Freeman

BOOK REVIEW

Recapturing the Spirit of Enterprise and Wealth and Poverty

A Definitive Case for Supply-Side Economics

MARCH 01, 1994 by RAYMOND J. KEATING

By publishing anew George Gilder’s now-classic volumes Recapturing the Spirit of Enterprise (formerly The Spirit of Enterprise) and Wealth and Poverty, ICS Press has performed an invaluable service to anyone concerned about economic growth, opportunity, and freedom. The updating and republication of these Gilder tomes takes on even greater importance in light of recent movements in Washington, D.C., not only to wipe out positive economic policy achievements of the 1980s such as lowering marginal income tax rates but also to foster once again the mistaken notion of a leviathan state as the guiding force for economic growth.

In both books, Gilder amazingly manages to lift economics from the deadening morass into which much of it had sunk for at least a half century. He understands and communicates perhaps better than any other contemporary economist that economics is not largely an endeavor of statistics and econometrics, since such disciplines do not possess the tools to analyze the dynamic, entrepreneurial change that lies at the very core of capitalism. Through his comprehensive view of economics, Gilder himself provides an example of an economist unwilling to accept irrelevancy by limiting the scope of his examination to a purely econometric analysis. In fact, Gilder justifiably supplants many of the detached, mechanistic assumptions about economic reality, to which a considerable portion of the economics profession subscribes, in favor of a more realistic analysis of how the economy functions, focusing on human creativity, entrepreneurship, and a wide variety of individual incentives.

Gilder elevates supply-side economics—with its emphasis on providing the means and incentives for individuals to work, create, innovate, invest, save, and take risks—to its proper pre-eminence over bankrupt demand-side economic management and wealth redistribution. Gilder correctly de-emphasizes the static, input-output style of economics so relied upon, for example, by former Soviet planners, authors of U.S. economics textbooks, and New York City government officials, while instead focusing on the creative, entrepreneurial aspects of capitalism that, while difficult to quantify, are essential to understanding and ensuring economic growth and opportunity.

After more than a decade of misrepresentations in the media and by a wide range of economists, revisiting George Gilder’s classics reinvigorates too-often dormant supply-side economic senses. Gilder vividly portrays the importance of, as he puts it, “the entrepreneurial dimension of the economy.”

Recapturing the Spirit of Enterprise remains one of the finest analyses of the entrepreneur’s role in the economy. Gilder understands the bankrupt status of current economic analysis where the primary role of the entrepreneur has been subsumed by an emphasis on governmental management of aggregate figures:

Economic recovery depends on the resurrection of entrepreneurs. This resurrection cannot fully and durably occur until the ultimate arbiters of economic policy—the economists—resurrect entrepreneurship in their own influential theories. The contrary vision of capitalism without capitalists springs in part from a fundamental error of economic thought, drastically overrating the importance of physical capital formation and other quantitative measures of economic activity and drastically underestimating the decisive and controlling importance of entrepreneurial creativity.

Gilder conveys this critical nature of entrepreneurship not just with sound economic arguments, but with a wide range of real-life examples, including Florida’s Cuban immigrants who prospered “not chiefly by a trickle-down of grants from the government, but by the upsurge of their own productive efforts;” Henry Ford’s illustration “that high profits come from giving, through low prices and high wages, rather than from gouging for what the traffic will bear;” and Honda’s plunge into designing a motorcycle for which no demand yet existed. Gilder quotes Soichiro Honda, “We do not make something because the demand, the market is there. With our technology we can create demand, we can create the market,” thus reaffirming the supply-side tenet that “supply creates its own demand,” or Say’s Law, named for the nineteenth-century economist Jean-Baptiste Say.

Notably, four new chapters were added to Recapturing the Spirit of Enterprise. In one such chapter, Gilder once again exposes the weakness of today’s economists: “The reason that most economists cannot comprehend the 1980s is that it was a period of entrepreneurial acceleration. While economists measured the deficit and the trade gap, entrepreneurs were multiplying value at an unprecedented pace and disguising it with plummeting prices.”

