George Gilder – Knowledge and Power
Last Sunday I sat in glorious sunshine watching my son play cricket. The only thing more complex than the rules of cricket is trying to work out the current state of the global economy. Luckily, while watching the game I was also reading a copy of George Gilder’s Knowledge and Power. This important book makes a scholarly case for seeing capitalism as the interplay of knowledge and power. The tension between a dispersed entrepreneurial macrocosm and a governmental drive toward centralisation and control. In this episode I offer some opening insights of the key themes and what the current distortion of market signals may mean for the future.
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📍 Well, Hey everybody, Jonathan Doyle with you. Once again, welcome aboard to the next edition of the supply side podcast. Great to have the pleasure of your time for this short discussion. On now what I’ve been reading lately, and we’re going to be talking about George Gilda’s book. Knowledge and power. This is the kind of book.
That, uh, you want to read in the right place. This requires some concentration and I first. Began to tackle it just a few days ago. While I’m sitting at my son’s cricket game. So from my American listeners, The only thing more complex than global macro finance and information theories of capitalism.
Is the rules of cricket. So, uh, basically I took myself out there. It was a beautiful day. And began to work through George Gilder’s knowledge and power. So really what we’re looking at here. Is this information theory of capitalism, that capitalism is a system. By which information is communicated. And I guess in a way, information is sort of, or knowledge.
Is overlaid on physical reality. So I want to take you through a few opening ideas from the books. There’s a couple of great quotes. And I think even though it was written a little while ago, it really speaks presciently, too many of the issues and challenges that we are facing. A couple of, uh, interesting opening quotes from the book. Gilder says we are almost entirely in capable.
Of predicting the future. Amy, any sort of says it in the context of, if you look at our own lives, You know, none of us knows at any given point in our life. Exactly what the outcomes of certain things will be now. Sure. If you put your hand on a hot stove, you can predict that outcome relatively effectively.
But for anything of more complexity gives the example of, you know, Deciding what to study. If you go to college or university, you know, you can’t know what that, what you study is the absolute best, possible decision that you can make. And you can’t predict the exact outcome of that. You know, one career might take you in one path with enormous success studying something else might not. So key points in our lives.
He was making this point that predicting the future is not a particularly, uh, a particular skill that humanity has really been able to master. And he says here, this is the next quote he says from Adam Smith’s day to us. The chief concern of the discipline and that’s the discipline of economics. He says, has been to render economic events.
Unsurprising. I liked that. So he’s basically making the point that from Adam Smith, right through. One of the goals of economics has been to take surprise out of the system. So that when things happen, there’s very few surprises. And if you look at, I guess, modern central banking were still laboring under that illusion.
You know, central bank, monetary policy seems to be based on the idea that they can create stability and predictability in the system so that we can all have certainty in our economic undertakings. But how has that been working so far? Let’s talk about surprising economic events. Let’s talk about the.com bubble. Let’s talk about, uh, the global financial crisis. Let’s talk about all the stuff that’s happening at the moment.
It’s it’s, it’s a fact. That economic events continued to be extremely surprising at key moments. Now, some people did pick them. You look at people like Peter Schiff predicting the housing bubble collapsed. He was predicting that back in 2006, Jim Ricards is awesome. It’s a maker of predictions. But, uh, this idea that economics itself and especially those at the higher, highest echelons of economic power can render these events. Unsurprising does not seem to be borne out by facts at this point.
So a couple more key quotes here. Um, I’m just gonna read you a couple of key things here. He says at the heart of capitalism. Is the unification of knowledge and power. And then he quotes from, um, from higher can, he says, this is a direct quote from a Friedrich Hayek. And he says to assume all the knowledge to be given to a single mind.
Is to disregard everything that is important and significant in the real world. So hi X pointing to the fact that when it comes to information, what we can know about the world or economics. One of the first things we need to understand is that knowledge information. Is highly dispersed in reality.
