A review of The Spirit of Enterprise, by George Gilder
The twin subjects of George Gilder's latest book are announced in the title: "enterprise" and "spirit." Although the theoretical basis for capitalism was developed over two centuries ago by Adam Smith, Gilder does not believe capitalism has ever been adequately justified, however successful it has been in practice. The defenders of capitalism usually treat it as a "system"-efficient, progressive, free, but impersonal. Nineteenth-century capitalism became Darwinian and Malthusian, arguing for absolute economic freedom as the necessary precondition for a kind of relentless progress in a world that resembled a cosmic state of nature. Even in our day, orthodox conservative spokesmen for free-market economies often sound grim and uncompassionate.
The conventional defense of capitalism has always been unsatisfying, most of all because of its low view of people: Mankind's deepest characteristic is selfishness. The world is moved by a greed Leo Strauss once described as the "joyless quest for joy." The most successful are said to be the most self-interested, driven by their passion to accumulate huge profits. There is some inevitable law of nature, an "invisible hand" that allows the profiteering of the greedy to trickle down and unintentionally benefit the rest of us. Private vice equals public benefit or, as one parodist put it: "'Every man for himself, and the devil take the hindmost,' said the elephant as he danced among the chickens."
Is it any wonder that many of the poor and the young reject an economic system that has no place for acts of generosity, benevolence, and giving? The strongest case for socialism, by contrast, was never its economic efficiency or growth potential but its appeal to community, morality, and human solidarity.
The radical left and traditionalist right, then, tend to agree about the "low moral stature" of capitalists. The unsatisfactory moral basis of capitalism guaranteed that socialism would always remain as a theoretical alternative which, when armed and in practice, would pose a threat to freedom. Gilder intends to provide a more satisfying moral defense of capitalism.
Gilder prefers speaking of "enterprise" because it focuses on the importance of the central actor of capitalism, the entrepreneur. An economy is not self-moving; it needs enterprising individuals to generate new products, new ideas, and new knowledge. Successful entrepreneurs cannot be understood as selfish individuals. Rather, they are givers, overflowing with talents and skills, the results of which the world needs. Talented men and women would be selfish if they refused to place their potential in the service of society.
Gilder's case for the benevolence of the entrepreneur has been misunderstood by some: perhaps it can be seen more clearly by considering great statesmen. Any theory that tries to make self-interest the highest motivation of statesmen fails, not because there are no selfish political leaders (or businessmen), but because the success of the greatest cannot be accounted for by mere self-interest. Winston Churchill spent years outcast in the "wilderness" for his stubborn unorthodoxy when it would have been so easy for him to play the good party man and assume a modest government post. A self-interested Abraham Lincoln could have let the "wayward sisters of the South" leave the Union and pretended to be a peacemaker rather than prosecute the war that ended forever the stain of chattel slavery. Great statesmen follow the model of the good shepherd, for whom narrow ambition is transformed into a comprehensive desire for the good of all.
In somewhat the same way, a merely "selfish" entrepreneur cannot achieve great success. Gilder notes that "entrepreneurs who hoard their wealth or seek governmental protection from rivals or revel in vain consumption or retreat to selfish isolation [are] relics of the feudal and static societies of the precapitalist era." For those who claim that their superiority entitles them to privileges and reject equal opportunity for all, capitalist freedom only frustrates their effort to gain without giving and avoid risk and sacrifice. An Andrew Carnegie, for instance, who made and lost entire fortunes and donated millions of non-tax-deductible dollars to philanthropic causes, is unintelligible if greed is mankind's deepest passion. Calvin Coolidge, who well understood the benevolent character of free enterprise, said of Carnegie that "his chief aim in life was not acquisition but bestowal."
The insight that allowed Gilder to develop this argument was his recognition, or rediscovery, that wealth is not simply the accumulation of material goods. The quantity of matter in the cosmos, after all, never changes or increases. Wealth arises only by giving matter new forms that make it useful to people. Almost any material substance-even grains of sand, the material basis for the computer microchip-can be wealth. "Wealth consists not chiefly in things but in thought," Gilder writes, "in the ideas and applications which confer value to what seems useless to the uninformed."
