Wealth is knowledge – WSJ
The stock market carnage came fast and furious, destroying GameStop-like memes and get-rich-quick crypto schemes and cracking SPACs. The leader, Robinhood, fueled by stimulus checks, is a good indicator of excess. Its stock is down nearly 80% from its August peak. It’s a good time to ask yourself: what is wealth? Did Justin Bieber lose $1.3 million on a non-fungible Bored Ape Yacht Club token? Ha! More importantly, how do you keep the wealth?
How to create lasting wealth is surprisingly simple: do more with less. Has always been true, always will be. The Industrial Revolution resulted from the application of knowledge to replace messy horses with steam, reducing both the cost of comfortable clothing and global shipping. Computers, with information embedded in cheap silicon, are still not done displacing librarians, secretaries, doctors and more. These productivity gains are the motors of progress, to the chagrin of the anti-capitalists of degrowth, soaked in sustainability and sharing the pieces of the pie.
Here is a paradox. If you didn’t sleep during Econ 101, you were taught about supply and demand curves and that when prices fall, supply must fall to reach equilibrium. Yet in today’s digital economy, when costs drop, we actually get more supply, such as for silicon chips, data storage, and bandwidth.
I asked author and economist George Gilder about wealth creation. “Wealth is essentially knowledge,” Gilder says. “Let’s face it, the caveman had access to all the materials we have today. As a result, economic growth learns, which manifests itself in market-induced “learning curves” of cost collapse. Yet these learning curves are ignored by economists. Mr Gilder argues that it is information, not materials, that drives growth: “Crash a car and all its value is gone, even if every molecule remains.”
Another paradox is the belief that entrepreneurs like Tesla CEO Elon Musk and Meta CEO Mark Zuckerberg are driven by greed despite the charitable characteristics of capitalism. Rep. Alexandria Ocasio-Cortez of New York, showing her misunderstanding of economics, said in 2020, “Nobody ever makes a billion dollars. You take a billion dollars. Have you ever noticed that those who criticize capitalists the most are too lazy to be capitalists?
Mr. Gilder counters: “Capitalism is not primarily an incentive system, where entrepreneurs act by rote in response to rewards and punishments like in a Skinner Box. It is an information system governed by the unveiling of surprising truths, innovation. If the creativity of entrepreneurs were not a surprise, socialist planning would work. Karl Marx and Bernie Sanders didn’t understand productivity! Some recent surprising truths: mRNA, neural networks, Crispr, quantum computing.
These two paradoxes are linked, says Gilder: “You can only keep your wealth if you are willing to give it to others. Think about it. If you have knowledge and capital, the only way to produce wealth is to invest in things that reduce costs for consumers and slide into new learning curves. Indeed, by providing something they will find productive – the iPhone, an artificial intelligence software – entrepreneurs increase the wealth of their customers. This is what I call social wealth. Capitalism is not greedy, it is the sincerest form of charity. Unfortunately, too much capital is redistributed before it can be invested and provided to others in a wealth-generating form.
So the wealth is knowledge, but, says Gilder, “the biggest constraint on learning processes is time. Time is what remains scarce when everything else becomes abundant. The Fed can print money, but it cannot print time.
Instead, what the Federal Reserve has done with its zero interest rate policy is time warping and distorting when it comes to the markets. When interest rates are zero, all rows in an ROI spreadsheet will flash green as investors’ time horizons stretch out and capital is applied to more distant ideas. The money is spilling over into venture capital, private equity and IPOs. Air taxis? Electric trucks? NFT marketplaces? Woo-hoo! It’s fine, as long as you understand the double risk: the invention doesn’t work and the time horizons kick in when interest rates rise. Kind of like now that the Fed has finally announced interest rate hikes starting in March. Good riddance to zero interest rates.
Mr. Gilder concludes: “In effect, money functions as symbolized time and sets the pace of progress through the darkness and ignorance of man into the future.” Darkness indeed. Investing works best when the future is unknowable, unlike the past few years when investors assumed everything would work out perfectly and got caught holding the bag.
As the Fed raises rates, I think for the next few years investors should be cautious in pursuing their dreams. They should look for real, not imagined, learning curves. In the long term, wealth is created by investing in learning, knowledge and productivity. Don’t focus on demand or supply. Instead, think of the economy as being fueled by knowledge. The ideas are endless, the supply is endless, and the social wealth is endless – it’s only a matter of time.
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