September 8, 2013

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 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 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 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.


  1. that tore into my Sunday evening. I remember meeting Art Laffer in the early 1980's and listening to him on economics, and , not being highly educated myself...I really, really worked at understanding his concepts. I think what Gilder might be asking or saying here is that we view economics as an "effect" when it really is a "cause". Entrepenuers are not enabled by the economic system - they are they creators of the system. ??

  2. Wikipedia has a concise definition for economics: "… the social science that analyzes the production, distribution, and consumption of goods and services." People across the ages have developed different explanations for how goods and services are produced, distributed, and consumed. Perhaps more accurately people have attempted to get at why folks engage in economic activity or how the demand for goods/services might best be met, with "best" always defined in the eyes of the theorist -- is 'best' derived by a motive for personal gain (profit)? Is 'best' defined by efficiency in the use of raw materials or perhaps how the laborers efforts are appreciated? Do people make decisions on how to use their limited resources based on emotion, a sense of fair play, to gain a positional advantage relative to their trading partner, or to acquire something they value more than what they are willing to give up in exchange? Gilder isn't saying that "economics" is a cause or effect, or that entrepreneurs are the creators of the system. What he's saying is that "wealth" comes as a result of differences in knowledge and that knowledge can only be created when we discover something new, whether individually or as a society. The tricky part to Gilder's argument is that the word "knowledge" can be used in discussing anything. For example, you hear a piece of music you've not heard before and find that you really like it. For you, the discovery...the awareness that someone else produced something you didn't (or couldn't) produce and the fact that you find value in this new thing…constitutes "news" for you. If you're willing to exchange something for it - money, time needed to listen, effort to go see the performer, etc. - then an economic transaction has occurred. "Wealth", of a sort, has been created and the participants in the exchange have advanced their standing - you've acquired something you value and the producer has been rewarded accordingly. Now, if the government determined that a narrow set of music was the approved music of our time, restricted people from listening to any other, and continued to officially promote such music even if it were really bad, then government intrusion would have distorted the reality of the market. Innovation..."new stuff"...would be stifled and society would be stunted in the arts. Thinking about it this way, you can see how government subsidies to "green" companies, outfits like Solyndra, or bailing out failing auto companies or very large banks has a similar distorting effect. If such companies had working, successful models, they wouldn't have failed. By artificially propping them up, the market doesn't learn anything or learns the wrong lessons (e.g. get big enough and it doesn't matter what wasteful policies you implement or failed products you try to develop; the government will bail you out!). Stifling innovation, experimentation, creativity also strikes at what it means to be human. People are inherently creative. They want to communicate, exchange ideas, develop new things, build a better mousetrap. When a million people are all at work trying new things, truly remarkable things pop out, things that couldn't have been predicted prior to all the experimentation. But when a central authority forces a preferred solution by diktat, it warps the whole system, strikes at individual freedom and expression, and ends up wasting resources that might otherwise have been used to discover something new! The negative inherent to what Gilder is saying is that there always has to be the potential to fail because failure is also shows us what doesn't work, so some people ‘lose’ even if society as a whole gains. Remember that when Edison was asked about all his 'failures' when trying to invent the light bulb he replied that they weren't failures, he simply learned 3000 ways how not to create a light bulb!