Book Reviews

In both books, Gilder amazingly manages to lift economics from the deadening morass into which much of it had sunk for at least a half century. He understands and commu nicates perhaps better than any other. con temporary economist that economics is not largely an endeavor of statistics and econo metrics, since such disciplines do not pos sess the tools to analyze the dynamic, en trepreneurial change that lies at the very core of capitalism. Through his comprehen sive view of economics, Gilder himself pro vides an example of an economist unwilling to accept irrelevancy by limiting the scope of his examination to a purely econometric analysis. In fact, Gilderjustifiably supplants many of the detached, mechanistic assump tions about economic reality. to which a considerable portion of the economics pro fession subscribes, in favor of a more real istic analysis of how the economy functions, focusing on human creativity, entrepreneur ship, and a wide variety of individual incen tives.

Gilder elevates supply-side economics with its emphasis on providing the means and incentives for individuals to work, cre ate, innovate, invest, save, and take risks~ to its proper pre-eminence over bankrupt demand-side economic management and wealth redistribution. Gilder correctly de emphasizes the static, input-output style of economics so relied upon, for example, by former Soviet planners, authors of U.S. economics textbooks, and New York City government officials,while instead focusing on the creative, entrepreneurial aspects of capitalism that, while difficult to quantify, are essential to understanding and ensuring economic growth and opportunity. Mter more than a decade of misrepresen tations in the media and by a wide range of economists, revisiting George Gilder's clas sics reinvigorates too-often dormant supply side economic senses. Gilder vividly por trays the importance of, as he puts it, "the entrepreneurial dimension of the economy."

Recapturing the Spirit of Enterprise re mains one of the finest analyses of the entrepreneur's role in the economy. Gilder understands the bankrupt status of current economic analysis where the primary role of the entrepreneur has been subsumed by an emphasis on governmental management of aggregate figures: Economic recovery depends on the res urrection of entrepreneurs. This resurrec tion cannot fully and durably occur until the ultimate arbiters of economic policy the economists-resurrect entrepreneur ship in their own influential theories. The contrary vision of capitalism without cap italists springs in part from a fundamental error of economic thought, drastically overrating the importance of physical capital formation and other quantitative measures of economic activity and dras tically underestimating the decisive and controlling importance of entrepreneurial creativity. Gilder conveys this critical nature of en trepreneurship not just with sound eco nomic arguments, but with a wide range of real-life examples, including Florida's Cu ban immigrants who prospered "not chiefly by a trickle-down of grants from the gov ernment, but by the upsurge of their own productive efforts;" Henry Ford's illustra tion "that high profits come from giving, through low prices and high wages, rather than from gouging for what the traffic will bear;" and Honda's plunge into designing a motorcycle for which no demand yet ex isted. Gilder quotes Soichiro Honda, "We do not make something because the de mand, the market is there. With our tech nology we can create demand, we can create the market" -thus reaffirming the supply side tenet that "supply creates its own demand," or Say's Law, named for the nineteenth-century economist Jean-Bap tiste Say.

Notably, four new chapters were added to Recapturing the Spirit ofEnterprise. In one such chapter, Gilder once again exposes the weakness of today's economists: "The rea son that most economists cannot compre hend the 1980s is that it was a period of entrepreneurial acceleration. While econo mists measured the deficit and the trade gap, entrepreneurs were multiplying value at an unprecedented pace and disguising it with plummeting prices." One of the best ways for any student of economics, whether in pursuit of a bache lor's degree or already in possession of a doctorate, to gain a better understanding of the economy would be to read Wealth and Poverty. It remains quite difficult for me to think of a more important book written about economics over the past two decades. Gilder gracefully weaves together devastat ing attacks on both aggregate demand man agement and the notion of perfect competi tion, while even occasionally enlisting demand-side demigod John Maynard Keynes in support of a definitive case for supply-side economics.

149 Invoking the fundamental economic prin ciple of division of labor, Gilder also illus trates that supply-side economic theory does not rest solely on incentives: "Capi talism is the most effective way ofexpanding wealth not chiefly because it offers the most powerful incentives, the most tantalizing arrangement of carrots and sticks, but be cause it links knowledge with power. It gives control over resources and over the future flow of investment not to political bureaucracies of certified experts or to the most avidly self-loving pursuers of leisure and luxury, but to the particular business men who manage successful experiments of enterprise .... Under capitalism, economic power flows not to the intellectual, who manipulates ideas and basks in their light, but to the man who gives himself to his ideas and tests them with his own wealth and work. " Gilder correctly points out that "entrepreneurs must be allowed to retain wealth for the practical reason that only they, collectively, can possibly know where it should go, to whom it should be given."

