It was probably fifteen years ago that I was at lunch with Banknote Capital’s Jim Fitzgerald. We were finishing up when the conversation shifted to tax rates, at which point Fitzgerald dismissed the notion that lower rates stimulate more work.
To be clear, Fitzgerald was not saying that he opposed lower tax rates. He was and is very much for them. But he was expressing his disdain for the theory that lower rates cause people to work more. In his case, Fitzgerald would work a great deal precisely because there was joy in it.
Still, what he said at the time was jarring. It called into question so much that was accepted wisdom. Gradually it made lots of sense. Tax rates should be low simply because they should be low. After that, it’s perhaps unrealistic to suggest that Jeff Bezos, Mark Zuckerberg and FedEx founder Fred Smith began to build their remarkable businesses only after consulting the tax code. Work for them was and is similarly joy.
The conversation with Fitzgerald, along with my own evolution on matters economic, came to mind while reading George Gilder’s essential new book, Life After Capitalism. Though Gilder penned what many view as the underlying philosophy of supply-side economics with the brilliant Wealth and Poverty in 1981, in his spectacular 2013 book Knowledge and Power Gilder began to question the “incentive” economics that at least on the surface informs supply-side.
To Gilder, wealth is the creation of information, and individual tax rates arguably aren’t as relevant there, particularly in technology. We’re talking about people obsessed with inventing the future. The latter tells us they too aren’t checking individual tax rates ahead of time before deciding whether to work at the Post Office or start a new business. About the Post Office, a card-carrying, well-regarded and well-published supply sider once literally told me that high tax rates would cause our greatest entrepreneurs to take jobs in the Post Office…About all this, tax rates DO matter. Big time. That supply is the source of all demand is a tautology. But tax rates arguably aren’t the work catalyst for the reasons long expressed by supply siders. Please read on for thoughts on why.
For now, Life After Capitalism is just so good. It’s Gilder “launching a new economic theory” rooted in the essential truth that knowledge is the true wealth. Gilder puts it so well throughout the book, but just to give readers a taste ahead of jumping off into all sorts of areas, he writes in the opening pages of what will now be referred to as Life that “when you insert your credit card into the gas pump, what you’re really buying is the knowledge that makes the transaction possible.” So very true, and so very important. And clear evidence in support of Gilder’s thesis: oil is of the earth, it’s been bubbling up from the earth for billions of years, but market applications for it weren’t discovered until the 19th century.
It all speaks to a bigger truth conveyed by Gilder through Caltech professor Carver Mead. In the past Mead and his colleagues would gather for “confession” where they would admit what they got wrong. In Mead’s words, “If it’s a thing that doesn’t fit, that’s information. If it does what you thought, you haven’t learned anything.” Confirming what you know is running in place. Call the latter a metaphor for consumption. Investment is the pursuit of new information, including information that confirms how wrong you are. Again, learning is the wealth. Yet it’s more than that.
Supply siders have for so long based their argument against John Maynard Keynes on incentives created by government to work more at lower prices (tax). There’s probably some truth to the latter at nosebleed rates that have really never existed in the U.S. even when they existed (the effective top tax rate was in the 25% range when the headline tax rate reached 90% in the 1950s), but the better argument is that Keynesianism calls for government to spend and war just to spend and war on the false supposition that spending to spend and destroying wealth and life to destroy it is what keeps the economy moving. Keynesians call for redistribution of precious resources not to those who will invest, but to those who will spend. Except that spending, particularly by those of limited means, produces very little knowledge. It confirms what’s known, as we all want to consume. Which means wealth redistribution logically constrains knowledge. Government spending similarly suffocates knowledge creation, which means it’s a barrier to economic growth.
