Notes:BC1.EF.The Secret of Enterprise

2014/11/22 User:Jeff

An outline of the ideas in the prologue of Gilder's 2012 edition of Wealth and Poverty.

Wealth and Poverty was first published in 1981.

Supply Side vs. Incentive-Reward

In 1981 "socialism was dead" but few stepped up to hail capitalism as triumphant. Most seemed to view capitalism as faute de mieux that was saved by charities and regulations and the New Deal. But capitalism is

"the supreme expression of human creativity and freedom, an economy of mind overcoming the constraints of material power."

"a dynamic force of constant creation, pushing human enterprise down spirals of declining costs and greater abundance"

Supply side vs. incentive-reward.

In the supply side model, taxes are "the price of earning and investing income - that yielded increasing revenues as the rates were reduced." A controversial idea.

• Some accept the behavioral model of stimulus and response, in which lower rates are the stimulus of reward for more work and risk taking which yield more taxes.

Gilder writes that a successful economy is driven more by the "unimpeded flow of information. . . Increasing revenues come not from a mere scheme of carrots and sticks but from the development and application of productive knowledge."

• Greed vs. information and knowledge

The acceptance of stimulus-response encourages the idea that capitalism is a greed based system.

On the contrary - greed "prompts capitalists to seek government guarantees and subsidies that denature and stultify the works of entrepreneurs. Greed . . leads as by an invisible hand to an ever growing welfare state - to socialism."

It is the expansion of information and knowledge that generates growth and progress.

It is a competitive pursuit of knowledge. (CW emphasis)

• Capitalism is not a zero-sum dog-eat-dog game.

The winners teach the losers how to win through the spread of information.

The success of some is not at the expense of others. Free economies "climb spirals of mutual gain and learning."

Capitalism's moral center is a golden rule of enterprise: The good fortune of others is also your own.

"Not only does capitalism excel all other systems in the creation of wealth and transcendence of poverty, it also favors and empowers a moral order."

But much of the world indicts capitalism as a zero-sum game in which any gains by the rich come at the expense of the poor - that they are somehow extracted from the poor.

"Aero-sum inequality and exploitation continue to preoccupy the media. Congress remains enthralled with static accounting rules that assume tax-rate reductions will not alter economic behavior. In this model, the only way to expand tax receipts is to raise rates on the "rich."

• Altruism: capitalism favors altruism, an orientation toward the needs of others (a slight warping of the meaning of the word which also means selflessness)

Quotes Richard Posner, a professor of law and economics at the University of Chicago. "Because the individual cannot prosper in a market economy without understanding and appealing to the needs and wants of others, and because the cultivation of altruism promotes the effective operation of markets, the market economy . . . also fosters empathy and benevolence, yet without destroying individuality."

It's not the Budget

The ranks of supply siders have thinned. A number of erstwhile allies now insist that they never claimed that lower tax rates lead to higher revenues.

• The focus on the budget is misguided:

"Shrink the budget" is now the conservative mandate for prosperity. "Keep what you earn" is the moral foundation. The focus is on the downside of deficits as the deterrent to abundance and creativity.

Still, no one has the political will to shrink the budget except to cut defense. They seek a balanced budget amendment as the fix.

But revenue to fund progressive-liberal can be extracted in ways less obvious than taxes - with mandates and regulations - that are even more demoralizing to enterprise. These can take the form of mandating private spending or offering a tax rebate - example, the mandate to suppress CO2.

This focus sees budgetary issues as acute in the future

which "implies that liberal policies are not already infecting our economy with a multiple sclerosis of tax and regulatory curbs, destroying jobs and families with webs of rules and pettifoggery, price controls, skewed social policies, and litigation. A budgetary focus obscures the continuing devastation of vast expanses of our environment with archaic windmills, ethanol farms, and subsidized Druidical sun-henges. It downplays the continuing degratdation of schools by agitprop campaigns and Ponzi schemes of self-esteem. It diverts attention from the stultification of our health care systems by misconceived insurance fragmented through fifty states and denatured by coverage of every human frailty and daily need (rendering it not insurance at all but merely government overreach)."

