In reading Chapter 4 of Gilder’s “Wealth and Poverty,” I concluded that capitalism is driven simultaneously by supply and demand and that there is no such thing as a capitalist driven by reciprocity, or what Gilder describes as “giving.” Gilder emphasizes the limitations of mathematical models to discredit them and refutes the idea that people will choose to save their money to the detriment of the economy, but there are clear errors in his reasoning on these two points.
Which Leads: Supply or Demand?
The argument about which leads capitalism, supply or demand, feels very similar to the argument over which came first, the chicken or the egg. Supply shapes demand, but demand also shapes supply. One could say that innovation creates demand for a certain product, but often innovation is done from a place of wanting to solve a problem that a solution is demanded for. One could say demand for a certain product leads to that product being supplied, but people would never know they wanted or needed that product until someone created it. Both are affecting each other constantly, and because you cannot have one without the other, neither can be “first.” I imagine the birth of economy and capitalism began with a supplier meeting someone’s demand for something like food or clothing. The demand for the food or clothing was technically there first, but there was no economy and in fact people didn’t even consider the idea that they could trade for this item until someone entrepreneurial supplied the goods. The demand was there first, but the capitalist system was not truly present until there was also supply. Therefore, you cannot pick one or the other to be the driving force of capitalism.
Reciprocity as a Drive for Capitalists
Capitalists driven by reciprocity, or “giving” as Gilder describes it, do not exist. These people are driven by self-interest and greed. They are just a) business savvy enough to know that providing a product that genuinely serves people will help them profit more greatly in the long run; and b) in a system where it is difficult if not impossible to manipulate rules in a way that allows them to profit more by suppressing the profits of others. In every situation other than a free-market system, a capitalist who is driven by greed will behave the same way as a capitalist driven by reciprocity. This is because both are primarily driven by their own self-interest, and in any system other than a free-market system, the way to maximize profits and satisfy that own self-interest is to manipulate the rules which limit the capitalist system. In a free-market system, the distinguishing factor between the person who seemingly innovates empathetically and the person who seemingly innovates selfishly is not what is driving them, but their business-savvy and social intelligence. The person in a free market who gives without considering the needs of society is not greedier, they are just unaware of the world around them in a way which likely hurts their profits. Analogously, the person who innovates empathetically is doing so because they know that this is the best option to maximize profits and satisfy their own self-interest.
Mathematical Modelling of Economic Behavior
One critique Gilder gives of Keynesian economics is that the world it describes is admittedly not rational or predictable. While I agree with Gilder that this creates a fault in the Keynesian model, I do not think that discredits Keynesian economics as a viable way to describe the economic world. From my limited experience with this model, I have understood it to be something that describes a pattern and allows for some predictive ability, not something that claims to be all knowing about the exact development of an economy. It is the difference between social and natural science, and economics falls within the social sciences. There will never be a model which perfectly encapsulates human behavior (and therefore economic behavior), but the point of the Keynesian model is to use a mathematical model to attempt to predict irrational and unpredictable behavior with some degree of certainty. Therefore, I do not see this critique by Gilder as something that discredits Keynesian economics, but rather as an expected fault of all discoveries in social sciences.
Maintaining Liquid Assets
Gilder seems to imply that people will not simply save their money and keep it liquid without investing because if everyone does it, the money will become worthless. This argument seems extremely faulty to me because by the time people realize that they have not achieved their goals by keeping their money liquidated, they will have already waited too long to invest it. He seems to be saying that an economic depression will not happen because people will invest their money and people will invest their money because if they do not a depression will happen. This is not how it works. People make individual financial choices based on what is individually best for them, often with little to no knowledge of economic theory and simply an assumption based on current market conditions. Thus, if everyone is individually more incentivized to save money in a liquidated form, they will do so, and nobody will achieve the goals they originally intended, and a depression will happen. I believe people are highly incentivized to invest in a capitalist market, but if they were not, the idea that they would still invest because if everyone did not the whole market would fall apart is a fallacy.