The misunderstanding of the nature of wealth as a material "thing" recurs throughout history. And observers have continually replied to this misunderstanding. To quote Coolidge once more, "In the last analysis, what the workman sells is his intelligence."
It is no coincidence, either, that Gilder, like that once-popular President of sixty years ago, emphasizes the damage to incentives for capital formation and work effort caused by excessive tax rates. What Gilder calls the "invisible yield of enterprise," the "metaphysical capital" of capitalism, erodes and dissolves under excessive marginal taxation, stopping the expansion of real wealth. The rich, to be sure, are not impoverished by high tax rates; they simply reinvest in nonproductive shelters, diminishing the gain to society from the productivity of taxable capital investments.
One profoundly mistaken and misleading result of the misconception of wealth, according to Gilder, is the narrow concentration of professionally trained economists on static measurements of material goods and services. Econometric analysis, which tries to quantify the science of human behavior, focuses on mathematical considerations while the entrepreneur is thinking about quality. Econometric studies measure marginal changes; entrepreneurs look for radical breakthroughs. Econometrics design models to understand the past, while entrepreneurs undermine them to affect the future.
This conflict of views is the core of Gilder's book: It is the theme of the central two chapters Gilder calls "The Euthanasia of the Entrepreneur." The false lesson inculcated by an economic science that forgets the qualitative process of technological innovation and entrepreneurial creativity is that capitalism can do without capitalists.
In two devastating pages of discussion of business schools (pp. 146-47), Gilder argues that, "preoccupied by the incalculable maximization of self-interest," business school faculties "show a pathetic incapacity to comprehend the essence of entrepreneurship." The imprint of the econometric statistical approach soon appears in the conservative marketing strategies of Fortune 500 giants with their five-year "growth" plans. If that planning sounds as if it derives from managed economies, we should not be surprised. Typical business administration school course work, charges Gilder,
stress[es] the amoral mechanisms more prominent in static or socialist systems than in a growing capitalist economy. Business schools thus tend to turn out cynical manipulators of existing values rather than entrepreneurial creators of new value.
The most serious damage wrought by macro-economic model building is the distortion of public policy. Officials whose entire outlook is shaped by quantitative analysis base their budget and policy recommendations on econometric predictions.
In his enthusiasm to emphasize the significance of what cannot be quantified, however, Gilder seems to reject quantification altogether. This leads him to dismiss unemployment and business failure data as measures of economic vitality. Unfortunately, this mistake could create a serious misunderstanding of the author's moral intention. (Think of New York Governor Mario Cuomo's persistent claim that supply-side economics is social Darwinism.) Unemployment can be a moral catastrophe for any jobless person with a family to care for, and persistent high unemployment statistics suggest that there are systematic policy failures requiring economic reforms.
Europe's economies, according to Gilder, have been devastated by misconceiving the nature of economic growth. The continent of Europe has had no net growth in jobs for over a decade. Mesmerized by mountains of irrelevant economic data, policymakers contemplate small marginal increments in wealth, earnings, and productivity as if they were isolated from the effects of rising tax rates and complicated regulatory policies. In fact, the gains made by the new technologies and ideas launched by enterprising men and women are keeping European welfare states afloat. By drawing attention away from the actual process of creativity and enterprise, policies determined by statistical analysis make entrepreneurship increasingly difficult.
Gilder's deepest insight, I believe, is his recognition that the limits-to-growth thinking of many intellectuals results from their socialism and materialism, not to mention atheism. Conversely, Gilder draws a connection between faith in a supreme power and the capitalist view that growth is potentially unlimited. He has, to use a Marxian phrase, turned the left-wing prejudice against the materialism of capitalists on its head. The idea that there are no limits to growth really comes from the impossibility of ascribing a priori limits to the human mind, which seems capable of finding an infinite number of ways to make material things into useful wealth. Materialists, by definition, reject the existence of immaterial beings like the human mind or soul. Since there is a limit to the amount of physical matter in the universe, "the contemporary intellectual, denying God, is in a trap, and he projects his entrapment onto the world. But the world is not entrapped; man is not finite; the human mind is not bound in material brain." The difference between pessimistic socialism and optimistic capitalism turns, ultimately, on the difference between atheism and faith in transcendence.