Gilder’s information as wealth view of the world thoroughly rejects what’s always vandalized reason for it holding fast to the truth that wealth is knowledge. Write it down over and over again with politicians top of mind. As readers of this column have read over and over again: politicians are constrained by the known. And they direct precious funds in politicized fashion to the known. What choice do they have when it’s remembered that the unknown is defined by thoroughly outlandish and realistically impossible concepts. Regardless of party affiliation, politicians can’t touch that which invents the future. Progress is a consequence of knowledge creation that springs from producing heretofore unknown information. Gilder’s new economics of knowledge discredits Keynes far more effectively than does “incentive economics.”
That is so given the basic truth that the corollary to wealth is knowledge is the unsung reality that “it must be a surprise” if it’s actual information. Governments are much less likely to fund surprise simply because the act of finding the unexpected is logically littered with stupendous errors. As Gilder puts it, “the most valuable startup companies tend to be the least expected.” Which explains why billionaires are billionaires. They generally get that way not because they’re expertly improving on how things are already done, rather they become billionaires by virtue of reinventing altogether how people do things to the total surprise of most everyone, including most investors. Bezos turned traditional shopping on its head, Steve Jobs forced a massive redefinition of the phones that sit in our pockets, while Reed Hastings helped us to see the former folly of driving to a physical place in order to “rent” movies that weren’t always available as is.
What rates stress about all three is that what they did was only obvious after the fact. Per Gilder yet again, if it’s real knowledge it’s a “surprise.” And the more surprising it is, the more wealth earned by the creators of same. Of course, the surprise nature of it all hopefully explains to readers that much more often than not, those working feverishly to create surprise fail. In which case imagine if politicians were directing the money of their constituents at the myriad “impossible” ideas hatched in the private sector. The outrage would be enormous, which explains yet again why government can’t play venture capitalist. But it also explains why only the rich can play VC: they have money to lose. The latter is arguably the most important truth about progress, but the one that politicians on each side are least likely to touch. How sad.
All of which brings us back to why tax rates matter. Though Jeff Bezos and others of his ilk would likely work relentlessly at all sorts of tax rates, none of them can innovate without capital. There’s no getting around the basic truth that there are no entrepreneurs without capital. This hopefully further awakens readers to the problem with taxing wealth, and the tax that is government spending more broadly. Precisely because progress is born of surprise, and because “the most valuable startup companies tend to be the least expected,” they’re by extension the companies least likely to be funded in the first place. Which means every dollar taxed and spent by government means fewer dollars that might find their way to the next big advance.
Ideally this causes readers to think about what is, but also what could have been. Gilder writes that “Much of that $100 trillion in [global] GDP would disappear without it.” Without what? Without Silicon Valley. Innovation there is “driving virtually all economic progress.” No argument there, but lots of wonder. Just how much further along would we be if government hadn’t been such a size consumer of the very wealth that drives knowledge, and that by extension begets new wealth in the process? Rich as the U.S. is, it’s no reach to suggest that we’re Bangladesh relative to where we could be if all the trillions spent by politicians over the decades had been kept in the private sector. It staggers the mind, all the while eliciting copious disdain for the faux “deficit hawks” who write of the carnage that awaits us and the “grandchildren” if we don’t shrink the national debt. What these self-proclaimed skinflints miss as they carry water for witless economists and clueless politicians is that the real crisis is now, though it’s unseen. Again, how much further along would we be absent all the redistribution of investment capital into consumptive hands, not to mention all the funding of research meant to bolster what is “settled science.” As Gilder so valuably points out, the governmental presumption of “settled science” actually suffocates science since it “outlaws surprises and crushes testable dissent, which is but another term for innovation.”
The reverence for the known or what politicians deem as “settled” has Gilder worried. His launch of a “new economic theory,” or what comes after capitalism is a consequence of his pessimism about what capitalism has become. He argues that it “is deeply inconsistent with actual practice,” that markets have “given way to a new generation of government rules best defined as ‘emergency socialism.’” The latter is suppressing “the surprises of capitalist innovation,” and it’s difficult to argue with despite the remarkable abundance all around us. As always, we must consider the unseen. If so, it’s not unreasonable to speculate yet again that we’re Bangladesh relative to where we could be owing to the basic truth that wealth is knowledge.
