[OSList] Open Space Economics? Be Prepared to be Surprised!

[Michael Herman]

  Here's a long one, friends… But maybe an important one.

What follows is an excerpt from a markets newsletter I've read for maybe 10
years by a financial expert and best-selling author Named John Mauldin.  He
describes and then shares an article by a guy named George Gilder, Who
seems to have been writing "important" books for at least a few decades.

This article and these ideas seem important because they describe, in
economic and information theory terms, exactly what we've been doing in
open space. I've long described OS to business people as a "really
efficient market for info in organization" But this piece makes a
genuine economic case for opening more space.

What's more, given Gilder's view as a foundation, it might piont to
practical ways of  doing open space research and demonstrating value – in
terms of something like a surprise quotient or surprise rate.  The research
might look something czykzentmihalyi's flow studies, but capturing levels
or frequencies of surprise rather than flow.

I rarely read things more than once, but I've read this one three times and
I'm still trying to absorb the language and implications.

What do you think?

Here's a link to PDF, that might work, if I've mangled the pasting on my
phone. http://www.mauldineconomics.com/images/uploads/pdf/2013_09_17_OTB.pdf


--

John Mauldin | September 17, 2013

In today's Outside the Box, my good friend George Gilder, the well-known
techno-utopian, attempts with some success to turn economics on its ear.
"The economy is not chiefly an incentive system," he asserts, "it is an
information system." And information, truly understood, is about the
introduction of novelty, or "surprise," into a system. In the case of the
economy, it's about invention and entrepreneurship. The new information
that is injected gets converted into knowledge; and thus, says George, it
is accumulated knowledge, rather than money or material, that constitutes
true wealth.

And thus the economy is driven not so much by powerful people and
institutions wielding the levers of the economic machine as it is by the
ever-increasing power of information and knowledge. Economists and the
governments they work for often appear to prefer a deterministic,
no-surprises (and too-big-to-fail) economy, but that way lies economic
stagnation. If determinism worked, socialism would have thrived.

Knowledge is centrifugal: it's dispersed in people's heads, and that has
never been more true than in the Age of the Internet. And it is this
universal distribution of knowledge which feeds back to the economy through
the creative insights and entrepreneurial efforts of people worldwide that
constitutes our chief hope for economic growth in the era opening up before
us, where the limits of monetary manipulation and material extraction are
becoming painfully apparent.

Here is a telling sentence from George:

Whether fueled by debt or seized by taxation, government spending in
economic “stimulus” packages necessarily substitutes state power for
knowledge and thus destroys information and slows economic growth.

The writing is on the wall: either we reinvent ourselves and our global
economy, or the noise that is obviously building in the system will
overwhelm the creation and transmission of knowledge, and the great human
quest for the democratization of wealth will fail. But, as George says,
"[C]apitalism is not a system of equilibrium; it is an engine of disruption
and invention.... A capitalist economy can be transformed as rapidly as
human minds and knowledge can change." So we do have plenty of grounds for
hope...


The Need for a New Economics

By George Gilder

Why is it that so many Americans seem to believe that government spending,
fueled by debt or taxes, can drive economic growth and wealth creation? Why
do they believe that low interest rates, enforced by the Federal Reserve,
can somehow spur business and investment? Why do they imagine that money
and consumer demand impel the economy forward?

The reasons, I believe, are rooted in an economic confusion between
knowledge and power. Many economists believe that growth is impelled by the
exercise of power, represented by money creation and by government spending
and guarantees. By manipulating the so-called “levers of the economic
machine,” government power can enlarge demand, inducing businesses to
invest and consumers to spend. This process is seen to generate the demand
that fuels economic growth.

These images of the economy of power are part of the very creation story of
economics in an era of new machines and sources of energy. The first
economic models were explicitly based on the dynamics of the steam engine
then impelling the industrial revolution. Isaac Newton’s physical “system
of the world” became Adam Smith’s “great machine” of the economy, an
equilibrium engine transforming coal and steam into economic growth and
progress.

Exploring technology investments over recent decades, however, I found
myself preoccupied less with sources of power than with webs of knowledge
in a field of study called Information Theory. On one level this theory was
merely a science of networks and computers. Its implications, however,
would change our deepest concepts of the nature of wealth. It would show
that wealth is not money or power or demand. It is essentially the
accumulation of knowledge.

Information theory effectively began with Kurt Godel’s demonstration in
1930 that all logical systems, including mathematics, are intrinsically
incomplete and depend on axioms that they cannot prove. This epochal
finding is often obscured by elaborate explanations of the intricate
mathematics he used to prove it. But as John Von Neumann in his audience
was first to recognize, Godel’s proof put an end to the idea of the  universe,
or the economy, as a mechanism. Godel’s proof, as he himself understood,
implied the existence of autonomous creation.

