The Spirit of Enterprise
Wealth and Poverty.
by George Gilder.
Basic Books. 306 pp. $16.95.
As a work of entrepreneurship, George Gilder’s book has succeeded far beyond the wildest expectations of Gilder himself or his publishers. A year ago, Gilder was known as the author of some rather idiosyncratic attacks on feminism. Today he is the toast of talk shows and claims to be seeking tax shelters for his new-found income. Wealth and Poverty has become a best-seller and the most hotly discussed book in Washington. President Reagan likes to give it away as a present, while budget director David Stockman calls it “promethean in its insights.” With its unabashed defense of capitalism, its attack on the excesses of the welfare state, its emphasis on both religious faith and the family, and its argument for supply-side cuts in marginal tax rates, Wealth and Poverty is also the best single book for understanding many of the economic and social ideas influencing the domestic policies of the Reagan administration.
The first section of Wealth and Poverty is a defense of capitalism against what Gilder sees as three sets of enemies: egalitarians, whose redistributive tax policies stymie the creative potential of entrepreneurs; pessimists, who think unplanned market economies are incapable of handling all the resource scarcities and uncertainties of the modern world; and halfhearted proponents of capitalism, who prefer capitalism to other economic systems but nevertheless see it as morally vacant or, worse, centered on greed.
The great folly of the egalitarians, Gilder argues, is to view wealth as a “zero-sum game.” Together with classical economists for the last two centuries, Gilder contends that there are mutual gains from trade and that one of the keys to prosperity is “the belief that the good fortune of others is also finally one’s own.” But in a departure from classical economics that owes much to the work of Joseph Schumpeter, Gilder sees entrepreneurial innovation as the driving force in economic advancement. What disturbs him most about egalitarian tax policies is that they rob entrepreneurs of the venture capital they need to bring new goods and services to market.
The chief threat to “capitalist ferment and creativity,” Gilder writes,
is taxation with rates so progressive—graduated so steeply to capture increasing portions of larger incomes—that the rich refuse to risk their money. Wealth is withdrawn from productive uses, hoarded in gold or collectibles, or put in tax shelters (businesses of little economic value except in relation to the tax laws).
Gilder’s rationale for cutting marginal tax rates is not to “defend established privilege” or make the rich richer, as reviewers such as Michael Kinsley in the New Republic and Michael Walzer in the New York Review of Books have contended. It is to induce the rich to invest more productively in the U.S. economy—whether through their own efforts or, more likely, by financing entrepreneurs.
A critical assumption here is Gilder’s notion that the world—and in particular the U.S. economy—is full of opportunities for entrepreneurs to exploit once they have the incentive and the wherewithal. Unlike many of the Cassandras who dominate economic writing, Gilder does not worry about the depletion of natural resources. Wealth, he argues, consists in people’s “morale and ingenuity,” not in physical resources, which is why Japan, Taiwan, and Hong Kong, with virtually no resources but their populations, are rapidly advancing while Saudi Arabia with all its oil billions is still an underdeveloped country. Nor is Gilder dismayed by the troubles of the U.S. steel and auto industries; in fact, he sees their decline as a necessary part of the shift to the revolutionary new technologies of microprocessors, lasers, and bioengineering.
Gilder is not bothered in the least by all the risks and uncertainties of the future; on the contrary, he is confident that market economies are best suited to adapt to them. “Socialism,” he writes, “presumes that we already know most of what we need to know to accomplish our national goals.” Market capitalism, by contrast, with its multitude of experiments and its reliance on individual creativity and initiative, allows a much more flexible response to a “world of unfathomable complexity, ignorance, and peril.”
