George Gilder on knowledge, power, and the economy

the signal and the noise can high-tech information theory revived the American economy George Gilder is certain that it can uncommon knowledge now welcome to uncommon knowledge I'm Peter Robinson a graduate of Harvard who served in the United States Marine Corps George Gilder is the chairman of the Gilder fund Management LLC and a prolific author whose books include men in marriage microcosm telecom and the israel test mr. guilders 1981 book wealth and poverty so impressed President Ronald Reagan that the president personally gave a copy to each member of the cabinet George Gilders latest book knowledge and power the information theory of capitalism and how it is revolutionizing our world George Gilder welcome great to be here again George your thesis I want to come to information theory itself in a moment for first knowledge and power quote the war between the centrifuge of knowledge and the centripetal poll of power remains the prime conflict in all economies explain wealth is essentially knowledge Thomas soul in 1971 wrote that all economic transactions are transactions of differential knowledge different things that each of us know and he also pointed out that the Neanderthal in his cave had the same material resources that we command today the difference between the Stone Age and our age of luxury today is entirely the accumulation of knowledge we really live in an knowledge economy knowledge isn't like wealth or associated with wealth knowledge in a real sense is wealth and that's what we trade in an economy all right so I can understand treat me as a very slow layman here I can of course understand when it comes to something such as software yeah the operating system that runs my Mac I can get the idea that that's knowledge because it's totally immaterial it's a set of instructions you can't really pick it you can't hold it but when I go by you said that all wealth is knowledge when I go by go to the drugstore and pick up shower soap and toothpaste where does the knowledge enter into that transaction because because the drug store whatever that is selling you the toothpaste and so it has the knowledge of how to build a distribution system a retailing scheme that can deliver these products to you at the moment you need them in exchange for the knowledge that you've accumulated and converted into money to bring to the store for that transaction it's you're really trading the knowledge that's commanded by the drug store the pharmacy with the knowledge that you have previously developed and which has imparted power to your career not that much power but but enough to buy toothpaste now to information theory and I'm going to insist on going slowly here George because this is tricky material yet it informs the entire book I had to read a couple of passages several times to make sure I had them once again from knowledge and power quote we begin with a proposition that capitalism is not not chiefly an incentive system but an information system and that information itself is best defined as surprise take the first assertion first capitalism is not an incentive system but everybody knows the reason entrepreneurs do what they do is to get rich they're responding to incentives well incentives are ubiquitous ascribing capitalist wealth to incentives is like ascribing plane crashes to the force of gravity you know greed incentives they're everywhere and yes they are significant but they don't really explain the create the fabulous creation of wealth so in the old Soviet Union the bureaucrats were responding to incentives to yeah the bureaucrats were responding okay very assiduously - precisely - the incentives that they faced and like those and incentives are everywhere but what differentiates capitalism is it's a knowledge system it's and knowledge is generated by a process of learning and I really came to this insight through my studies with Bill Bain and Bain & Company way back in in the day when he showed me that all the learning curve and and the learning curve applies to all products from insurance policies to poultry you mean by the learning curve the learning curve ordains that with that the costs of producing any good or service dropped between 20 and 30 percent with every doubling of total units sold and a famous learning curve out here in Silicon Valley is Moore's law and because Moore's law applied to transistors which could be produced by the trillions this learning curve transformed the entire world but the learning curve is a is very specifically a learning curve it's a reason cost drop is because people the people manufactures the distributors everybody involved is learning new efficiencies how to do what they do better faster is that correct that's correct all right meanwhile material resources as physics teaches us don't accumulate them it matter is conserved that's a principle of physics all the differences the differential Delta's that account for transactions across the economy are differences of knowledge and information itself is best defined as surprise that's your the second assertion that I quoted what does this mean well when I first started studying entrepreneurship I encountered an observation by Albert Hirschman of Princeton who said creativity always comes as a surprise to us if it didn't we wouldn't need it and planning would work and I've extended that socialism would work but entrepreneurial creativity is almost defined by its surprisal by its unexpected character and I've been saying this for years and then when I came to Silicon Valley with rich Carl guard to start ASAP Forbes a Forbes public a Forbes ASAP as I started studying information theory which is the foundation of what the internet and and telecommunications and computer science ok let me give you a quotations knowledge and power