metamitya ·
It was probably fifteen years ago that I was at lunch with Banknote Capital’s Jim Fitzgerald. We were finishing up when the conversation shifted to tax rates, at which point Fitzgerald dismissed the notion that lower rates stimulate more work.
To be clear, Fitzgerald was not saying that he opposed lower tax rates. He was and is very much for them. But he was expressing his disdain for the theory that lower rates cause people to work more. In his case, Fitzgerald would work a great deal precisely because there was joy in it.
Still, what he said at the time was jarring. It called into question so much that was accepted wisdom. Gradually it made lots of sense. Tax rates should be low simply because they should be low. After that, it’s perhaps unrealistic to suggest that Jeff Bezos, Mark Zuckerberg and FedEx founder Fred Smith began to build their remarkable businesses only after consulting the tax code. Work for them was and is similarly joy.
The conversation with Fitzgerald, along with my own evolution on matters economic, came to mind while reading George Gilder’s essential new book, Life After Capitalism. Though Gilder penned what many view as the underlying philosophy of supply-side economics with the brilliant Wealth and Poverty in 1981, in his spectacular 2013 book Knowledge and Power Gilder began to question the “incentive” economics that at least on the surface informs supply-side.
To Gilder, wealth is the creation of information, and individual tax rates arguably aren’t as relevant there, particularly in technology. We’re talking about people obsessed with inventing the future. The latter tells us they too aren’t checking individual tax rates ahead of time before deciding whether to work at the Post Office or start a new business. About the Post Office, a card-carrying, well-regarded and well-published supply sider once literally told me that high tax rates would cause our greatest entrepreneurs to take jobs in the Post Office…About all this, tax rates DO matter. Big time. That supply is the source of all demand is a tautology. But tax rates arguably aren’t the work catalyst for the reasons long expressed by supply siders. Please read on for thoughts on why.
For now, Life After Capitalism is just so good. It’s Gilder “launching a new economic theory” rooted in the essential truth that knowledge is the true wealth. Gilder puts it so well throughout the book, but just to give readers a taste ahead of jumping off into all sorts of areas, he writes in the opening pages of what will now be referred to as Life that “when you insert your credit card into the gas pump, what you’re really buying is the knowledge that makes the transaction possible.” So very true, and so very important. And clear evidence in support of Gilder’s thesis: oil is of the earth, it’s been bubbling up from the earth for billions of years, but market applications for it weren’t discovered until the 19th century.
It all speaks to a bigger truth conveyed by Gilder through Caltech professor Carver Mead. In the past Mead and his colleagues would gather for “confession” where they would admit what they got wrong. In Mead’s words, “If it’s a thing that doesn’t fit, that’s information. If it does what you thought, you haven’t learned anything.” Confirming what you know is running in place. Call the latter a metaphor for consumption. Investment is the pursuit of new information, including information that confirms how wrong you are. Again, learning is the wealth. Yet it’s more than that.
Supply siders have for so long based their argument against John Maynard Keynes on incentives created by government to work more at lower prices (tax). There’s probably some truth to the latter at nosebleed rates that have really never existed in the U.S. even when they existed (the effective top tax rate was in the 25% range when the headline tax rate reached 90% in the 1950s), but the better argument is that Keynesianism calls for government to spend and war just to spend and war on the false supposition that spending to spend and destroying wealth and life to destroy it is what keeps the economy moving. Keynesians call for redistribution of precious resources not to those who will invest, but to those who will spend. Except that spending, particularly by those of limited means, produces very little knowledge. It confirms what’s known, as we all want to consume. Which means wealth redistribution logically constrains knowledge. Government spending similarly suffocates knowledge creation, which means it’s a barrier to economic growth.
Gilder’s information as wealth view of the world thoroughly rejects what’s always vandalized reason for it holding fast to the truth that wealth is knowledge. Write it down over and over again with politicians top of mind. As readers of this column have read over and over again: politicians are constrained by the known. And they direct precious funds in politicized fashion to the known. What choice do they have when it’s remembe…