How did we get here? Gilder’s view about the how will unfortunately surprise many who populate the uncritical amen corners of conservatism and libertarianism, but he writes that “the seeds of the new era were sown in 1971, when Richard Nixon and Milton Friedman unveiled the initial phase of emergency socialism, emergency monetarism.” Praise to Gilder for his willingness to point out what’s so blindingly true, “that on the issue of money,” Milton Friedman “has been proved wrong.” Much more than wrong in his obsession with so-called “money supply,” as though what facilitates movements of actual wealth must be “supplied” from the charitably empty minds inside central banks.
Though Friedman is viewed by people who should know better as the embodiment of all things free market, his embrace of “top-down control” of money whereby the Fed and other central banks quite literally centrally plan so-called “money supply” was and is an obnoxious conceit of gargantuan proportions. What’s sad is how few will do as Gilder has done. The simple truth is that money in circulation is a consequence of production, at which point the very notion of planning so-called “money supply” is no different than planning production. Translated for those who need it, the central planning that defines monetarism explains why it never has worked, and never will. If you can’t plan production, and you certainly can’t, you most certainly can’t plan the “supply” of currency that only has purpose insofar as it facilitates the exchange of the fruits of production, the storing of production, and the migration of crucial market inputs to ever higher uses. How were so many wise people so easily duped by a school of thought (monetarism) that gives so much life to phrenology?
Worse, it wasn’t just that Friedman sought central control of so-called “money supply,” as though producers lay in wait for governmental types to supply the dollars without which they allegedly wouldn’t produce. He also sought a dollar without definition, which would be the equivalent of an NFL scout calling for the floating of the second. As Adam Smith so pithily and correctly put it, “the sole use of money is to circulate consumable goods.” Yes money is but a measure. That’s it. It’s not wealth as much as it’s an agreement about value that facilitates the exchange of wealth, only for Friedman and other PhDs to successfully (though cruelly on the matter of progress) substitute a PhD standard for the constancy of a measuring stick. It’s monetary activism that would make the worst of judicial activists blush. While conservatives and libertarians properly recoil at jurists writing all new law from the proverbial bench, they to this day lionize one of their own for essentially replacing money price stability with the rule of capricious men.
As a consequence, money that was formerly “low-entropy” in the words of Gilder, or “quiet” in the words of your reviewer, suddenly became loud, That which had been always meant to measure reality, including a high-entropy, innovative reality, would soon be reality. With horrendous results. Money that used to be facilitator of wealth moving to its highest use, has at various times been a noisy barrier to crucial capital flows. In other words, it’s not just been government spending and taxation of wealth that have thrown progress-arresting wrenches in the gears of capitalism; Friedman’s monetarism similarly set us back in substantial ways, but also “unseen” ways. Think about it.
And in thinking about it, consider what investors seek when they put money to work: they seek returns, usually in dollars. But if the dollar’s value is indeterminate thanks to it “floating,” it’s entirely possible that any returns could come back in greatly shrunken dollars. Gilder described the consequences of this brilliantly in Wealth and Poverty. With the dollar in stupendous decline in the 1970s, commodities and other hard assets (wealth that already existed) least vulnerable to devaluation shined. Think housing, think oil, gold, rare stamps, art, etc. If investment is about the creation of wealth born of knowledge, then it’s easy to say that consumption meant to hedge against inflation is a flight to the real per Mises, or per Gilder, a flight to what is already known; to wealth that already exists.
From there, is it any wonder that wealth creation declines markedly during periods of actual inflation; inflation always and everywhere a shrinkage of the monetary unit? It shouldn’t be, after which the horrors of inflation (devaluation – always) pair perfectly with Gilder’s “knowledge is wealth” message. When money is trusted, there’s logically much more investment in new knowledge creation over protection of existing wealth in consumptive hedges.
