The Soul of Enterprise Interview [Part 1]

Over the next few Daily Prophecies I’m going to be sharing the transcript of an interview that I did with the hosts of The Soul of Enterprise.

Keep scrolling to read part 1…

George: I wanted to interview you but I guess I’m not going to be able to do this in public.

One of those things about Bitcoin that I’m writing about a lot is Bitcoin is an innovation in information theory, it’s a new security model but it’s also a new accounting model. It’s triple entry bookkeeping. I’d like to have a better understanding of just what that means as an advance, in accounting theory. You don’t just have to [asset 00:01:19] in the liability. You also have to have to process of verification and integration of the transaction with all previous transactions. That’s a triple entry is the idea. I don’t know whether it’s a confusing concept or whether it actually has a contribution to make to accounting.

Ron: Go ahead, Matt. Sorry.

Matt: Sorry, we were getting started right now guys.

Ed: Okay.

Ron: Okay.

Ronald Reagan: Like a chrysalis, we’re emerging from the economy of the Industrial Revolution, an economy confined to and limited by the Earth’s physical resources, into the economy in mind in which there are no bounds on human imagination and the freedom to create is the most precious natural resource.

Ron: Welcome to The Soul of Enterprise: Business in the Knowledge Economy sponsored by Sage, supporting small and medium sized businesses by creating greater freedom for them to succeed. I’m Ron Baker along with my good friend, VeraSage Institute colleague and co-host, Ed Kless. Ed, today, we are so honored. We have my all-time mentor on the line for the entire show, George Gilder. George, thank you so much for appearing on The Soul of Enterprise.

George: Oh, The Soul of Enterprise is just what I’m about. I’m delighted to be here.

Ron: This show is basically inspired by your work. I have to tell you, back in 1981, my father, who’s a barber. In fact, he was born 2 years before you so you’re roughly the same age, he read your Playboy interview in 1981. He took me out to lunch and said, “You need to read this guy’s book. This guy wrote this incredible book. Everybody’s raving about it. Reagan passed it around in his Cabinet. He said, you know, apparently he read 200 books that are cited in his bibliography.”

I pooh-poohed it, George. I said, “Ah, come on, Dad! There’s a lot of crackpot economists, a lot of people right.” For some reason that I can’t explain. I think it ties into your book Men and Marriage and the Faith of Fathers, my dad persisted. He went out and he bought me the book. He threw it at me. He said, “Read this.” I did and I did it in one sitting. It turned my world upside down. That’s how I learned about you. I owe it all to my dad.

George: Thank you so much, Ron. Thanks guys for taking this knowledge and power concept another step forward now in knowledge and power which is an outgrowth of Wealth and Poverty, the book that Reagan read and made me Reagan’s most quoted living author.

It took me another 25 years or more from 1980 to … Gosh! To 2013 to really figure out that economics is best expressed as information theory and capitalist economy is not chiefly an incentive system but an information system.

This is a hard thing to swallow because all economics is based on incentives. Incentives are obviously important but the fundamental concept at the center of economics is called Homo economicus, human being is chiefly a function of the forces around them, a function of outside conditions and forces. Information theory says the human being is not a mere function. He’s a creator in the image of his creator. That is, he’s created in the image of his creator. The key property of creation is surprise. If it’s truly new, the measure that’s novelty is it’s surprise or it’s unexpectedness. That is the crucial principle of capitalism, that it’s an information system, bringing new creations into the world.

Ron: George, you’ve been saying that, I know it’s some Princeton professor, you quote Albert Hirschman who said creativity should always take us by surprise.” You’ve added to that: “Otherwise, planning would work and socialism would work.” I don’t want to live in a world that’s planned.

Let me ask you. A lot of economists, a lot of supply side economists or libertarian or right leaning, people like Steven Landsburg. Steven Landsburg has a great line: “People respond to incentives. The rest is a commentary.”

What I love about Knowledge and Power, your latest book, is you say, “Incentives are like greed. They’re ubiquitous.” You can’t blame and airplane crash on gravity and you can’t blame anything on greed because you can’t blame change on a constant. You’ve flushed out this theory of the creativity and creative destruction of capitalism or entrepreneurship with information theory. Can you explain information theory, Claude Shannon and his concept of that?

George: After writing Wealth and Poverty, I went to Silicon Valley and wrote a newsletter on the semiconductor industry, the microchip industry. Underlying all this semiconductor industry and computer systems that evolved from semiconductors and internet connections which were further expression of network computers is Claude Shannon’s information theory.