Gilder’s most ambitious defense of capitalism is his effort to ground it in religious faith and altruism. Most defenders of capitalism—from Adam Smith to Irving Kristol—have accepted as a given that the system is propelled by the self-interested profit motive. Not Gilder. For him, “capitalism begins with giving”; he ascribes its origins to such practices as potlatching among the Kwakiutl Indians, where rival chieftains would try to outdo each other in giving away food and treasure to guests, in the expectation that greater hospitality would be returned. In like fashion, says Gilder, the modern entrepreneur “gives” his energy, his imagination, his organizational ability. He willingly sacrifices his time and capital in order to provide a new good or service, even though he knows his rewards are uncertain.,
To make sacrifices in the face of this uncertainty, says Gilder, the entrepreneur must be motivated by some kind of faith. At points in Wealth and Poverty, this faith is akin to what Keynes called “animal spirits,” at points it is simply the entrepreneur’s bullheaded confidence in his own abilities. But at still other points, Gilder thinks the entrepreneur needs “confidence in a higher morality: a law of compensation beyond the immediate and distracting struggles of existence.” Only such a belief in higher morality, he asserts, could have sustained the efforts of the overseas Chinese, the Mormons, and other groups afflicted with economic hardships to improve their lot. Successful capitalism requires not only “faith in man, faith in the future, faith in the rising returns of giving, faith in the mutual benefits of trade.” It also requires “faith in the providence of God.”
In the second section of the book, a critique of U.S. welfare programs, Gilder borrows from the insurance industry the metaphor of “moral hazard,” the “danger that a policy will encourage the behavior—or promote the disasters—that it insures against.” Citing studies by Martin Feldstein, he maintains that “unemployment compensation promotes unemployment.” He asserts that “Aid for Families with Dependent Children makes more families dependent and fatherless.” And he worries that the panoply of welfare benefits now available—AFDC, Medicaid, food stamps, housing grants and subsidies, social, legal, and child-care services—make it economically irrational for many poor people to work.
In place of existing welfare programs, Gilder proposes “a disciplined combination of emergency aid, austere in-kind benefits, and child allowances—all at levels well below the returns of hard work.” In short, he wants to make welfare dependency much less attractive; “in order to succeed,” he contends, “the poor need most of all the spur of their poverty.” Here too, as in his discussion of wealth, a critical assumption is that opportunity abounds for those who are willing to work hard. Gilder is convinced that racism has largely been eliminated from U.S. job markets, and that there are plenty of attractive job opportunities, especially in small businesses. He dismisses the “dual labor market” theories of many economists and social critics who argue that the menial jobs usually available in restaurants, garment manufacture, and other small businesses offer few opportunities for either security or advancement.
Gilder’s hostility to welfare policies is based not only on his analysis of economic incentives but also on his notions of sexual psychology. “By making optional the male provider role,” Gilder argues, “welfare weakens and estranges the prime mover in upward mobility”: the father and husband who subordinates his short-term lusts for the sake of his family responsibilities. “The welfare culture tells the man he is not a necessary part of the family: he feels dispensable, his wife knows he is dispensable, his children sense it”—with a devastating effect on the fragile male ego. “Cuckolded by the compassionate state,” the poor young male has to demonstrate his masculinity on the street—and that leads to crime, drugs, disruption of communities. According to Gilder, “The key to the intractable poverty of the hardcore American poor,” especially blacks, “is the dominance of single and separated men in poor communities.” By lowering welfare-benefit levels, Gilder hopes to bring men back to their families and to the traditional routes by which generations of poor people have escaped poverty: “work, family, and faith.”
In the third and most timely section of the book, Gilder argues that high marginal tax rates combined with inflation are sapping the American economy of its productive potential. When state and local taxes are added to the federal take, Gilder contends that the vast majority of American households face marginal tax rates of at least 50 percent—meaning that “most Americans could expect to keep less than half of any additional earnings they might choose to seek.” This tax burden is a powerful disincentive to work, savings, and other taxable economic activity. Gilder argues that the combined burden of marginal taxes and inflation has fallen most heavily on income from productive investments—and that the U.S. government has therefore been “massively and persuasively telling its citizens and corporations to disinvest in the productive capital of America.”
Instead, Americans have been investing in tax shelters and housing. Homeowners have been able both to deduct their mortgage payments and to find an inflation hedge. The rich, with few opportunities to get richer through productive investment, buy Rolls Royces and live high on the hog, because, as Gilder points out, “the chief effect of steeply progressive tax rates is to lower the price of luxury and leisure in relation to investment and work.” One of the principal purposes of supply-side tax cuts would be to encourage the rich to put more of their capital at risk—instead of spending it on themselves.
