ON POLITICAL BOOKS

...Managers who diversify their businesses into fields they know nothing about, who follow the herd and play by the financial numbers, will fail to create new wealth...

...The secret of its success is ultimately traceable to that society's overwhelming emphasis on social cohesion, its tightly woven network of economic and social obligations...

...This kind of experimentation does not merely respond to already established markets, but creates new ones...

...Americans at the turn of the century thought they could see Horatio Alger stories personified all around them...

...Not only does production experience raise the overall level of skills in the population, but it also can be applied generally, across all kinds of goods and services—not just the latest inventions...

...The stories Gilder relates are inspiring...

...For much the same reason, conventional economics has not yet come to terms with what is known in business-school lingo as the "experience curve...

...Edward Harriman had begun as a $5 per week office boy and now headed a mighty railroad empire...

...All you can do is hope they stick together—or help build a shared commitment so they will want to...

...Maybe his heroes would sooner spend their new-found fortunes on entrepreneurial ventures than exotic vacations...

...We don't build up this sort of experience...

...His ambition became an object of derision (what makes Sammy run...

...And presumably Gilder also should approve of a significant hike in gift and estate taxes, lest all this wealth—intended for daring and imaginative new products—inadvertently find its way to "entitled children ." Neither of these taxes would reduce the funds available to his heroes for their entrepreneurial pursuits...

...They are, in Gilder's words, "mostly outcasts, exiles, mother's boys, rejects, warriors, they learn early the lessons of life, the knowledge of pain, the ecstacy of struggle...

...They surrender their wealth to the sterile knowledge of tax laws, accounting rules, partnership-packages, real estate lore...

...That's why they would rather invest in production experience than in invention...

...His fatal flaw is an inability to distinguish between invention and production...

...But it failed to recognize other, less attractive aspects of laissezfaire capitalism...

...And, according to Gilder, they do it on their own, by themselves...

...the Parkinson brothers, whose imagination and conviction unleash a new era in semiconductors...

...Bankruptcies are a sign of economic progress...

...But the worst villains by far are those who would expropriate the new-found wealth of our heroes...

...And it leads to just those sorts of small, incremental improvements in products and processes that can mean all the difference in terms of price, quality and marketability...

...By the same token, conventional economics tends to view national wealth in terms of items bought and sold, physiCal capital, mineral resources, and other tangibles...

...Basic inventions, on the other hand, don't necessarily alter and enrich the populations in which they occur...

...The system must be flexible enough to allow people to take risks, but the people who take the risks must know enough about the grease and grit of their, businesses to make the risks worthwhile...

...The shelters didn't seduce them...

...The most valuable learning continues to occur across the Pacific...

...Then the citizens of another country—often the Japanese—commercialize it...

...We make money from licensing our technology to them...

...The spirit of enterprise can thrive only where taxes do not...

...All this means that expenses that contribute to the accumulation of knowledge and skills are really investments in the future—even if they fail to produce immediate profits...

...Now the pendulum has swung again...

...Even the collectivist Japanese somehow get shoehorned into entrepreneurial cowboy boots...

...Simon & Schuster, $17.95...

...His compulsiveness came to be seen as a menace to family life...

...It is not, to be sure, an easy task...

...Andrew Carnegie had started as a $1.20 a week bobbin boy in a Pittsburgh cotton mill only to become the nation's foremost steel magnate...

...They have faith...

...John Masters, whose inventiveness makes him an oil magnate...

...But we often have had difficulty turning our ideas into commercial products...

...Milos Krofta, the founder of a sewage-treatment industry...

...Yet to acknowledge this reality would be to mess up the story, to blur the distinction between heroes and villains...

...his antisocial tendencies, a subject of psychological colloquia and frantic parent-teacher meetings...

...Smart...

...Their goal is not a life of leisure and luxury...

...The Capital Cost Recovery Provision embedded in the 1981 tax act further entrapped our poor heroes: it allowed depreciation of rental structures over ten years and commercial buildings over 15...

...They become ensnared in tax dodges...

...The "experience curve" works on the consumer side as well...