once again we must be able to distinguish between the signal and the noise between the word and the wire that's at the heart as I take it of information theory go ahead no make me understand that George I then encountered Claude Shannon who is a great figure who in 1948 the same year that William Shockley and Bardeen and Brattain introduced the transistor which I always previously regarded as the great achievement of 1948 at Bell Labs but at the same time Claude Shannon introduced information theory which which defined information itself as transmitted through a computer or over a wire or across the world as chiefly surprised and it seemed to me that since Shannon had defined information itself and information as the raw material for knowledge and Hirshman had defined entrepreneurship as surprise here we had a crucial tie between the economy the very substance of economics and the information theory that was animating all the great technological progress of our day so for the first time it became possible to create an economic science that could capture the surprising creativity of entrepreneurs not patch it in from the outside or or treat it as some derivative of price differences or arbitrage or as Paul Romer calls that chemical elements being reassembled in some way but raw creativity is right at the center of information theory definition of Vanek of an economy as human creations or communications as transmissions across a wire a channel or the world in the face of noise you know resistance and noise with the outcome gauged by its surprise how unexpected it is how how contrary to expectations it is that's what information is it's it's what you don't expect rather than what you do expect so I'm the the the word and the wire the signal in the noise on if we think of a what what are we thinking of here if we're thinking of a tin can on a string and you hold the other tin key you and I you can hear a kind of staticky sound it's a seashell sound right that's the background that's the noise and when you said hold Peter that's the surprise that's what's different from the background that's right that's different from the channel right and the crucial point that Shannon saw was that in order to carry a clear signal a surprising creative signal you need a predictable carrier and Shannon started this with a tin can down of a barbed wire fence back in his home in Michigan Gaylord Michigan and he really Kappa tree capitulated the entire history of the of the phone industry because he started by doing telegraph signals across tin cans and barbed wire fence and ended up doing voice signals as a child and later went to Bell Labs and invented information theory and so one aspect I'm I'm returning to this because again it's a point of departure for a great deal of what you say about capitalism itself let me just quote knowledge and power it takes a low entropy carrier no surprises to bear high entropy information that is to say full of surprises that's right so let me make sure that I have that right a telephone line is a pretty low entropy device we can transmit electronic signals that are quite easy to decipher it's pretty good a fiber-optic cable is even better because it's even lower entropy look less disorder fewer surprises total stability and clarity and you send a pulse across that and you get almost a pure delivery of the surprise information is that correct that's correct okay the only further point that I used to make when I was writing at ASAP and writing telecom and microcosm was I used to predict that all information would finally migrate to the electromagnetic spectrum because the electromagnetic spectrum whether it's light down a fiber optic line or or a lek trickle signal down a wire or or microwaves across the air would always have a perfect it'd always be possible to separate the signal from the carrier because the carrier is guaranteed by the speed of light the absolute speed of light guarantees all transmissions down the electromagnetic spectrum it means you can always differentiate the signal from the wire that the word from the wire because the wire is completely predictable barring electromagnetic signal now influence from the wire or from the channel to the content is called noise right and and you want to have as little noise as possible and in the least noise and any channel in the world really is the Allah is the fiber optic line that utter purity of worldwide webs of glass and light that currently inform our entire globe no rational determinist scheme knowledge and power no rational determinist scheme can encompass entrepreneurial entropy because of this no planned economy actually observes or fulfills its plan you know the socialist system the centrally planned economy of the old Soviet Union and even you make very clear you believe impulses toward expansion of the government in this country introduce noise into the economic system correct yes but that's not just a metaphor somehow or other you really mean it in in so explain that well there there's noise is has a characteristic that's kind of that I've encountered first with Qualcomm Corporation which is the kief force in wireless technology invented the CDMA system that really spurred the vast expansion of wireless capabilities over the recent decades they've really came from Qualcomm and and Qualcomm was based really on an insight that that the ultimate most efficient system is a system where all the signals were totally unexpected there's a totally unrelated to one another in other words by knowing one signal you know nothing about the next signal right because and Viterbi whose was the one of the founders of quality Qualcomm and famous for the Viterbi algorithm said that ultimately you want your signal to resemble white noise because white noise perfect noise is also identified by heaven each noise