Originally published: 1981
282 pages
Chapter 27

WEALTH AND POVERTY


George Gilder
 
Primarily because of some spectacular individual failures, and despite three centuries of inspiring success, capitalism does not always engender warm, soft feelings in people. George Gilder opines that capitalism's deficiency in creating a positive emotional response is as much the fault of the observer's knowledge as it is of the system's defects. As proof of that, when Wealth and Poverty was first published and extensively reviewed, Gilder noted that "the central theme of the book had not been grasped, even by my closest intellectual allies in the conservative movement. Indeed it was missed by all the book's reviewers. This failure was so widespread I was forced to conclude it was . . . my fault." In a second attempt to achieve his original purpose-a useful explication of modern capitalism and its effects on society-Gilder offers the updated edition synopsized here. The point of Gilder's experience, that even the most precise and succinct explanation of any theory or philosophy can be misconstrued or even wholly misunderstood if the public's mindset is at odds with its premise, is something skeptics of all hues should keep close in mind as they are asked to consider taking a road less traveled.
     The principal intent of Gilder's effort in Wealth and Poverty is to investigate two aspects of modern economics: the logic, machinations, and rationale of private enterprise, and the effect of government on a free market system (with particular attention to taxation).
     For Gilder, as for Adam Smith and all those who have honestly investigated competitive free-market economics, the core of capitalism is inherently (but not exclusively) self-interest. It is not greed in

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a negative sense, for if this were the heart of our capitalistic interrelationships neither consumers nor producers would be very interested in participating. Self-interest's beneficial essence is a form of mutual sustaining; "I will do well for myself if I do well by others."
     Capitalism's engine is the division of labor. Its fuel is profit. Essentially no one, except those who choose to live on a primitive level, can create a self-sustaining life. This results in a need for personal and commercial cooperation.
     As Gilder notes, the necessary variety of objects and services required in a modern economy is well supplied through the division of labor. In a free enterprise system after each person acts individually to create something of value (whether working alone or under the umbrella of a larger enterprise) he or she engages in "marketing" their skill or product. The free interaction with others who offer different skills and products establishes an "open" market where exchange is (essentially) uncontrolled. Each hopes to profit (in the broadest sense) by means of that interaction-the goal being to achieve a personal level of independence. Each wishes to become self-sustaining through mutually beneficial but primarily self-interested exchange.
     Gilder offers the following in explaining Adam Smith's comprehensions:

               [I]t is not from the benevolence of the entrepreneur that we expect
               to profit, but from the interaction of each of us with regard to our
               own interests.

     Enlightened self-interest, Smith's concept and phrase, is what makes the system work. The division of labor basic to capitalism results in everyone organizing coincidentally-not intentionally-and that unplanned cooperation becomes reciprocally beneficial simply by default.
     Unfortunately, in offering his explanation Gilder uses the word "altruism" to define and explain the mutual cooperation and profit inherent in a successful capitalistic system. This word's modern meaning and use, "the practice or philosophy of devotion to the welfare or best interests of others," when utilized as an explanation of the foundation of capitalism, somewhat confuses the topic. It makes Gilder's larger point marginally more difficult for some readers to comprehend. Ludwig von Mises, in Human Action (Chapter 40), dissects the motivations behind capitalism and suggests that, in a market economy,

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               Everybody acts on his own behalf; but everybody's actions aim at
               the satisfaction of other people's needs as well as at the satisfaction
               of his own.