...American companies simply don't want to invest in production experience nearly as much as the Japanese because production experience is essentially social...

...They are the left-leaning liberals—the socialists, communards, and intellectuals—who want to redistribute the wealth to the poor via the tax code...

...It is too bad that Gilder succumbs to such rosy visions, because he says several useful and truthful things that get buried under the excess...

...Taxes do not reduce their entrepreneurial ardor...

...True, the Japanese have started to manufacture some of their products in the United States, employing American workers...

...Many economists still assume that, at some point, production costs will start moving upward, toward a "natural" or "equilibrium" price at which supply and demand neatly intersect...

...Gilder's entrepreneurial heroes— and, indeed, most of us—would find that kind of environment stifling and paternalistic, the sandboxes too small, too identical, too crowded...

...They are diverted from their true entrepreneurial callings, forced instead to become real estate moguls so that they can hold their fortunes together...

...Gilder may be too sanguine about the rise in bankruptcies generally, but he is correct when he points out that some bankruptciL may signal risk-taking and experimentation on the way to new breakthroughs rather than economic decline...

...George Gilder understands part of the dynamic of capitalism...

...They start with nothing, Gilder tells us, and build empires by dint of sheer courage and cunning...

...We have always had an abundance of tinkerers and inventors...

...Not much production experience can be gleaned from putting together kits of sophisticated pieces all made in Japan...

...Gilder is equally simplistic in his discussion of the energy crisis, which he calls "a religious disorder, a failure of faith!' As for the economy, he makes the preposterous claim that it has boomed ever since 1978, when Congress cut the capital gains tax (presumably those of us who remember the severe recessions of 1979 and 1981-2 suffer from a "religious disorder...

...Taxes...

...Entrepreneurs must be allowed to retain the wealth they create because only they, collectively, can possibly know how to invest it productively among the millions of existing businesses and the innumerable visions of new enterprise in the world economy...

...Who else would have had an interest in creating such schemes...

...But it strains history and common sense to attribute the present-day successes of these giant companies solely to these lone visionaries...

...We like our freedom...

...To envision these two sides of the experience curve in action you need only consider the recent explosion in Yuppie electronics—pocket radios, tummy TVs, digital cameras, video cassette recorders, home computers, stereophonic running gear...

...Meanwhile, the Japanese forestall protectionist sentiment in the United States, and at the same time create a captive market abroad for their sophisticated components...

...In his new book,* Gilder revives the Alger cosmology—with all its unfortunate excesses...

...America's population of entrepreneurs comprises 30 million people, a near majority of our working citizens...

...There are Cuban immigrants, alienated teenagers, down-and-out bureaucrats, exexecutives...

...It requires that we build and nurture working communities, that we foster collective entrepreneurialism...

...Most economists are content to measure only those parts of the economy that stay static long enough to be measured...

...Gilder fails to reconcile his praise for the lonely genius, the maverick, the visionary who is forever quitting his old job to start something new, with this fundamentally collective component of prosperity...

...Gilder has it right, allowing for his tendency toward hyperbole "The knowledge—of inventors, entrepreneurs, producers, and consumers—which accumulates through the ongoing waves of human experience—is the most crucial curve and capital of industrial progress...

...And this means that an aggressive and courageous...

...Why is this happening...

...Microcircuitry leads to the pocket radio...

...I could go on—hyperbole piled on top of purple prose—but you get the drift...

...By focusing relentlessly on tangible resources...

...They don't raise the overall level of skills or generate broad experience...

...Like his predecessor, Horatio Alger, George Gilder views the world in oversimplified terms...

...But it is well to remember that freedom and community lie along a very wide path—wide enough for many different routes linking one to the other...

...They are the experts and doomsayers: the top executives of huge corporations and banks who invariably lack imagination, the bureaucrats who automatically impose needless regulations, the "entitled children" of America, who think that they have a right to everything they wish for...

...With its circular flows of purchasing power, its invisible-handed markets, its intricate interplays of goods and money, all modern economics...

...and the exchange of pre-existing goods and services, conventional economics overlooks thisvital center...