Yet there is a problem with Gilder's response. Although it is absolutely essential to correct the long neglect of the role of the mind in the creation of wealth, he seems to have answered one exaggeration with another. Isn't the mystery of human existence precisely the combination of the spiritual mind in the physical body? Wealth reflects that mystery because it too is a compound of spiritual form and material substance. To correct the philosophy of materialism, one need not flee to that of spiritualism.
Quantitative econometrics and the dogmas of materialistic science are intimately connected because the former tries to understand an essential human activity in subhuman terms:
In the hierarchies of nature, the higher orders cannot be reduced to the lower ones. . . . Atomic structure, in fact, tells us little of value about the material objects of our lives, little about the workings of an engine, virtually nothing about our organic existences, and nothing whatever about the operations of human consciousness or human society.
Entrepreneurship is not simply a means of satisfying desires for material comforts. It is also a spiritual process of learning, a source of new knowledge, an epistemology advancing the frontiers of science. Growth is limited only by the frontier of current knowledge, which is being pushed back every day by enterprising individuals creating new markets much as scientists develop new theories.
Like the method of science which can demonstrate that some ideas are false, entrepreneurial activity provides a "testable hypothesis" which can be disproven by the market failure of a new product, by economic loss, by bankruptcy. In this respect, enterprise is different from gambling, which cannot test knowledge, and from public-sector "jobs creation" programs that are incapable of matching needs to demands and hence are "epistemologically barren."
The successes and failures of entrepreneurs are a source of knowledge. One of the key terms of this book is the so-called "learning" or "experience curve," a concept which lies at the basis of supply-side economics. The experience curve indicates that whenever the total output of any industry doubles, the unit cost of production over the industry will tend to decline by between 20 and 30 percent. If the annual production and sales of, let's say, widgets increases from 1,000 to 2,000 tons, the cost of producing each widget will drop from $1 to 70 or 80 cents. If the next year widget sales double again to 4,000 tons, the per-widget production expense will fall to between 64 and 49 cents, and so on. According to Gilder, this relationship is not subject to diminishing returns. Henry Ford, for instance, achieved his marketing breakthroughs by cutting the price of his automobile in order to increase sales, and then establishing the economies of scale which made his price reductions profitable. Ford defied the conventional wisdom according to which producers must first achieve cost reductions before lowering prices.
One corollary to this marketing and sales strategy is that there is no price equilibrium point which cannot be lowered by dramatic production increases. A second corollary is that tax rates should be low enough to allow for incentives to expand marketing and new production. Thus the learning curve can be extended further, decreasing consumer costs and increasing the supply.
The experience curve is a principle implying an immense economic growth potential. And, while Gilder does not explicitly say so, the experience curve also explains why tax rates should be reduced, not raised, in the face of large budget deficits, since growth is the real long-run answer to the problem of government expenditure outstripping stagnant revenue returns.
Thus, policies which stifle entrepreneurship, such as excessive tax rates, do not prevent investment; they impose a "mind tax" encouraging a different, less socially beneficial investment strategy, such as real estate speculation, tax evasion, and entry to the untaxed underground economy. Tax sheltering tends to shorten the time horizon of investors, placing a premium on substandard construction and poor product quality. According to Gilder's argument, the short time horizon of investment due to excessive taxation is the most important cause of the record-high interest rates we have suffered from in recent years. (I believe, however, that he is mistaken in denying that the Federal Reserve Board's monetary policy has intentionally generated higher interest rates than finance markets alone would have produced.)
