Applying Informaion Theory to Economics: Entrepreneurs trump Central Planners

by Robert Maynard

Economist and futurist George Gilder has pioneered an interesting approach that applies the principles of Information Theory to the discipline of economics, coming up with a view of economics that allows for creativity and surprise.  This view highlights the role of entrepreneurs, rather than central planners.  Here is an article from the Acton Institute for Religion and Liberty, which examines Gilder’s approach:

We are trained and educated to comprehend the operations of the universe in a materialistic way, where physical and chemical processes are assumed to be the deepest level of knowledge that can be acquired. George Gilder, disputes that in his new book Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World. The universe, he writes, is actually a vast information system of unfathomable limits.

Ever since the rise of information theory in the 1940s, it is becoming increasingly clear that the universe is, in a sense, digital. Information, logic, data, whatever you want to call it, lies even deeper than the material operations that science has so ably discovered and quantified. This deeper informational dimension is dynamic and unpredictable. It is also how systems (biological, institutional, economic etc.) change and grow.

Gilder applies the principles of information theory to help us understand how economies grow. Known mostly for Wealth and Poverty, a book written over 30 years ago (earning him a reputation as “Ronald Reagan’s most quoted economist”), Gilder lays out what he calls the sum of all his work: Information, not the management of processes, creates economic growth.

Gilder calls this the “information theory of capitalism” and it turns conventional thinking about free markets and statist economic theories on its head. Most of us think free marketers and statists are from opposite schools when in fact they are “fresh water and salt water” as Gilder calls them.

How so? Both share a vision in common: Markets are mechanical. This leads to an impoverished understanding of the role of the human person in economic expansion albeit to differing degrees. Think of their vision as Newtonian physics applied to economics; an illusion of determinism applied to human actions.

The universe, Gilder argues:

… is not subsiding like a steam engine or any other kind of machine … It is not constantly subsiding into thermal equilibrium. It is an engine of ideas, an information system, like an economy … (T)he universe is not statistical. It is a singularity full of detailed and improbable information. It is a “Super Surprise.” … All the information for a random universe is equally applicable to one full of information and creativity.

Information is the unexpected “surprise” that when incorporated into the system creates growth and surplus value – wealth. The mechanistic assumption of many free marketers and most statists blinds one to the “surprise,” the indication that new information has entered the system that contributes to its growth and expansion. Without new information systems perish (Xerox and Kodak for example). When new information enters the economy revolutionary growth is possible (Oracle, Qualcomm, Apple, Southwest Airlines for example).