23 Aug Knowledge and Power is George Gilder’s New Magnum Opus
George Gilder is one of the most important minds in the United States of America, and he has been for 30+ years. His Wealth and Poverty is one of the very few HAVE-TO-READ books in the history of free market economics. His Israel Test is one of my favorite books of the last ten years. He has been one of the true thoughts leaders of this generation in economics, technology, cultural values, and the inter-connectedness of markets and morality. And now, in the later portion of his illustrious life and career, I am happy to say that he has outdone all of this previous accomplishments with his thought-provoking new work, Knowledge and Power.
Allow me to bullet point for you some of the ket takeaways from this work:
• Free market economists miss the mark when they hang their shingle on the triumph of the system and the pursuit of market “equilibrium”
• Capitalism is an incentive system but it us chiefly an information system. Learning and discovery are paramount
• Adam Smith rightly described equilibrium, spontaneous order, competition, supply and demand, incentives. The new paradigm builds on that where economic progress comes through disequilibrium – through noise
• Information Theory says that information is valuable when it is surprisal (entropy)
• Profits differentiate between normally predictable yield of commodities and unexpected returns of creativity
• The failure of nearly all schools of economics amounts to an inadequate role for the entrepreneur. Even Adam Smith thought entrepreneurial creation was reducible to a division of labor. All systems of thought predict a reduced role for the entrepreneur; they do this to their own peril
• Entropy is a measure of surprise, disorder, randomness, complexity – a measure of freedom of choice
• The inherent advantage (genius) of private equity is the alignment of knowledge and power. Fully-informed finance.
• A price of “free” evokes unbounded demand while choking off supply
• “The incentive theory of capitalism allows its critics to depict it as an inhumane scheme of clever manipulation … Wealth actually springs from the expansion of information and learning, profits and creativity that enhance the human qualities of its beneficiaries as it enriches them. Workers’ learning increasingly compensates for their labor, which imparts knowledge as it extracts work. Joining knowledge and power, capitalism focuses on the entropy of human minds and the benefits of freedom. Thus it is the most humane of all economic systems.”
• Smith’s vision of the entrepreneur as a tool of the market rather than its creator constitutes the original sin of what we call “demand-side” economics
• The market creates neither product nor the process of production. The entrepreneur and his product create the market
• Supply creates its own demand through the proliferation of goods and services down the curves of learning, entropy, and imagination
• Socialists believe their mission is to seize capital for the masses but the great secret of capitalism is that, detached from a capitalist, there is no capital
• Political order is not spontaneous; capitalism can not thrive in anarchy. Believing it can is the key flaw in modern Libertarianism. Central to the Austrian model is the power of prices for signaling economic conditions (Hayek). Without the government’s enforcement of property rights and contracts and its maintenance of defense and a monetary system, the carrier fills up with noise. Information Theory defines entropy as freedom of choice and surprise. It is intrinsically libertarian in its implications. But it does not and can not presuppose anarchy. Legal codes and moral practices do not spring spontaneously from the self-interested conflicts of individuals. Progress in law and order is achieved through a heroic struggle to develop civilized institutions and defend them
• For the last decade, the chief endeavor of capital markets has been to weaken all the disciplines of ordinary ownership
• Rational choice in the face of massive ignorance – whether attributable to folly or deceit – is meaningless
• The goal of financial reform should be to end this divorce between knowledge and power and ensure that most capital flows to the people who can wield it best, the entrepreneurs
• Government approach in the financial crisis was classic negative feedback-loop producing … Markets quit trying to accumulate economic knowledge and instead tried to predict the exercise of government power (i.e. they were second-guessing Paulson). But Paulson was trying to second-guess the markets. So in other words, “the government was trying to figure out what the markets thought the government would think about what the markets were thinking”
• By definition, innovation can not be planned. Unpredictability is fundamental to free human enterprise. Crucial mistakes are made when one believes they can buy a business rather than actually learn it. Entrepreneurial knowledge and commitment is, time and time again, what confounds the master-planner types. It can not be redistributed because that reduces it to rank material, when knowledge is not material. This point is the crux of what is so often missed by enemies of free men and free markets
• In a free economy, a high degree of apparent randomness does not mean actual randomness; entrepreneurial economies can be expected to be full of creative surprises
• The only alternative to the individual creation of capitalism is mediocrity and stagnation
• Those seeking assurances and certainty necessarily live in the past, and become a slave to a reactionary ideology. The entropy of giving is the heart of the matter, and only the entrepreneur holds the future
Gilder’s book takes aim at certain targets which were desperately in need of the punishment Gilder gave them: The anarchist-Libertarians (Rothbard, Rockwell, Paul) who fail to understand the need for protection of contracts and private property rights that their system depends on; the randomness-cultists (Taleb) who fail to appreciate the non-random creativity driving the markets they describe as random; the technicians who believe outside knowledge could ever supersede the inside knowledge of fundamentals; the “CFO-bureaucrats” who obsess over data (backward-looking) but miss the future (visionary entrepreneurial growth).
I can not recommend Gilder’s magnum opus enough for those looking to grow their understanding of economics, and most importantly, develop a framework for how entrepreneur-driven systems can and should flourish in the generations ahead.