     Gilder's attempt to raise these motivations to the level of altruism, a word that connotes self-sacrificing subservience to the greater good of others, creates some ambiguity, especially in relation to the concept of profit, an equally integral part of capitalism. It is enough off the mark that it can foster an unease in the comprehension of his unquestionably valid point. If we "lower" the definition of capitalistic enterprise to express it as a community of interests, one's own and those of others, the essence of everyone's mutual efforts may be better understood.
     As was noted earlier in this book, capitalism sometimes gets a bad reputation because of the actions of that small minority who actually operate outside its boundaries. This is an anomaly that deserves some attention. It must be stressed that such deviants as the crooked financier, the dishonest salesperson, the slick huckster, or the outright thief not only do not typify free enterprise, they operate in opposition to it. These parasites abuse the open market by contravening it. That these charlatans get as much press as they do skews the impression of capitalism to the detriment of everyone who participates honestly. This is particularly obvious when one considers that on any given day there are literally billions and billions of free-market transactions, all of which are fair and open and mutually benefiting to the parties who participate. The number of honest transactions so dwarfs the dishonest players that their marginalization-within the system, not with regard to the individuals affected-should be recognized. However, much to the detriment of society such recognition and perspective would not serve the needs of the media (who know better but do not, like an insolent teenager, act as though they do), so the actual size of the miscreant population is largely ignored or buried and media exploitation of their mostly trivial acts continues unabated. (Regarding the issues of both criminal activity and legally permitted yet unethical behavior that can take advantage of the public's ignorance and/or greed see Wealth of Nations [Chapter 12] and the introductory section to this book "Self-Governance in an Open Society.")
     The successful entrepreneur is the person who realizes and acts on the fact that he must satisfy his customer by offering good value for a fair price, thereby ensuring repeated patronage and a solid reputation

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that will draw others to his products. As Gilder notes, the often-widespread misunderstanding of how the system works leads to negative reactions when we view capitalism out of its context. And the context of capitalism is people, not profit. After defining capitalism's foundations, Gilder changes directions slightly and brings to the fore a little-noted economic reality. His observation had widespread political consequences, thus its importance yet today. His contention is that naked consumer demand is not the force that creates the free-market sequence of foresight, invention, production, distribution, sales, and consumption. Instead, he maintains that the process begins with the conjecture and ability of the risk-taking capitalist to create supply. If a product doesn't exist there usually isn't voluble clamoring that calls for its creation (think of in-vitro fertilization, Internet dating services, international air travel, or the internal combustion engine). The public's imagination is usually not that inventive. Instead, a new product or service appears pursuant to the efforts of a visionary producer who often risks all in the hope of capturing the consumer's heart. Without the creativity, efforts, and expertise of the producer and the support of capital financing formed out of someone's previous profits, there is no supply. This understanding-called supply-side economics-came into focus during the presidency of Ronald Reagan.
     Gilder notes that a supply-side economy requires that incentives be in place to encourage the entrepreneur to take the risk to create something novel, improved, less expensive, etc., while in the bargain creating new jobs and hoped-for profits. As a free-enterprise system becomes over-regulated and subject to high levels of taxation (remember, if not controlled, government grows inexorably) there comes a need for adjustment to the tax system and the bureaucracy to allow the capitalist to see the advantages and potential success of attempting something new or different. Mostly that simply means lowering tax rates to free up funds that formerly went into government coffers. It also means reigning-in regulators who stifle both invention and competition because they do not understand enterprise as a concept, and whose administrative franchise has expanded over time for too many reasons to iterate here.
     When taxes are lowered and remain low and without fluctuation capital becomes available to finance industry; new products, services, and concepts abound. (With regard to an unpredictable tax structure: the business person thrives on the certainty of government intentions

