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Aug 11, 2014
Presented by
George Gilder

Why are some countries rich and some countries poor? Is it access to natural resources? Is it tax policy? A motivated work force? These are important, but not determinative. The answer is deceptively simple - it's what's in our heads: knowledge. Thus, the surest way to promote economic growth is to cultivate an environment that encourages the spread of knowledge. Such an environment requires freedom, which is why the freest societies are the most prosperous. In five minutes, economist George Gilder explains why.

Knowledge—not money or any tangible resource—is the most essential ingredient in wealth creation and economic growth.

  • Capitalism is a knowledge system, not simply an incentive system; increasing knowledge leads to increased innovation and wealth.View Source
  • WATCH: George Gilder on the need for innovation to create wealth.View Source

When governments determine winners and losers, society suffers.

  • Crony capitalism interrupts the knowledge gained from entrepreneurial experiments, stifling economic growth.View Source
  • When governments determine winners and losers ahead of time, society gains nothing.View Source
  • WATCH: George Gilder on the need for innovation to create wealth.View Source

Socialism tries to make economies predictable—but stifles innovation and economic growth in the process.

  • Socialist governments attempt to control millions of people’s complex economic decisions through regulatory schemes, tax policy, labor regulation, etc.—all of which can only hurt the economy.View Source
  • Entrepreneurship leads to increasing private sector knowledge.View Source
  • Increasing knowledge leads to growth and wealth.View Source

Knowledge is the most essential ingredient to wealth creation. Capitalism is the system that spreads the most knowledge to the most people.

  • Capitalism is a knowledge system, not simply an incentive system; increasing knowledge leads to increased innovation and wealth.View Source
  • WATCH: George Gilder on the need for innovation to create wealth.View Source

Wealth is created by the organic process of individuals making economic decisions. Government interference destroys wealth.

  • Governments impede entrepreneurial activity by top-down plans like regulatory schemes, bad tax policy and labor regulation.View Source
  • Entrepreneurship leads to increasing private sector knowledge.View Source
  • Increasing knowledge leads to growth and wealth.View Source
  • WATCH: George Gilder on the importance of freedom and innovation in creating wealth.View Source

Government intrusion into markets impedes the acquisition of knowledge, innovation, and economic growth.

  • Governments impede entrepreneurial activity by top-down plans like regulatory schemes, bad tax policy, and labor regulation.View Source
  • Entrepreneurship leads to increasing private sector knowledge.View Source
  • Increasing knowledge leads to growth and wealth.View Source
  • WATCH: George Gilder on the importance of freedom and innovation in creating wealth.View Source

The government can’t create jobs or wealth, because government spends other people’s money. Only the private sector can create wealth.

  • Private sector knowledge combined with capital creates new industries and job opportunities.View Source
  • New industries replace old industries through creative destruction. But when the government gets involved beyond a certain minimal point, everyone but politicians and connected business people loses.View Source
  • WATCH: George Gilder on the need for innovation to create wealth.View Source

Socialism cannot succeed because it tries to control the billions of complex economic decisions made by millions of people every day.

  • Socialist governments attempt to control millions of people’s complex economic decisions through regulatory schemes, tax policy, labor regulation, etc.—all of which can only hurt the economy.View Source
  • Entrepreneurship leads to increasing private sector knowledge.View Source
  • Increasing knowledge leads to growth and wealth.View Source

Let me begin with what sounds like a very simple question: What is the most essential ingredient in wealth creation and economic growth?  Almost everyone would answer: Money. Or having a lot of natural resources.  But the real answer is . . . knowledge.  It's easy to prove. What is the difference between us and a cave man? The only difference is that we know a lot more. Biologically we're the same. The neurons in our brains are the same. The physical world is the same. But our lives are infinitely better. Why? Because of knowledge.  

You don't have to go back to the cave man to prove this point. You could go back fifty years. New knowledge , say the discovery of penicillin or new algorithms that leads to a better search engines -- always comes as a surprise. We call these surprises innovation because they are inherently unpredictable.  New products burst on the scene seemingly out of nowhere. Suddenly, there's electric light or an automobile or an iPhone. Now, of course, these products didn't come from nowhere; they came from the synthesis of accumulated knowledge which led to these innovations, these surprises. By definition, then, innovation can't be planned, it involves dislocation.  The makers of buggy whips did not have a great future when Henry Ford introduced the first Model T and it always points to the future. Innovation -- new knowledge -- leads to not only new products but new companies, and whole new industries. And innovation creates wealth; wealth that is ultimately distributed all through an economy. 

Here's how it works. More freedom, more knowledge, more innovation. And more innovation leads to dynamic economic growth.  Less freedom, less knowledge, less innovation, -- less economic growth. So, if freedom promotes knowledge and innovation, which leads to economic growth, why don't all people and governments embrace it? To understand that we have to return to what I said earlier about innovation being a surprise, being unpredictable. This unpredictability makes many people uncomfortable. Their goal is to eliminate surprise. One finds this is in all utopian visions from communism to socialism to the belief that through complex insurance packages bankers could protect themselves from a catastrophic mortgage meltdown. In Europe with its failing welfare states and more and more in the U.S., we see this desire to eliminate surprise in the ever expanding role played by government, bigger bureaucracies, more rules, more regulations. Every new crisis, real or imagined, brings ever more laws. A corrupt energy conglomerate, Enron, implodes in 2001. A year later the Sarbanes-Oxley Act is passed, adding thousands of new pages of regulations to the federal registry. In 2011, the 2,300-page Dodd-Frank Act is written in response to the 2008 financial crises. It has since grown to more than 8,000 pages.

Most of these new regulations simply impede freedom and the therefore impede the growth and distribution of knowledge. They divert the entrepreneur's energy and resources away from innovation and toward compliance. They create uncertainty about the future. And they raise the barriers of entry for new entrepreneurs. Ironically, the ones who most benefit from all these regulations are big corporations and their teams of lawyers, lobbyists and accountants -- they're the only ones who have the resources to untangle the mess and survive in it. But this drift away from freedom can be reversed, and quickly; within a matter of a few years, in fact. There are numerous recent examples: in the United States during the Reagan Administration, in Chile in the nineteen seventies, in Eastern Europe after the fall of Communism, in New Zealand and Israel in the nineteen eighties, in China and India in the nineteen nineties, in Canada in the first decade of the 21st century.  Because it's an economy of mind, the future can change as fast as minds can change.  Whenever intrusive government retreats, knowledge expands and new prosperity follows. The opportunity for dynamic growth exists not only in the United States, but all over the world if we are only courageous enough and free enough to seize it. 

I'm George Gilder for Prager University.

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