...The Japanese well understand this new reality...

...It exists in the relationships among engineers, fabricators, technicians, and marketers...

...Collective entrepreneurialism' Gilder's emphasis on the dynamics of capitalism is well placed...

...We get bogged down somewhere between invention and production...

...They inspired a generation with a single, unfailing theme: in America it was possible to rise rapidly from rags to riches...

...resembles a vast mathematical drama, on an elaborate stage of theory, without a protagonist to animate the play...

...The Spirit of Enterprise...

...Gilder is correct, for example, in his criticism of mainstream economics for failing to acknowledge the central importance of innovation...

...America continues to lead the world in scientific discoveries, technical breakthroughs, Nobel laureates...

...They are building cars in California, trucks in Tennessee, stereo equipment in Arkansas...

...They thereby ignore the most dynamic parts...

...The complex components that go into the products are all made in Japan...

...Gilder may be correct...

...Their heads are turned by all the tax credits, depreciation benefits, interest write-offs, and financing options...

...They simply are better able to turn the technology into inexpensive, high-quality products...

...Gilder's villains are more abstract than his heroes...

...And only a comparatively few of us gain very much experience inventing the new technologies to begin with...

...All manner of villains would try to entice him into a life of debauchery or to rob him of whatever small earnings he had amassed...

...There were more than one hundred of them in all—in 20 million copies— with titles like Bound to Rise, Luck and Pluck, Sink or Swim, and Tom the Bootblack...

...Some of Gilder's heroes don't make it...

...As customers of a new product gain experience using it, they may find new uses for it...

...This is not a recent phenomenon...

...the more consumer experience, the more sales...

...Laws and rules that favor established companies, certified borrowers, immobile forms of pay, pensions, and institutionally managed savings will be biased toward the status quo...

...American managers won't make these social investments because, by and large, they are incapable of—or unwilling to—transform their enterprises into such communities...

...It is just possible, of course, that some of these entrepreneurs helped create the loopholes in the first place...

...His lack of formal education became a drawback in a society increasingly deferential to professional expertise...

...For example, data on productivity improvements—increases in output per unit of input—typically overlook improvements in quality and reductions in costs...

...They metamorphose from producers of goods into manipulators of finance...

...We learn that their economic successes have been due to the ambition and vision of a few courageous men—Masaru Ibuku, founder of Sony...

...Because, if freed from the burden of tax, these heroes will reinvest the money they earn, creating a cornucopia of new products, services and jobs—and thereby generating far more social wealth than would government using the same funds...

...But in that case Gilder should have no objection to a steep tax on personal consumption, rising steadily in proportion to the amount that one spends each year on self and family...

...Their chief desire," says Gilder, "is not money to waste on consumption but the freedom and power to consummate their entrepreneurial ideas...

...His search for self-fulfillment seemed out of place in a society beseiged by wars, depressions, the vestiges of racism, and inner-city enclaves of permanent poverty...

...The fact is that for a broad range of products costs can keep falling...

...The lower the price, the more consumer experience...

...His heroes brim with energy, vision, and daring...

...This, together with the 25 percent tax credit for rehabilitating commercial buildings and the fact that real estate is about the only tax shelter that allows purchase with non-recourse loans, has made the temptation overwhelming...

...It is a reality which requires substantial investments in our people—in their capacities to learn together...

...It becomes a necessity...

...the pocket radio, in turn, becomes the "walkman...

...the walkman evolves into a whole new world of exotic electronics for the mobile upwardly-mobile...

...There is J.R...

...Gilder's heart bleeds for these misled moguls...

...We end up buying our technology back from them—within cars, steel, robots, computer-aided manufacturing systems, computer chips, and all manner of Yuppie electronics...

...Our backyard tinkerers and inventors, by contrast, often work alone or in very small groups...

...Making products is a complex social activity, depending upon unique organization...

...It ignored the facts that Rockefeller was destroying competitors and monopolizing the nation's oil supply, that Carnegie was brutally suppressing the first stirrings of organized labor, that Harriman was driving people from their farms through questionable legal tactics, that the gap between rich and poor was widening, and that America's cities were festering...

