The stock-market carnage came fast and furious, wrecking GameStop-like memes and get-rich-quick crypto schemes and cracking SPACs. The ringleader, Robinhood, fueled by stimulus checks, is a good proxy for the excess. Its stock is down almost 80% from its August peak. It is a fine time to ask: What is wealth? Is it Justin Bieber dropping $1.3 million on a Bored Ape Yacht Club nonfungible token? Ha! More important, how do you keep wealth?
How to create lasting wealth is surprisingly simple: Do more with less. Always has been true, always will. The Industrial Revolution resulted from applying knowledge to replace messy horses with steam power, lowering both the cost of comfortable clothing and global shipping. Computers, with information embedded in cheap silicon, still aren’t done displacing librarians, secretaries, doctors and more. These productivity gains are the engines of progress, much to the chagrin of degrowth, sustainability-soaked, divvy-up-pieces-of-the-pie anticapitalists.
Here’s a paradox. If you didn’t sleep through Econ 101, you were taught about supply and demand curves and that when prices drop, supply needs to come down to reach equilibrium. Yet in today’s digital economy, when costs go down, we actually get more supply, as with silicon chips, data storage and bandwidth.
I asked the author and economist George Gilder about wealth creation. “Wealth is most essentially knowledge,” Mr. Gilder says. “Let’s face it, the caveman had access to all the materials we have today. Therefore, economic growth is learning, manifested in ‘learning curves’ of collapsing costs driven by markets.” Yet these learning curves get waved away by economists. Mr. Gilder says information, not materials, drives growth: “Crash a car and all its value disappears, though 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 capitalism’s charitable characteristics. Rep. Alexandria Ocasio-Cortez of New York, showing her misunderstanding of economics, said in 2020, “No one 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 chiefly an incentive system, where entrepreneurs act in rote response to rewards and punishments like in a Skinner Box. It’s an information system governed by the unveiling of surprising truths, innovation. If the creativity of entrepreneurs wasn’t a surprise, socialist planning would work.” Karl Marx didn’t — and Bernie Sanders doesn’t — understand productivity! Some recent surprising truths: mRNA, neural networks, Crispr, quantum computing.
These two paradoxes are related, Mr. Gilder says: “You can keep your wealth only if you are willing to give it to others.” Think about that. If you have knowledge and capital, the only way to produce wealth is to invest in things that lower costs to consumers and slide down new learning curves. In effect, by providing something they will find productive — the iPhone, artificial-intelligence software — entrepreneurs expand their customers’ wealth. This is what I call societal wealth. Capitalism isn’t greedy, it is the sincerest form of charity. Sadly, too much capital gets redistributed before it can be invested and provided to others in wealth-enhancing form.
So wealth is knowledge but, Mr. Gilder explains, “the biggest constraint of the processes of learning is time. Time is what remains scarce when all else becomes abundant. The Fed can print money, but it can’t print time.”
Instead, what the Federal Reserve did with its zero-interest-rate policy is distort and warp time as far as markets are concerned. When interest rates are zero, all rows in a return-on-investment spreadsheet flash green as investors’ time horizons push out and capital is applied to more distant ideas. Money overflows into venture, private equity and IPOs. Air taxis? Electric trucks? NFT marketplaces? Woo-hoo! All that is fine, as long as you understand the dual risks: the invention not working and time horizons pulling in when interest rates rise. Kind of like now as the Fed finally has announced interest-rate increases starting in March. Good riddance to zero interest rates.
Mr. Gilder concludes, “In effect, money operates as tokenized time and sets the cadence of progress through man’s darkness and ignorance into the future.” Darkness indeed. Investing works best when the future is unknowable, as opposed to the past few years, when investors assumed everything will work perfectly and got caught holding the bag.
As the Fed raises rates, I believe for the next few years investors should be careful chasing dreams. They should look for real, not imagined, learning curves. Over the long haul, wealth is created by investing in learning, knowledge and productivity. Don’t focus on the demand side or supply side. Instead think of the economy as knowledge-fueled. Ideas are infinite, supply is infinite, and societal wealth is infinite — it is only a matter of time.