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and is cautious when government roots about for small changes that are usually political, and mostly ineffectual in increasing real revenue.) With lower taxes the economy expands-to everyone's benefit, but especially to the benefit of the government because increased economic activity brings in greater revenues than were collected before at the higher tax rates. This fact is one that must continually be brought to the fore as it is misrepresented often-from the city desk to the broadcast booth, from the political stump speech to the halls of Congress. But it is also a fact that must be understood in its details.
     A diversion to politics is worthwhile at this juncture. In the thirty years since Gilder first offered his theories, political rhetoric in this arena has gone to extremes in almost every direction possible; yet there is still just one distinct issue with which we are dealing, viz., which economic design will best allow the free market and government to work together. Arthur Laffer is an economist who in the early 1970s conjured the Laffer Curve and publicly re-offered the common sense notion that as taxes are lowered economic activity increases (his insight had first appeared in economic writing as early as the fourteenth century). This results in increased revenue for the taxing authority when a larger economic footprint is taxed at lower rates. In 1961, when John F. Kennedy began his presidency, the highest marginal income tax rate was 91%. That means that above a certain income
level the government took $9.10 of every $10 earned. A Democrat Congress, at Kennedy's urging, reduced the rate to 70%, and over the course of the next 20 years the mark was further lowered to 28%, and then raised and lowered again in the ensuing 30 years. It rests at 35% today (2012). During that five decade period the American economy experienced periods of both boom and bust. However, what is obvious to anyone who looks at the details is that what occurred in the economy at any given time was not solely the result of tax policy but was buffeted by many elements such as crises in oil prices, the beginning of stateless terrorism as a global reality, the massive increase in federal spending as a result of President Lyndon Johnson's multibillion dollar Great Society programs, President Barack Obama's multitrillion dollar bailout, stimulus, and health care programs, etc.
     At the turn of the twenty-first century the political conversations regarding this subject are once again about the actual effects of lower tax rates. However, these conversations are sometimes disingenuously attempted in a false economic vacuum and are often presented in simplistic, black and white terms, which is unfortunate for the discus-

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sions but convenient for the politics. The fact is that tax rates and their effects and consequences, like any other aspect of government policy, are subject to a vast array of forces. Here are three of the basic issues (in exactly the political vacuum noted above) that determine whether lowering tax rates brings in more or less revenue to the government:
    
     A. The rate in effect at the time lower rates are proposed and how much of a reduction is contemplated. Lowering the personal income tax rate from 91% to near or just above a 28% level increases economic activity and brings a net gain to the treasury (absent any significantly changed government or social circumstances). The massive strength of the American economy, known as the engine that pulled the world along for much of the last half-century (abetted by continuously expanding free trade policies), is example enough of this proposition. Lowering the rate from 35% to 31% generally will not induce the same effect in the same measure, thus secondary considerations will also affect what happens. Lowering it from 35% to a flat rate of 19% would likely expand economic activity and increase tax revenues to a significant extent because of both the lower rate and the disappearance of tens of thousands of pages of tax regulations that also stifle the free market.
     B. What taxes are being lowered. (The federal government currently imposes hundreds of different taxes and fees.) The area where the tax applies will determine how economic activity is affected and thus whether there is a net gain or loss of revenue. If capital gains taxes are lowered from 28% to 15%, as was done during the last decade, economic activity in that arena will increase dramatically and there will be a net revenue increase in that sector. If they are lowered from 18% to 15% the effect may actually be a net revenue loss-that is, there may be some increased activity but not enough to offset the 17% decrease in revenue that was generated at the former level of activity.
     C. To what purpose the revenue is being put. If Congress lowers taxes but increases spending (usually as part of the political bargain that allows the lower rates to be implemented) because it expects greater revenue as a result of the reduced tax rates, the effect on the actual revenue stream may be doubly negative; first because the populace sees that the increased revenue is being used only to enlarge government (something

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of which the voting public does not approve) and is not being applied toward reducing previously created debt; second, because when the dual realization
hits home that government is not only going to get bigger, but past excess isn't going to be paid back, people will understand that the reduction in taxes can only be temporary. Their incentive to increase economic activity only to have that activity taxed more heavily in a few years is thus itself reduced, if not flattened or even reversed.
     While decreased tax rates usually bring in more revenue, those revenues have never kept up with government spending.  (From 1965 to 2012 federal spending increased every year.  The last time the national debt was paid in full and the budget was balanced was 1835.) When the public sees no reduction in spending it becomes cynical about tax reductions, spending, and the governing class itself
     Of course, the fact that spending is very difficult to reduce is a given because the politicians want it both ways—credit for lowering taxes and credit for increasing both the size and number of government programs.  Once the political class realized it could cut taxes and increase spending (obviously resulting in ever-greater deficits) without paying for it at the ballot box, a cynical partnership was born and yearly trillion dollar deficits became an acceptable, to them, reality.  If budgets are to be balanced it must be accomplished by cutting spending because the power to spend for political gain and personal aggrandizement breeds on itself.  It is more than an elixir, it is an aphrodisiac.  Spending must reassert itself as a principled exercise, not a political one.  At that point taxation will begin to resolve itself.