impulse completely unpredictable from the previous impulse so therefore the most capacious channel is the channel that can bear signals that are completely surprising because each each all information it was all information pure information and that that's that was what Qualcomm attempted to achieve cdma so that rather than fighting the noise you join the noise as it were with signals that resemble noise and and are differentiated by their codes and this was code division multiple access which is the system that all our wireless phones and smartphones have used until very recently we're sort of moving to another system now but to get it the CDMA was the heart of the wireless revolution so in an economy you want a set of circumstances government circumstances tax policy regulation legal regime property rights which somehow or other gets your permits the group greatest possible pure information at right so why does socialism impinge on pure information well what you want is a predictable carrier remember the electromagnetic spectrum all guaranteed by the speed of light which you want in economy is predictable laws predictable political leadership a spirit of trust which means contracts can be predictable property rights which means that property rights don't change from time to time that entrepreneurs can launch their creations through a world that's governed by predictable rules of law the rules of the road as Hayek said and where I diverge to some extent from pure libertarian views is that I don't believe that these rules of the road the Constitution the trustworthy political leadership contracts courts that are reliable that all these low entropy carriers can emerge spontaneously I think it takes heroic took George Washington and Jefferson and Madison all these great men to achieve the low entropy carriers that allowed the efflorescence of the American economy and that still requires both restrained and inspired political leadership and and sacrificial national defense and and reliable police and the whole structure of the constitutional order is necessary in order to bear the unexpected surprising creations of entrepreneurs new goods and services new barring new knowledge through the economy knowledge and power in capitalism the low entropy carriers are the rule of law the maintenance of order the defense of property rights the stability of money the discipline and Futurity of family life and a modest and predictable role of government these low entropy carriers do not emerge spontaneously they originated historically in a religious faith in the transcendent order of the universe George there are moments when there's a kind of cultural whiplash from reading this book because here and here and here you're talking about cutting-edge information theory you even go into the mathematics of it you talk about how the physics that I struggled with in high school is now transit you sound so cool and so cutting-edge and so high-tech and then you talk about sacrifice and thrift and a religious belief in the transcendent order of the universe and suddenly were not in Silicon Valley we're in small town Kansas or Iowa how do these go together well Tom Wolfe wrote a great essay about Bob Noyce Bob Noyce was the founder of Intel Corporation and the inventor of the integrated circuit really one of the great heroes of our entire history is Bob Noyce and Tom wolf came out and really studied came out here to California and studied Bob Noyce as he was founding and developing Intel into a powerhouse the really the transformative come company I think in the history of the 20th century virtually was Intel Corporation if I remember Tom Wolf's essay which was an Esquire maybe in Esquire but it was collected and Tom Wolfe over you can remember Tom Wolfe concluded that what was going on that that the you had to understand noise you had to understand little Grinnell you know Iowa I was about to say Ohio you had to understand little Grinnell Iowa you know correct yes and that's it's the same kind of thing that noise I don't recall this was not a particularly religious person but he had imbibed a certain sense of order to build is that correct that's right he he was what Shannon would call a low entropy carrier and entropy Shannon uses as a essentially synonym for information entropy means information and Shannon surprisal Barack Obama takes office and one of the first actions is a bailout of General Motors which wipes out I'm not sure I got to the bottom of the figures but it wipes out the value that certain bondholders believed they were entitled to as a matter of contract law and that does what to the economic system it's all it's limited to the auto industry and indeed Ford never took a handout it's quite the administration was look we hit we preserve jobs it was very very limited but it does what to the systems it's noise you know a key principle of information theory was profound it by Karl Popper a great philosopher who said any scientific proposition in order to be sustained had to be falsifiable you couldn't yield scientific knowledge without false fireball experiment you've had to be able to test it you had to be able to test it it had it couldn't be its outcome couldn't be guaranteed if the outcome is guaranteed it yields no new knowledge and thus cannot contribute to economic growth and wealth so when politicians come into office and start guaranteeing banks and guaranteeing auto companies and guaranteeing mortgages and guaranteeing ever bigger savings accounts trying to guarantee outcomes they're shutting down it's the experiments that lead to information there that lead to or are in their own way wealth wealth yeah it they they are halting wealth in its tracks and that's why all the agitated interventions and stimuli packages about the Fed what about the money engine and loose zero interest