The only solution to the mental "euthanasia" of entrepreneurship is tax reform which reduces marginal tax rates and expands the economic base through the encouragement of job creation. Recent tax-reform plans offered by President Reagan, by Senator Kasten and myself, and by Senator Bradley and Congressman Gephardt are all inspired in part by this need to correct the growth-discouraging aspect of our current, nearly incoherent, tax code.
The twin themes of Gilder's book are joined at the end when he proclaims "the spirit of enterprise" as "a thrust beyond the powers and principalities of the established world to the transcendent sources of creation and truth."
Gilder insists on the moral subordination of free markets and economic decisions. He points out, for example, that the environmental movement of the 1970s, much of which was hostile to industrial development, actually provided new opportunities and directions for entrepreneurial activities such as air and water purification, increasing energy efficiency, and toxic waste disposal. Unlike many libertarian defenders of capitalism, Gilder has no objection to the enforcement of moral standards and limits on commerce and trade. He argues, against Marx, that economic values derive from the "values" of a whole society, adding that capitalism is not blameable for the unwillingness of a democratic society to ban pornography or otherwise prohibit harmful or immoral activities. Forbidding illicit commerce for profit is a legitimate goal of political, judicial, and religious institutions, and capitalism can operate only within the bounds of a comprehensive moral and legal order.
Here lies the greatest difficulty in this otherwise brilliant book. Gilder subordinates "generals and politicians, bureaucrats and revolutionaries . . . elections and wars, mass meetings and militant movements" to "the creative work of entrepreneurs." Entrepreneurial activity does not create moral principles and ends; rather, moral purposes create free markets, according to the author. Yet political actions are said to be subordinate to the success of capitalist enterprise. The source of moral order apparently has disappeared. Possibly he wishes to' argue that that source is in the people themselves; but the people assert their collective moral judgment primarily through their political choices and the actions of representative government. In the final analysis, a democratic politics cannot help but provide moral guidance and limits to commercial activity, and Gilder's claim that the "significance" of politics is dependent on the advance of "the creative work of entrepreneurs" seems untenable.
Closely related to this problem is the fact that Gilder seems to make the role of the people in the operation of free enterprise purely passive. The author treats the entrepreneur as a hero, perhaps even the highest human type. He is said to be even freer and less limited by "tastes and technologies" than "artists and writers" in "reshap[ing] public desires." Moreover, Gilder implicitly agrees with the entrepreneurial principle that "the crowd is always wrong." There is an elitist implication in this view which contradicts the populism of supply-side economic thought and democratic capitalism. One of the greatest nineteenth-century supply-side economists, Frederick Bastiat, insisted that the purpose of economic activity is the satisfaction of the needs of the whole, not just the producers. If we look at the economy as an order of purposes and causes, it is not difficult to see that the enterprising producer is a cause designed to meet the purposes and ends of the purchasing consumer. As the overriding reason for the productivity of the entrepreneur, the consuming public is the highest, final cause of enterprise. Perhaps Gilder exaggerates the importance of the entrepreneur in order to combat the conventional view that capitalism does not need capitalists, but there is an equal and opposite danger, particularly among conservatives, in denying that wisdom of the whole people which political philosophers from Aristotle to Edmund Burke and our Founding Fathers have acknowledged.
Aside from these differences, I believe The Spirit of Enterprise adds a moral pillar to the defense of capitalism. It demonstrates how free enterprise/free markets, and free minds advance the dynamics of lower prices and higher wages to expand the benefits of prosperity to the poor and the disadvantaged all over the world. It shows the entrepreneur's need for moral qualities such as humility, service to others, and independence, and argues that the ultimate rationale for "the optimism and trust, the commitment and faith, the discipline and altruism" evinced by the life of the enterprising man or woman "can flourish only in the midst of a moral order, with religious foundations." Capitalism cannot survive and prosper without sustaining its religious and moral institutions: the churches, schools, and families.
Gilder, along with writers like Irving Kristol, Jude Wanniski, Warren Brookes, and Michael Novak, has undermined whatever was left of the moral case for socialism and seized the moral high ground for the economics of freedom. With this book he has advanced an enterprise of the spirit from which the whole world has much to learn and benefit in years to come.