Gilder's Capitalism Without Tears

...Gilder's Capitalism Without Tears_ Wealth and Poverty By George Gilder Basic Books 306 pp $16 95 Reviewed by Barry Gewen Writer/Researcher, ILGWU Political Department "We are being made aware that the organization of society on the principle of private profit, as well as public destruction, is leading both to the deformation of humanity by unregulated individualism, and to the exhaustion of natural resources, and that a good deal of our material progress is a progress for which succeeding generations may have to pay dearly " The statement is not that of a socialist or environmentalist or any kind of Leftist It comes from no less a self-proclaimed reactionary than T S Eliot, thus illustrating the problem George Gilder sets out to address For capitalism, says Glider, has no true friends Writers of the Right and the Left might disagree on many things but on one thing they agree The capitalist system lacks an ethical foundation Here John Kenneth Galbraith and Alexander Sol-zhenitsyn share common ground Irving Knstol shakes hands with Tom Hay-den Proponents of capitalism like Knstol are feeble champions, according to Gilder, advocating the system not for what it is but for what it is not, awarding it only two cheers Their argument is that despite scvercshort comings, capitalism remains better than anything that could replace it Yet this, as Gilder notes, is haidly food lor true behcveis, and in Wealth and Povertv hcattempts to provide slrongci sustenance a icinvigora-lion ol lailh in the system through a total oflensive that aidenlly asseils capitalism's virtues Utopia is possible now, if only we knew it and allowed unbridled individualism to perform its glones without hindrance from welfare state regulations "Unleashing" is one of Gilder's favorite words Such intellectual energy expended for such a cause is highly unusual, and Wealth and Poverty has already created quite a stir A prominent convert to the new, more robust, conservatism has applauded the book in the pages of the Wall Street Journal Young Republican luminaries like Budget Director David Stockman and Congressman Jack Kemp have been publicly appreciative In high circles Gilder's book is "must reading,' prompting liberal economist Lester Thu-row to call it "the Bible of the New Right " Of course, the convinced can always be expected to cheer one of their own, but what makes the commotion surrounding Wealth and Poverty so remarkable is that Gilder is not a conservative at all He is impatient with institutions, suspicious of traditions, uneasy with authority, unsympathetic to old wealth He worships change, apparently for its own sake, and sees risk as one of life's necessary dangers Some of his ideas are very odd, indeed "All certitude is sham," he opines—and when he is not proposing tax cuts for the wealthy, he is celebrating irrationality and praising chance as " the vessel of the divine ' If Gilder can be called anything, it is a Nietzschean romantic, although he also carries about him a whiff of pre-World War I Italian Futurism Around 1911 Mannetti declared "Put your trust in Progress, which is always nght even when it is wrong, because it is movement, lite, struggle, hope " That whirligig sentiment would fit easily alongside Gilder's own admonitions to "unleash the forces of creative destruction that can save the world " As Europeans learned m the '20s and '30s \iews of this kind can lead in very dangerous di-i ections, especially when thev are taken up bv the powerful But those with an eye toward history can relax The influence II ealth and Poverty has had is not philosophical Glider has really written two books One contains more-or-less practical proposals for reducmg taxes for the rich and social programs for the poor—in short, the agenda Ronald Reagan has put forth less extremely in his economic package The other, with its peculiar notions about the "mdeterrmnacy of all human life," probably baffled the author's influential readers from the start, and any vestiges of this thinking they may have earned away with them were undoubtedly drop-ed the moment the daily rough-and-tumble in Washington began There is little room amid Congressional wheehng-and-dealing for talk about "the economy of faith " (Still, unsympathetic readers can have a fine time trying to imagine the look onDaveStockman'sfacewhen, in the middle of a discussion of the Federal Budget, his friend George begins dnfting off into revenes about the' realm of dark transcendence where can be found all true light and creativity ") Although the more practical book has had the impact, it does not particularly break any new ground, Gilder simply argues his points with more zest than most Investment is what makes our economy go, and if today the economy is not going very fast or very far, the reason is that the wealthy, on whom investment depends, are reluctant to risk their funds Between high taxes and inflation, they lose more than they gain from their investments, and in increasing numbers are looking for protection through tax shelters The more adventurous speculate by purchasing commodities, gems, foreign currencies, gold, or participate in the burgeoning "underground economy " Meanwhile, new enterprise, the source of jobs, growth and prosperity, is being strangled Since the rich alone create wealth through their risk-taking investments, it is only bv cutting their taxes that we can conquer stagflation Here is Gilder s argument in a nutshell "In recent vcars steeply progressive rates, exacerbated bv inflation, seem to have steadily reduced productive investment among the upper economic classes in many Western countries and thus have forced a steady enlargement ol the lax burden on the middle class [because the wealthy, by earning less through investment, are paying less in total taxes] This situation, if one is lucky, ends in middle-class tax revolts, but it is caused by upper-class rates and, ironically, will be worsened by reducing taxes on the middle class alone Cuts in middle-class rates will merely make the system more progressive and reduce still further the productivity of the rich The middle class will have to support the government one way or another This is the dead end of egahtananism to help the poor and middle classes, one must cut the tax rates of the rich " These ideas have become more familiar since Ronald Reagan moved into the White House They grow out of the new conservative creed called supply-side economics, to which Gilder is a firm adherent He and his supply-side comrades are certainly correct when they point out that stimulating demand without increasing supply is a recipe for inflation The Keynes who half-senously suggested, as a way to pump up demand, that governments bury bottles filled with money so that "pnvateenterpnse" could dig them up again today sounds mischievous at best And no responsible person could oppose stepping up the supplies of food, housing or medical services to bring down the cost of these essentials Gilder takes the supply-side insight too far, however, going to great lengths to show not only that supply is