The Grad Course In Economics We’ve Been Waiting For

Andy Kessler in a WSJ Opinion article, February 7, 2022, does more for the understanding of economics and how it works in a Capitalist Democracy than do many college texts on the subject.  His questions and answers by Economist George Gilder should be required reading and comprehension by every politician across the country.   Senators Sanders and Warren, and particularly Representative Ocasio-Cortez, all should be required to read this material and demonstrate understanding.  As Mr. Kessler points out, producing more with less, is the simple and only way to create lasting wealth. And fortunately or unfortunately, the wealth is necessary in order to provide decent wages to employees.  

To create wealth you need knowledge to make productive and technological advances. But it requires new knowledge and innovation risk applied to what an industry is currently producing, or not producing.  Government or socialist planning, according to Gilder, cannot do this—it doesn’t possess the new knowledge.  And, even if it did, governments don’t know how to apply it successfully because they are not the innovators of the new idea. This new knowledge allows the innovator to accumulate the wealth that is necessary to pay for the new factories, new equipment and new employees that will be required to implement the new knowledge to produce the new product or service.  Taxing the wealthy may make those who cannot innovate feel better, but it has a destructive effect on the economy by taking the money needed to produce the new industry and new jobs and transferring this capital over to the government in the form of taxes.

To answer Senator Elizabeth Warren’s colossal concern, wealth creation is a necessary evil. Every system has it. Producers with new ideas (knowledge) will not risk the failure and loss of their time and cost unless the chance to be paid well is there. This is the risk-wealth referred to above. Under a communistic or socialist system, immense wealth may be created, but the public receives few benefits. There the benefits go to the “oligarch and his friends” and can seldom be controlled. Capitalist wealth of billionaires that is not employed in production can be controlled by smart governments in the form of tax incentives which don’t have to be destructive, or by shareholders and the stock market which will determine policy and stock price respectively. No system, including capitalism, is totally fair and every system at times needs some control. Capitalist governments and leaders that are ill advised can destroy the opportunities for innovation with destructive taxes or absolute control and intervention.

In a free society it may look like an employee at the bottom of the ladder can have no claim on wealth, but if you are willing to work you have the chance to be a wealthy producer or employee anywhere in between. Most billionaire capitalists today started at the bottom and created thousands of jobs and opportunities as they moved to the top. A good example of this is Home Depot started by an unemployed person with little money, but a great idea. The founder became wealthy, but in doing so he created a company with many stores and thousands of employees. What is fascinating is that the company itself has created the additional opportunity for thousands of individual entrepreneurs (contractors) to start their own construction or remodel business with additional employees. Classic capitalism.

It is vital to recognize the important role that productivity plays in our Capitalist system and how the creation of real individual wealth is the necessary benefit that produces the new companies and the higher paying jobs we are looking for.   Mistakenly adding more government “Build, Back, Better” dollars only serves to create inflation. It makes inflation worse and harder to control by taxing capital and converting it to government payouts adding spendable money to an existing economy with the same productivity, same products and services. This is a complicated formula that bureaucrats generally don’t understand, but it inflates prices as we have witnessed this past year.  There is no improved productivity created. What’s more dangerous is that these government dollars, provided via government printing presses and taxes, generate little incentive to protect bottom line costs, and, we can expect to see more stories like the San Francisco Bay Bridge replacement project which was agency-run and approved at $1.6 billion, but cost $6.1 billion at completion.  

The socialist model that has become so popular with many Millennials and even some members of the House and Senate (who should know better), may appear to be the answer, but it takes the incentives out of the capitalist system and substitutes government control to make the capitalist system “fairer.” The problem is that there is no control over the government bureaucrats (and representatives) who oversee the socialist system trying to make it “fairer,” but who eventually become tyrants to be feared.  Decades later, it is the government managers who have amassed the fortunes, but have given nothing in exchange like new products and ideas, or a productive economy with attractive wages for others.  Countries like Venezuela and Cuba are good examples of this where we find a few wealthy bureaucrats, but little productivity, and a very poor public. Another example is Russia where the GNP of the entire nation is about equivalent to that of New York State! But Putin and his buddies have all the wealth they need.

Rather than funding government “Build, Back, Better” programs, the country should be focusing on tax incentives that will encourage the companies and entrepreneurs that have new marketable ideas and useful products and services to put people to work here in America.  Raising wages to $15 or $18 per hour across the board without any productive improvements just creates more painful inflation.  On the other hand, paying higher wages for longer hours, building new facilities or buying new equipment for better productivity, finding better ways of producing a product, or using less labor are all counter inflationary and will put real money in worker’s pockets.  The federal government cannot do this except by reducing taxes, reducing staff, consolidating agencies, or eliminating Nancy Pelosi’s second life-time retirement fund.    

Geoff Wood     

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