But as I often like to save you, look at the fed, they have this idea that, you know, the, the 12 governors can meet. And that all knowledge and wisdom is contained within those 12 heads and they can be relied upon. To bring about the best outcomes. And I also, I’ve often said that the, the us federal reserve system has over 1500.
Economics PhDs on staff. Let alone. You know, what the IBS would have, or the IMF would have in terms of brain power, but high is making the point that if we, if we argue that and just the knowledge and information is contained in a single person or a small single group of people, That’s problematic. And then Gilda goes on here and says, because knowledge is dispersed power must be as well.
And then he’s talking about Thomas soul and, um, Robert Mondale. And he says they saw that the crucial knowledge in economies originated in individual human minds and thus was intrinsically centrifugal dispersed. And distributed. And he’s an important final quote here. He says the freer and economy is.
The more, this human diversity of knowledge will be manifested. This is the part that I like here. Listen to this by contrast political power originates. In top down processes. Governments, monopolies regulators and elite institutions, all attempting to quell human diversity and impose order. Thus power always seeks centralization.
And I think we are very familiar with that at the moment with lockdowns. And all sorts of other political issues in our political economy, we can see the power that, you know, political power, particularly six to centralize at all costs. Whereas Hayak is saying that really at the heart of capitalism.
Is this distributed information. Is this. So there’s an interesting tension there. Don’t you think? The, the tension between this government drive towards control and centralization? And this wider dispersement of human ingenuity, creativity information, knowledge. I think that’s one of the promises of blockchain. So.
Uh, not so much a Bitcoin, but, uh, speaking of which it dropped 17%. Overnight. So how Bitcoin is a store of value. I’m not sure when it has that level of volatility in a 24 hour period. So. Let me give you a couple more things here. Um, So that’s the opening gambit is that, you know, capitalism. Is an information system. It’s, it’s a, and I’ll get into that more deeply. This make more sense as we go.
So, this is the next quote I wanted to share with you. Uh, Gilda says the key to economic growth is not acquisition of things by the pursuit of monetary rewards. But the expansion of wealth. Through learning. And discovery. That’s a very powerful, quiet. I was going to do this again quickly. The key to economic growth is not acquisition of things.
But the, by the pursuit of monetary rewards. But the expansion of wealth through learning and discovery. So in this thesis, wealth grows in a society as more and more people pursue innovation, learning and discovery. You can see again, the inherent, you know, enormous flaws. Of, you know, central planning and, uh, and communism.
You know this idea that, uh, that you’re going to have economic, flourishing and stability. If everybody is disincentivized from individual learning and discovery. He’ll look at the great breakthroughs in technology. In health care in all the different areas, come through individual people. And they’re learning and discovery entrepreneurship.
So th the next significant opening section of the book gets into this really important concept around signal and noise. So he’s talking a great deal here about Claude Shannon. Who was at bell labs back in the fifties and sixties. And Shannon was kind of the. Develop this theory around entropy around change in information systems and how using technology electronics.
Uh, how, how signal is communicated through a system through a channel. This is quite complex. So if I’m doing a bad job at it, Please forgive me. Cause I had to bury myself in it. Uh, on the weekend to get through it. But, I mean, you know, Shannon, Claude, Shannon was a phenomenal mind, but his work on how signals get through a channel. Um, you, you know, this whole concept of like signal and noise that, that you want to be able to hear the signal through the noise. This was a lot of what Shannon was working on in terms of.
Uh, sound waves and radio and technology and early transistors and all this kind of stuff. So this led to stuff, of course, like Qualcomm and then Gilda talks a bit about Qualcomm. You know, and how they were the guys to really figure out this a CDMA mobile phone signal technology that really transformed.
So much of the system, because they were able to figure out. How you can move clear signal through surrounding noise. Now, what is this have to do with you? What’s it got to do with supply side economics? Well, the answer is a great deal and he is why, because the, the ability of a, of an economy to function effectively.
Is based on the ability of people to read and understand signals. I think about it this way. So here’s a really important quote. All information. This is from Gilda. He says, all information is surprise. Only surprise, qualifies as information. This is the fundamental Axiom of information theory. Information is the change between what we knew before the transmission.
