Magazine August 19, 2013, Issue

Signal over Noise

Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World, by George Gilder (Regnery, 400 pp., $27.95)

Don’t sit down with George Gilder’s Knowledge and Power with the idea that you are about to read a book. You are entering into an evening of rambling discussion with a thinker who is revisiting ideas that have animated him for almost half a century, as he delves more deeply into what he was trying to say all those years ago in Microcosm (or in the first version of Wealth and Poverty) or finally understands what Andy Viterbi of Qualcomm was telling him about information theory in 1993.

The work has the texture of a conversation, as threads are plucked, dropped, and found again a few chapters later. Tangents are in order, and tales from Gilder’s personal history, and an occasional rant that he just could not resist. Supply-side economics comes up, demand-siders are excoriated. The history of information theory is discussed, along with some of its broader concepts and extensions. Themes are stated but not explored in depth, often triggering a “but wait a minute . . .” reflex as some thought whizzes by.

So what is this conversation about? A simple but profound issue: the nature of information, and its central position in human experience. Gilder examines the unfortunate consequences of ignoring this centrality, particularly for politics and economic policy.

The recurring focus is on economic issues, and economists as a class receive a good bit of scorn. Gilder does not paint in pale pastels. An author who disrespects Smith, Ricardo, Hayek, Keynes, Schumpeter, and Krugman all within a few pages is using a bold palette.

The book starts with a chapter called “The Need for a New Economics,” which states his main theme, that economics does not understand either the workings or the virtues of capitalism: “Economists became preoccupied with mechanical models of markets and uninterested in the willful people who inhabit them.” The economists, like other social scientists, study human beings by relying on a “heuristic simplification that leaves out creativity and mind” and that assumes a consistency of response to stimuli that precludes learning: Poke the organism in the same place and it always responds in the same way. “Intelligent entities [do not] act purposefully and willfully in the world; in general the world acts on them and through them.”

In this artificial world, surprises are upsetting. Governments that chart their policies by these models are, accordingly, upset — so they try to eliminate surprise, by adding new regulations, by macroeconomic maneuvering, by targeted taxes and subsidies, and by other manipulations. Gilder repeats often that it’s because the authorities lack knowledge that they use power to try to impose artificial order. This ruins systems that need to adapt and change, and that need information about the real world to do so — information about the state of the market, the workability of business models, the values of consumers, and the feasibility of technologies.

The imposition of control by power instead of knowledge suppresses these streams of information, and the results are not pretty, or even sane. As Gilder describes the financial crisis:

The markets were not accumulating economic knowledge. They were trying to predict the exercise of governmental power. They were trying to  second-guess  Paulson, who thought he was second-guessing  the markets. The government was trying to figure out what the markets thought the government would think about what the markets were thinking. With no idea of what was going on, Paulson was impotent to improve the situation in any way. So he needlessly and repeatedly made it worse.

Gilder’s history as a technology writer and investor involved him deeply in the information theory developed by Claude Shannon and others in the middle part of the last century, a theory upon which the computer and telecommunications revolutions are built. That was when he realized that the concepts of information and creativity that are essential in the tech world are missing from economic theory.

He uses as an example William Nordhaus’s work on the history of illumination, which showed that the cost of lighting in 1900 was about a tenth of one percent of its cost in 1800. The change cannot be attributed to anything except human creativity; no resources were available in 1900 that did not exist in 1800. The difference was in knowledge of how to use them.

More generally, Gilder looks at the great leap forward since 1800, as “conventional gauges of [worldwide] per capita income soared some seventeen-fold.” He cites Robert Solow’s work, which found that a conventional analysis of the impact of increases in factor productivity of capital, natural resources, and labor can account for only 20 percent of the increase. All the rest is a “residual,” which must be human creativity plus the development of institutions that allowed this creativity to flourish.

Gilder wants an economics that focuses on this residual. Why think of equilibriums, which are boring and mostly transitory? The question is how to escape equilibrium, and advance. How does society harness human diversity of knowledge to this end, when “the war between the centrifuge of knowledge and the centripetal pull of power remains the prime conflict in all economies”? We need to “reconcil[e] the two impulses [by] a new economics, an economics that puts free will and innovating entrepreneurs not on the periphery but at the center of the system.”

In this view, the capitalist economy is a giant information system that provides feedback and knowledge to entrepreneurs about productive investment and creative possibility. In information theory, information is “surprise,” the unpredicted. A system full of possibilities for surprise is called “high entropy,” and a system with little such potential is “low entropy.” Message-carrying channels must be low entropy (which is to say, predictable) to allow high-entropy messages (those that carry meaning) to get through. Fiberoptic cable can carry unbelievable quantities of information precisely because the glass itself is so pure that any irregularity in the signal is detectable, and thus constitutes a “surprise,” a.k.a. “information.”

For Gilder, entrepreneurial creativity is high entropy. For the messages to get through, the institutional channels of the society — such as its property-rights system, regulatory environment, tax laws, and monetary policy — must be low entropy. The more the government tries to fine-tune these, the more noise it inserts into the system, and the more difficult it becomes for the entrepreneurial messages to be discerned.

All of these thoughts would make for an interesting evening of talk, but as the night deepens, the conversation takes on a deeper tone. It is not just about economics or institutions, but about the human spirit.

Gilder is fascinated by the mind/body distinction. Materialists resolve it by interpreting everything as the result of physical processes. Consciousness, free will, and volitional action are regarded as suspect, and probably illusionary. At an extreme, tell me the position and trajectory of every particle in the universe right after the Big Bang, and I can tell you what you will order for breakfast tomorrow.

Gilder is on the other side. He not only believes in mind as a real entity, he is not much interested in the material world except for its ability to carry information. Knowledge and Power is incomplete because it does not cover, except in an occasional aside, Gilder’s thoughts on the connections between information theory and biology. (On this issue, see his article “Evolution and Me,” National Review, July 17, 2006.) The omission is understandable — he can’t cover everything, and the publisher might have shied away from a work that wandered over into the acrimonious disputes about Darwinism — but regrettable, because Gilder’s views on economics and political institutions are logically connected to his thoughts about the spiritual nature of human existence. There is no information without a mind to create it, and the mind is more important than the physical carrier.

The entrepreneur of Gilderian economics is not the top-hatted capitalist of Marxist cartoons. Nor is he the Homo economicus of economic modeling. He is a spiritual actor expanding the possibilities of human existence and freedom. He will succeed only to the extent that he is “altruistic” in the sense that he truly understands what other people need and want.

Gilder objects to the interventionist state because it clogs the communication channels of the capitalist system with noise, which will prevent such future surprises as the illumination revolution or the great post-1800 leap. But he also objects, perhaps even more vehemently, to its effect on the spiritual health of its citizens. For example, he mourns what the radical green movement has done to his beloved Silicon Valley, by triggering a “general Gadarene rush for green subsidies” and “transform[ing] venture capitalists from heroic contributors to American innovation . . . into a pack of grubby petitioners for pork.”

In the end, the most important message carried by the pages of Knowledge and Power is that capitalism is a profoundly spiritual system. It allows and encourages people to be the best they can be, not only in serving their own interests and exercising their own talents, but in meeting the needs of others. It is responsible for the extraordinary achievements of the past two centuries.

Gilder’s assertion of the need for a new economic model is also an assertion of the inextricable interconnection of our economic lives and our spiritual nature. This imperative of spiritual revival is the real message of Knowledge and Power, and let us hope that that signal gets through.

– Mr. DeLong is the author of Ending ‘Big SIS’ (the Special Interest State) and Renewing the American Republic.

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