A Theology for Capitalism

Wealth and Poverty, by George Gilder, Basic Books, 306.pp., $16.95.

“This is the book!” IS being said in some circles about Wealth and Poverty, for George Gilder’s latest work is being touted by the New Right as the answer to New Deal liberal social philosophy as well as the definitive Post-Keynesian manifesto on economic theory and policy. These are highly ambitious claims, which is no real surprise, as Wealth and Poverty is an extremely ambitious book. Within a mere 269 pages of text, Gilder attempts to provide a moral defense of capitalism, an explanation of the causes of wealth and poverty, a psycho-sociological theory of the effects of the welfare state on sexual relationships, and a case for supply-side economics. Although Gilder fails on each of these counts, he does provide us with a fair amount of provocative thinking (intentionally), as well as with a number of important insights into the bankruptcy of modern conservative thought (unintentionally).

A key clue to what is going on in Wealth and Poverty can be found in the book’s first chapter, entitled “The Dirge of Triumph,” where Gilder surveys the ideological failure of capitalism. When discussing Ludwig von Mises, F.A. Hayek, and Milton Friedman, Gilder applauds their “technical” analysis of how the market works, but laments the fact that “... none of these writers sees reason to give capitalism a theology.” (emphasis added)

Although one of Gilder’s main goals is to outline a moral defense of capitalism, Wealth and Poverty fails to provide a specific definition of just what capitalism is. There is absolutely no discussion of the role of the state (if any) in a capitalist society. Instead, we are told that “...capitalism begins with giving.” Gilder’s search for an understanding of modern capitalism begins, not with its ideological and historical roots, such as the Enlightenment, the Industrial Revolution, or classical liberalism, but rather with “potlatching,” an obscure tribal ritual practiced by the Kwakiutl Indians of Northwestern America. Potlatching is essentially a tribal process administered by an Indian chief where each member of the tribe offers a gift to the entire tribe with the expectation of receiving something in return. What makes this sort of offer so interesting to Gilder is that the compensation for such an offering is not defined beforehand. In some sense, the Indian is engaging in an act of faith. Gilder would have us believe that it is the logic of potlatching that underlies capitalistic investment and production. If capitalists made investments with the hope of reaping a monetary profit, thinks Gilder, investment would never occur at all, for investment is a far too risky a process to be ruled by reason and common sense. Rather, it is a faith in the “...compensatory logic of the cosmos...” a belief that he will receive some sort of undetermined return, either in this life or after, that compels the capitalist to invest. Because the return on the investment is never known with certainty, Gilder labels investments as gifts. Hence, capitalism becomes nothing but an advanced form of potlatching. According to Wealth and Poverty, the secret of capitalist success is to be found in production. Although the reader is initially overtaken by a sense of comfort when Gilder recites Adam Smith’s classic proposition that production is the source of all wealth, we soon find ourselves threading through a series of arguments of which Smith would never have dreamed.

Like most supply-siders, Gilder starts with Say’s Law— “supply creates its own demand”—and quickly proceeds to twist it into a nearly un-recognizable form. Say was attempting to communicate two fundamental and corollary truths about the market economy—production is the source of demand, and, as a consequence, a general overproduction of supply is impossible since any good produced carries the potential strength of a demand for another good. However, Gilder interprets Say’s Law to mean that supply is the active, driving force in a market economy and that demand is relegated to a purely passive role both in our analysis and in reality. The Austrian doctrine of consumer sovereignty is turned on its head. It is not consumer demand that guides production and determines the prices of both consumption goods and factors of production, as well as the return of the capitalist. In Gilder’s world, the fancies of the capitalists determine consumer demand: “... demand, like public opinion, does not exist in any very definite and identifiable ways; it is a flux of hungers and sentiments which assume particular forms chiefly in response to the flow of supplies.”

It is Gilder’s uncompromising adherence to the primacy of the supply side that blinds him to perhaps the two greatest practical abilities of the free market — its skills in coordinating individual plans and in servicing consumer demand — and the greatest moral virtue of the market — the essentially voluntary nature of all transactions. Perhaps this is why he is forced to look elsewhere (to faith) for a justification of the market.