Unlike many supply-side enthusiasts, Gilder does not try to deny that marginal tax cuts might be inflationary. But he reminds his readers that inflation rates were fairly high in Japan during that country’s most dramatic period of continuous economic growth. The difference was that the tax incentives in Japan encouraged greater capital formation. For just that reason Gilder is willing to place a higher priority on tax cuts—particularly as they affect savings and investment—than on reducing inflation.
Given the scope and ambition of Wealth and Poverty, it is hardly surprising that Gilder’s arguments are not always consistent, and not always persuasive. If, for example, “faith in the providence of God” is so crucial to entrepreneurship, one wonders why it should also be necessary to cut marginal tax rates. Perhaps entrepreneurs require both faith and incentives—though this would suggest that faith is contingent on a demonstration of success. In any case, Gilder does not fully address the relation between faith in the future and the rational calculation of likely risks and rewards as each of them applies to entrepreneurship.
Moreover, even if faith in a higher morality is a practical necessity for entrepreneurship, this is not the same thing as saying that capitalism itself is ethical, nor does it justify capitalism on religious grounds. By the same token, to say that “capitalism begins with giving” is not to say that capitalism is altruistic. The Kwakiutl chieftains, as Gilder himself points out, “imposed implicit debts on their guests,” who would be obliged to provide more extravagant feasts in return; the gift, in short, came with an expectation of return.
The modern entrepreneur similarly seeks a return, even if he is uncertain what it will be. To be sure, he will achieve such a return only if he is able to provide value to customers, but that is just another way of saying that the market channels self-interest into social purposes. Gilder in no way contradicts Adam Smith’s dictum that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Gilder’s reliance on the element of faith seems to desert him somewhat when he deals with the poor, who perhaps especially need not so much “the spur of their poverty” in order to succeed as they need faith in the future, confidence in their own abilities, a sense that hard work will be rewarded. Unfortunately, his recommendations for reshaping welfare policy do not really focus on ways of advancing the faith of welfare recipients in their future or in themselves.
He does, however, offer some inklings of what might be done. He mentions that “high-technology corporations like Control Data, Borg-Warner, and IBM show phenomenal success when they establish ghetto factories and have the time, patience, and federal subsidies to assemble and train a work force.” He mentions, too, the critical importance of changing the fatalistic messages hammered into so many blacks by social-service agencies. One need not fully concur with Gilder’s contention that racism has largely been eliminated from job markets to agree with him that “nothing is more deadly to achievement than the belief that . . . the world is a bleak and discriminatory place.”
Finally, one misses some hard evidence for Gilder’s hypothesis about welfare and single men. His deterministic division of sexual labor and psychology—man as breadwinner, woman as bearer and nurturer of children—would seem to ignore the experience of most poor families throughout history, where everybody has worked, including young children. There have been plenty of cultures where tightly-knit nuclear families have remained mired in poverty: Gilder himself cites Edward Banfield’s study of this phenomenon in a southern Italian village. The urban lawlessness and anarchy that Gilder attributes to single men was common in U.S. cities long before the welfare state could possibly cuckold them. What is more, a number of the great fortunes of this world have been made by men still single—which suggests that male self-discipline may not depend on paternal responsibilities as much as Gilder believes.
Despite its flaws, however, Wealth and Poverty remains one of the most significant, and gracefully written, works of political economy in years. Hardly a page fails to provoke thought or to challenge some conventional assumption. Perhaps the most striking challenge flows from Gilder’s exuberant optimism concerning the future of the U.S. economy. Gilder does not fret over declining industries; he is exhilarated by the many emerging technologies. He does not worry about a shift to a “service economy”; he sees a coming boom in the productivity of service industries. And the inspiring vignettes of entrepreneurs that dot the pages of Wealth and Poverty make it clear that the spirit of enterprise is still thriving—even though all the tax policies are skewed against it. One can imagine what energies would be released if those policies were changed.