Regnery Publishing, 256p, 1981, 2012
Reviewed by Daniel Brinkman –
When challenging Ronald Reagan in 1980 for the Republican nomination, George H W Bush leveled a charge against the idea of cutting taxes to stimulate economic growth calling it, “voo-doo economics.” It is a charge that has been repeatedly leveled at it since. As predictable as that line is, you can just as likely expect a lame ‘shrug of the shoulders’ defense of the free market capitalist system, usually spiced with some paraphrased version of the Churchill line “it’s the worst form, except for all the others.”
George Gilder comes charging into this breach with a robust defense of the inherent morality of capitalism, and a well researched look at how countries have thrived from the ideas of Supply Side Economics. This classic was originally published at the outset of the Reagan Revolution. The author released an updated version in 2012 with a new forward by Steve Forbes, a new epilogue, and new case studies. The meat of the book, though, its prose and arguments are timeless and need no update. Economics at its vey best is a study of human nature. George Gilder gives us that and more in Wealth and Poverty.
Gilder uses as his ballast an almost scriptural adage for the supply side argument, “give and you will be given unto.” Keynes’s theory is jibed as, “take and you shall be given unto.” The other running theme is the role of incentive. As Warren Buffett’s business parter Charlie Munger is wont to say, “show me the incentive, and I will show you the outcome.” Gilder does this in spades.
Repeatedly, Gilder cites the misaligned incentive structures of government programs. On welfare he states, “For most people poverty is a passing phase caused by some crisis in their lives. The goal of welfare should be to help people out of these dire but temporary problems, not to treat temporary problems as if they were permanent ones and thus make them so.”
If the goal is to move people upward, the notion that the deck is stacked against someone be it by a racist establishment, or by some lack of credentials on their part, coupled with the sad idea that all wealth is ill-gotten, conspires to “incapacitate all poor who believe in it.” Gilder pinpoints other large but often unconsidered costs in government largesse, “One of the key moral hazards entailed in government job programs and other insurance schemes is the loss of knowledge, a real capital loss that they inflict on citizens who never learn their own best abilities and opportunities.” Gilder even makes an effective argument against bilingual education, showing how it creates a natural segregation, and extends poverty by preventing assimilation.
On supply side economics, Gilder brings many examples of countries whose tax cutting lowered their debt, deficits, and spurred economic growth. The case study of Japan is particularly striking: “It financed its deficit with no inflation. This achievement merely required tax policies heavily favoring savings and investment. Between 1963 and 1978 the Japanese savings rate rose from 16% – 23% and the tax burden fell at the same pace while the US savings rate dropped and taxes soared. Productivity growth increased in Japan and declined here.” He details similar proofs in New Zealand, Canada and Israel. In a world of some 270 countries, it has become much easier to see the truth of the supply side.
Gilder does not dwell long on numbers, he is at his most forceful and sublime in showing the morality inherent in free market capitalism. He rightly skewers the notion of generational wealth threatening the future of the republic by citing the infinitesimal rarity of it In the most upwardly mobile society in the history of the world one cannot simply hold what one’s assets under a mattress and expect it to last beyond a few generations. Like fertilizer from rotting trash, even the Saudi sheikh level spending of the most profligate provides opportunity for those on the make, while they themselves continue their downward slide. Invested capital, even in something as pedestrian as regular bank accounts, are leveraged to fund opportunities for others making their way up the ladder. But truly as Churchill said, “The destiny of man is not measured by material computations.” This is seen, “Throughout history from Venice to Hong Kong, the fastest growing countries have been the lands best endowed not with things but with free minds and private rights to property. Two of the most thriving of the world’s economies lost nearly all of their material capital during World War Two and surged back by emancipating entrepreneurs.”
“Capitalism offers nothing but frustrations and rebuffs to those who wish because of claimed superiority of intelligence, birth, credentials, or ideals to get without giving, to take without risking, to profit without sacrifice, to be exalted without humbling themselves to meet the unruly demands of others in an always perilous and unpredictable life. It is not surprising therefore that the chief source of the misunderstanding of capitalism is the Intelligencia, one of the many aristocracies that preen themselves on the contempt for bourgeois or middle class values and that refuse to acknowledge the paramount role of individual enterprise in the progress of the race.”
Gilder’s rightly regarded classic offers a defense of capitalism, a regard for incentives in policy making, and the encouragement to be the best that God intended us to be.