20 Key Insights Regarding the New Economics of Information

Through information theory, we can see that capitalism is neither a determinist physical machine nor a social Darwinian mechanism animated by stimulus and response, pleasure and pain, or fear and greed.

Capitalism is an information system of experimental ventures that can fail or succeed and thus, yield knowledge.

After all, as Sowell also pointed out, the Neanderthal in his cave had all the material resources and all the physical appetites that we have today.

The difference between our own wealth and Stone Age poverty is not an efflorescence of self-interest — but the progress of learning, accomplished by entrepreneurs conducting falsifiable experiments of enterprise.

Summing up the new economics of information are 20 key insights:

  1. The economy is not chiefly an incentive system. It is an information system.
  2. In an information system, capital flows not to people most ready to spend it but to people most able to expand it.
  3. Demand is irrelevant except as an effect of supply. Entrepreneurs keep their profits not because they deserve them, but because they have proven that they have learned how to invest them.
  4. Information is the opposite of order or equilibrium. Capitalist economies are not equilibrium systems but dynamic domains of entrepreneurial experiment yielding practical and falsifiable knowledge.
  5. Material is conserved, as physics declares. Atoms are eternal. Only knowledge accumulates. All economic wealth and progress is based on the expansion of knowledge.
  6. Knowledge is centrifugal, dispersed in people’s heads. Economic advance depends on a similar dispersal of the power of capital, overcoming the centripetal forces of government.
  7. Creativity, the source of new knowledge, always comes as a surprise to us. If it didn’t socialism would work. Mimicking physics, economists seek determinism and thus erroneously banish surprise and creativity.
  8. All new companies based on innovations begin as monopolies. Monopolies only thwart growth when they are products of government guarantees and subsidies.
  9. Interference between the conduit and the contents of a communications system is called noise. Noise makes it hard to differentiate the signal from the channel and thus reduces the transmission of information and the growth of knowledge. A key source of noise in the carrier is capriciously activist government.
  10. To bear high entropy (surprising) creations takes a low entropy carrier (no surprises), whether the electromagnetic spectrum, guaranteed by the speed of light, or property rights and the rule of law enforced by constitutional government.
  11. Money should serve as a low entropy carrier for creative ventures. A volatile market of gyrating currencies and grasping governments shrinks the horizons of the economy and reduces it to short term trading and arbitrage in a hypertrophy of finance.
  12. The most pervasive regularity and governing scarcity in economics is time. Time cannot be stolen or hoarded, and is equally distributed 24 hours a day to rich and poor alike.
  13. Money functions as tokenized time, translating the scarcity of time into economic transactions.
  14. Money is time. But time is not money. Money must be invented by human ingenuity translating time into coins or tokens.
  15. The true price of anything is the time it takes to earn the money to buy it. Time-prices are measured in the universal metric of hours and minutes and seconds. They can be roughly calculated by dividing nominal GDP or gross output or other nominal commodity price by nominal wages or salaries. Time prices obviate and falsify all the estimates of inflation, deflation, purchasing power parities, and hedonic adjustments in economic data.
  16. Wall Street wants volatility for rapid trading, with the downsides protected by government. Main Street and Silicon Valley want monetary stability so they can make long term commitments with the upsides protected by law. Politicians and central bankers manipulating money are in fact rebelling against time.
  17. Central banks can print money but they cannot print time.
  18. Regardless of whether government spending is fueled by taxes or by government debt, economic “stimulus” packages and guarantees necessarily substitute government power for knowledge. Thus “guarantees” of growth destroy information and slow actual growth.
  19. Analogous to average temperature in thermodynamics, the real interest rate represents the average returns expected across an economy. Analogous to entropy, profit or loss represent the surprising or unexpected outcomes.
  20. Knowledge is the aim of enterprise and the source of wealth. It transcends the motivations of its own pursuit. Separate the knowledge from the power to apply it and the economy fails.

No business guaranteed by the government is capitalist. Guarantees destroy knowledge and wealth by eliminating falsifiability. Unless entrepreneurial ideas can fail and businesses go bankrupt, they cannot succeed in creating new knowledge and wealth.

Epitomized by heavily subsidized and guaranteed leviathans, such as Goldman Sachs, Archer Daniels Midland, Harvard University and Fannie Mae, the economic crisis of today is crony socialism.

The message of a knowledge economy is optimistic. As Jude Wanniski wrote, “Growth comes not from dollars in people’s pockets but from ideas in their heads.” And as Irving Kristol once told me, propelling me to my dictionary, as he often did, “capitalism is a noosphere.” My dictionary was unavailing. But I figured out from the Greek that a noosphere is a domain of mind. A capitalist economy can be transformed as rapidly as human minds and knowledge can change.

Today’s Prophecy

As experienced in the United States after World War II — when government spending dropped 61% in two years, in Chile in the 1970s when the number of state companies dropped from over 500 to under 25, in Israel and New Zealand in the 1980s when their economies were massively privatized almost overnight, and in Eastern Europe and China in the 1990s, economic conditions can change over a span of months when power is dispersed and the surprises of human creativity are released.

Deeper than economics or social theory, these ideas reflect the most powerful scientific ideas of the era.

Information Theory recognizes that information is not order but disorder and that the universe is not a great machine that is inexorably grinding down all human pretenses of uniqueness and free will. The uniqueness and free will of humans is indispensable to civilization.

Ever since The Wealth of Nations, economists have imagined that entrepreneurs seek equilibrium and order. Hundreds of conservative economists have followed the great Friedrich Hayek into the intellectual swamp of “spontaneous order” and self-organization. Hayek was an intellectual giant, but he sometimes accepted the key misconception of the popular versions of libertarian and Austrian economics: that political order can be spontaneous — that capitalism can thrive in anarchy.

In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government.

Progress in law and order does not spring from a Darwinian process of natural selection among random mutations. Progress stems from political leadership and sacrifice, prudence and forbearance, wisdom and courage. Sometimes these must be defended by military force. They originated historically in a religious faith in the transcendent order of the universe. They embody a hierarchic principle. It is these low-entropy carriers that enable the high-entropy creations of successful capitalism.


George Gilder
Editor, Gilder’s Daily Prophecy

You May Also Be Interested In:

George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

And he’s certainly no stranger to the financial newsletter...

View More By George Gilder