Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World
By George Gilder
(Regnery, 400 pages, $27.95)
AT THE BEGINNING of Knowledge and Power, George Gilder recounts the story of Qualcomm, the San Diego-based semiconductor manufacturer and telecommunications firm, whose rise, he claims, was not just another of those fantastic Silicon Valley success stories. Two decades ago techies faced a seemingly insurmountable challenge: the physical scarcity of bandwidth. The laws of physics said that even in the digital world there was only so much you could do before hitting the proverbial brick wall. But Qualcomm claimed that it had found a way to overcome this obstacle. Critics were, naturally, skeptical, saying, in effect, that Qualcomm’s executives were charlatans. Physics was physics. But by employing information theory—a series of mathematical ideas put forth by Claude Shannon and the late Alan Turing, an evolving discipline that, as Gilder emphasizes, encompasses surprise, that is, new knowledge—Qualcomm’s controversial technology triumphed. Instead of breaking signals into pieces and assigning the bits different times to be transmitted, the company tagged signals with codes and sent them simultaneously. Imagine, Gilder writes, a cocktail party where everyone talks at the same time, but each couple speaks a different language.
Information theory became the foundation for the miracle of wireless communications. Qualcomm’s stock soared and soared, and its market capitalization, well over $100 billion, has surpassed that of Intel’s. You don’t have to be a technologist to see what happened here: The laws of physics were transcended. “Physics is not the final word,” Gilder concludes. “Qualcomm triumphed by moving beyond physics to the new science of information, transforming the physical scarcity of ‘bandwidth’ into an abundance of wireless communications.”
The assumption since around the time of Adam Smith was that the economy was a closed system that functioned similarly to Isaac Newton’s clock-like universe. Mathematics took over. The byword in economics became equilibrium. The key task was to figure out how an economy could be made to run smoothly, like an engine. But some in the early 20th century, including an Austrian named Joseph Schumpeter, declared the whole premise to be utterly preposterous. Equilibrium was a myth; disruption was the norm, and the innovator and entrepreneur drove the system forward. “Creative destruction” was how Schumpeter famously put it.
But Schumpeter shared some of his colleagues’ pessimism. He came to believe that capitalism’s very success would be its undoing. He thought it natural that the economy would be dominated by increasingly large companies. As wealth increased, certain expanding classes—academics, journalists, lawyers, government bureaucrats—would ignore the wellspring of their affluence and regard people of commerce with disdain, if not hostility, and would urge policies and practices undermining of capitalism. He wouldn’t be surprised by the anti-free-market sentiment that exists in so much of Europe and the U.S. today.
Ultimate power is in the hands of government. But knowledge, of course, is spread among billions of individuals. The constructive role of government is obvious when one understands that wealth creation comes from the mind, from entrepreneurs creating new things—such as Steve Jobs’s iPod, iPhone, and iPad—which requires sound money, low taxes, and predictable rules and regulations.
This seemingly simple insight has enormous implications. Economists—and, obviously, politicians—must put aside the illusion that government can productively guide economies. Doing so hurts the creation of new knowledge, which comes only through the endless experiments of individuals. Economies are not machines that are susceptible to the wise ministrations of mechanics.
The ultimate test of government action becomes clear: Does it impede the creation of new knowledge? Politically this is potent: Who can be against the creation of new information? Big profits are the result of the surprise creations of entrepreneurs, but the new surprise quickly becomes commonplace, and the profits from it recede.
Information theory makes painfully plain the foolishness and destructiveness of government efforts to redistribute wealth as a means of stimulating economic growth. Take capital away from capitalists and it will wither rather than multiply. Who would you rather invest your capital with, Warren Buffett or the U.S. Post Office?
Gilder’s uplifting message is that if policy is based on the recognition that capitalism is a system of creating new knowledge, our current malaise will quickly go away. Gilder discusses how several countries (Israel, Canada, and New Zealand) in the grip of economic crisis rapidly transformed themselves into innovative, productive powerhouses. The U.S. did so after World War II and again in the 1980s. It can do so again, far faster than most observers think possible.
After all, look at western Europe and Japan after World War II: mass destruction and immense loss of human life. But knowledge hadn’t been destroyed. Thanks to extraordinarily creative U.S. diplomacy, which provided for systematic reductions of trade barriers, a sound international monetary system (which we gratuitously blew up in the 1970s and must recreate), and military security from outside aggression, these devastated lands surpassed their pre-war output less than a decade after the cessation of hostilities. And the countries that did so the fastest were those that did the most to reduce barriers to commerce—and the creation of new knowledge.
In fact, the heart of Gilder’s thesis is that there are virtually no limits to economic growth, now or in the future. Why? Because the real source of wealth is knowledge, and economies grow as knowledge is acquired. The cave dwellers of tens of thousands of years ago “had the same set of physical appetites and natural resources as we have today. The difference between our lives and Stone Age penury is the growth of knowledge.” And new knowledge comes from continuous experimentation. We learn from failures as well as successes. For example, Steve Jobs’s NeXT, a personal computer, was a commercial flop in the 1990s, but its superb operating system was adopted as the core of the Apple Macintosh. (Gilder points out how major pharmaceutical companies have severely hampered the discovery of new drugs by relying on endless ad hoc experiments and accidental observation instead of employing the information theory of biology, which builds on previous failure à la Apple. Their search for new medicines “remains a million tiny shots in a dark sky.”) If you grasp the truth that the mind is the source of wealth, you see that concerns about “sustainable growth,” running out of natural resources, populations expanding faster than our ability to grow food, and fatal shortages of water are all groundless.
Speaking of water, Gilder cites the inspiring success story of Israel. Since the state was founded in 1948, its population has grown tenfold, its arable land three-fold, its agricultural output sixteen-fold, and its industrial output fifty-fold, yet its net water usage has dropped an astonishing 10 percent.
So as long as the quest for knowledge is not thwarted—as it increasingly has been in recent times through government regulation, over-taxation, and the debasement of our currency—Schumpeter’s worries will be groundless. And the best defense against anti-information-creating actions is understanding the true source of wealth: new knowledge, which can only come from experiments in which you risk failure and bankruptcy. It manifestly doesn’t come when government guarantees the outcome. As Forbes.com columnist Jerry Bowyer pithily put it, the real crime of crony capitalism is that “it makes us stupider.”
With Knowledge and Power George Gilder has written a very important book. It is not, and will not be, the runaway bestseller that his classic Wealth and Poverty—a work that wonderfully, refreshingly set forth the case for supply-side economics and made Gilder the living author whom Ronald Reagan quoted most—was more than three decades ago. But his new book’s ultimate impact may well be greater, in no small part because it attempts to reset the terms of the national debate about economic policy.