Economics is so uninteresting, it is fascinating the discipline consumes as much of our time as it does. We hang on every report, looking for indicators, a narrative with which to confirm our biases. Gas prices fell x cents in June. The economy added x jobs in July. Second quarter growth was a tepid x percent.
As if any of it really mattered. When it comes time to show our cards and describe our economic philosophy, how often do we make our case using the latest statistics courtesy of mathematicians and bureaucrats? Never. Rather, the depth of most people’s thoughts on economics could be distilled to a few stat-free sentences speaking to the nature of economic man.
Here are mine: People’s wealth, earned and inherited, is their own. The state-run and -regulated economy impedes profits and the pursuit of value. Borrowing against the future to slake present thirsts should be the exception, not the rule.
Thankfully we have George Gilder, who infuses humanity and energy into our discussion of economics, taking it away from the planners’ domain, weighed down with staid talk about numbers and models. To that end, he’s come out with a new book, Knowledge and Power, a sequel of sorts to Wealth and Poverty. Here are a few press clippings about the book around the time of its release.
The first is from Gilder himself giving an interview to Jerry Bowyer:
Capitalism is chiefly a knowledge system, rather than an incentive system. After all, when the Neanderthal in his cave had the same set of physical appetites and natural resources that we have today — the difference between our lives and the lives of Stone Age penury is the growth of knowledge, which is a process of learning which depends on falsifiable experiments. A great result of the research in Knowledge and Power is that crony capitalism necessarily fails because it thwarts the emergence of knowledge. Knowledge comes from experiments that can either succeed or fail. If they’re guaranteed ahead of time, information theory tells us that they cannot yield real profit; any profit they yield is extorted from the rest of us.
A sure way to stultify an economy is to separate the knowledge which is in all our heads, dispersed around the world with each person with a different perspective and set of skills, from the power to actually carry through these experiments of enterprise. Power is centripetal, it tends to go to the people with guns in Washington, and knowledge is dispersed. What makes an economy work is the alignment of knowledge and power.
I say that the incentives are significant but that the reason they’re significant, and the reason the supply-side is so much more important than the demand-side, is that the supply-side is actually generating new knowledge. Whenever a company launches a new product it’s really testing an idea; and if the idea succeeds, if it’s supported in the market place, the knowledge inhering in that idea is incarnate in the economy. That is how growth occurs. It’s a process of learning. Demand-side has very little knowledge in it — it’s really reduced to pricing and transactions. The big mistake of most economics is it tries to parlay a theory of transactions into an entire economy, but what really makes the economy work is creativity, and creativity always comes as a surprise to us. If it didn’t, planning socialism would work.
If you’re reading that for the first time, I envy you. Your life just changed.
Don’t miss this back and forth between Gilder and Bowyer, which hits on the crux of Gilder’s information theory paradigm and the fatal flaw of progressivism:
Gilder: “It takes a low-entropy, no-surprises carrier to bear high-entropy, surprising content. Any influence from the carrier to the content is called ‘noise.’ In an economy, that low-entropy carrier is constitutional government, and contract law, and the rules of the road as Hayek defined them. Property rights are absolutely indispensable, they’re essential.”
Jerry: “Stable family?”
George: “Stable families are a further crucial institution that project the economy into the future. Without stable families, people aren’t oriented toward a long-term future embodied in children.”
Jerry: “So, is the problem with progressive ideologies that they want to introduce the change, the dynamism of society, into the carrier instead of into the signal?”
George: “That’s right. That’s a very good way to put it.”
Gilder writes in the Weekly Standard:
For purposes of the new economics, I sum up Information Theory as the treatment of human communications or creations as transmissions down a channel, whether a wire or the world, in the presence of the power of noise, with the outcome measured by its “news” or surprise, defined as entropy and consummated as knowledge.
Since these communications or creations can be business plans or experiments, Information Theory supplies the foundation for an economics driven not by equilibrium and order but by surprises of enterprise. Information Theory requires that such a process be experimental and its results be falsifiable. The businesses conducting entrepreneurial experiments must be allowed to fail or go bankrupt. Otherwise there is no yield of knowledge and thus no production of wealth.
By identifying a capitalist economy as chiefly a knowledge system rather than a mechanistic incentive system, the new economics obviates all the concerns over greed and avarice as crucial to the creation of wealth. The enabling theory of telecommunications and the Internet, Information Theory offers a path to a new economics that places the surprising creations of entrepreneurs and innovators at the very center of the system rather than patching them in from the outside as “exogenous” inputs. Information Theory also shows that knowledge is not merely a source of wealth; it is wealth. Wealth is the accumulation of knowledge. As Thomas Sowell declared in 1971: All economic transactions are exchanges of differential knowledge, which is dispersed in human minds around the globe.
Sowell’s point is essential to put down the planners’ conceit. They are not gods of the economy. No person or entitled group of people is. Knowledge is dispersed. The free market, people’s informed choices and interactions from the perspective of their own conflicting desires, sorts knowledge out. Not even massive data centers storing our virtual and cellular communications can build a complete profile of us. What little of us that data represents can be used against us, to be sure, and can be used as a pretense to implement grand schemes, but it is not the otherworldly wisdom they sell it as. Those schemes fail because they are never complete, and they don’t stand up to changing circumstances.
Information is also a measure of freedom and creativity. It is gauged by the freedom of choice of the sender of a message, which Shannon termed “entropy.” The more numerous the possible messages that can be sent, the more uncertainty at the other end about what message might be sent and the more information there is in the actual message when it is received. Thus Shannon offers a way to put human freedom at the very heart of the economic model. It addresses freedom on a new level, not only as a condition of enterprise but also as the measure of information and criterion of creativity. (emphasis mine)
There it is, distilled to a single line. The moral argument for a free market, better put forward by Gilder than any campaign literature or political manifesto.
Ben Shapiro writes:
John Maynard Keynes posited that consumers were the great heroes of the economy. Spur consumerism, and spur the economy. But, as Gilder writes, this is dead wrong: “A tempting tautology for every sophomore economics student enamored with the promises of heroic government, and irresistible to liberal politicians and economists, the Kalecki-Krugman principle pervades much economic analysis.” But this treats all consumption as the same. That, in turn, suppresses “the multifarious complexities of supply … But consumer goods represent only the present flow in an economy that entails many stages of production over time.”
On the other hand, economists like Friedrich Hayek and Ludwig von Mises focus on defending Adam Smith’s “invisible hand,” which has lately been termed “spontaneous order.” But, Gilder writes, this is wrong, too: “Spontaneous order is self-contradictory. Spontaneity connotes the ebullition of surprises. It is highly entropic and disorderly. It is entrepreneurial and complex. Order connotes predictability and equilibrium. It is what is not spontaneous. It includes moral codes, constitutional restraints, personal disciplines, educational integrity, predictable laws, reliable courts, stable money, trustworthy finance, strong families, dependable defense, and police powers.” Both are necessary in order to create a successful economy – a growing economy that constantly surprises consumers.
In the end, what is required is a steady system of laws that enshrines private property, rule of law, and consistency. That enables the great insights of man to shine forth. But that requires recognizing a vision of man that embraces spontaneity. “Relentlessly seeking equilibrium and order, homo economicus does not jump or duck; he does not create new things or leap ahead purposefully,” Gilder laments. Reality is far different. “Economic activity is not iterative or ergodic; it constantly changes. It is entropic, full of surprises.” And those surprises come from knowledge: “The power in capitalism must not be mindless. Unless it is combined with knowledge, mere economic power or money is fruitless. Enterprise involves memory of the past and anticipation of the future, and it is creative.”