Unleash the Mind
Capitalism means benevolent creativity.


Here we go again, in the New Millennium. The themes of exploitation and zero-sum equality 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.”

For their part, some conservative leaders imply that our national crisis is merely some budgeting blunder remediable through a balanced-budget amendment to the Constitution. The focus on budgetary issues that will become acute a decade or so from now 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, skewed social policies, and litigation. A preoccupation with national liabilities diverts attention from the massive political devaluation of the nation’s assets.

“Starve the beast” is the new mantra of conservative economics. “Shrink the budget” is the new mandate for prosperity. “Keep what you earn” is seen as the moral foundation for lower taxes. All these formulations bear some truth, but they focus on accounting tautologies rather than on the dynamics of creative enterprise. Conservatives still urge lower taxes, but many no longer know how to defend them, distracted as they are by an economics of austerity that obsesses on the downside of deficits in a way inimical to the supply-side vision of abundance and unpredictability.

The first edition of Wealth and Poverty (1981) sprang from a period of essentially balanced budgets and trade surplus under Jimmy Carter and helped launch a siege of deficits and trade gaps under Ronald Reagan. During the Carter years, the government was mostly in the black while everyone else was in the red. Under Reagan, though, the trillion-dollar rise in government liabilities was dwarfed by a $17 trillion expansion of private-sector assets thanks to creative entrepreneurs. Over the decades following the Reagan revolution, government liabilities continued to expand, but once again private-sector-asset values increased, by $60 trillion more. Only over the past ten years or so have liabilities risen faster than assets, which have crashed. Improvements in policy and tax rates can instantly upgrade the value of all the assets in the economy without any physical change in their material composition.

Opposed to the reality of capitalism as a function of knowledge and creativity is the behavioral dream — implicitly accepted even among some supply-siders — of a “Skinner box” economics of stimulus and response, wherein lower tax rates impart a stimulus of reward for more work and risk-taking and thereby yield more revenues for the government. The implication is that the mere desire for wealth has something to do with the ability to create it. But as Steve Forbes observes in How Capitalism Will Save Us, explaining capitalism by self-interest or greed is like explaining airplane crashes by the force of gravity. Greed and gravity are general and ubiquitous in regimes of all sorts and therefore irrelevant to the extraordinary results of capitalist creativity.

Taxes do yield massively increased revenues as the rates are reduced. A successful economy, however, is driven less by the sharp edges of incentives than by the unimpeded flow of information and its conversion into knowledge and wealth through falsifiable experiments of enterprise. Increasing revenues come not from a mere scheme of carrots and sticks but from the development and application of productive knowledge.

The equation of lower tax rates and higher revenues remains perhaps the most thoroughly documented and widely denied proposition in the history of economic thought. It has been abandoned even by some former supply-siders who ignore the global tax revolution beyond our shores while obsessively analyzing ambiguous data from the Clinton era.

August 13, 2012    |     Volume LXIV, NO. 15

Books, Arts & Manners
  • Steven Hayward reviews How to Think Seriously about the Planet: The Case for an Environmental Conservatism, by Roger Scruton.
  • Samuel R. Staley reviews Debacle: Obama’s War on Jobs and Growth and What We Can Do Now to Regain Our Future, by Grover G. Norquist and John R. Lott Jr.
  • Scott Winship reviews The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, by Timothy Noah.
  • Florence King reviews Winter King: Henry VII and the Dawn of Tudor England, by Thomas Penn.
  • Ross Douthat reviews The Dark Knight Rises.
  • Richard Brookhiser offers Kerouacian haikus.
The Long View  .  .  .  .  .  .  .  .  
Athwart  .  .  .  .  .  .  .  .  
Poetry  .  .  .  .  .  .  .  .  
Happy Warrior  .  .  .  .  .  .  .  .