All Commentary
Sunday, February 1, 1981

A Reviewers Notebook: Wealth and Poverty

The Reagan triumph is the political culmination of a movement that has been thirty years in the making. But we are not yet home free. Washington, D.C., is riddled with a conflict of “buts” even as the guard is changing. Every assent is coupled with a dissent. Yes, we must cut taxes, BUT not at the expense of unbalancing the budget. Yes, we must reduce the cost of welfare, BUT not by pushing anybody below the poverty line. Yes, we must go back to capitalism, BUT labor cannot be despoiled of its gains—and it would risk too much in unemployment if a corporation the size of Chrysler were allowed to fail.

It is too much to hope that we will escape at least two or three years of dubious political battle, but maybe the key to America’s future exists somewhere outside of Washington. True enough, we need some help from a Reagan regime dedicated, even though the BUTs abound, to getting the government off the peoples’ backs. We need at least a diminution of inflation. But benign neglect would help, too. The creative society (Reagan used to talk about that in California) depends on the free play of a social power that is not constrained by the politicians.

Luckily, at this juncture, we have a seminal book, George Gilder’s Wealth and Poverty (Basic Books, 10 East 53rd Street, New York, N.Y. 10022, 306 pp., $16.95), that could be to the Age of Reagan what Stuart Chase’s A New Deal and George Soule’s The Planned Society were to the Age of Roosevelt.

What Mr. Gilder has done in vital and vivid style is to smash all the models that have treated capitalism as something that is destined to modulate into socialism, with or without the help of Marxian conflicts. He does not deny that the big corporations often become bureaucratized, preoccupied with problems of marketing a given product when the world is really clamoring for something new. Galbraith is right, he says, in observing the existence of a technostructure that resists change. But in a brilliant chapter on “the entrepreneurial future” Mr. Gilder shows how the small entrepreneurs continue to swarm in. Change, despite the Biggies, is what we get.

The infiltration comes even when investment capital is hard to come by. There is the phenomenon of California’s Silicon Valley, for example, where, as Gilder says, “worlds indeed unfold in grains of sand.” The sand refers to the silicon chip, something no bigger than a fly, that will store thousands of bits of information for computer use. The silicon chip owed nothing to either the government or huge IBM—it began with “a second-rank camera firm, Fairchild,” and “achieved its crucial breakthrough in 1971 at a tiny firm, Intel.” It is “not only a product but also a producer of science . . . with multifarious industrial and commercial uses . . . from astrophysics to medicine.” And on the heels of the microprocessor are coming other new technologies—lasers, for example, and the photovoltaic cell.

The point that Mr. Gilder is making is that it is men and ideas, and common faith or “animal spirits,” that continue to create jobs and plenty. Mr. Gilder does not rely on statistics to prove his contentions, but when he does invoke them he uses them tellingly. Between 1969 and 1976 smaller firms created 7.4 million new jobs. This was at a time when the businesses on Fortune’s list of one thousand largest corporations were experiencing practically no growth at all.

The Moral Case for Capitalism

Mr. Gilder’s case for capitalism is fundamentally a moral case. It is based on giving. The enterpriser can’t know that he has a market waiting for him. He ponies up the energy, the brains and the capital, and in an act of faith floats them out into the unknown. “The essence of his giving,” says Mr. Gilder, “is not the absence of all expectation of return, but the lack of a predetermined return.”

As a”supply side” economist, Gilder goes back to Say’s Law of Markets. Supply creates its own demand by releasing claims on goods into the marketplace in the form of wages, interest, dividends and outlays for raw materials. People may not even know they want something until they see what is being offered, but when they see it the money is already there to buy it. Purchasing power cannot be created apart from supply, for any paper claims in excess of the money that supply calls into being will have an inflationary effect.

Mr. Gilder does his painting in bold strokes for the most part. But he is also good at miniature brush work. In his chapter on “the nature of wealth” he centers on a small community in the Berkshires, where there are few “natural resources.” He tells about a Lebanese family who arrived in Lee, Massachusetts, with few dollars and fewer words of English. The family bought an abandoned shop beside the road. Every day the father of the family drove over to the Connecticut Valley, a hundred miles away, to load up with vegetables, which he bought cheaply. With the help of six children the roadside shop prospered. Today, the family owns the biggest office building in town, a large clothing store, and what amounts to a small shopping center at the original shop site. In the same town of Lee a man named Kelley parlayed a business of making scratch pads out of refuse paper into a variety of businesses. And another man, named Sprague, turned a small patrimony into a huge conglomerate which began with a chicken hatchery in Iran.

By focusing on the Berkshire town of Lee, Massachusetts, Mr. Gilder is telling us how England and Japan, Taiwan and Hongkong, all of them relatively barren islands, became wealthy without having any natural resources that might be called riches. Saudi Arabia does have riches in its oil. Whether it will ever become wealthy in the Berkshire-British sense is a question. Wealth begins as a state of mind and a state of will.

The Senseless War Against Wealth

Only in the “zero sum” thinking of modern “liberals” does wealth create poverty. In the real dynamic world one man’s fortune is a boon to all. The savings of the rich create jobs for the poor. So the “war against wealth,” as Mr. Gilder sees it, is senseless. We tax the producer to pay for a welfare that keeps women and dependent children locked into dingy ghetto life, with the men taking off because they can’t stand the feeling of being unneeded as breadwinners. As long as welfare payments to women are a cut above what a family can earn in the market, the government, says Gilder, will continue to cuckold men.

This is strong stuff, and no politician, even in the Age of Reagan, is going to succeed in abolishing welfare. But we can hope that supply side economics, helped by tax cuts that will give productive people something to play with, will float a few families off the relief rolls. Meanwhile the new atmosphere in Washington may make some of Mr. Gilder’s observations on welfare seem less hard-hearted than they would have seemed in the days of the Great Society. When Mr. Gilder says that “aid for families with dependent children makes more families dependent and fatherless,” or that “unemployment compensation promotes unemployment,” he isn’t being mean. He is merely being accurate about the “moral hazards” of some of our best intentions. What he is saying is that the Welfare State has become counterproductive. It is time for something new and more inventive.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.