George Gilder, ”Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World.”

”Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World.”

 Human diversity and free markets ”Enforced by genetics, sexual reproduction, perspective, and experience, the most manifest characteristic of human beings is their diversity. The freer an economy is, the more this human diversity of knowledge will be manifested. By contrast, political power originates in top-down processes—governments, monopolies, regulators, and elite institutions— all attempting to quell human diversity and impose order. Thus power always seeks centralization.“

 The primacy of information ”Because the system is based more on ideas than on incentives, it is not a process that is changeable only over generations of Sisyphean effort. An economy is a “noosphere” (a mind-based system), and it can revive as quickly as minds and policies can change. That new economics— the information theory of capitalism— is already at work in disguise. Concealed behind an elaborate mathematical apparatus, sequestered by its creators in what is called information technology, the new theory drives the most powerful machines and networks of the era. Information theory treats human creations or communications as transmissions through a channel, whether a wire or the world, in the face of the power of noise, and gauges the outcomes by their news or surprise, defined as “entropy” and consummated as knowledge. Now it is ready to come out into the open and to transform economics as it has already transformed the world economy itself.”

 Entrepreneurs and the information economy ”In an information economy, entrepreneurs master the science of information in order to overcome the laws of the purely physical sciences. They can succeed because of the surprising power of the laws of information, which are conducive to human creativity. The central concept of information theory is a measure of freedom of choice. The principle of matter, on the other hand, is not liberty but limitation— it has weight and occupies space.”

 Disequilibrium and disorder over equilibrium and spontaneous order ”From the equilibrium and spontaneous order of Adam Smith and his heirs, from invisible-handed markets and perfect competition, supply and demand, and rewards and punishments, I was pushed to theories of disequilibrium and disorder, and information and noise, as the keys to understanding economic progress.”

 Entropy and noise ”One fundamental principle of information theory distills all these considerations: the transmission of a high-entropy, surprising product requires a low-entropy, unsurprising channel largely free of interference. Interference can come from many sources. Acts of God like tsunamis and hurricanes have been known to do the job, though otherwise vigorous economies quickly recover from these disasters. For a particular entrepreneurial idea, interference may come in the form of a more powerful competing technology. The most common and destructive source of noise, however, is precisely the institution on which we most depend to provide a clear and stable channel in the first place. When government either neglects its role as guardian of the channel or, worse, tries to help by becoming a transmitter and turning up the power on certain favored signals, the noise can be deafening.”

 Innovation, surprise and profit ”Linking innovation, surprise, and profit, Shannon’s entropy is the heart of the economics of information theory. Signaling the arrival of an invention or disruptive innovation is first its surprisal, then its yield beyond the interest rate— its profit, a further form of Shannon’s entropy. As the market absorbs a new product, however, its entropy declines until its margins converge with prevailing risk-adjusted interest rates. The entrepreneur must then move on to new surprises. The economics of entropy describe the process by which the entrepreneur translates the idea in his imagination into a practical form. In those visionary realms, entropy is essentially infinite and unconstrained and thus irrelevant to economic models. But to make what he has imagined practical, the entrepreneur must make specific choices among existing resources and strategic possibilities. Entropy here signifies his freedom of choice. As Shannon understood, the creation process itself defies every logical and mathematical system. It springs not from secure knowledge but from falsifiable tests of commercial hypotheses. It is not an expression of past knowledge but of the fertility of consciousness, will, discipline, imagination, and art.”

 The primacy of entrepreneurs ”The key force of economic advance is the entrepreneur, who on his own, without governmental cues or expert consultation or even a defined market, creates new goods, services, business plans, and projects. Economic growth and progress, jobs and welfare, markets and demand all stem from this creativity of the entrepreneur. Population growth, capital accumulation, economic efficiency, and even scientific advances are all less important than entrepreneurial creativity…Failing to see the centrality of entrepreneurial creativity, economists everywhere have counseled governments to attend to the money supply, aggregate demand, consumer confidence, trade imbalances, budget deficits, capital flows— to attend to everything except what matters most: the environment for innovation.”

 Inventions, entropy and the supply side Entrepreneurship is devoted to creation of new goods and services. Creativity is always surprising. That is why it cannot be planned or demanded by governments or even by customers. As Steve Jobs put it, explaining his contempt for market surveys, “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” As Henry Ford said many years earlier: “If I had listened to my customers, I would have built a faster horse.” Inventions in general express Shannon entropy. They come from the supply side.

 The brilliance of Bain and mistakes of presidents Carter and Obama ”Bain and Andrews explained to me that tax-rate reductions were just a special case of the strategy of aggressive price cutting on which Bain had based much of its consulting practice. Bain itself would often do its first project for free. “We have discovered,” Bain said, “that aggressive price cuts can trigger a cascade of strategic benefits, not just expanding market share, building asset values, and increasing revenues and profits, but also gaining more knowledge of the strategic environment and provoking overreactions and blunders by rivals.” “Companies in trouble that raise their prices, on the other hand,” Bain explained, “all too often begin a spiral of decline.” The market darkens before them as they retreat from it into highly paid niches. Their technological progress slows as their volumes decline and rivals rush ahead into the future. Bain saw the United States under President Carter as a company in trouble that was raising its prices in response, with all the predictable bad effects, such as competitive losses to Japan and Germany, lower real revenues for the government, collapsing equity values and the famous “national malaise.” The pattern is being repeated today under Obama.”

 Against spontaneous order “Things that are growing and changing are by definition high in entropy. Moving from a settled past into an undetermined future, they are always defined by their information, their news, their surprises. 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. Order requires political guidance, sovereignty, and leadership. It normally entails religious beliefs. The entire saga of the history of the West conveys the courage and sacrifice necessary to enforce and defend these values against their enemies.”

 Against materialism ”Entrepreneurial creation is the generation, de novo, of novelty and surprise— freedom of choice originating in the world of ideas, and imagination beyond all concern with chemicals. The contrary view— that all ideas are determined by material relationships— is the materialist superstition.”

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