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Notes from "Knowledge and Power"

Updated: Sep 6, 2023

These are my notes from the amazing book "Knowledge and Power" by George Gilder. They are raw and unedited.

Knowledge and Power by George Gilder

Capitalism is not chiefly an incentive system, but an information system.

Information itself is best defined as surprise. 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. The economy grows not by manipulating greed and fear through bribes and punishments, but by accumulating surprising knowledge through the conduct of the falsifiable experiments of free enterprises. Crucial to this learning process is the possibility of failure and bankruptcy. Because the system is based more on ideas than incentives, it is not a process that is changeable only over generations of sisyphean effort. An economy is a knowosphere - a mind based system. And it can revive as quickly as minds and policies can change.

Most measured financial profits are not real, they merely cover the cost of capital, The return of interest. Innovation is the source of real profit - entropic profit, which derives from the upside surprises of entrepreneurial creativity. In order for the entrepreneur to succeed he must know that if his generation creates an upside surprise, The related profits will not be confiscated or taxed away. If they may be confiscated his entire project will not be able to attract the necessary resources to bring it to market.

Through wars and depressions, through booms an benisons of prosperity, the central failure of economics has been its inability to grasp the centrality of entrepreneurial creation in economic life. The key force of economic advance is the entrepreneur, who, on his own, without governmental cues or expert consultation or even a defined market, creates new goods, services, business plans, and projects. Economic growth and progress, jobs and welfare, markets and demand, all stem from this creativity of the entrepreneur. Population growth, capital accumulation, economic efficiency, and even scientific advancesAre all less important than entrepreneurial activity. And governmental intervention in the economy are distractions, noise on the line, that nearly always retards economic expansion.

The most important feature of an information economy in which information is defined as surprise is the overthrow, not the attainment of equilibrium. The science that we have come to know as information theory establishes the supremacy of the entrepreneur because it appreciates the powerful connection between destruction and creative destruction, between chaos and creativity.

Entropy is a measure of surprise, disorder, randomness, noise, disequilibrium, and complexity. It is a measure of freedom of choice. It’s economic fruits are creativity and profit. It’s 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.

The agency problem: ownership fosters good management because owners are their own agents. All other arrangements foster subtle, or even open, conflict between managers, who are tempted to enrich themselves, hire cronies, and build empires, and shareholders, who in general single mindedly seek to maximize the value of the enterprise. The underlying reason for the efficacy of transactions however, is the better alignment of knowledge and power.

High tax rates don’t stop rich people from being rich. They stop everyone else from getting rich. Progressive tax rates don’t redistributing comes they redistribute taxpayers, from factories and offices and onto foreign beaches and early retirements.

Henderson’s 25% efficiency gain with every doubling of cumulative output applies to every from hominids bunting and gathering on the African savanna to rainforest slime molds collecting nutrients.

People learn how to exploit any good they experience as free.

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

The market creates neither the product nor the process of production. The entrepreneur and his product create the market.

As physical advances become harder to achieve in manufacturing productivity gains increasingly stem from applications of information theory. These take the form of new computer architectures, robotic efficiencies, and compression schemes. At the end of this process is new software virtualization, where advances in computing hardware enable the replacement of a once physical manufacturing process with a software abstraction. Memory, networks, and processors are virtualized.

The paradox of thrift: during an economic crisis, one person can increase his savings by forgoing consumption, curtailing spending, and paying down debt in a process called deleveraging. But when many people try to pay down debt or increase their savings at the same time, Overall savings in the economy will decline because the general drop in spending causes a drop in incomes, and savings are the residual of income minus consumption. The paradox is that the more people try to save the less savings there are overall.

This theory is not necessarily correct.

A higher savings rate is associated with faster economic growth. Savings reflect the profitability, the upside entropy in the economy. Their growth is usually the result of unexpected cash flows, who’s rise normally signifies prosperity. Willingness to save indicates the consumers preference for products to be supplied in the future over current goods and services. Satisfied today, consumers supply resources for consumption tomorrow. Savings both endow investment and defer demand.