Only for the story to get worse. A major, and very important theme of Life is the notion of time. Other than humanity itself, it’s no reach to say that time is the most important driver of progress. Please keep this in mind when half-wits on the various business shows talk about what the Fed can do to “stimulate growth.” It’s amazing even the ignorant could believe what is so at odds with reality. The Fed has no credit, so it certainly can’t expand it with rate machinations, and then the Fed most certainly cannot expand time. In Gilder’s words, “time is the only money that politicians and their bankers cannot print or distort.” No they can’t, though one guesses there are politicians and economists who naively seek to make us “taller” and “faster” through the shrinkage of the foot in concert with the lengthening of the second. They’ve already perverted the measure that is money, why not time?
Gilder adds that “real money is ultimately rooted in tokens of time,” “when we spend money, we are spending our time.” From this he calls for readers to not look at the money price of goods as much as they should contemplate hours worked to attain the goods. It’s a useful distinction, and it leads to Gilder quite literally bringing Professor Gale Pooley into Life. Pooley wrote Superabundance with the Cato Institute’s Marian Tupy, and in it the duo showed how hours worked to purchase all manner of goods and services have plummeted. Yes, if you measure money prices from an hours worked standpoint, everything is much cheaper, hence “money is time.”
It all points to something bigger. Adam Smith most famously happened on it with his reporting on a pin factory visited in the opening pages of The Wealth of Nations. Smith observed that one man working alone could maybe produce 1 pin per day, but several men working together could produce tens of thousands. Yes, work divided is the path to soaring productivity advance that brings down the time price of everything. Pooley and Tupy expand on this essential truth: they note that “for every increment of population growth, global resources have grown by a factor of eight.” As opposed to a burden, humans are naturally additive. In Gilder’s words, “the only relevant scarcity is human lives.”
The above truth jibes perfectly with Gilder’s parallel argument with Smith that “the wealth of nations is advanced by the learning of nations.” Absolutely. The more “hands” in production, the more specialization, the more specialization the more learning. I would just add a tweak here: the more learning aided by specialization, the more unlearning. Please keep “unlearning” top of mind now, and in the future. While education fanatics fight about “good” or “bad” schools, and “government” versus “private” schools, they’re arguing about how subjects are taught, how well, and subsequent test scores. The only problem is that commerce doesn’t wait for academia. This is crucial with economic dynamism top of mind. What is taught in schools is impossibly dated, assuming it was ever up to date in the first place. Getting to the point, it can’t be stressed enough that much as knowledge is wealth, the acquisition of knowledge is much more about unlearning concepts than learning them. Remember this when the unoriginal in thought lament falling math scores. That would be like the deep-in-thought biting their nails about reduced facility on the farm 100 years ago. The beautiful reality is that we increasingly didn’t need to know farming. Math is no different. In the new economics of knowledge acquisition, facility at calculus and other loathsome (for many) forms of learning won’t matter. Amen to that!
Yet there’s more. Gilder makes the crucial point that all-too-many continue to incorrectly believe that “wealth must have a material embodiment.” He’s so right here, and it’s here that Gilder channels his late, great colleague Warren Brookes. Brookes’s optimism about the 1980s was rooted in his belief that the wealth of the mind would trump physical wealth. And it did, with booming results. As the price of a barrel of oil routinely fell into the $7-12 range in the 1980s and 90s, extraction of what was nominally very cheap (think a rising dollar) no longer made sense stateside. Yes, we were very energy “dependent” in the Reagan 80s and Clinton 90s, and it was beautiful. Which was why I’d hoped Gilder would expand on the Brookes/Gilder truth in order to lecture increasingly unhinged conservatives who embrace “Drill, Baby Drill,” “Saudi America,” and numerous other offenses to simple economic reason. In Gilder’s words, “economies stagnate and seize up when investment becomes low-entropy.” Essential as oil is to mankind’s progress, it’s low entropy as evidenced by the backward locales that it’s abundantly supplied from. The sad truth is that George W. Bush’s shockingly dim decision to reverse course on the Reagan/Clinton dollar resulted in a collapse in the greenback beginning in the early 2000s that logically revealed itself in gold, oil, and other commodities representative of wealth that already exists.
