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Gilder – Market Economics and the Conservative Movement

Market Economics and the Conservative Movement

By: George Gilder
George Gilder – Philadelphia Society Address
June 1, 2004


The
following speech was given by Discovery Institute Senior Fellow George
Gilder to The Philadelphia Society at their national meeting in
Chicago, Illinois on May 1, 2004.


This is a great celebration. Forty years of the Philadelphia Society
devoted to the concept of ordered liberty under God. Through this it
reconciles the two great themes of conservative thought: free markets
and transcendent order; economic freedom and cultural stability. Bill
Buckley caught this reconciliation very early in his first book, God
and Man at Yale, an attack on the atheistic socialism, which was
taught at Yale during his time there. He focused on the atheism as
much as the socialism. They both reflected the same fundamental
disorder or fallacy.

Midge Decter, your new president, led me through a crucial transition
of a book project I was doing called, The Pursuit of Poverty at the
time. And, The Pursuit of Poverty was transformed into Wealth and
Poverty under Midge’s guidance. Crucially, when she gave me a
prepublication copy of Jude Wanniski’s, The Way the World Works. And
he grasped the supply side but perhaps not the deeper links to
transcendent order. And the key focus of Wealth and Poverty was to
reconcile these two, sometimes conflicting, branches of conservatism.

Now, at the Discovery Institute, with my friend of 40 or more years,
Bruce Chapman, we are again carrying this essential concept of ordered
liberty, this reconciliation of cultural conservatism and economic
conservatism forward with the focus on my part on science and
technology, the implications of the new findings in science and
technology for a deeper understanding of the themes of ordered
liberty.

I think there’ve been two great findings of twentieth century
thought that are deeply relevant to this theme of ordered liberty and
politics in society; two great scientific findings. One is Information
Theory. Now, Information Theory was conceived by Claude Shannon at MIT
and Bell Labs in the late 1940’s. He was focusing on determining how
much information could be transmitted down a particular communications
channel. And the key insight was that information, real information,
consists of surprise and he measured surprise in terms of what he
called entropy as an analogy to a concept in physics. The crucial
insight was that information is not equilibrium but disequilibrium.
Information is not predictable data. Information is unexpected data.
Information is newsówhat you don’t expect. A crucial insight of
Information Theory, absolutely central, is that it takes a low entropy
carrier to bear a high entropy message. In other words, you have to
have a predictable carrier in order to bear a lot of information. And
that’s why virtually the entire information economy rides on the
electromagnetic spectrum on world wide webs of glass and light. As a
form of electromagnetic energy, light is perfectly predictable. It’s
predictable sign waves. The key to transmitting lots of information is
to have a perfectly predictable vessel of that information.

Although this information theory was designed for communication
systems it also applies fully to economic systems. What you need is
economic systems that are predictable; that can bear a lot of the good
news, the unexpected boons of human creativity. Creativity always
comes as a surprise to us. If creativity was not surprising you could
plan it and socialism would prevail. But surprise is what defines
creativity. It is news. It is unexpected data. In order to have an
environment that can result in the surprises of human creativity you
need to have a predictable, stable environment of law; stable law,
stable families, stable money, stable property. These are essential to
a productive economy. So, Information Theory is an absolutely vital
finding that underlies almost the entire information economyódoes
underlie the information economy. And it also fully supports the
Philadelphia Society’s concept of ordered liberty, which combines
the low entropy of order with the high entropy of creativity. The
crucial point, however, is that an economy is an information system
not a material system. So, it’s ruled by the laws of information not
by the laws of matter. And that is a critical insight.

The second key discovery about information during the twentieth
century was Kurt Gˆdel’s demonstration and Gˆdel’s proof that no
mathematical system is coherent or self-sufficient in itself. Any
mathematical or logical system is necessarily dependent on premises
beyond itself and irreducible to the system. In other words, Gˆdel’s
proof sustains the second great theme of ordered liberty of
transcendent order under God. And, indeed, Kurt Gˆdel imagined that
he was proving the existence of God. You can read a lot about Kurt Gˆdel
without understanding this fact. My daughter, who’s just written a
300,000 word book on physics that’s just been accepted by Knopf in
New Yorkómy 25-year old daughteródiscovered this about Gˆdel in
the course of researching her book on Entanglement Theory, but I
won’t go into that.