critical to a healthy economy but that in the order of things it must necessarily precede demand His reasoning is that whereas demand is inert, passive, supply is innovative "Producers play a leading and initiatory role in eliciting, shaping, and creating demand Investment decisions will be crucial in determining both the quantity and the essential pattern of consumer purchases"—as if the mere production of pyramids were enough to insure their consumption Yet Gilder never successfully disentangles supply from demand, and struggles mightily only to demonstrate that the egg comes before the chicken—unless it is the opposite that he has proven The supply-side theorists themselves have been engaged in much debate The purists insist that a proper tax cut alone will generate enough revenue to pay for itself, the others maintain that spending cuts have to accompany the tax reductions lest we risk greater inflation through larger government deficits Glider appears to agree with the more extreme group He chides conservatives for failing to "come to terms with the meaning of debt," noting that the Japanese have been able to carry government deficits twice as large as America's (as a percentage of GNP) with no serious effect on the inflation rate He cites, too, the oft-overlooked fact that the Federal debt as a percentage of GNP has been dropping steadily since World War II There are times when one is apt to mistake Gilder for an un-regenerate Keynesian Conveniently, though, Gilder also happens to be in favor of spending cuts, albeit not for straightforward economic reasons, so he is spared the problem of taking sides in the argument that divides the Reagan people Gilder is less worried about budget deficits than about the negative effect government spending has on the poor themselves Social programs destroy families They encourage fraud and the shirking of responsibilities They prevent people from learning that "the only dependable route from poverty is always work, family and faith " Elsewhere, Gilder writes that "in order to succeed, the poor need most of all the spur of their poverty," and, as a friend, he is eager to see that the spur is as sharp as possible He would cut welfare, he would reduce unemployment compensation and disability benefits, he would scale down Social Security benefits, he would eliminate the minimum wage, and there is the suggestion that he would revive child labor Next to him, Reagan looks profligate One might note in passing the incongruity of Glider's recommending that the wealthy get more money and the poor less in order to motivate both groups to work harder, or his belief that the "spur of poverty" prods effort among the working classes whereas the spur of inflation encourages only criminality among investors But the real question is what we could realistically expect from the elimination or drastic reduction of many of the cornerstones of the welfare state Gilder argues familial stability, more productive labor and renewed faith in the capitalist system Common sense suggests increased familial strife, higher crime and ever more dangerous social pathology, divisions and alienation In any case, Gilder's passion for spending cuts is secondary His main point remains the unleashing of the wealthy class "In the 1980s, the United States must remove the tax burdens and paralyzing protections and subsidies from the private sector, and release its energies, even in the face of conclusive mathematical demonstrations by the most eminent conservative economists that the result will put us on 'the road to national ruin '" One need be neither Jeremiah nor Arthur Burns to be skeptical What would the wealthy do with the higher incomes Gilder wants to provide9 Would throwing money at the rich lead them to invest productively or to purchase still more gold, antiques and Swiss francs9 Past supply-side cuts, in the form of investment credits for business, have not stimulated great outpourings of funds, and people less persuaded than Gilder that supply creates its own demand might wonder why anyone would want to put money into new equipment and machinery when the economy is currently running at only 75 per cent of capacity Assuming the wealthy did decide to invest, who can guarantee that the money would not flow overseas to set up factories where workers make one-tenth of an American wage1 Foreign investments overseas by manufacturing industries have increased dramatically since the early 1960s, and account at present for more than one-fifth of capital expenditures by American companies Other questions abound Does investment automatically lead to growth9 The evidence suggests not In the 1950s, when investment averaged around 9 per cent of GNP, the economy grew at a yearly rate of 3 1 per cent, in the '60s, when investment rose to over 10 per cent of GNP, yearly growth fell to 2 9 per cent, and in the '70s, when investment held at around 10 per cent, yearly growth declined further to 1 4 per cent Moreover, with the Commerce Department saying it has been radically underestimating true investment levels, the problem seems to be not how much but where Since companies spent $100 billion over the last five years simply to acquire other companies, one must ask whether scarce investment funds are being effectively employed Even if Gilder is right, to paraphrase Mannetti, he may be wrong If investment leads to the purchase of new machinery and higher productivity, it could also result in net job losses through technological displacement You don't have to be a Luddite to worry that limited numbers of new high technology positions replacing thousands of labor-intensive jobs could have a negative impact on the poor, regardless of their effect on the Bureau of Labor Statistics' productivity tables In other words, investment that is not targeted or carefully controlled can do more damage than good, weakening demand, increasing industrial concentiatton and reducing job opportunities Before the wealthy arc given any moic money loplav with, the government might well considci tightening (he strings on what thev al-leadyhave Gildci says Iimdsaicbeing wasted in tax shelters The most direct solution would seem to be icimn nig the sliclleis Wlialcvci disagreements one may liav c witli Ciildci \ piaelical policv pi o-posals, at least llicv ollci room lot aigument Of the other book contained in Wealth and Poverty, the philosophical rumination, the justification of capitalism, there is little one can say Gilder states "The crucial rules of creative thought can be summed up as faith, love, openness, conflict, and falsifia-bihty The crucial rules of economic innovation and progress are faith, altruism, investment, competition, and bankruptcy, which are also the rules of capitalism The reason capitalism succeeds is that its laws accord with the laws of mind " In his Preface, Gilder says he first propounded these ideas around dinner tables and during late-night conversations, and he thanks everyone who helped him get his philosophy into print With the exception of one person who urged him to cut, his friends and relatives were much too kind...