In Gilder’s mind the success of capitalism is due to the entrepreneur, the driving force behind production and innovation. His analysis of entrepreneurship is admirably dynamic and somewhat reminiscent of both Joseph Schumpeter and the Austrian view as represented by Israel Kirzner’s Competition and Entrepreneurship. However, Gilder tends to ascribe entrepreneurial ability only to the rich and/or specially talented capitalists. In reality, consumers are not the inert lumpen masses that Gilder describes; the words consumer, producer, capitalist, and entrepreneur denote different roles, not necessarily distinct and separate individuals. Therefore consumers, as a group of people, may possess just as much entrepreneurship as producers, or as any other group in society.

Gilder’s entrepreneurial elitism is responsible for such fallacies as “The rich remain the chief source of discretionary capital in the economy.” In fact, it is quite well established that most of our capital formation comes from corporate investment, as well as from middle and lower class savings. Gilder sees the willingness of the rich to risk their money in new investments as the chief determinant of how an economy progresses (or regresses) and as “...the secret of capitalist ferment and creativity.” Our biggest problem today, therefore, is that the wealthy have lost their desire to “potlatch” (invest) because of the effective high marginal tax rate which inflation and taxes have imposed on the act of saving and the receipt of “unearned” income (dividends and interest). As a result, the rich turn to conspicuous consumption, which, in turn, arouses public hostility against the rich. This leads to the imposition of even higher levels of progressive taxation which then proceeds in a vicious spiral to cause even higher levels of consumption.

When evaluating Gilder’s defense of the market one should keep in mind his description of socialism, the system which he considers to be the polar opposite of capitalism: “In a socialist economy... rationality rules, and it rules out the awesome uncertainties and commensurate acts of faith that are indispensable to an expanding and innovative system.” The trouble with socialism is not that it can’t plan (see Hayek’s Collectivist Economic Planning), but rather, that it can plan! Gilder is saying that capitalism’s “anarchy of production” truly means chaos, not merely the absence of a central planner. Socialism is capable of eliminating chaos all too well.

This error may stem from Gilder’s neglect of demand as an active, driving force behind economic activity, and his underemphasis on microeconomic coordination as the crucial factor in the success of “anarchic” capitalist planning. Both capitalism and socialism “plan” both investment and production. The important questions are: how is the planning to be done? who is to do the planning? and for whose ends do we plan? The mere ability of certain socialist economies to fulfill certain macroeconomic growth statistics does not mean they can plan successfully. Satisfying consumer demand is the name of the game and this is where every socialist economy falls flat on its face. However, if, like Gilder, we believe that demand is an essentially unimportant phenomenon, then socialism would be able to plan better than capitalism. After all, who cares what the consumers want? They may grow to like standing in bread lines.

The most serious flaw in Gilder’s defense of capitalism is that he is trying to justify the market on a holistic level by invoking its “practical” achievements. There is absolutely no mention of individual rights in Wealth and Poverty. In truth, capitalism in the aggregate sense cannot be morally justified. What can be justified are what Robert Nozick has called “capitalist acts between consenting adults.” The libertarian theory of self-ownership and the right to all justly acquired property lead us to endorse (or at least tolerate) all voluntary exchanges and relationships. The market is merely the spontaneous order arising out of all such interpersonal contract, and only in this sense can it be morally justified. To quote Descartes, “Divide each problem into as many parts as possible; that each part being more easily conceived, the whole may be more intelligent.” (Discourse on Method)

As indicated by the title of the book, Wealth and Poverty presents both a theory of wealth and a theory of poverty. Gilder’s theory of wealth is essentially a dynamicized version of supply-side economics. It is in the analysis of poverty, however, that Gilder’s book provides us with some truly excellent insights. His theory is basically sociological — “The only dependable route from poverty is always work, family, and faith.” Work, the first member of this trio, would probably be the most important factor in a free society. (Gilder’s case for the importance of family is somewhat unclear, while the role he projects for faith is downright dubious.) Gilder’s discussion goes far beyond the usual insight that welfare benefits provide a disincentive for work. There is a brilliant analysis of the phenomenon of “creden-tialism,” a growing trend that places more and more emphasis on paper credentials. As Gilder points out, “The poor benefit from a dynamic economy full of unpredictable capital gains (they have few capital losses!) more than from a stratified system governed by educational and other credentials that the rich can buy.”

The reader can get a good deal of insight into poverty if he reads the book carefully, although many of the arguments are not fully developed. For instance, Gilder presents some interesting ethnic history to show how those groups that were attracted to government jobs (i.e., the Irish) and those groups that have been recruited for government jobs (i.e., the blacks), have been hurt by their participation in the public sector. The chapter on racial discrimination is also another part of Wealth and Poverty that is particularly worth reading. Gilder provides a definitive refutation of the myth that racism is responsible for the low incomes of much of the black community. Instead, the blame is placed on the state, especially on federal welfare programs.