Claude Shannon defined information as unexpected bits, calculating information as unexpected bits. He could measure the bandwidth, the capacity of any communication link. Being able to measure it, he could then interconnect it with other information links and be sure that the network would function, that it was the basic insights of the internet came from information theory and the basic insights of computer science also came from information theory of … Shannon was the first to really formulate the bit and the byte and define them.

This really underlies our technologies and our technologies really do drive our economy. It makes sense that the information theory that underlies our technologies also can be used to explain our economy. I discovered it really does.

Ron: It’s an ingenious way of looking at the role of the entrepreneur because I guess economics has never really had a good theory of the entrepreneur. Yeah, they chopped it up to randomness or spontaneous order or whatever. You’re really flushing it out here and giving it a theory. It’s not about responding to incentives or price arbitrage. It’s really an act of creativity.

George: Yeah. What I really came to do was to simplify these concepts. Basically, wealth is knowledge. You really can tell that because as Thomas Sowell said in 1971, “The Neanderthal in his cave had all the material resources we have today. The difference between our age and the Stone Age is entirely attributable to the accumulation of knowledge.” This, I think, is a crucial way to look at wealth. Wealth is knowledge.

If wealth is knowledge, what is growth? I think this was the most important insight. If wealth is knowledge, growth is learning. I’d long been fascinated by learning curves. Several of my books contain long explanation of learning curves. Boston Consulting Group and Frank Haggerty and Texas Instruments and Bain & Company all pioneered the science of learning curves and extended them to almost all, really all activities in a capitalist economy.

With every doubling of total units and value produced, you get a drop in cost of 20 to 30%. Learning curves have been demonstrated for all across the economy from the production of eggs to insurance policies to microchips to bandwidth to … Everything in economy can be described by a learning curve and so it becomes reasonable to take a step forward and say, “If wealth is knowledge, growth is learning.”

Ron: Learning. I love that. It’s learning through falsifiable experiments which is what each new business launch is. I know you’re a big fan of Carl Popper and if something’s not falsifiable, it’s not scientific. Each business is a falsifiable experiment, isn’t it?

George: That’s correct. That’s just right. Learning is governed by Popperian falsifiability. There are lots of argument about Popper and just how complete an explanation of scientific progress popper expounded but it works beautifully in an economy. Businesses succeed because in generating real growth because they perform entrepreneurial tasks of new business ideas. These tests can only yield knowledge and wealth if they can fail, if they’re falsifiable, if they can go bankrupt.

That’s why governments constantly try to guarantee things in order to produce growth but guarantees are absolutely inimical to a learning process. If it’s guaranteed, it doesn’t yield learning. It’s low entropy in Shannon’s model. Entropy being Shannon’s way of defining surprise or unexpected bits or creativity.

Ron: Right. Really, the economy is more about ideas than it is about incentives.

George: Yes. That’s right. It’s more about ideas than it is about incentives. The idea has to be embodied in real experiments which have to be fully tested and which can be falsified and which are enacted in a market process that renders the knowledge institutional and cumulative and thus allows capitalist wealth. That’s why when you have all of these government guarantees, all of these economies so now it doesn’t guarantee everything, that whole system suffers the biggest risk which is systemic risk. The whole system collapses.

That’s the great danger we face today that our economy is so interwoven and interweft with government regulations and guarantees and specifications and rules that are really incomprehensible to any individual in it and thus becomes just noise in the system in information theory terms. The channel is full of noise, you can’t communicate over it. Capricious government regulation is just noise in the channel.

Ron: George, that’s a brilliant insight. Wealth is knowledge, growth is learning and also somewhere else you wrote that knowledge is about the past and entrepreneurship is about the future. I just absolutely love that.

Unfortunately, George, the clock is up against it. We’ve got to run to a break. We’re going to go to this break, folks. When we come back. I’m going to get Ed in here. He’s going to take over and ask Mr Gilder some questions. We’re really excited to have him on the show.

Now, we want to hear from our sponsor, Leading Results.

Matt: Very good job, guys. All clear.

Ron: Sorry about that, George. I hate cutting you off.

George: I’m all right.

Ron: We have soft breaks every 15 minutes or so. We try to stick on schedule but this is just fascinating.

Ed: We got to pay the bills and Voice America is very entrepreneurial.

George: Okay. I’m going to fix that in the next couple of years.

Ed: Yeah.

George: I wanted you to be able to collect your money from micropayments.

Ed: Yeah!

Regards,

George Gilder
Editor, Gilder’s Daily Prophecy

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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...

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