The entrepreneur is the savior of the system because he capitalizes himself. He is his own most important capital. What we call intellectual capital is also informational and moral capital; diligence, good judgment, imaginative appreciation of others’ inputs and needs. Socialist believe their mission is to seize capital for the masses. But the great secret of capitalism is that detached from a capitalist, there is no capital. To create wealth, knowledge and power must be merged. Assets wither and die without capitalists to tend them.

Entrepreneurial profit, entropic profit, is not simply the transformation of input into output, it is the surprising excess of output over input. But this excess itself is, in a sense, an illusion. Measured profit is the excess of output over accounted inputs. The very nature and role of the entrepreneur is to infuse the venture with inputs, informational capital, that never make it to the accounting statement, and that all to often cannot be measured until the originator is retired or dead. This entrepreneurial capital, the unaccountable input of the innovator, is abundant in free economies and makes up for all the inevitable leakage out of the circular flow.

Order is not spontaneous but it is a necessary condition for all the surprises of freedom and opportunity.

He who receives an idea from me receives instruction himself without lessening mine. As he who liked his taper at mine receives light without darkening me.

Thomas Jefferson

A rival good is a thing that can be appropriated by only one person at a time - an egg, an apple, a book, a bond, a tennis racquet, or an apartment. It tends to be used up as it is used. Non-rival goods, by contrast, are appropriable by any number of people at one time. As you use non-rival goods they expand according to network effects, Metcalf's Law, by the square of the number of compatibly linked users. Examples are books on Kindle, Google searches, Quicken spreadsheets, operating systems, dress designs, songs, television programs, or economic ideas.

Imagination precedes knowledge. Creative thought is not an inductive process in which a scientist accumulates evidence in a neutral and objective way until a theory becomes visible in it. Rather the theory comes first and determines what evidence can be seen.

The power in capitalism must not be mindless. Unless it is combined with knowledge, mere economic power or money is fruitless. Enterprise involves memory of the past and anticipation of the future. End it is creative. It is not a simple incentive system of rewards and punishments, of carrots and sticks. It is an information system and is governed less by economic theory as we know it than by information theory.

Knowledge is about the past. Entrepreneurship is about the future.We are connected to the past by our memories and to the future by our choices. Information theory moves from the future to the past. Physical therapy moves from the past to the future. Events are determined by the physical causes from the past and by subjective choices from the future. The entrepreneur surfs the crests of creation in between.

The low entropy carriers that conservatives uphold of law, property, family, and morality enable the high entropy creations of science and entrepreneurship. Information theory tells us that order is not spontaneous. Information is not perfect. Playing fields are not level. Property rights and human rights are not automatic - they must be upheld and fulfilled by culture, religion and politics. But information theory is also a mandate of liberty enshrining freedom of choice as its deepest law of entropy and creativity.

2008 crisis:

What was going on it turned out was not conventional disruption of macroeconomic circular flows, but and acute information miss match between short-term low entropy money, which banishes transactional surprise, and the long term high entropy quests for upside profit and the assets behind it.

Perhaps the central secret of capitalism’s success is its ability convert the search for security, embodied in savings, into the ability to risk, embodied in enterprise.

Financial instruments become more opaque as they approach the liquidity of money. This is not a flaw of money and demand deposits, it is their enabling feature. The history of the money in your pocket, the ultimate sources of its value, is unknown to you. That’s why money and deposits can be used anywhere for legal and illegal purposes.

Banks and financial institutions bridge the enormous gap between the blind immediacy of the demand side and the deliberation, delay, and information density of the supply side, between transactional cycles and business cycles. Most of the time they accomplish this prestidigitation marvelously well, but not always. Taking in liquid deposits and issuing long-term bonds, thanks profit from the spread in the maturity miss match.

In the 2007-2008 crisis, the bank liabilities, debt, deposits, commercial paper, prime broker balances, and repos (repurchase and sale agreements, a form of overnight deposits) were short term, liquid, and guaranteed at par. They promised no surprises and no entropy. The assets backing these liabilities and collateral were high entropy, subject to market vicissitudes, the frailties of human enterprise, conflicts of intellectual property, and acts of god such as hurricanes, earthquakes, wars, public panics, and the ousting of Hank Greenberg. All financial panics reflect the collapse of the bridges of trust between short term liquid liabilities, and the long term assets that back them up as collateral. The opacity of money and near money gives way to fearful glimpses of information that cast doubt on their liquidity.

