The genius and inspiration of capitalism: the individual.
George Gilder will be speaking at the Freedom Center's Wednesday Morning Club on Monday, July 22 in Los Angeles. For more info, click here.
Most Americans don’t understand economics. And they don’t understand it because it is boring. Economics has been labeled the “dismal science” mainly because so many economists have turned the drama of human entrepreneurship into a series of stock phrases, statistic equations, and nonsensical memes.
In his new book, Knowledge and Power, economist and philosopher George Gilder liberates capitalism from the chains of economic jargon. Capitalism, he writes, is not about supply and demand or command and control: it is about information. More specifically, it is about surprise – new information being added to the system, changing it in mind-bending and stupefying ways. The term “information theory” is drawn from the world of technology, Gilder explains: “information is not order but surprise….[information] is entropy. It is disorder, deformations of order, disruptions of equilibrium. It is indeterminism and surprise. And entropy is freedom of choice. This insight is at the heart of the information theory of capitalism.”
Most economists focus almost entirely on the conditions of equilibrium: how do we achieve full employment? How do we prevent recessions? How can government intervene in the economy to help certain segments of the market?
But this is the opposite of how economics should work. Both on the right and on the left, everyone focuses on the system, rather than on providing the stability in structure that allows free radicals to change the world. The heroes of this vision are either consumers, on the one hand, or no one, on the other.
John Maynard Keynes posited that consumers were the great heroes of the economy. Spur consumerism, and spur the economy. But, as Gilder writes, this is dead wrong: “A tempting tautology for every sophomore economics student enamored with the promises of heroic government, and irresistible to liberal politicians and economists, the Kalecki-Krugman principle pervades much economic analysis.” But this treats all consumption as the same. That, in turn, suppresses “the multifarious complexities of supply …. But consumer goods represent only the present flow in an economy that entails many stages of production over time.”
On the other hand, economists like Friedrich Hayek and Ludwig von Mises focus on defending Adam Smith’s “invisible hand,” which has lately been termed “spontaneous order.” But, Gilder writes, this is wrong, too: “Spontaneous order is self-contradictory. Spontaneity connotes the ebullition of surprises. It is highly entropic and disorderly. It is entrepreneurial and complex. Order connotes predictability and equilibrium. It is what is not spontaneous. It includes moral codes, constitutional restraints, personal disciplines, educational integrity, predictable laws, reliable courts, stable money, trustworthy finance, strong families, dependable defense, and police powers.” Both are necessary in order to create a successful economy – a growing economy that constantly surprises consumers.
In the end, what is required is a steady system of laws that enshrines private property, rule of law, and consistency. That enables the great insights of man to shine forth. But that requires recognizing a vision of man that embraces spontaneity. “Relentlessly seeking equilibrium and order, homo economicus does not jump or duck; he does not create new things or leap ahead purposefully,” Gilder laments. Reality is far different. “Economic activity is not iterative or ergodic; it constantly changes. It is entropic, full of surprises.” And those surprises come from knowledge: “The power in capitalism must not be mindless. Unless it is combined with knowledge, mere economic power or money is fruitless. Enterprise involves memory of the past and anticipation of the future, and it is creative.”
In order for capitalism to operate, conditions must be right. Money cannot be debased. Gilder argues for a gold standard: “The 130,000 metric tons of gold that has been mined in all of human history constitutes the supreme low-entropy carrier for the upside surprises of capitalism.” Economics cannot be based on dehumanized equations. It must be based on human ingenuity. When it is not, the economy collapses: “The reason the crisis was allowed to careen out of control was simply that the blind side had all the capital – thousands of times more than did the entrepreneurs betting against them.” And the success of an economy cannot be based on the power of government compulsion: “From the perspective of information theory, regulation is mainly an effort to replace knowledge with power. In general, the more regulation, the less information.”
So, how can such a system be defended? Only by discarding the Gordon Gekko-esque “greed is good” ethos. As Gilder says, “Far from being greedy, America’s leading entrepreneurs – with some exceptions – display discipline and self-control, hard work and austerity, excelling those found in any college of social work, Washington think tank, or congregation of bishops….They are chosen for performance alone, for service to the people as consumers.” Greed, says Gilder, leads toward socialism. And as for the inequalities of wealth, those are not justified by any moral system, but because “the creators of wealth are granted the right and burden of reinvesting it – or choosing the others who receive it in the investment process.” Capitalism succeeds because those who are most knowledgeable invest the most money. Anything else stifles economic growth and innovation. The unpredictability that is “fundamental to free human enterprise” somehow “yields mountains of new wealth in ways that could not possibly be planned.”
Gilder’s Knowledge and Power is a masterwork, not merely because it provides a new framework for explaining an old system, but because it inspires a new generation to the heroism inherent in the market. To enrich our lives, we need surprises of which we haven’t even dreamed. And in order for those surprises to be available, we must have a system that keeps the line quiet enough for us to hear the surprises. Our preoccupation with debt and taxes, with stimulus and inflation, is foolish. We must focus instead on those who change the world. Who knows? It could be us.
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