     The political games being played today regarding the issue of taxation are far too complex to fully investigate by means of Gilder's book. Briefly, however, the following factions are vying for control: There are those in Congress who want to "starve the beast" of government by keeping taxes low so there is simply less money for government to spend. A second group will not stop spending even if there is less revenue, for spending is their key to continued political power. Each group intends to overwhelm the other, and both simply allow federal deficits to grow-in unconscionable amounts-while each blatantly seeks to force the other to succumb to fiscal blackmail to reduce the

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deficits they both created. This battle is pure power politics in its ugliest form.
     There is an opposite question here as well, one also too broad for any serious consideration in this volume but which needs to be addressed even if only superficially. It asks what effect raising taxes has on the people, the market they operate, and government revenues-although based on real history the answers seem somewhat plain. The point is that lowering taxes doesn't automatically raise revenues any more than raising taxes does because there are too many other (mostly political) factors that have a strong effect on economic activity.
     What's a body to do? As Jean Bodin observed in the sixteenth century, Rousseau noted in the eighteenth, and Wilhelm Ropke commented in the twentieth, we must design economic policy to fit mankind, we cannot expect mankind to conform to economic policy. The latter demand is simply a fool's errand, but one often undertaken by those who understand little about the human condition and even less about the free market.
     There is a quite legitimate conversation that must take place regarding levels of taxation and realized revenues before sound policy can be implemented. However, that dialogue cannot occur in a milieu of accusation, or disingenuous black and white statements regarding complex calculations that involve both human nature and fiscal possibilities, nor can it occur where political goals are squarely in the way of anything resembling fair economic discussion.
     The truth for Gilder is both plain and simple: low taxes, fewer regulations and less government intrusion into the free market result in greater economic activity, which will increase government revenues. Conversely, more of any of these elements reduces economic activity, and more of all of them makes a significant difference in how well the whole operates-and how much revenue the government receives. Yet, in this arena what will work best for the citizenry and its goals is now almost solely and unfortunately a political question. That means distortion, exaggeration, and indictment will abound-to the detriment of everyone.
     As was noted in the introduction to this book, there were those at the Constitutional Convention in 1787 who were opposed to allowing the national government the power to tax. From our twenty-first century perch it is easy to see how well they knew of what they spoke. If we had left taxation to the states the competition among them to keep taxes low and thus attract and build economic opportunity would

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have kept legislatures within the bounds of reality. We know this is true because we see it happening currently in the U.S. as individual states try to attract business with favorable tax rates and structures. With no competition and a virtually unfettered power to tax (essentially no check or balance) the national government increases the revenue it can collect and its equal (or greater) unfettered ability to spend. It has become an entity over which the electorate has no control except that effected at the (now mostly ignored) ballot box. Of course, what America would or would not have become without the power to tax at the national level is an entirely different and equally broad query. As noted above, all of these issues are far too extensive for this treatise, but they are necessary elements, foundational elements, in determining how we tax, and govern, ourselves.
     There are two further and equally consequential facts: first, the real need to regain control of and eventually reduce government spending in order to keep the system itself viable, and second, the effects of fiscal deficits (incurred increasingly as tax revenues do not meet legislative mandates) on near and long term economic stability.  The citizens of the United States, particularly the next three generations, now face, at the local, state, and national level, somewhere near $110 trillion (not billion) in unfunded retirement, healthcare and other liabilities payable to ourselves.  This debt continues to grow each year.  That is an untenable burden, but it exists.  As noted above, the only options to resolve what has been created are higher taxes and/or reduced spending, which means fewer services.  New taxes have failed to solve the ever-growing cost of government for more than eight decades.  When rates are raised and some revenue is realized, all levels of government simply spend more—that is the Faustian bargain that has been struck time and time again.  These results are pure electioneering, the endemic need to get re-elected, reflected in the art of supposedly being responsible and caring at the same time and collecting a vote either way, or both.  It is cynical, self-serving, and very bad economics. 
     Of course there is a third, even more devastating option—the federal government can inflate us out of this spectacular burden by simply printing money that doesn’t exist.  That eliminates any need for either increased taxation or program reduction.  If taxation and inflation, in tandem or separately, are the choices to solve the existing problems the effects on future generations and the nation are incalculable.  The dollar (and all property owned by every citizen) will be devalued, the dollar’s use as the measure and foundation of international finance