rates all these are destroying knowledge because they're destroying falsifiable experiments and thus are prohibiting economic growth that's why stimulus packages do not create jobs do not expand growth but in fact inhibit it and suppress it because they suppress the creation unexpected surprising innovations that actually constitute all wealth in an economy I quoted a moment ago knowledge and power to the effect that in capitalism one of the low entropy carriers is the the future Futurity and stability of the family yeah which sounds pretty retrograde if I may say so and this year of our Lord 2013 except of course it's not our Lord that's also retrograde but George it even gets worse I went back and looked at the opening page of men and marriage get ready I'm going to quote this and when I do it what I'm about to quote is so politically incorrect there will be a paddy wagon waiting to take you away after the shoot the prime fact of life the prime fact of life is the sexual superiority of women women transform male lust into love channel male wanderlust into jobs homes and families change hunters into fathers and divert male will to power into a drive to create Oh George you go from being cool to being unspeakable well crucial to economic growth is a sense of the future you have to you have to be engaged in long term activities because knowledge is hard to achieve and it takes determination and resolution and sacrifice and persistence and perseverance and imagination to pursue and when families break and the way most of the society gains a sense of a stake in the long term future is through children who biologically extend our lives into the future and give us a sense of a stake in the future and when when the family breaks down just as when a stable money fails and the courts become capricious and unpredictable and politicians gouge for power and money of their own what happens is the whole the horizons of the kind of the economy closed ends and you and the whole society becomes increasingly engaged in short-term transactions and you get a company like goldman sachs of focusing on nanosecond supercomputer games to increase the speed of its trading and their everything resolves to small little price differences in the next seconds minutes or hours rather than in the long-term commitments that yield a great and growing economy what is to be done knowledge and power the solution to our current economic stagnation is a return to the low entropy carrier predictable rules of taxation regulation immigration and monetary stability and economy an economy is not a process that is changeable only over generations it can revive as quickly as minds and policies can change CLAB solutely this is this is one of the great mess of the left that somehow we're in the new normal this is permanent you Joe yeah thinks that that it's impossible to change economic systems except over long periods of time and and the because this is an economy of knowledge because it's an economy of mind it can change as fast as human minds can change when you change your mind you're changing reality yeah basically and and in an economy of mind you change your mind and about the valuation of your of the house down the street or about the valuation of a stock in the stock market or about the valuation of the of the apples at the roadside farm stand and you change these values and so what happens when you when policies change you can radically transform an economy I'm going to quote you again George Gilder writing not long ago in the Wall Street Journal now everyone knows America's liabilities will have to be addressed but the real opportunity is to transcend them to quote management expert Peter Drucker this is still you but you're quoting Peter Drucker do not solve problems pursue opportunities now what opportunities let's be practical let's for a moment let's shrink our own horizons and talk about the contemporary political scene what opportunities should if you're John Boehner if you're the Speaker of the House or if you're the president the administration what opportunities are there to be grasped they're just immense opportunities that are largely the counter part of our oppressive government regulations the mazes of tax rules the twenty three thousand twenty three hundred and twenty three pages of the dodd-frank bill the mazes and entanglements of Obamacare all these regulatory systems are trying to suppress actually suppress surprise when what really can save us is the creativity of enterprise the creativity of entrepreneurs just as you know the great example I think in the great test of this issue arose after the Second World War and all the socialist economists all the Keynesian economists including Paul Samuelson predicted that after the Second World War the US would and in a depression the worst depression in the history of economic said Paul Samuelson the leading Keynesian unless we maintain government spending roughly even after the war a huge wart on levels yeah at huge wartime levels instead we reduced government a Republican Congress was elected in 1946 and to the horror of all the establishment all the sophisticated Keynesian economists said this Astor would come and that Republican Congress cut government spending sixty one percent they laid off a million government workers a hundred and fifty thousand regulator's they dismantle more if you think of all the people who are being demobilized all the trolls or even immortalized it's it was just a complete catastrophe according to every Keynesian there's no way that the US economy could could endure this utter disaster without another depression instead we ignited it a period that we now consider the Golden Age of this 1950s economy George the Republican Congress in 1946 and Harry Truman is president later I mentioned in the opening that President