Information Theory and Capitalism

Hard to believe it's been almost two months since my last post. "Life" does have a way of imposing itself  such that we all need to prioritize our allocation of time, attention and effort. Clearly this blog has taken a lesser place when balanced against family time and even work, though I try to limit the amount of work that comes home with me. Another contributing factor has to do with my desire to share things that I hope are value-added or to spend time here at the keyboard on material of sufficient interest (even if only to me) that warrants not spending the time doing something else...like spending it with family. We are awash with news reports, commentaries, the hyperactivity of the blogosphere, an unending stream of televised and broadcasted punditry and, thank goodness, the occasional really good article in print media all hard at work dissecting, analyzing, and critiquing the issues of our day. Why just add to the noise? Snowdengate, Obamacare, the Benghazi debacle, an out-of-control IRS, a dysfunctional Congress, continued turmoil in the Middle East (shock), amateur-hour-theatrics over whether to strike Syria, the latest starlet going into or coming out of rehab...these are covered ad nauseum.  If you are taking the time to read this blog, you are highly likely to be the type of person who already tracks current events and takes more than a moment to reflect on their implications and the various factors that converge to create such situations in the first place...in which case I'd like to provide material you might not otherwise have read during the week. After all, it's not as if I'm trying to entice readership with fantasy league stats, photos of the new royal baby, or commentary on the dating techniques of the newly-graduated-but-not-yet-employed-who-still-live-with-parents-cohort.

With this in mind, I'd like to direct your attention to a superb article published in a recent issue of The Weekly Standard. The item, a four page article entitled "Surprise and Creativity," by George Gilder, is a fascinating overview of Information Theory as the basis for a new economics theory for Capitalism. Yes, yes, I know..."fascinating" in the same sentence as "theory," "economics," and "capitalism"? It doesn't carry quite the emotional high that you get when you see your favorite team beat its arch-rival in overtime but stick with me on this. I think what Gilders is saying is profoundly important for this reason: at the root of any substantive policy lies some sort of strongly-held belief by the person(s) who crafted and implemented the policy...some conviction that a given approach to an issue is most likely to achieve a desired objective or outcome. 

For socialists, the conviction is that production should directly and immediately satisfy needs (of the market or the individual person) rather than the private accumulation of wealth. Therefore, Socialists seek to centrally control resources and dictate production and distribution instead of allowing individuals to do so and for the market, writ large, to determine prices, availability, market penetration, etc. Different religions have different central imperatives that drive implementation of their doctrines. Some belief systems compel adherents to impose their system on others while other systems are quite "hands off." The stewardship of natural resources even finds wildly different expression based on the underlying beliefs of different people--some believing that the "natural condition" of the environment takes priority over the material progress of humans while others are just as firmly convinced that Man has every right to use what nature has to offer in pursuit of material advances. In all these cases, such beliefs can shape the policies that governments adopt and impose on their citizens. We have seen the relentless march of Socialism in Europe whereby governmental (local, state, national), super-governmental (European Union), and extra-governmental (e.g. the European Commission) regulatory bodies dictate that how, when, where, and why of economic policies for all member states and their citizens. Islam, as it is being practiced throughout much of the Middle East, seeks to impose its view of "right conduct" by force, necessarily at the expense of the beliefs of other populations such as Christians or even competing sects within Islam (Sunni vs. Shia). Those who believe the industrial-age activities of mankind are responsibility for changes in our climate seek to change policies effecting energy production and use. My long-winded point here is that theories actually mean something since they serve as the basis for the policies, laws, and regulations that effect our daily lives. 

What Gilder is proposing is a different way to understand economics, in general, and capitalism in particular. An early and devoted disciple of Irving Kristol, Gilder begins his article with an overview of Kristol's thoughts about economic models, specifically highlighting Kristol's criticism of the prevailing theory of capitalism as "a calculus of simple self-interest and apparently governed by no moral code," that "[in] a democratic society...no such system can ultimately survive." By this, Kristol meant that free-market capitalism and, indeed, a free democratic society should be governed by some sort of morality to reflected the conservative values he did so much to champion. According to Gilder, Kristol posed two key questions for any economic theory: "Can the theory provide a moral or 'transdendental' justification for its results, so that it is politically acceptable" and "can it explain growth and creativity?" Gilder says that the Information Theory of economics does so and therefore should serve as the basis for better understanding, and by extension informing policies for, our government's approach to economic policy. 

Here are some highlights (extracts or paraphrased items) from the article:

- Most economists believe that order and information are kindred concepts...that a successful economy seeks balance or equilibrium between the two.

- "Order," however, is the opposite of information since "information" is essentially news or surprise; information is something new, something unexpected. If you hear something you already know, you haven't learned anything, nothing new has been created. Order, then, is in opposition to this because it seeks to minimize disruptions to the system.

- Gilder's "information theory for economics" should be thought of as human creations viewed as 'transmissions down a channel' in the presence of 'noise' or 'impediments to transmission' with the outcome measured by its 'news' or surprise.

- Businesses conducting entrepreneurial experiments must be allowed to fail; otherwise, nothing is learned from the attempt, no new knowledge is generated and therefore no new wealth is produced. [In other words, you can't really learn any true lessons if outcomes are predetermined.]

- Information Theory places the surprising creation of entrepreneurs and innovators at the very center of the system.

- Information is ultimately a measure of human freedom and thus places such freedom at the heart of the economic model.

So what does all this really mean? I believe it means that wealth comes from creativity (something that is new and unexpected); creativity comes from experimentation; and experimentation is defined by an infinite variety of attempts to find new things and new ways. When "the system" -- i.e. the government -- seeks to dictate preferred outcomes, shape efforts toward desired solutions, or impose burdensome restrictions and impediments on capitalism then entrepreneurialism is stunted, the flow of "information" is reduced ("information" in this sense can be thought of as anything, really -- individual effort, the exchange of ideas, the flow of capital, etc.), working capital is bled-off (in taxes, regulatory compliance, and bureaucratic overhead), and true innovation is quashed. 

Consider some of Gilder's closing thoughts:

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

The message of a knowledge economy is optimistic. As Wanniski wrote, "Growth comes not from dollars in people's pockets but from ideas in their heads."...A capitalist economy can be transformed as rapidly as human minds and knowledge can change.

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 pretense of uniqueness and free will. The uniqueness and free will of humans is indispensable to civilization.

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.

As Kristol observed, 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 forebearance, 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.

What Gilder is getting at is this: when our government uses its regulatory powers to choose winners and losers, when it bleeds capital from the private sector via high taxes and extraordinary levels of public debt, when it imposes layer upon layer of regulation on private business and individuals, and when it takes control of sectors of our economy (health care, for example) it distorts our economy, undermines our entrepreneurs, constrains innovation and creativity, and blunts generation of wealth. And most importantly, an overly active government saps "the uniqueness and free will of humans [that] is indispensable to civilization."

Our government helps most when it does the least necessary to maintain a stable framework within which the creative energies of capitalism are unleashed and the root values of our culture find their full flower. I hope Gilder's new economic theory gains traction and I hope you take a few minutes to read the article for yourself.