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will first be diluted and eventually eliminated (because of the international financial market’s own protective reaction), and the strength and ability of the nation to either prosper or defend itself will be significantly reduced.  Not to consider the details of these issues makes either the reader or the political aspirant or any current office holder unprepared to be effective and likely to be, as many have noted, part of the problem, not the solution. 
     Finally, there is a practical reason why increased federal deficits/debt will not adequately address this circumstance: debt can only be created within reason because the market where future debt is to be sold will ultimately not participate as it becomes obvious that the notes being offered have little chance of being repaid.  As Ronald Reagan humorously but entirely accurately quipped when asked about the size of the deficits during his presidency, “I’m not too worried about the deficit.  It’s big enough to take care of itself.”  What Reagan was observing is that the national debt can only grow as far as the market will allow; it cannot expand to whatever level the political class demands.  That means real answers to political and fiscal questions will have to be found.  The 2011-2012 fiscal crises in Europe have established on the ground exactly what the foregoing predicts for the U.S.   How these elements of national insecurity will be resolved on either side of the Atlantic can only be guessed at for now, but as the football aphorism notes with regard to the forward pass, three things can happen when one is thrown, and two of them are bad.  The same goes for the political options of higher taxes, reduced spending, and inflation.
     Unfortunately for our future generations, how the politics, much less the payments themselves, will be accommodated are large questions that are yet being ignored. The longer we let them fester, the worse will be the treatment-including real economic disaster or revolution by other than law and negotiation. These fiscal issues are called the third rail of electoral politics (meaning that any politician who tells the truth about them will be defeated if not tarred and feathered as anti-American) thus the lack of political will to address them. In simplistic fashion, increased taxes (generally on the "unlimited" resources of the wealthy) will be the first (political) response. Gilder's point in all of this is that tax increases are counter-indicated and would be fully inadequate to solve the problems created by unrestrained growth in government.
     To return to the sub-point of this discussion: the increased federal income raised by Gilder and Laffer's model is intended to be used to reduce previously incurred government debt, or at the very worst, to

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stabilize government activity at its current levels and keep inflation in check; the revenue is not supposed to further increase the size of government. However, if those with political muscle see matters differently then government grows yet again. If an increased (largely unrealistic but politically expedient) government intrusion into society on the spending side is the result of the increased revenues, lower taxes will eventually only result in further deficits. It is important to understand that in the hands of some politicians the lower taxes get the blame for this effect, but they are decidedly not the cause, obviously the increased spending is. That such a link between lower taxes and increased debt is made at all is political dishonesty of the first rank.
     All his adult life President Reagan recalled something he learned during the Depression: "We cannot spend our way to prosperity." It is equally understood we cannot borrow our way there either.  Winston Churchill observed a like reality: "I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." We would all do well to recall both men's observations as discussions regarding fiscal issues come to the fore.

*      *      *

     Gilder's exposition of supply-side economics is more than just an attempt to create a climate where more revenue finds its way to the federal treasury. His real goal is to define how to change the culture of government itself by changing its foundations. Gilder is obviously aware that since the Great Depression the legislative process has been controlled by the liberal redistributionists of the Left, as well as other hand-wringers whose concern for the have-nots often does not extend beyond public posturing largely aimed at claiming a mantle of virtue. Gilder looks at social inequities and sees the need for something more than liberal efforts to tax wealth to level the playing field to make all of life equal. He knows that such actions are intellectual attempts to subdue both society and the economy, but that they instead cause incremental economic contraction on a broad scale and endemic destitution on the individual level.
     Gilder observes that modern liberals seek melioristic if not socialistic results bought with capitalism's wealth. The negative consequences of simply taxing wealth as a solution to life's inequities are candidly and eloquently discussed in Bertrand de Jouvenel's The Ethics of Redistribution (Chapter 28) and Frederick Bastiat's The Law (Chapter 7). But, Gilder