This fundamental aspect of capitalism is currently being washed over by a wave of class warfare rhetoric in much of our public debate, which recently manifested itself in higher income tax rates that will divert energies from productive investment and entrepreneurial ventures to tax-sheltering endeavors fostering economic stagnation. In this light, the new preface to this edition of Wealth and Poverty provides an important review of the supply-side suc cesses of the 1980s and some sound advice for the 1990s: "This recovery [of liberalism] is likely to be short-lived. Although the left may never believe it, demand-side econom ics is dead. In an increasingly competitive global economy, a government can no more raise its revenues simply by raising its taxes than a company can raise its income simply by raising its prices. Like a company, a government must constantly lower its prices and improve its services to expand its mar kets (its tax base). In the 1990s, the United States needs further rounds of tax rate reductions and simplifications in order to lower its deficit."

150 THE FREEMAN • MARCH 1994 Again refusing to pigeonhole economists, Gilder also provides a profound observa tion: "By a supply-side standard, immoral ity diverts, demoralizes, obsesses, and de praves the men and women who must forgo immediate returns, sacrifice immediate pleasures, master difficult disciplines, and respond to the needs and desires of others if they are to create successful businesses. Capitalism has been incomparably the most productive economic system in the history of the world because it best evokes the effort and creativity-the moral quality and pro ductive energy-of workers and entrepre neurs who put the interest of others before their own gratifications." Gilder justifiably deserves to be referred to not only as a great supply-side apologist but also a great apol ogist for capitalism in general. The following two paragraphs from Wealth and Poverty express the essence of the supply-side economics revolutiona revolution still being fought, with the com mensurate setbacks one inevitably finds in any battle, but nonetheless moving relent lessly toward victory: Say's Law in all its variations is the essential enactment of supply-side the ory. But its value does not reside in its mathematical workings. In economics, mathematical models, however elegant, must always defer to the behavior and psychology of persons with free will, who often act, and interact, in unexpected ways. The importance of Say's Law is its focus on supply, on the catalytic gifts or investments of capital. It leads econo mists to concern themselves first with the motives and incentives of individual pro ducers, to return from a preoccupation with distribution and demand and concen trate again on the means of production.

The return is crucial to understanding the current predicament of capitalism. But it will be difficult for economists. Reversion to the supply side means leav ing the comfort of rigorous models and computations and again entering the fray of history and psychology, business and technology. Economists should once again focus on the multifarious mysteries of human social behavior and creativity which Adam Smith luminously addressed in The Wealth of Nations, which Marx stuffed into the maw of his theory, which Keynes treated in most of his writings, and which even John Kenneth Galbraith, in his often perverse way, delights in describing. With Wealth and Poverty and Recaptur ing the Spirit of Enterprise, not to mention other books such as Microcosm, Men and Marriage, and Life After Television, George Gilder-the economist-has entered the fray not only of history, psychology, business, and technology, but of faith and the human spirit as well, to the benefit of both his readers and the economics discipline. D Raymond J. Keating is New York Director of Citizens for a Sound Economy.

Kindly Inquisitors: The New Attacks on Free Thought by Jonathan Rauch Chicago: University of Chicago Press/A Cato Institute Book. 1993 • 178 pages. $17.95 paperback Reviewed by Jonathan H. Adler F reedom of speech lies at the heart of classical liberal thought. Without it, classical liberals have always understood, most other freedoms are nearly unprotect able and scarcely meaningful. Yet today, in America as in many ostensibly liberal na tions, the freedom to speak one's mind is under assault. Buttressing the intellectual defenses of freedom of speech against such attacks is the purpose of Jonathan Rauch's Kindly Inquisitors: The New Attacks on Free Thought. Rauch's achievement is no small accomplishment. Eschewing, for the most part, traditional defenses of free thought, Rauch takes a broader view, drawing on the works of Thomas Kuhn, Karl Popper, and David Hume. To the well-understood liberal systems of politics and economics-represen tative government and free market econo mies-Rauch wishes to add the recognition of a liberal intellectual system" what he calls "liberal science." On this system rests the very possibility of scientific knowledge, broadly understood. "Liberalism holds that knowledge comes only from a public pro cess of critical exchange, in which wise and unwise alike participate."