"Most of all, the budgetary preoccupation obscures the ongoing assault on the families of the poor, ensnaring them in a welfare state for women and children and a police state for two generations of black boys. Some seventy programs annually dispense close to $900 billion mostly to single-parent families totally incapable of raising boys."

The Crash of 2008

• The crash of 2008 caused many to raise the issues and concerns of capitalist economics and democratic politics

Gilders former influence Richard Posner was the most formidable critic. writing The Failure of Capitalism (2009) and The Crisis of Capitalist Democracy (2011) which called the financial problem a new Depression.

There were some interesting questions concerning the events.

US bankers took $2 trillion from taxpayers over 6 years "while massively misallocating the world's liquid capital."

Posner described it thus:

as "the result of normal business activity in a laissez-faire economic regime" and as "an event consistent with the normal operation of economic markets."

He absolves the government - "were there no government regulation of the economy, there probably would still have been a depression" - but acknowledging that low interest rates did increase the demand for housing.

Posner diminishes the impact of Fed policy and points to the private excesses of "aggressive marketing of mortgages, a widespread appetite for risk, a highly competitive, largely deregulated finance industry, and debt securitization."

He maintains that the authentic capitalists of Wall Street were forced to follow the actions of deregulated rivals and that consumers similarly followed capitalist rationality by accepting attractive mortgages at a time of rising housing prices.

According to Posner, it all made perfect capitalist sense.

It was not the greed of bankers or consumers or of regulators. It was the flawed logic of capitalism itself.

Mathematicians, quants, and computer nerds developed sophisticated hedging algorithms, diversification schemes, and insurance techniques that were supposed to reduce tisk to near zero. This transformed finance, neutralizing each risk by a hedge, and every downside with insurance.

And standing behind the assets and promoting subprime lending were guarantees from government bodies such as Fannie Mae and Freddie Mac and insured bank deposits via the FDIC.

"Posner is right that, assuming close to zero risk, bankers would be entirely rational to maximize their borrowing; the banks with the ost leverage would then win the largest returns. Ad the bankers certainly did believe they had reduced risk to something very like zero.

"The fundamental assumption of modern finance in the early years of the new millennium was that the best way to address the perils of a volatile world was not by confronting those perils and analyzing how to ameliorate them, but by hedges and insurance."

There are two ways to reduce uncertainty - replace uncertainty with information, creating productive knowledge, or alternately - turn uncertainty into a measured probablility and purchase insurance.

Modern finance opted for insurance. "Buttressed by government guarantees, the banks persuaded themselves they had solved the actuarial problem and fully understood the probabilityes and believed they could havest the difference between the cost of the insurance and the yield of investments without risk.

"In such a world...the winning investors would be the boldest borrowers, making the biggest bets.

For Posner, the explosion of leverage made capitalist sense which could only call for more aggressive regulation.

It was the incentives that had no basis in capitalism

Posner is shocked by the disastrous outcome of the apparently rational behavior to the defined incentives. The flaw is that the defined incentives had no basis in capitalism.

Posner felt betrayed by the collapse of ordered markets at the core of his legal philosophy.

but "Adam Smith's view of the economy as a 'great machine' a Newtonian mechanism driven by self-interested optimizations as inexorable as the force of gravity, was always an illusion. free economies are constantly convulsed by human will, creativity, and conflict. Always in disequilibrium, they feed on the new information flows of enterprise and the voluntary responses of customers."

and according to Gilbert "devoid of entrepreneurial surprise, such a rational world is irrelevant to real capitalist economies.

"entrepreneurs resolve uncertainty not by reducing it to statistical probabilities but by replacing uncertainty with information" - which is what the people behind "the Big Short" did. (these were the only capitalists in sight)

---