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independently builds on the substance of both authors' observations, which coincide with his own. After exposing meliorism's premises, and failures, he (like Hayek and Freidman before him) addresses the fundamental fallacy of liberal tendencies toward redistribution that simply substitute one form of inequality for another.
     Ultimately, inequality is intractable, a fact that percolates to the surface in almost all of the books presented in this colloquium. But inequality is as beneficial as it is universal, something liberals refuse to recognize publicly but ceaselessly take advantage of in their political maneuvers. Inequality's beneficial effect comes to the fore in the genius, drive, imagination, fearlessness, and dedication of each individual who has created the world's wealth, raised the standards of living, and done all of the labor required to make dreams come true-from those in the mine shaft or on the shop floor, to those in the laboratory or boardroom. As these truths have gained public recognition, "solving" inequality in the twenty-first century has been less and less the object of surmise of social philosophers. These philosophers have begun to understand the benefit to society of recognizing inequality's overwhelming positive contributions, not just its sometimes-negative image in the wrong politician's hands.
     Of course, using superficial allegations of inequality as a populist ploy has not left the repertoire of the politically starved or the demagogues who seek to achieve power by embracing specious economic policies and goals. Gilder precisely dissects the programs of these self-aggrandizers, while coincidentally giving substance to economic realities that will allow a rational approach to the benefits of a supply-side market economy.
     Gilder's conclusion, that any attempt at redistribution of wealth always results in further inequity (especially for those whose resources are being redistributed) is inescapable. But he is equally
ready to offer that some redistributive assistance is both justified and essential in the twenty-first century. For Gilder-as for most First Principles authors who address the economically less well-off-this assistance should as often as possible be privately constructed and administered, as it was during the ten thousand years prior to the mid-twentieth century. If aid is directly fostered by local agencies (where those who give and those who receive can observe what is working and what is not) the public component cannot as easily grow, nor can it as easily drive out private initiative-which is invariably more effective, nimble, and less expensive than government subsidies. Above offering help on a basic

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level, the premise that government redistribution is fairer than free economic interplay is simply false, despite its prominence in many a left-leaning political campaign. In the end, the only real commodity to distribute is opportunity.
     Gilder takes this insight slightly a field from merely examining capitalism. He finds that any economic configuration-not just free enterprise-results in inequality. The nature of the free market and the foundation of its ultimate utility is that it is transparent. This allows everyone to equally understand its operations and make decisions in their own best interest. Natural cause and effect are overt and the inevitable inequality isn't simply the arbitrary result of bureaucratic or legislative caprice, political influence peddling, or even populist or dictatorial whim.
     Gilder finds that after the market has met the essential needs of all members of society-sparingly and rationally abetted by various forms of both public and private social safety nets-each person must engage the system on his own. Government should only be allowed minimal intervention to ensure fair play. He notes that we are first individually responsible for what happens to us, so that government should not have to intrude in our efforts and relationships on more than a very basic level. Given a moment's thought, that's pretty much what all of us want anyway, because pride and self-esteem are basic components of human nature. In this vein see Charles Murray's What It Means to Be a Libertarian (Chapter 19).
     Of course, determining where government should be further involved is where much disagreement arises. Conservatives argue that additional government interference beyond what is described above would simply recreate inequity. Liberals, through both their rhetoric and their programs, contend otherwise. They appear to purposely ignore the harm done to the whole system when the energy of capitalistic impulse-better termed the human spirit-is suppressed through redistributive taxation and ignorant or even foolish regulations. All of these skew the market, invite both the law of unintended consequences and corruption to blossom, and cause social devolution toward the culture of dependency in those oppressed by paternalistic government.
     Wealth and Poverty arrived on the New York Times Best Sellers list and came to be called "the bible of the Reagan revolution." President Reagan had been telling the public that government could raise revenues by cutting taxes, thus freeing the economy from high levies while