The economic consequences of the above have been predictable, and unfortunate. Gold is nearly six times more expensive in dollars than it was in the early days of the 21st century, and oil is predictably up a similar amount. Odious, anti-information slogans such as “Drill, Baby Drill” have won the day over the pursuit of new knowledge in concert with the import of what the rest of the world so ably provided us in the closing decades of the 20th century. Rich as we are now, imagine how much further along we would be if the semi-reasonable dollar policy that prevailed under Reagan and Clinton had continued. Instead, Bush (easily the worst president in my lifetime) pursued a weak dollar illusion that brought on a massive retreat of people and investment into the work (oil extraction) of the past.
Gilder wisely disdains in Life’s early pages the absurd notion of abundance despoiling the earth, and how it has “won the day,” but then global warming theorists talk a good game while doing very little. This isn’t true with the regard to conservatives who claim they’re for free trade, but who are horrified by imports of crude. And it shows up in their analysis. While the genius that Gilder properly ascribes to Silicon Valley is vivified by ever-falling prices for seemingly everything, conspiratorial conservatives claim every decline in the oil price to $60 (five time what it was in 1998) is a sign that Saudi Arabia and Russia are trying to break the back of “U.S. oil” and “frackers” who can only extract insofar as the dollar is very weak to all of our detriment, such that oil is nominally expensive. Can they really be this dim? Was Reagan a Russian or Saudi agent? This question is asked simply because by far the worst decade of all for U.S. energy extraction was the 1980s.
Are there quibbles? Gilder arguably spends too much time on banks, and J.P. Morgan in particular. Gilder is one of the very, very few who routinely points out how economically crippling it is that there’s $7 trillion+ in daily currency trading. He’s so right. Money should once again be low-entropy, or quiet. We don’t talk about the foot or a second because they’re constant, rather we talk about what they measure. Total agreement The quibble has to do with Gilder’s suggestion that banks like JPM want it that way since the fruits of the trading flow to “a tiny elite of governmentally favored financiers” at the expense of enterprise. In reality, Jamie Dimon quickly shut down JPM’s proprietary trading desks when he took over the bank, and he did simply because there’s no valuation growth in what’s ephemeral. After that, the financing of enterprise pays much better. It’s not even close. A weak, unstable dollar is wildly perilous to both banks and investment banks as 2008 reminds us.
Gilder also occasionally went too negative, though not too too negative as he unfortunately did in Life After Google. He writes of a BBC poll revealing that 56% of schoolchildren believe the planet is doomed thanks to global warming. Ok, but the world continues to move toward the coasts allegedly most threatened by warming, and also to where opportunity is greatest. Watch what people do, not what they say. One example of “emergency socialism” cited by Gilder was the horrid lockdowns related to the coronavirus. There’s no disputing that (Gilder wrote the foreword to my book about the lockdown tragedy, When Politicians Panicked), but he would surely agree that if the virus had begun spreading in 2010 versus 2020, there would have been no lockdowns. People shamefully took a few weeks off because they could, in other words. The world wants growth, and Gilder has the answer.
Read this wonderful book to rethink what you think you think. And get ready to change your magic formula of growth. While “low taxes, stable money” is more than worthy, it’s arguably incomplete. If knowledge is wealth, and it is, the true magic formula is one of money as measuring stick, massively reduced government consumption of knowledge-producing wealth, and a zeroing out of taxes on investment without which there is no progress. Knowledge economics beats the hell out of incentive economics.
