Thread by @eriktorenberg

0/ Here is my high level reading/summary of @scandalofmoney’s economic philosophy from his book: “Knowledge & Power”:

1/ Keynesian and Friedman paradigm: by exerting power over gov’t spending (Keynes) or monetary supply via fed (Friedman), gov’t and central banks can control — even summon — economic growth.

Time for those paradigms to die, according to Gilder.

2/ Current paradigms assume that global economy is driven by aggregate demand.

Keynesians believe it comes from gov’t spending

Monetarists believe it comes from expanding money supply / central bank reduction of interest rate

Gilder: “Supply creates its own demand.”

3/ In the last decade, current paradigm hasn’t worked.

Since 2008:

•619 interest rate reductions

•9 trillion of govt debt issued with negative interest rates

•10 trillion quantitative easing

•US fed balance sheet went from 500 billion to 4.5 trillion

4/ Flaws of current paradigm:

- Assumes that that velocity is constant and predictable and thus government can control money supply.

- Fail to see the entrepreneur as central cause, rather than a byproduct, of economic growth.

5/ New Paradigm:

Capitalism is not chiefly an incentive system—it’s an information system.

Wealth is created by the learning curves that result from falsifiable experiments in entrepreneurship by economic actors in mostly free market economies.

wired.com/2002/01/gilder/

6/ Principles underlying new paradigm:

Fundamentally, Wealth is *knowledge*.

Neanderthal in cave had all material resources that we have today.

The main difference btw our age & stone age is the increase in knowledge.

7/ If wealth is knowledge, growth is *learning*

Learning doesn’t come from expanding money supply or fiscal stimulus—it comes from entrepreneurship.

They key to learning is that businesses be allowed to fail .

If outcome is guaranteed, it’s neither knowledge nor growth.

8/ Information theory applied to capitalism:

Learning always comes as a “surprise” to us, otherwise we’d “plan” it (ie socialism)

Entrepreneurs bring that surprise, or high entropy system, which must be combined with a low entropy carrier—a predictable channel with no surprises

9/ If knowledge is wealth, and wealth is learning, what is money?

Money is *time*.

Money translates the real scarcity of our lives into the economy in ways that permit learning and growth.

Time is what remains scarce when everything else becomes abundant.

10/ Money is a measuring stick that gauges the value of economic activity—not a magic wand  that can create economic growth out of thin air.

Manipulating the value of money, whether by printing currency or artificially suppressing interest rates, does not create wealth.

11/ It’s like  manipulating the data of a scientific experiment after it takes place, distorting the information economic actors need to create new wealth.

12/ Monetarism (control of money), Keynesianism (control of spending), and Mercantilism (control of trade) all foster the illusion that government power can drive economic growth and wealth creation.

13/ Government can properly create the conditions under which knowledge—yielded by millions of falsifiable experiments in entrepreneurship—is created.

But it power cannot order wealth — new knowledge—into being.

14/ The mistake here stems all the way back to Adam Smith—the champion of free markets himself.

Smith’s vision of the entrepreneur as a tool of the market rather than its creator constitutes the original sin of what we call “demand-side” economics.

15/ Demand based systems can’t flourish in a world where events are shaped by millions of human beings, acting unknowably in fathomless interplay & ever increasing social complexity.

16/ Smith posited a pre-existing market “pulling” in entrepreneur

This implied that once market need was met, growth would stagnate.

It also implied that if the entrepreneur didn’t fill the market need, another would. That they were in some sense, replaceable (and inevitable).

17/ The notion that markets define technology, that demand creates supply, is a fallacy that leads to endless mischief + meddling in entrepreneurial activity.

While gov’t power can increase $ volume, it can't enhance $ value.

Value is an expression of entrepreneurial knowledge.

18/ The key issue in economics is not aligning incentives with some putative public good but aligning knowledge with power. Business investments have both a financial and an epistemic yield.

Capital is not merely a flow of power, it is an accumulation of specific knowledge.

19/ Capitalism is a knowledge system that preserves the experience of entrepreneurs by allowing them to continue their work and expand their investment if their project succeeds.

It aligns power with knowledge.

20/ current paradigm:

Low interest rates = investment & spending easier

From information theory POV however, interest rate represents opportunity cost of spending now.

When you enact 0 interest rate - signals there is 0 opp cost, 0 avg yield from investments across economy.

21/ Interest rates rates are like shot clock in basketball.

Ticking of interest rate forces entrepreneurs to shoot rather than passing the ball= maintaining optionally

If you throw away shot clock, everything slows down

22/ Lower interest rates don’t spur the economy, they slow economy down.

Not only transfer signal to entrepreneurs they don’t have to act, but also convey to economy that there are 0 opportunities for investment.

Might as well spend now.

23/ Another misconception:

Capitalism isn’t “emergence” or “spontaneous order”

Evolutionary forces may generate crystals + other repetitive patterns that can be produced by a simple algorithm, but these phenomena lack complexity as measured by informational entropy.

24/ Innovations are not an expression of equilibrium and order, like crystals or snowflakes, but disruptions of it

Information is the opposite of order. Capitalist economies are not equilibrium systems but dynamic domains of entrepreneurial experiment.

25/ Failing to see the centrality of entrepreneurship, economists have counseled gov’ts to attend to $ supply, aggregate demand, consumer confidence, trade imbalances, budget deficits, capital flows—to attend to everything except what matters most: the environment for innovation.

26/ As Hayek wrote in The Road to Serfdom, govt should provide rules of the road, a low-entropy role, not be the backseat driver.

Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier to bear high-entropy information

27/ Supply side solution to current economic stagnation is a return to the low-entropy carrier: predictable rules of taxation, regulation, immigration, and monetary stability, which favor long-term investments in innovative new companies.

28/ In other words, in order to bear the fruits of entrepreneurial innovation (the real source of learning & economic growth in our country) we need security.

29/ Entrepreneur must know that, if their creation generates an upside surprise, the related profits will not be confiscated or taxed away arbitrarily. They must be able to measure the opportunity cost of investing and starting a business.