Godel’s proof led directly to the invention by Alan Turing of a universal
generic computer, a so-called Turing machine. By this abstract conception,
which became the foundation for all computer science, Turing showed that no
mechanistic computer system could be complete and consistent. Turing
concluded that all logical systems were intrinsically oracular.

Computers could not be Smithian “great machines” or Newtonian “systems of
the world.” They inexorably relied upon human programmers or oracles and
could not transcend their creators. As Turing wrote, he could not specify
what these oracles would do. All he could say was that “they could not be
machines.” In a computer, they are programmers. In an economy, they are
entrepreneurs.

In 1948 a rambunctiously creative engineer, Claude Shannon, from Bell Labs
and MIT, translated Godel’s and Turing’s findings into a set of technical
concepts for gauging the capacity of communications channels to bear
information.

Shannon resolved that all information is most essentially surprise. Unless
messages are unexpected they do not convey new information. An orderly and
predictable mechanism, such as a Newtonian system of the world or Smithian
great machine, embodies or generates no new information.

Studying information theory for decades in my exploration of technology, I
finally found the resolution to the enigmas that currently afflict most
economic thought. A capitalist economy is chiefly an information system,
not a mechanistic incentive system. Wealth is the accumulation of
knowledge. As Thomas Sowell declared in 1971: All economic transactions are
exchanges of differential knowledge, which is dispersed in human minds
around the globe. Knowledge is processed information, which is gauged by
its news or surprise.

Surprise is also a measure of freedom and criterion of creativity. It is
gauged by the freedom of choice of the sender of a message, which Shannon
termed “entropy.” The more numerous the possible messages that can be sent,
the more uncertainty at the other end about what message was sent and thus
the more information there is in the actual message when it is received.

In Knowledge and Power, I sum up information theory as the treatment of
human communications or creations as transmissions down a channel, whether
a wire or the world, in the presence of the power of noise, with the
outcome measured by its “news” or surprise, defined as entropy and
consummated as knowledge.

Since these communications or creations can be business plans or
experiments, information theory supplies the foundation for an economics
driven not by equilibrium and order but by surprises of enterprise that
yield knowledge and wealth.

Information theory requires that such a process be experimental and its
results be falsifiable. The businesses conducting entrepreneurial
experiments must be allowed to fail or go bankrupt. Otherwise there is no
yield of knowledge and thus no production of wealth. Wealth does not
consist in material capital that can be appropriated by the greedy or the
government but in learning processes and knowledge creations that can only
thrive in freedom.

After all, the Neanderthal in his cave had all the material resources and
physical appetites that we have today. The difference between our own
wealth and Stone Age poverty is not an efflorescence of self-interest but
the progress of learning, accomplished by entrepreneurs conducting
falsifiable experiments of enterprise.

The enabling theory of telecommunications and the internet, information
theory offered me a path to a new economics that could place the surprising
creations of entrepreneurs and innovators at the very center of the system
rather than patching them in from the outside as “exogenous” inputs. It
also showed that knowledge is not merely a source of wealth; it is wealth.

Summing up the new economics of information are ten key insights:

   1.

   1)  The economy is not chiefly an incentive system. It is an information
   system.
    2.

   2)  Information is the opposite of order or equilibrium. Capitalist
   economies are not equilibrium systems but dynamic domains of
   entrepreneurial experiment yielding practical and falsifiable knowledge.
    3.

   3)  Material is conserved, as physics declares. Only knowledge
   accumulates. All economic wealth and progress is based on the expansion
   of knowledge.
    4.

   4)  Knowledge is centrifugal, dispersed in people’s heads. Economic
   advance depends on a similar dispersal of the power of capital,
   overcoming the centripetal forces of government.
    5.

   5)  Creativity, the source of new knowledge, always comes as a surprise
   to us. If it didn’t, socialism would work. Mimicking physics, economists
   seek determinism and thus erroneously banish surprise.
    6.

   6)  Interference between the conduit and the contents of a
   communications system is called noise. Noise makes it impossible to
   differentiate the signal from the channel and thus reduces the transmission
   of information and the growth of knowledge.
    7.

   7)  To bear high entropy (surprising) creations takes a low entropy
   carrier (no surprises) whether the electromagnetic spectrum, guaranteed
   by the speed of light, or property rights and the rule of law enforced
   by constitutional government.
    8.