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maintaining government services on an even level. At the time, as this seemed an inherent contradiction even though it was historically a given (every federal tax cut from Presidents Coolidge to Kennedy had resulted in increased government revenue by means of increased economic activity), people bought Gilder's book to have the riddle explained. The answer was simple and hardly revolutionary. In addition to what has been noted previously in this synopsis, Gilder also observes that as lower taxes revitalize entrepreneurship numerous additional changes occur, especially higher rates of employment. Gilder examines how capital migrates from tax shelters to more productive
investments; why tax avoidance declines; finally, he observes that individuals previously disengaged from the job and capital markets re-enter them because opportunities abound. As a direct consequence of higher levels of employment, a reduced need for government assistance results. As government now costs less it needs to tax less.
     This simple cycle has to be reinvented and reinvented and reinvented because liberal demagogues insist on penalizing the "rich" with high taxes (as though they had done something venal in creating the various aspects of our prosperity), thereby driving down tax revenues, drying up the supply of capital needed as fuel for economic activity, and creating exactly the reverse economic result from what they intend. One of the main reasons this result ensues is that although the tax rhetoric is aimed at the wealthy, the reality is that such schemes invariably must be applied to the top half of income earners-who currently pay 97% of all income taxes-in order to have their supposed effect. Clearly the liberal attitude of "let the wealthy pay for it" is both counterproductive and not what happens when tax rates are raised. As Gilder explains, the alternative offered by supply-side theory looks not just attractive, but obvious as well. If tax policy is to be discussed rationally it must be done in terms of economic activity, not individuals or a class of people, or social goals. Economics as a craft creates opportunity, politics as a methodology most often does the opposite-it wants to effect control.
     American liberals beginning with the last half of the twentieth century were like their pro-Communist "intellectual elite" forebears of the 1930s and '40s who sought wholly equalitarian goals. In both cases, the mistake was that of arguing against human nature, especially the principle of individual incentive that is the foundation of economic success. This error was often not an honest one. Populist political speech, no matter how disingenuous or unsupported by facts, was simply too useful to demagogues seeking to be elected or re-elected.

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Sadly, the economic illiteracy of the citizenry abetted the office-seekers in this enterprise. This fact won't be changed easily-that is human nature-thus vigilance is the tool, if not weapon, of choice in the ongoing battle surrounding the free enterprise system.
     In Wealth and Poverty Gilder is especially hard on the post-World War II liberal economists, particularly those who attempted to justify the free lunch of President Lyndon Johnson's Great Society. These "experts" pontificated in the service of liberal politicians who instituted programs that failed in the face of human realities. Gilder notes that populist and pessimistic economists such as Lester Thurow and John Kenneth Galbraith put forth a weak argument in favor of government control of the economy. Their premise was that the human race had "seen its finest hour and that the future looked bleak," and that government's centralized control was needed to create any chance of economic stability. To expose this kind of narrow pessimism one needs only to step back to secure an historical perspective. Optimists like Reagan did just that. Spurred on rather than daunted by modern challenges, they were optimists because they appreciated what people had done in the past and saw what they could do in the future. The history of the human spirit makes negative contentions such as those of Galbraith and Thurow look particularly paltry and even silly. The economic history of the world since they offered their views and theories at mid-century makes them look like something even less.
     How and where wealth will originate (if only so it can be taxed) if there is no mechanism in place to create it is a question liberals never ask, much less answer. The question appears not even to have occurred to them. The political success of 1960s liberals bred hubris and led to an almost
complete inversion of economic truth. They thought simply because they had been elected that their programs would work; however, voter validation is often a bad test of free-lunch economics. The destructive economic and social force of President Johnson's Great Society programs, and, by inference, the confiscatory tax policies and deficit spending necessary to support them, was individually deconstructed by former New York Senator Daniel Patrick Moynihan when he was assistant secretary of labor in the early 1960s. His 1965 report, The Negro Family: The Case for National Action (the premise of which was that welfarism did more to destroy families than encourage them), abetted the social sea change that culminated in the unprecedented political ascendancy of conservatives by the end of the twentieth century. Yet, as Gilder observes, such "intellectuals" as Galbraith are still

