Review of The Scandal of Money: Why Wall Street Recovers but the Economy Never Does (Regnery 2016) by George Gilder.
Citizens of the world’s superpower are worried about the future. Polls of public sentiment indicate that Americans are pessimistic about their opportunities for prosperity, concerned that the next generation will not enjoy an improving quality of life, and more. This anxiety is reflected in the current presidential primary season. Hillary Clinton unimaginatively offers to manage the decline. Donald Trump offers himself unfiltered for public service, yet his strongman act seems better placed in the darker decades of the last century rather than the new challenges presented in the 21st.
By the end of the 20th century, communism proved to be the god that failed, defeated by a resurgent American resolve backed by an extraordinary new capacity for production and invention. Now Ronald Reagan’s most quoted living author returns to smash another idol: the voodoo economics practiced by those who try to conjure growth, boost employment and create cosmic justice from the office buildings of Washington. In his latest book, free-range thinker George Gilder exposes The Scandal of Money: Why Wall Street Recovers but the Economy Never Does.
To the ideas of the supply-side revolution he helped to launch during the Reagan boom, Gilder has added in the intervening decades the insights of Claude Shannon’s information theory. A monetary Marshall McLuhan, he argues that money is the medium, but the message has been lost. Unafraid to critique his own, Gilder sees a Republican Party frozen in tax-rate tinkering. An equal opportunity critic, he rejects both Ayn Rand and Karl Marx. Man is not homo economicus—a wind-up, utility-maximizing machine—but rather he is active, and his creative intelligence points to his Creator.
Instead of macroeconomic master planning, Gilder presents a new view of money based on the synthesis of supply-side economics and information theory introduced in his book Knowledge and Power. “In an information economy, growth springs not from power but from knowledge.” More than just a financial calculation, the time value of money is a message from the future. This future creativity always is a surprise, frustrating central planners with its disorderly experimentation. To measure the success or failure of these experiments, the economy requires an accurate meter of value.
Unfortunately, these valuable signals of human flourishing are being lost in the noise created by the Federal Reserve. Targeting statistical aggregates, these experts remain pretentiously convinced that they, not the free decisions of individuals, determine the effective money supply. The author of Men and Marriage doubts how American families can look to the future when their horizon is narrowed to the present. How can we resist consumerism when interest rates tell us that the opportunity cost of our consumption today is zero? How did President George W. Bush’s call for an ownership society end with individuals eating their seed corn in the form of home equity loans and second mortgages? How can our government honor commitments to Americans in old age and disability when mountains of debt zero out our future?
“Cash for Clunkers” was easily mocked, but less amusing is the attempt to run the entire economy on the principles of that failed program. Imagining that consumption, not production, drives our economy, politicians pass stimulus packages that drag assets into the present, bidding up current prices, and celebrating this paper wealth earned without satisfying human needs and wants. “How did we change from a nation of frontiersmen to flash boys?” Our monetary failures have enriched Wall Street in a hypertrophy of finance. Gilder points out that “[w]ith no global standard of value, currency trading became the world’s largest and most useless enterprise, accounting for more than a quadrillion dollars in transactions every year.” Instead of venturing into the unknown, our top technical talent is absorbed in a backwardlooking battle for micro-arbitrage.
Perhaps the only futurist worthy of that grandiloquent title, Gilder draws on a lifetime of insights into entrepreneurship and innovation to consider the problems caused by the present state of American money. Generously sharing his pages with the best underappreciated thinkers, like 20th-century French economist Jacques Rueff, and introducing relevant innovations in information technology, Gilder considers possible solutions: a modernized gold standard and decentralized digital currencies like Bitcoin. Gold and Bitcoin both offer the advantage of irreversibility, desirable in the same way that the results of an experiment should not be manipulated after their collection. Lacking a philosopher’s stone, we must expend time in the form of capital and labor to produce more gold. Mined not from the ground but through advanced mathematics, digital currencies like Bitcoin defeat attempts at counterfeiting with timestamping. Their irreversibility is anchored in the scarcest resource—time. In the author’s imaginative prose: “Sound money requires hostility to time travel.”
If Trump and Sanders are the tribunes of anxious middle Americans, failed monetary policy is partly responsible for their rise. Time-bound to the real economy, these workers have experienced remarkable productivity gains since World War II, but wages have failed to keep pace since the United States broke the last link to gold in 1971. Who is left behind? Gilder tells us: “Incarcerated in time are nonfinancial wage and salary earners, paid by the hour or month.” Denied the knowledge necessary to flourish, these Americans are unable to intelligibly respond to changes in the economy and see their wage growth slow. Misdiagnosing stagnation as inequality, technocrats energized by the recent work of French economist Thomas Piketty “propose mechanical and accounting solutions that do not address what real people care about and what affects our well-being: opportunity, creativity, and growth.” With our frontier closed, voters turn their frustration against scapegoats (e.g., immigrants, foreign trade) offered up by selfinterested populists. With our monetary mistakes veiled, greed leads by an invisible hand to socialism as redistribution misallocates scarce capital to the “least productive users of it—politicians.” Fortunately, we have George Gilder to help us separate the signal from the noise, bearing surprising new knowledge, not wielding power.
Stephen Schmalhofer writes from New York City, where he works in technology and venture capital. He is a graduate of Yale University. He invites responses from readers at stephenschmalhofer.com.