When he turns to the subject of family, much of Gilder’s case is based on the claim that the welfare system has broken up the nuclear family by emasculating the male’s role as provider and breadwinner. Only through monogamous marriage can men be responsible and productive. Here Gilder’s argument is somewhat controversial and it is worth quoting him at length:

… female sexuality … is psychologically rooted in the bearing and nurturing of children, women have long horizons within their bodies, glimpses of eternity within their wombs. Civilized society is dependent upon the submission of the short-term sexuality of young men to the extended maternal horizons of women. This is what happens in monogamous marriage: the man disciplines his sexuality and extends it into the future through the womb of a woman… The woman gives him a unique link to the future and a vision of it, he gives her faithfulness and a commitment to a lifetime of hard work.

Gilder’s psycho-sexual biases are based on Steven Goldberg’s The Inevitability of Patriarchy and his own Sexual Suicide. In some ultimate sense his views could be described as Freudian. Although most feminists will be outraged by his portrayal of women, many people will consider his treatment of men to be even more sexist. Single males are painted as a loathsome and lazy breed of people infected by drugs, alcoholism, homosexuality, and worst of all, unemployment. It is reassuring to reread the preface and discover that Gilder is married.

Finally, of course, Gilder emphasizes faith as a method of overcoming poverty. He says, “Faith in man, faith in the future, faith in the rising returns of giving, faith in the mutual benefits of trade, faith in the providence of God are all essential to successful capitalism.” Without this belief in the “compensatory logic of the cosmos,” ordinary life appears to be too risky and too frustrating to be worthwhile. Once people have this faith they are willing to save without the certainty of a given return, and they are willing to work beyond the requirements of the job. Capitalism can survive.

Despite all of its flaws, Gilder’s analysis of poverty leaves little doubt in one’s mind that the poor are the biggest losers when it comes to the welfare state. Gilder could make his case far stronger if he discussed the pernicious effects of the minimum wage (which is mentioned only briefly) and the tragedy of occupational licensing (which is never mentioned at all). But an important question comes to mind: If the interests of the poor are hurt by state intervention and if society is fighting a “war against the rich,” as Gilder would have us believe, then, who, in Gilder’s eyes, are the people who benefit from statism? Surely not the middle clsss?

And indeed, Wealth and Poverty suffers from a lack of any clearly defined theory of class. There appear to be no net tax-consumers in Gilder’s world, even in the short run. But if this is the case, how are we to understand state intervention? Without a knowledge of its causes it will be quite difficult to find its cures. For instance, Gilder’s arguments about poverty could be strengthened immeasurably by introducing the class analysis of Piven and Cloward’s Regulating the Poor. Piven and Cloward demonstrate that the purpose of welfare legislation has often been to “keep the poor quiet” and stifle social dissent and unrest.

The absence of a class theory also distracts Gilder from one of the most important aspects of inflation, the attendant redistribution of wealth. Those groups who receive the new money first (i.e., government, large banks, defense contractors) benefit just as if they were counterfeiters, while those who receive the new money last (i.e., fixed income recipients) lose considerable wealth. Gilder sees inflation as important only because it reflects the huge burden of government spending which the private sector must support.

Like most supply-siders, Gilder plays down the distortive effects of monetary expansion and plays up the distortive effects of taxation. There is no effective way, however, to achieve the tax cuts which supply-siders advocate without making a serious commitment to radically slashing government spending so much that non-expansionary monetary policy could accompany the tax cut. Gilder never clues us in on his views on the proper level of government spending or what monetary policy (if any) the government should adopt.

In sum, Wealth and Poverty is a highly flawed book which fails to achieve its objectives. However, it must be credited with both originality and some very perceptive insights into the nature, causes, and cures of poverty. As a moral defense of capitalism it is a total failure which reveals the intellectual bankruptcy of the New Right. For such a defense one must turn away from Wealth and Poverty and look to such works as Wilhelm von Humboldt’s Limits of State Action, Herbert Spencer’s Social Statics, and Murray Rothbard’s For a New Liberty.

Tyler Cowen is the managing editor of the Austrian Economics Newsletter, which is published by the Center for Libertarian Studies.