In the system of liberal science, it is through the exchange of ideas-and the resulting conflict between contrary view points-that beliefs and observations are transformed into knowledge. As a result, the realm of knowledge is inherently restrictive; some things are true, others not. The only way to make that determination is by setting forth propositions and subjecting them to challenges. Reasonable hypotheses are en tertained until they can be disproved. This removes from liberal science an element of certainty-all hypotheses are subject to challenge and revision-but it is this pro cess upon which the whole of knowledge depends. Without freedom of speech, thought, and inquiry (freedoms not wholly separable) liberal science cannot exist; with out liberal science, truth cannot be sepa rated from fiction. Liberal science, by its very nature, has little tolerance for fundamentalism; con versely fundamentalism is a threat to liberal science. Fundamentalism, defined by Rauch as the "search for certainty rather than for errors, " is the antithesis of scientific in quiry. Fundamentalism seeks a monopoly on knowledge from which it can deny the beliefs put forth by all others. Rauch even notes that there are fundamentalist free marketeers-those who refuse to accept the possibility that cherished economic axioms may be flawed, or at least in need of revi sion-and he challenges them to enhance their intellectual rigor. If classical liberals are willing to accept the self-correcting ac tions of the marketplace to properly allocate valued resources, they should also allow the self-correcting mechanisms of liberal sci ence to separate knowledge from supposi tion.

BOOKS 151 Due to its nature as a decentralized sys tem, liberal science frees knowledge from authoritarian control by self-appointed com missars of truth. "In an imperfect world, the best insurance we have against truth's being politicized is to put no one in particular in charge of it," notes Rauch. Liberal science achieves this end. It avoids despotism in the intellectual realm as it does in those of politics and economics. Just as capitalism makes some rich and others poor, liberal science accepts the beliefs of some as knowledge, while reject ing those of others; the game of liberal science creates winners and losers. This, without fail, generates opposition. And so one sees the erection of rules against certain forms of expression. These rules bar "hate speech" in Canada, "historical revision ism" in France, and "insults" directed at minorities in Great Britain. This siege of liberal science has even reached American shores. "In America,"

notes Rauch, "the movement against hurt ful speech has been primarily moral rather than legal, and nongovernmental institu tions, especially colleges and universities have taken the lead. " The threat is not that private institutions establish rules to enforce civility within their own confines but the principle on which such rules are being established. Rauch warns, "A very danger ous principle is now being established as a social right: Thou shalt not hurt others with words. " This principle threatens the whole of liberal science. The search for truth entails the examina tion of all ideas. This makes it inevitable that some will be hurt. In the process of identi fying mistaken beliefs, liberal science nec essarily wounds those who hold them. "Lib eral science does not restrict belief," argues Rauch, "but it does restrict knowledge" [emphasis in original]. It allows each indi vidual to think for himself, but it requires that beliefs be tested and challenged before they can be accepted as true. Thus, to limit criticism in the name of protecting individ uals, ethnicities, or creeds from harm is to limit the ability of liberal science to search for truth by ferreting out falsehoods. Rauch 152 THE FREEMAN • MARCH 1994 notes that "A no-offense society is a no knowledge society," and a "no-knowl edge" society is good for no one.

The determination of knowledge through liberal science works well in the realm of fact and fiction. But by Rauch's own admis sion it is more limited in its ability to discern good from evil; "It is true that the science rules cannot resolve moral questions in the way they can often lead to quick resolutions of questions of fact. You can't perform a study or run an experiment to determine whether abortion is murder or capital pun ishment is cruel. However, let it be said in favor of the science rules that they can help bring order and peacefulness to moral debate." By establishing criteria for the ex amination of ideas, liberal science allows for the peaceful exchange of hostile ideas. Thus "liberal science can help people organize the search for decent moral principles" even though "it is incomplete as to providing them." Kindly Inquisitors is a slim volume that deserves to be well read and widely dis cussed. Over time, one can hope that Rauch's beliefs will be accepted, scientifi cally, as knowledge. D Jonathan H. Adler is a policy analyst at the Competitive Enterprise Institute in Washington, D.C.

9th ANNUAL MISES UNIVERSITY Austrian Econolllics Ludwig von Mises 1881-1973 Students interested in Austrian economics are invited to attend the 9th annual "Ludwig von Mises University." This unique program, sponsored by the LudWig von Mises Institute and held at Claremont McKenna College in Claremont, California, runs from July 16-23, 1994. Undergraduates and graduate students attend lectures and follow a schedule of their own design, suited to their academic interests. Accepted students receive free tuition, room, and board: a scholarship worth $1,200. The weather is balmy, the library has 1.5 million volumes, and the accomplished faculty-headed by renowned economist and historian Mur ray N. Rothbard-provides learned instruction and individual attention. For more information: The Ludwig von Mises Institute Auburn University, Alabama 36849 Phone: 205-844-2500; Fax: 205-844-2583 IDEASON LIBERTY 156 The Economic Way of Thinking, Part 7 by Ronald Nash The unavoidable fact of economic uncertainty.