Sunday, September 08, 2013

Knowledge and Power

I've always been fascinated by George Gilder.  At at least three times in my life he has written a book which caused me to rethink basic principles.   The first two were Wealth and Poverty and Microcosm.  The first was the substantive bible of the Supply Side revolution in economics.  It did not make outlandish claims about how tax rate reductions would be always neutral (as Jude Wanniski seemed to do) but it did present a clear case (later affirmed by the results of the 1981 and 1986 tax acts) for reducing and simplifying the tax code.   The second gave a compelling roadmap for much of the technological revolution we have lived with in the last three decades.

I need to admit that I served on a national board with Gilder in the 1970s.   One funny story should explain - this was well before the publication of W&P.   We had a Ripon Society board meeting in New York and on Friday night George called and said he would have to miss dinner because he had gotten on the plane wherever he was and got so absorbed in his work that he failed to get off when the plane landed in NYC.  He promised he would be there on Saturday.   Mid-day Saturday he called from another location and said it had happened again and so he was in yet another city but not NYC.  He never did get to that board meeting.

Several of Gilder's books start with a hero.  So in Microcosm he spent a lot of time on Carter Mead.   Mead was at Caltech and Gilder did a superb job of explaining Mead's thoughts on how things would keep getting smaller and faster.   In his latest book, Knowledge and Power, he latches on to Claude Shannon - the Bell and MIT engineer who built a framework for information theory.

The book is divided into three sections - the first on information theory where he establishes that communications systems, including economic systems, can be divided into content (knowledge and information) and power (the conduit).   Content is messy and unpredictable; the conduit is opaque but predictable.  For conduit to be successful in economic transactions one needs to have things like property rights, stable exchange rates, etc.   In economics it is an old argument advanced by many of the Austrian economists.   You do not need to know why a dollar can be exchanged for something but you do need to have some certainty that the value of the dollar is not subject to constant negotiation.   Hayek raised similar points in his writing on knowledge.  I found this section dense, but worth the slog. The key part of the content layer is that it is infused with surprise(s).  One other idea is that content and conduit are linked.

The second section of the book then applies the theory to real world examples.  Mess up the conduit with inordinate regulation or other distortions and the knowledge benefits soon become less robust.   The second section is almost a practical implications discussion of the theory section.  It is quick and simple and I think mostly on target.

The third section has a series of responses those that might be in opposition to Gilder's thoughts on the relationships between knowledge and power.  Four are presented below as examples.

He begins by taking on a group of economists that do not understand the power of entrepreneurial spirits.   He chooses David Stockman and Paul Samuelson for special consideration.   Ultimately, economics is not just about transactions but about the ability to be what Smith called the "bull headed brewer" going forward with an idea despite what others think.   But this kind of thing cannot be planned.  After WWII Paul Samuelson and others in his camp argued that the demobilization would present us with a pretty severe downturn.   In the 1946 elections, Congress switched hands.   In a very short period of time the percentage of GDP devoted to the federal sector went from 46% to 14%.   But growth happened.   He seems a lot less concerned about debt to GDP ratios and even deficits, if those things allow the entrepreneur to thrive.   As Hayek argued in the Fatal Conceit, planners can never get it right because they cannot understand the "knowledge of time and place" that each of us carries on our own.   He does a good brief review of the tenuous position of American tax policy pointing out that ours is the highest corporate tax structure in the world.  He pokes fun at California and its tax follies.   Neither is productive for encouraging explorations into entrepreneurial growth.   You could add in Robert Reich or Paul Krugman - all seem to think that there is no cost to moving more and more into government.   

A somewhat opposite point of view was first presented in two books by Nicholas Taleb (Fooled by Randomness and The Black Swan).  Gilder argues that Taleb is interesting but ultimately wrong in his conclusion that unexpected and serious events will come in increasing frequency.  Included in Gilder's critique are the "random walk" theorists that argue it is impossible to beat the market.  Inherent in markets is the ability of a person who understands a detail that others do not - to exploit that knowledge - it is certainly present in the process of innovation and likely as present in the financial markets.

The third group might be called the apostles of the machine.   He reviews  the writings of George Dyson and Ray Kurzweil (and a couple of others like Kevin Kelly).   Several years ago Kurzweil wrote a long book called the Singularity which argues that computers will somehow become human or that humans will become anthro-robotic.   He suggests that computer intelligence will soon dwarf human intelligence.   Gilder rejects the notion in part because one cannot separate intelligence and creativity.  One of my favorite lines in the book is his dismissal of much of modern science which he suggests has devolved into "politics, panics and cartels."

Arnold Kling and Peter Theil are the next targets.   Kling wrote a book called the Great Stagnation which was written about in this blog about the time it came out.   It is a pessimistic tract that posits that we've taken all the low hanging innovation fruit off the table and will be stuck with low economic growth in the future.   Theil takes a slightly different tack to the argument by positing that big things (like teleportation) are not going to happen.   Gilder, ever the optimist, says neither idea is correct.   We do not know where the next good idea will come from - but he asserts unless the conduit level gets too oppressive (from regulation or unsound tax policy) that things will happen.  He points out that the risk of stagnation is always present - witness that the US in 2010 began to export talent back to countries like Israel - where the entrepreneurial spirit is in better shape.

I originally got the book as an Audible presentation.  But I was so intrigued with it that I also got  the electronic version from Amazon.   Forbes has a review of it that calls it his best work, and I think that is probably true.   The Forbes review quotes one of Gilder's conclusions - “The ultimate strength and crucial weakness of both capitalism and democracy are their reliance on individual creation.  But there is no alternative except mediocrity and stagnation.  Demand-based systems can never flourish in a world where events are shaped by millions of human beings, acting unknowably, in fathomless interplay and complexity, in the darkness of time.”

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