One of the best ways for any student of economics, whether in pursuit of a bachelor’s degree or already in possession of a doctorate, to gain a better understanding of the economy would be to read Wealth and Poverty. It remains quite difficult for me to think of a more important book written about economics over the past two decades. Gilder gracefully weaves together devastating attacks on both aggregate demand management and the notion of perfect competition, while even occasionally enlisting demand-side demigod John Maynard Keynes in support of a definitive case for supply-side economics.

Invoking the fundamental economic principle of division of labor, Gilder also illustrates that supply-side economic theory does not rest solely on incentives: “Capitalism is the most effective way of expanding wealth not chiefly because it offers the most powerful incentives, the most tantalizing arrangement of carrots and sticks, but because it links knowledge with power. It gives control over resources and over the future flow of investment not to political bureaucracies of certified experts or to the most avidly self-loving pursuers of leisure and luxury, but to the particular businessmen who manage successful experiments of enterprise . . . . Under capitalism, economic power flows not to the intellectual, who manipulates ideas and basks in their light, but to the man who gives himself to his ideas and tests them with his own wealth and work.” Gilder correctly points out that “entrepreneurs must be allowed to retain wealth for the practical reason that only they, collectively, can possibly know where it should go, to whom it should be given.” This fundamental aspect of capitalism is currently being washed over by a wave of class warfare rhetoric in much of our public debate, which recently manifested itself in higher income tax rates that will divert energies from productive investment and entrepreneurial ventures to tax-sheltering endeavors fostering economic stagnation.

In this light, the new preface to this edition of Wealth and Poverty provides an important review of the supply-side successes of the 1980s and some sound advice for the 1990s: “This recovery [of liberalism] is likely to be short-lived. Although the left may never believe it, demand-side economics is dead. In an increasingly competitive global economy, a government can no more raise its revenues simply by raising its taxes than a company can raise its income simply by raising its prices. Like a company, a government must constantly lower its prices and improve its services to expand its markets (its tax base). In the 1990s, the United States needs further rounds of tax rate reductions and simplifications in order to lower its deficit.”

Again refusing to pigeonhole economists, Gilder also provides a profound observation: “By a supply-side standard, immorality diverts, demoralizes, obsesses, and depraves the men and women who must forgo immediate returns, sacrifice immediate pleasures, master difficult disciplines, and respond to the needs and desires of others if they are to create successful businesses. Capitalism has been incomparably the most productive economic system in the history of the world because it best evokes the effort and creativity—the moral quality and productive energy of workers and entrepreneurs who put the interest of others before their own gratifications.” Gilder justifiably deserves to be referred to not only as a great supply-side apologist but also a great apologist for capitalism in general.

The following two paragraphs from Wealth and Poverty express the essence of the supply-side economics revolution—a revolution still being fought, with the commensurate setbacks one inevitably finds in any battle, but nonetheless moving relentlessly toward victory:

Say’s Law in all its variations is the essential enactment of supply-side theory. But its value does not reside in its mathematical workings. In economics, mathematical models, however elegant, must always defer to the behavior and psychology of persons with free will, who often act, and interact, in unexpected ways. The importance of Say’s Law is its focus on supply, on the catalytic gifts or investments of capital. It leads economists to concern themselves first with the motives and incentives of individual producers, to return from a preoccupation with distribution and demand and concentrate again on the means of production.

The return is crucial to understanding the current predicament of capitalism. But it will be difficult for economists. Reversion to the supply side means leaving the comfort of rigorous models and computations and again entering the fray of history and psychology, business and technology. Economists should once again focus on the multifarious mysteries of human social behavior and creativity which Adam Smith luminously addressed in The Wealth of Nations, which Marx stuffed into the maw of his theory, which Keynes treated in most of his writings, and which even John Kenneth Galbraith, in his often perverse way, delights in describing.

With Wealth and Poverty and Recapturing the Spirit of Enterprise, not to mention other books such as Microcosm, Men and Marriage, and Life After Television, George Glider—the economist has entered the fray not only of history, psychology, business, and technology, but of faith and the human spirit as well, to the benefit of both his readers and the economics discipline. []

Raymond J. Keating is New York Director of Citizens for a Sound Economy.

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March 1994

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