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given room for their diatribes in the popular press because liberals simply refused to brook any argument debunking their theories no matter how much experience has shown them to be bankrupt.
     As he approaches the end of his discussion, Gilder dissects inflation, perhaps the most dangerous effect of bad government policy. Inflation has many elements, and the details and permutations of inflationary theory and practice cover a range too broad for substantive discussion in a synopsis such as this. But Gilder wants the reader to have more than a passing acquaintance with the subject. He devotes a chapter to the evolution of inflationary assumptions and follows inflation's history from John Maynard Keynes's assertions that tax increases don't cause inflation (they do), to the effects of deficit spending (also highly inflationary).
     In the modern era it has become clear that inflation is caused principally by government's inappropriate expansion of the money supply, effected almost invariably to cover deficits created by legislative largesse. The unfortunate part is that fiscally illiterate politicians often do not see, or do not want to see, the connection between their actions and economic distortions, distortions that almost invariably act to the great detriment of the participants at the lower end of the economic scale. This, of course, fits nicely, albeit paradoxically, into the goal of raising taxes in the first place-so the government has more revenue to help the disadvantaged-a group the legislators have conveniently enlarged by their very actions. Unfortunately the pool of resources to aid this enlarged population has shrunk with equal vigor as tax increases stifle economic activity.
     As Gilder makes clear, the government's deficit expenditures ultimately must be made good via myriad inflationary practices: generally new or increased or even hidden taxes; or through the expansion of the money supply; or through the sale of government debt (with accompanying repayment of principal and interest that requires even more inflationary tax revenues), or with bankruptcy. Government spending is not and has never been an effective answer to either a faltering economy or grand schemes of "social justice" because the expenditures must be paid back sometime, someplace, somehow. That requirement invariably generates a less, not more, robust economy.
     A weak economy is made strong by increased economic opportunity, never by increased government; when an economy is strong, economic and social justice are achieved on their own terms, not by redistribution of society's income. Yet inflationary government policies are always a

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convenient political solution and are seen as a quick fix-which they might actually be in the short term and the narrow view-thus their siren song is ever-inviting to the political class. But, in the long term, the quick fix has to be paid for by otherwise productive dollars taken from the remaining citizens whose opportunities are thus reduced, as is the power of the economic engine those citizens
drive. (For further discussion of the negative consequences of short-term solutions to long-term problems, see Economics in One Lesson by Henry Hazlitt [Chapter 24] and The Theory of Money and Credit by Ludwig von Mises [Chapter 34].)
     Gilder's theories and prescriptions in Wealth and Poverty make sense because he bases them on human nature not wide-eyed and idyllic Enlightenment-era "rationalism." Human inventiveness and the economic rules of incentives and risks are his guideposts. Although no theory in its execution can be without side effects and dead ends, supply-side free-market economics seems more sensible and offers hope for more progress than does any rationalization for government intervention and control.

About the Author
Born in New York City in 1939, George Gilder attended Exeter Academy and Harvard University. While at Harvard he studied under Henry Kissinger and helped found Advance, a journal of political thought that he represented in Washington, D.C. after his graduation in 1962. Four years later he co-authored The Party That Lost Its Head, a profile of Republicans in turmoil. He later returned to Harvard as a fellow at the Kennedy Institute of Politics and as editor of the Ripon Forum. In the 1960s, Gilder served as a speechwriter for various officials and candidates, including Nelson Rockefeller, George Romney, and Richard Nixon.
     In the 1970s, as an independent researcher and writer, Gilder began an inquiry into the causes of poverty; this research resulted in his writing several books, including Wealth and Poverty. He pioneered the formulation of the theories of supply-side economics while serving as chairman of the Lehrman Institute's Economic Roundtable, as program director for the Manhattan Institute, and as a frequent contributor to the A.B. Laffer economic reports. After the publication of Wealth and Poverty he consulted regularly with key figures in the Reagan and first Bush administrations. Gilder is presently a Senior Fellow at the Discovery Institute in Seattle.

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