Reagan so loved your 1981 book wealth and poverty that he handed that around Reagan comes in when he takes office in January 1981 when the economy has been going sideways at best for years inflation is now in double digits and by the time he runs for re-election his agenda of peeling back regulation and stable money and so forth the economy has entered what will turn out to be 25 years of growth all right Harry Truman in 46 and Ronald Reagan in the early 1980s were both able to assume a certain social fabric when Reagan took office the out of wedlock birth rate was less than 10% today it's 40% among african-americans it's over 70% among Hispanics it's over 50% I can grasp your assertion that if you change your mind about valuations you can reach you can you can change the economy but what's your but the social fabric and I I'm I think you're great I'm good I think it's fair for me to bring this up because you talk about really you're knitting the two together you're talking about basic human impulses and you're talking about basic anthropology the structure of the family sexual impulses and joining this with this very sophisticated fascinating information theory but that anthropology can't be repaired like that can it's right that it's that is AB deeper problem the fact is as charles murray wrote this book coming at me hard it shows that this tragedy is befallen the middle class and in america and it is a tragedy when men and marriage I predicted that if the family collapsed the way it seemed to be doing and in the case of the inner city that it would take a welfare state to care for the women and children and a police state to take care of the boys and what we've done now is we do have a welfare state two trillion dollars a year supporting women and children and we have a police state to handle disruptive black boys mostly but boys in general are a problem for our society because female-headed families can't really raise boys very well and at some times they can and they're heroic stories we hear but in general the society depends on having a man and a woman taken care of of children and now we have a third of black young men either in jail or on probation or on the lam imagine liberal this is the harvest of liberalism it's to put 1/3 of black young men in jail that that's what liberalism is produced and how do we address that George well that if that requires the kind of changes in policy that can transform an economy overnight can also start changes and values that can in turn yield a more stable and flourish shrink the state and in particular the welfare state you can transform the economy quickly and you can begin the restoration of the family you certainly can what you do is is vast opportunity this whole idea that somehow technology is no longer advancing so fast and opportunities are closing down is all an effect of this concentration of power in Washington where it's separated from the entrepreneurial knowledge that can actually yield growth and progress and so you change the economy as we did after the Second World War as Israel did in 1985 when it had a thousand percent inflation and the whole Israeli experiment was about to collapse I wrote a book about it was real - called the Israel test and Israel just completely turned around in about three years and transformed their economy into one of the fastest-growing economies in the face of the earth the passage from knowledge and power with which we opened George quote the war between the centrifuge of knowledge and the centripetal pull of power remains the prime conflict in all economies close quote Obamacare is rolling out deficits are mounting up how is the war going are you fundamentally optimistic I'm optimistic but because my sense of history is when you have a train wreck ahead people change people change their minds people are still in a sort of delusional fog now about the left and about capitalism but when you know disaster strikes you get innovation and transformation you know you know during the 1970s the 1970s was about as bad a decade as the 1989 as the 2000s I can compare the two and and the 1970s was absolutely terrible high unemployment inflation ten percent a year the gold standard abandoned gas lines gas lines energy a theory of the of Paul Ehrlich predicting that vast famines around the world the Club of Rome predicting the end of human progress it all happened in the 1970s also in 1970s happened Bob Noyce and Andy Grove and Intel and Microsoft and the whole computer revolution began Federal Express was launched I mean always great companies actually emerged from the pits of the 1970s and I think that that we're gonna try turn America around and it won't take paying back the debt it takes changing all our minds would you read this passage from your own book I'd like to get George guilders words in George builders voice the seeker of assurance and certainty lives always in the past which alone is sure the Venturer who waits the emergence of a safe market the tax cutter who demands full assurance of new revenue the leader who seeks a settled public opinion will always act too timidly and too late the future is available only to entrepreneurs on the crest of giving George Gilder author of knowledge and power thank you for joining us thank you for the Hoover Institution in The Wall Street Journal I'm Peter Robinson

Channel: HooverInstitution

Views: 35,006

Rating: 4.8990293 out of 5

Keywords: knowledge, economy, technology, communication, religion, culture, free market, capitalism, innovation, power

Id: Uj3YA-JDv-k

Length: 41min 32sec (2492 seconds)

Published: Fri Dec 06 2013

Reddit Comments

[u/Filostrato]

The excerpt at 15:15 is great as well:

No rational determinist scheme can encompass entrepreneurial entropy. Because of this, no planned economy actually observes or fulfills its plan.