And what we know after it. So you can imagine an economic system where there is no signaling of change. No surprise, no new information. You effectively wouldn’t have an economy. You wouldn’t have markets because there’s nothing but permanent Stacey’s, there’s absolutely no change. So you know how to speculate has had entrepreneurs.
How to analysts. You know, make money. They do it by realizing changes in signals and changing their behavior and choices and investments based on these signals. So. I guess for a, for a market, for an economy to function properly, you have to have a system where you can clearly hear signal through noise through surrounding noise.
And that the system itself is able to bring about new information, new surprise. And here’s where I want to finish for today. So have you gone? Okay. This is a fair bit to this and, and, uh, it helps me just to kind of go back through it and I want to read you this final stuff here.
Page 24. Chapter is the science of information. Here’s the quote, a high entropy. Government dominated channel full of unpredictable political interference and noise would depress the sacrificial longterm investment of capital. So really simple idea. There is basically that the more that government.
Gets involved in the signaling. That’s taking place inside markets and economies. Then we obviously start to get malinvestment. We start to get the inability of people to make. Rational. You know, intelligent, productive investment decisions. And here’s the last thing I want to read you today. So slightly longer quote, but here it is.
Interest rates are critical. For information theory. Economic analysis. Because they are an index of real economic conditions and here’s the really important line. If the government manipulates them, they will issue false signals. Breeding confusion that undermines entrepreneurial activity. For example, if the government keeps interest rates artificially low for institutions that finance it as it has been doing in the United States.
The channel is seriously distorted. Okay. So you can see this link back to Claude Shannon’s channel and signal and noise theories. The interest rates are noise rather than signal. Interest rates near zero cost finance to hypertrophy as privileged borrowers re-invest government funds in government securities.
Only a small portion of these funds goes to useful infrastructure while the rest is burned off in consumption beyond our means. I mean. I’m trying to think when this was exactly published. Let me just check that I’ve got the book in front of me here. So this is first published. Well, the addition that I’ve got here, 2013, so a little, a little less than 10 years ago.
But how accurately does it describe the current situation? Interest rates near zero. The channel being seriously, distorted, privileged borrowers, taking government money, reinvesting it in government securities. Um, a small amount going to infrastructure, useful infrastructure and the rest being burned off in consumption beyond our main stimulus checks, anybody. So.
I just think it’s, it’s fascinating. Initial. Exploration of the book and I hope to share more with you more of it with you over the next few weeks. But my takeaway, my limited understanding at this point, I mean, many of you are far more advanced in this than I am. But basically. For markets to function effectively.
There needs to be a clear. Possibility for surprise for changes in information. For information to reach people effectively so they can make decisions about what to do, how do we invest? But if the channel is distorted, if the signal is disrupted, Through government manipulation. Then the markets will eventually distort and.
I don’t know about you friends, but looking at the asset, bubbles around the world at the moment, I think this is exactly where we are. I’ll be fascinated to know what you think. Some of you hearing this on the website, please post a comment. Come across the supply side partners.com. Supply side partners.com.
And, um, you’ll find this under the episode, knowledge and power. I’d love to know what you guys think. About some of the stuff I just shared in this brief message. Right? That’s it from me now. 📍 I’m going to go read the business pages and see how much distortion there is. In the channel. But, uh, and I.
I guess, you know, really this is going to go to the heart of the question. You know, that Nathan Lewis constantly brings so effectively. Around stable money, right around the gold signal around the price of gold. And the role of gold is. As a, you know, as the reserve that it’s been and the central money that it’s been for over 5,000 years, because gold.
Allows an becomes an accurate unit of account. It allows clear signaling. And obviously in fear based currencies where we’re seeing that, uh, That certainty, that predictability, that, uh, CLIA signal being distorted. All right, friends. That’s it for me today. My name’s jonathan doyle this has been the supply side podcast and i’m going to have another message for you very soon
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