...By standard measures the computer and semiconductor industries constitute relatively unimpressive parts of the economy...

...Not even Ronald Reagan's tax planners can escape Gilder's wrath...

...As the century wore on, the popular image of the rough-and-tumble entrepreneur grew increasingly anomalous within an economy of conglomerates, pension funds, money-center banks, labor unions, government agencies, and defense contractors...

...Gilder also warns us against capitalist entropy...

...the more sales, the lower the price, and so on...

...America's cowboy entrepreneurs are terrific at coming up with novel products, new services, innovative processes...

...But our hero would prevail on strength of character alone, and by the end of the story he would be a wealthy and powerful man...

...Robert Reich teaches business and public management at Harvard University...

...You can't patent it...

...Blueprints devised in Palo Alto reach Seoul and Taipei almost as soon as they reach Nashville...

...Experience in making products generates more social wealth than does inventing them...

...The entrepreneurial hero is back, to close out the century he began, and George Gilder is here to celebrate him...

...They designed them, lobbied for them, financed the elections of members of Congress who fought for them...

...what about MITI, that instrument of state intervention...

...and Soichiro Honda...

...Having overvalued the entrepreneur in an earlier era, we came to undervalue him...

...It's a form of collective entrepreneurialism...

...The crux of Gilder's argument is that government should not confiscate the money these entrepreneurs amass...

...All these shelters, and many others, seduce the entrepreneur from his chosen field and into alien activity" (my italics...

...We need to ensure that capital flows easily to small businesses and new ideas...

...Konosuke Matsushita, founder of the firm that bears his name...

...These are assembly operations...

...The Alger cosmology presented us with a noble ideal—a society where imagination and effort brought their just reward...

...they seduced Congress into enacting the shelters...

...But Gilder's heroes do not need substantial wealth to fuel their ambitions...

...Take Japan, which has had relatively few major technical breakthroughs, but which continues to beat us at production...

...This would be a fine trade except for the fact that along the way, a large number of them gain a great deal of knowledge and experience about how to make products that people want, extraordinarly cheaply and well...

...Each story was essentially the same...

...But in fact, our most precious national wealth is found in the potential carried around within people's heads— their skills, creativity, imagination, capacities to solve problems, abilities to work together...

...You can't enslave your newlyexperienced workers...

...Then why worry about taxes...

...But his stories, like those of Horatio Alger, mask a social reality having little in common with the derring-do of their heroes...

...Put simply, this is the tendency of manufacturing costs to fall as volume increases—due not just to economies of scale but also to accumulated learning about how to improve the production process...

...But look again...

...manufacturer could set his prices far below current production costs, in anticipation of a large market that would, in turn, justify a much larger production run—and far lower production costs...

...Simplot, who rises to become Idaho's potato king...

...John D. Rockefeller had risen from a $4 per week clerk's job in a commission merchant's house to become one of the world's richest men...

...They make money by selling the technology back to us, encased within terrific products...

...They eschew conventional wisdom...

...The pattern has been repeated constantly over the past 20 years and continues today: we invent the basic technology—solid-state transistors, radial tires, automobile stamping machines, open-hearth furnaces for making steel, robotics, computer-controlled machine tools, videocassette circuitry, semiconductors...

...Their motivations are spiritual rather than crassly material...

...Interestingly, Gilder makes no mention of these alternative means of raising public revenues...

...And yet, these changes may be far more telling than simple increases in the output of identical commodities...

...In the years ahead we will, I hope, continue to explore a variety of routes for gaining and sharing prosperity while maintaining liberty—in our companies, our politics, our voluntary associations...

...A fatherless, penniless boy—possessed of enormous determination, faith and courage— would seek his fortune...

...Even the semiconductors that the Japanese are starting to fabricate in the United States represent the most standardized segment of that market, for which all the jobs are relatively routine...

...They can flow across national boundaries at the speed of an electronic impulse...

...It does require a certain amount of imagination and daring...

...Here Gilder vents his rage...