gains for the rich must be extracted from the poor and middle classes. William Sloane Coffin, the formidable Yale chaplain, was inveighing against capitalist orgies of greed and environmental devastation. Howard Zinn and Noam Chomsky were denouncing Western capitalism for displacing American Indians and condemning Israelis for displacing Palestinians (rather than praising the settlers in both countries for reclaiming and redeeming wastelands and hugely enlarging the populations they could support). Edward Said was conducting his Columbia classes (fatefully introducing the works of Frantz Fanon to future president Barack Obama) on Western psychological colonization and hegemonic evisceration of the entire Third World.
Here
we go again, deep in the New Millennium. The themes of exploitation and
zero-sum equality continue to preoccupy the media. Congress remains
enthralled with static accounting rules that assume tax-rate reductions
will not alter economic behavior. In this model, the only way to expand
tax receipts is to raise rates on the “rich.”
For
their part, some conservative leaders imply that our national crisis is
merely some budgeting blunder remediable through a balanced-budget
amendment to the Constitution. The focus on budgetary issues becoming
acute a decade or so from now implies that liberal policies are not
already infecting our economy with a multiple sclerosis of tax and
regulatory curbs, destroying jobs and families with webs of rules and
pettifoggery, skewed social policies, and litigation. A preoccupation
with national liabilities diverts attention from the massive political
devaluation of the nation’s assets.
“Starve
the beast” is the new mantra of conservative economics. “Shrink the
budget” is the new mandate for prosperity. “Keep what you earn” is seen
as the moral foundation for lower taxes. All these formulations bear
some truth, but they focus on accounting tautologies rather than on the
dynamics of creative enterprise. Conservatives still urge lower taxes,
but many no longer know how to defend them, distracted as they are by an
economics of austerity that obsesses on the downside of deficits in a
way inimical to the supply-side vision of abundance and
unpredictability.
The first edition of Wealth and Poverty (1981) sprang
from a period of essentially balanced budgets and trade surplus under
Jimmy Carter and helped launch a siege of deficits and trade gaps under
Ronald Reagan. During the Carter years, the government was mostly in the
black while everyone else was in the red. Under Reagan, though, the
trillion-dollar rise in government liabilities was dwarfed by a $17
trillion expansion of private-sector assets thanks to creative
entrepreneurs. Over the decades following the Reagan revolution,
government liabilities continued to expand, but once again
private-sector asset values increased, by 60 trillion dollars more. It
is only over the past ten years or so that liabilities have been rising
faster than assets, which have crashed. Improvements in policy and tax
rates can instantly upgrade the value of all the assets in the economy
without any physical change in their material composition.
Opposed
to the reality of capitalism as a function of knowledge and creativity
is the behavioral dream—implicitly accepted even among some
supply-siders—of a “Skinner box” economics of stimulus and response,
wherein lower tax rates impart a stimulus of reward for more work and
risk-taking and thereby yield more revenues for the government. The
implication is that the mere desire for wealth has something to do with
the ability to create it. But as Steve Forbes observes in How Capitalism Will Save Us,
explaining capitalism by self-interest or greed is like explaining
airplane crashes by the force of gravity. Greed and gravity are general
and ubiquitous in regimes of all sorts and therefore irrelevant to the
extraordinary results of capitalist creativity.
Taxes
do yield massively increased revenues as the rates are reduced. A
successful economy, however, is driven less by the sharp edges of
incentives than by the unimpeded flow of information and
its conversion into knowledge and wealth through falsifiable
experiments of enterprise. Increasing revenues come not from a mere
scheme of carrots and sticks but from the development and application of
productive knowledge.
The
equation of lower tax rates and higher revenues remains perhaps the
most thoroughly documented and widely denied proposition in the history
of economic thought. It has been abandoned even by some former
supply-siders who ignore the global tax revolution beyond our shores
while obsessively analyzing ambiguous data from the Clinton era.
At
a generation’s distance, however, it is clear to me that we, the
original supply-siders, bear some responsibility for the failure to
persuade. All these years later, it has become evident to me that we
were not radical enough—that we allowed our own arguments to be ensnared
by the mechanical economics of Adam Smith and his heirs. Even Arthur
Laffer’s original and brilliant sketch, after all, functioned almost
entirely in the realm of rational expectations, stimulus and response
applied to poor passive Homo economicus.
Let him keep more of the fruits of his labor and he will labor harder,
we proclaimed; increase the after-tax rewards of investment and more
investment there will be.
By
focusing on incentives rather than on information and creativity,
free-market economists have encouraged the idea that capitalism is based
on greed, although, as we have seen, entrepreneurs cannot in general
revel in their wealth, because most of it is not liquid. Greed, in fact,
only motivates capitalists to seek government guarantees and subsidies
that denature and stultify the works of entrepreneurs. The financial
crash of 2007 and beyond reflected orgies of greed among crony
capitalists awash in government guarantees and subsidies, sitting on
their Fannies and Freddies, feeding in the troughs of Treasury
privileges and government insurance scams. Greed leads as by an
invisible hand to an ever-growing welfare and plutocratic state—to
socialism and near-fascist corporatism (see Jonah Goldberg’s Liberal Fascism for details).
The
secret of supply-side economics is not merely to incentivize people to
work harder or accept more risk in order to gain a greater reward. That
could be done under socialism. The reason lower marginal tax rates
produce more revenues than higher ones is that the lower rates release
the creativity of employers, allowing them to garner more information.
They can move more rapidly down the curves of learning and experience.
They can learn more because they command more capital to use in their
trade. With more capital they can attract more highly skilled labor from
around the globe. They reduce time and effort devoted to avoiding taxes
and interpreting regulations and consulting lawyers and accountants.
With fewer resources diverted to government bureaucracy, they can
conduct more undetermined experiments, test more falsifiable hypotheses,
try more business plans, generate more productive knowledge.
It
is not the enlargement of incentives and rewards that generates growth
and progress, profits and capital gains for the entrepreneur and
revenues for the government, but the combination of new knowledge with
the power to test and extend it. Volatile and shifting ideas, not heavy
and entrenched establishments, constitute the source of wealth. There is
no bureaucratic net or tax web that can catch the fleeting thoughts of
Eric Schmitt of Google, Jules Urbach of Otoy, or Chris Cooper of Seldon
Technologies.
The
key issue in economics is not aligning incentives with some putative
public good but aligning power with knowledge. Business investments
bring both a financial and an epistemic yield. Capitalism catalytically
joins the two. Capitalist economies grow because they award wealth to
its creators, who have already proven that they can increase it. Their
proof was always the service of others rather than themselves.
As
Peter Drucker has written, within companies there are no profit
centers, only cost centers. Whether a particular cost yields a profit is
determined voluntarily by customers and investors. Capitalism feeds on
information that is outside of the company itself and therefore under
the control of others. Only an altruistic orientation can tap the
outside incandescence of information and learning that determine the
success of capitalism’s gifts.
Mr. Gilder is the author of fifteen books, venture investor, and a co-founder of the Discovery Institute.
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