The key point is that every logical system and ultimately all logic is
reducible to mathematical propositions and is dependent on premises
beyond itself. And order is necessarily transcendent. It’s not
reductionist and that is the critical insight. It is hierarchical, not
reductionist.

So, this means that the world began not in a primordial soup, it
beganó”In the beginning was the Word”ónot a primordial soup.
These divergent themes of conservatism: ordered liberty and
transcendent order really have been fully and deeply confirmed by the
most important scientific discoveries of the twentieth century. A lot
of conservatives sort of adopt an intuitive resistance to the
discoveries of science without a full grasp of how deeply they affirm
conservative insights and how leftist scientismóthis sort of
materialist reductionismóhas been completely overthrown by the
twentieth century scientific discoveries.

So, information is disequilibrium not equilibrium. This is one of the
problems of much economics because economists always tend to favor
equilibrium. They seem to believe that somehow the correct system is
always in balance. But, I believe that science tells you that
economies should have balanced law, familiesóall theseóproperty
rights and stable money. But the basic forces of growth are
disequilibrium. The effort to reduce economics to equilibria is deadly
and destructive. I think it took a long time for the Republican Party
really to recognize this fact. For a long time the Republican Party
resisted lower tax rates in the name of a totem of a balanced budget
from the time of Hoover through Eisenhower and Nixon and Ford.
Equilibrium economics prevailed. It wasn’t really until Ronald
Reagan that we had a president who reconciled these two great
principles of ordered liberty and brought disequilibrium to the fore.

A couple of years ago I gave a speech to the Philadelphia Society
exposing a lot of myths about Ronald Reagan’s regimeóhe did not
reduce spending, of course. Most people know that. But, more important
he understood that economics is not a zero sum proposition. You lower
the rates and the regulations and render them more predictable and
stable and you get more revenues and more creativityóentrepreneurial
creativity. There is a popular conservative half-truth that is worth
confronting. That half-truth is that the burden of government is
represented not by tax rates but by spending levels. This seems like
an innocent misconception that somehow the best way to calculate the
burden of government is by the total spending levels.

But this is a profoundly wrong proposition. Indeed, it is only with
low tax rates that a nation can sustain the levels of spending
necessary to support the defense and national security that is
necessary to defend ordered liberty. For the entire 40 years of the
Philadelphia Society’s existence countries with low or declining tax
rates have been able to increase their government spending three times
faster than countries with high or rising tax rates. If you want low
absolute levels of government spending the best thing to do is to
enact high tax rates and oppressive regulations because these will
succeed in suppressing the surprises of entrepreneurial creativity on
which human triumph always depends.

Today, just before I left for this meeting I picked up the latest copy
of Regulation magazine, which is the Cato Institute’s publication.
Emblazoned across the cover of this magazine was an attack on Bush’s
tax cuts. Said they caused terrible disequilibrium and they would
ultimately be deeply destructive to the economy. And the problems
these tax cuts would cause, according to Cato, were a budget deficit,
implicitly a trade gap, a social security and generational
catastrophe.

All these assumptions which a supposedly libertarian organization
could propound and emblazon as their key insight cover story are just
totally misconceived. This article implies that balance is good for
trade and budgets and stuff. Balanced tires or a balanced
dietóthey’re deeply desirable. But a balance of trade or a
balanced budget is not necessarily desirable at all. Indeed, a trade
gap signifies a capital surplus. It means that people want to send us
money. It means they trust the stability and order of the U.S.
economy. You can see how this works when you realize that one-third of
global GDP is in the United States. The United States generates fully
one-third of global GDP. But the market caps of our companies
represent 57% of global market cap. In other words, people all over
the world want to invest in the United States and this is because the
United States has the most stable environment for investment. It has
the deepest and most creative capital markets. It’s got the largest
and most liquid stock markets and it has the rule of law, we hope,
rather than the rule of lawyers which threaten it.