   8)  Money should be a low entropy carrier for creative ventures. A
   volatile market of gyrating currencies and grasping governments shrinks
   the horizons of the economy and reduces it to high frequency trading and
   arbitrage in a hypertrophy of finance.
    9.

   9)  Wall Street wants volatility for rapid trading, with the downsides
   protected by government. Main Street and Silicon Valley want monetary
   stability so they can make long term commitments with the upsides
   protected by law.
    10.

   10)  GDP growth is fraudulent when it is mostly government spending
   valued retrospectively at cost and thus shielded from the knowledgeable
   judgments of consumers oriented toward the future. Whether fueled by debt
   or seized by taxation, government spending in economic “stimulus” packages
   necessarily substitutes state power for knowledge and thus destroys
   information and slows economic growth.
    11.

   11)  Analogous to average temperature in thermodynamics, the real
   interest rate represents the average returns expected across an economy.
   Analogous to entropy, profit or loss represent the surprising or unexpected
   outcomes. Manipulated interest rates obfuscate the signals of real
   entrepreneurial opportunity and drive the economy toward meaningless
   trading and arbitrage.
    12.

   12)  Knowledge is the aim of enterprise and the source of wealth. It
   transcends the motivations of its own pursuit. Separate the knowledge from
   the power to apply it and the economy fails.

The information theory of capitalism answers many questions that afflict
established economics. No business guaranteed by the government is
capitalist. Guarantees destroy knowledge and wealth by eliminating the
precondition of falsifiability. Unless entrepreneurial ideas can fail or
businesses go bankrupt, they cannot succeed in creating new knowledge and
wealth. Epitomized by heavily subsidized and guaranteed leviathans, such as
Goldman Sachs, Archer Daniels Midland, Harvard and Fanny Mae, the crisis of
economics today is crony statism.

The message of a knowledge economy is optimistic. As Jude Wanniski wrote,
“Growth comes not from dollars in people’s pockets but from ideas in their
heads.” Capitalism is a noosphere, a domain of mind. A capitalist economy
can be transformed as rapidly as human minds and knowledge can change.

As experience after World War II when US government spending dropped 61
percent in two years, in Chile in the 1970s when the number of state
companies dropped from over 500 to under 25, in Israel and New Zealand in
the 1980s when their economies were massively privatized almost over-night,
and in Eastern Europe and China in the 1990s, and even in Sweden and Canada
in recent years, economic conditions can change overnight when power is
dispersed and the surprises of human creativity are released.

Perhaps the most powerful demonstration that wealth is essentially
knowledge came in the rapid post world war II revival of the German and
Japanese economies. Nearly devoid of material resources, these countries
had undergone the nearly complete destruction of their physical plant and
equipment. As revealed by decades of experience with unsuccessful
ministrations of foreign aid, the mere transfer of financial and political
power is impotent to create wealth without the knowledge and creativity of
entrepreneurs.

Information Theory is a foundation for revitalizing all the arts and
sciences, from physics and biology to mathematics and philosophy. All are
transformed by a recognition that information is not order but disorder.
The universe is not a great machine that is inexorably grinding down all
human pretenses of uniqueness and free will. It is a domain of creativity
in the image of a creator.

In the same way, capitalism is not a system of equilibrium; it is an engine
of disruption and invention. All economic growth and human civilization
stem from the surprises of creativity and the growth of knowledge in a
domain of constitutional order.

The great mathematician Gregory Chaitin, inventor of algorithmic
information theory, explains that to capture the surprising information in
any social, economic, or biological science requires a new mathematics of
creativity imported from the world of computers. He writes: “Life is
plastic, creative! How can we build this out of static, eternal, perfect
mathematics? We shall use post-modern math, the mathematics that comes
after Godel, 1931, and Turing, 1936, open not closed math, the math of
creativity...”

Entropy is a measure of surprise, disorder, randomness, noise,
disequilibrium, and complexity. It is a measure of freedom of choice. Its
economic fruits are creativity and profit. Its opposites are
predictability, order, low complexity, determinism, equilibrium, and
tyranny.

Predictability and order are not spontaneous and cannot be left to an
invisible hand. It takes a low-entropy carrier (no surprises) to bear
high-entropy information (full of surprisal). In capitalism, the
predictable carriers are the rule of law, the maintenance of order, the
defense of property rights, the reliability and restraint of regulation,
the transparency of accounts, the stability of money, the discipline and
futurity of family life, and a level of taxation commensurate with a modest
and predictable role of government. These low entropy carriers bear all our
bounties of surprising wealth and progress.


-- 
Michael Herman
MichaelHerman.com
(312) 280-7838

Sent from my iPhone
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