Dec 1, 2012
The key issue in economics is not aligning incentives with some putative [supposed] public good but aligning knowledge with power. Business investments bring both a financial and epistemic [knowledge] yield. Capitalism catalytically joins the two. Capitalist economies grow because they award wealth to its creators, who have already proven that they can increase it. The tests of enterprise yield knowledge because business plans are falsifiable; they can be exposed as wrong, as businesses are subject to bankruptcy. Investment outcomes afford both negative and positive feedback loops. Errors enron and successes google. Entrepreneurial tests yield power in the form of after-tax profits that can be reinvested without recourse to bureaucratic commissions, congressional committees, boards of experts, charitable trusts, and arrays of political administrators.
If business hypotheses are shielded from falsification by political protections or government subsidies or bureaucratic mandates, they cannot yield knowledge, and in most cases they destroy it. The power of politicized companies grows and congeals, but their knowledge degenerates into ideology and public relations. BP fatuously postures into “Beyond Petroleum” and GE turns from productive manufacturing into confectionary energy projects such as windmills and defective light bulbs. Self-justifying leviathans, from Harvard University and Archer Daniels Midland to Fannie Mae and Goldman Sachs, can loom over the economic and social landscape, distorting price and opportunity signals and withering the real enterprises in their shadow.
The United States over the last decade has witnessed a classic confrontation between the forces of entrepreneurial capitalism and those of established institutions claiming a higher virtue, expertise, and political standing. One side subsists on unforced profits of enterprise; the other on rents and tolls and privileges at the Treasury, the Federal Reserve, and the White House.
From the prologue of the new edition of Wealth and Poverty by George Gilder
The government regulators and bureaucracies have power but no knowledge, and high taxes and excessive regulations takes power away from those with knowledge. Stagnation is the logical outcome.