So, the way to think of this is: a foreigner with a dollar can do two
things with it. He can buy an American goodóbuy an apple exported
from the United States, for exampleóor he can buy an asset in the
United States. If he purchases the apple, he eats it and we don’t
have it anymore. If he purchases the asset in the United States, we
keep it. And he registers a deeper commitment to America than he does
in buying an apple, or a side of beef or any other kind of American
product. When we begin to run a trade surplus I begin to worry. The
last real trade surplus we had was about 1978 and that was in the
midst of a terrible crisis when people no longer trusted the American
dollar or the reliability of American economic leadership under the
Carter years and Ford years, unfortunately.

The budget deficit is a similar proposition. The budget deficit is 500
billion dollars. That’s not nice on the surface but it’s dwarfed
by the increase in American assets that has simultaneously occurred as
the deficit increased. While the budget deficit increased to 500
billion dollars we had a five or six trillion dollar increase in
assets. One of the problems with many economists is they can count
liabilities but they can’t count assets. They’re one-armed
economists, as they say. The net assets of American households now are
some 42 or -3 trillion dollars. The gross assets are 52 trillion
dollars. The assets of the total economy is over 70 trillion dollars.
In the context of these huge asset numbers the 500 billion dollar
deficit in the federal budget is actually a trivial factor. It’s
dwarfed by changes in the value of assets. Indeed, the balance of
payments is governed chiefly by capital movements in the modern
economy. Capital can move much more quickly and readily than can goods
which face all sorts of obstacles of distance. So it’s capital
movements that drive it. And if the United States has a favorable
environment for capital we will tend to thrive regardless of the
budget deficit of this order.

But, if the United States has bad and destructive economic policies it
won’t matter what kind of budget balance we achieve at the same
time. It’s not just overseas holders of dollars who will try to sell
them but domestic holders of dollars. The idea that there’s
something special about Chinese or Japanese who hold dollars that
differentiates them from Americans who hold dollars is misconceived.
George Soros and Warren Buffet can sell dollars just as fast and as
efficiently as anyone in China or Japan or Europe. What’s critical
is to maintain the institutions of ordered liberty in the United
States.

The social security crisis in America is similar. What it essentially
means is we’re living longer. That’s the essence of it. And
that’s a good thing, entirely. As we live longer and are healthier
we can be more productive for more years. And the solution to the
problem of productivity among old people is really information
technology. You can do indoor work with no heavy lifting in the
contemporary economy. Even if your sight and hearing is deteriorating
you still can, with the advances in contemporary technology, continue
to be a productive contributor to the U.S. economy. So, this sort of
catastrophe theory that there’ll be too few workers to support old
people as time passes is just a misconception. Indeed, a further
solution, of course, is Professor Harburger’s, which is implemented
in Chile of allowing a great private pension component to the social
security system. And you hope that ultimately the private system with
thrive enough to render the public deficit irrelevant.

So, the real solution is entrepreneurial creativity, which is a force
of disequilibrium, “creative destruction,” said Shumpeter. This is
a great era of entrepreneurial creativity in the United States. The
latest data is fascinating on this subject. The proportion of total
jobs, which represents self-employment or limited liability
corporations as a share of total employment has risen from 5% in the
middle 1980’s; only 5% of all jobs in households surveyed were
self-employment or individual proprietorships. During the 1990’s it
rose to 9%. Today during the first years of 15% capital gains taxes
and 15% dividend taxes, 31% of all employment and households surveyed
is self-employment and entrepreneurial employment of this kind.

One of the problems with the dismal science, what makes it dismal is
that economists always tend to ignore the entrepreneur. And, thank the
Lord, the entrepreneurs ignore the economists. So, we can get some of
the life and surprise of disequilibrium.

The triumph of the entrepreneur is ultimately a moral triumph as well
as merely a material triumph. Because, he ultimately is an information
agent. The essential rule of enterprise is the golden rule. The good
fortune of others is always your own. That’s the fundamental
principle of capitalism. Where you get rich by serving others and
where you, above all, hope that others succeed. Where always the
biggest untapped market is the poor. The billions of people around the
world who are now at last ascending toward the bounties of ordered
freedom that the Philadelphia Society upholds. It’s not greed or
self-interest but the service of others that propels the advances of
capitalism. Equilibrium economics is an economics of death.
Disequilibrium, entrepreneurial economics, the economics of surprise
and creativity is the economics of life. The key message of ordered
liberty is “choose life.”

Thank you very much.

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