Financial development and intermediation is central to economic advancement in both developed and undeveloped countries. It is a process of removing information from transactional media and suffusing information into the investment process, creating knowledge and wealth. The polarization of the economy between zero entropy money and high entropy investments is a source of the voltage that drives growth. It gives both sides of the economy what they want. The savers get low entropy. The investors get high surprises both up and down. The polarity between the two impulses capitalism is the source of both economic vitality and financial fragility. Economies stagnant and seize up when most investments become low entropy, changeless, big company commodities and projects guaranteed by government, and money becomes high entropy full of surprises of devaluation and illiquidity.

Money is an expression of productive services rendered.But by definition it is distinct from the services that are the source of its value.

Gold forestalls the volatility and high entropy gyrations that spring from fears of government manipulation and banking fraud. It thus can extend the horizons of the world economy. What it cannot do is end the intrinsic scandal of banking. That scandal derives from the maturity mismatch at the heart of any capitalist system of long term high entropy supply and instantaneous low entropy demand. You will hear about this scandal wherever libertarians gather. There is no money in the banks. Fractional reserve banking as a fraud and a delusion. It allows unlimited production of money by the banks which can issue money at will.

The prevailing theory of capitalism suffers from one central and disabling flaw: profound distrust and incomprehension of capitalists. Capitalists are owners who understand intimately what they own. For the last decade the chief endeavor of capital markets has been to weaken all the disciplines of ordinary ownership. In the place of owners were CFOs, who played the role of economists for individual companies, attenuating the accountability and responsibility of effective ownership and focusing on the benefits of financial efficiency. What distinguishes capitalism from other forms of economic management is that the capitalist cannot guarantee his returns. The key principle of investment is that its outcome is determined by the voluntary responses of customers. If there is a government guarantee, it is not a capitalist venture and the is no real owner and no real profit.

Capitalism relies not on the freedom to choose but on the free flow of information across a low entropy carrier. Corrupt the carrier with noise and the system collapses. And the great corrupter of any carrier, The great generator of destructive noise, is power.

Credit default swap’s are contingent on certain events.And those events, securities defaults, are less frequent than say, The usual occasion for Life insurance payouts.

From the perspective of information theory, regulation is mainly an effort to replace knowledge with power.In general, the more regulation the less information.

Knowledge is about the past. Entrepreneurship is about the future.Regulations are rules based on past experienceRegulators are political appointees responsible to their bosses and the rules. Only entrepreneurial owners Take their cues from the subtle signals on the crest of creation.

As Peter Drucker has explained,Inputs and costs are determined within the business But outcomes are not.Businesses are dependent on information held by customers andInvestors, and both can’t change their mind in minutes.

The problem is that even If each individual regulation is good, the effect of all the regulations combined may be bad.A single pebble thrown into his dream may not do much. But throw enough pebbles and soon enough the stream of innovation is damned.

Approximately 70% of the average company’s value cannot be explained by traditional GAAP financial statements. Adding more arcane and picayune rules to GAAP, or converging existing GAAP with international accounting standards will not solve this problem. The accounting model is suffering from what philosophers call a deteriorating paradigm. It gets more and more complex to account for its lack of explanatory power. CEOs have to create the future not relive the past, and the only way to do that is with a theory of the business, and to get outside the four walls of their organizations, and connect with external reality, where all value is created.

The regulatory blindness of the demand side is most evident in the fields of energy and the environment. How much energy the United States produces and how clean the environment is, depend entirely on supply side capabilities. All the relevant information is on the supply side. Physical entropy cannot abated on the demand side. If a nation fails to produce fossil fuel energy’s in sufficient volumes, people routinely strip the land of trees to heat their homes and beat their mules. Government may demand solar energy or electrical hovercraft or carbon sequestration or windmills or biofuels or hydro cells or geothermal plants. But even if the goals were desirable, it could achieve none of them without a profitable energy economy that can sustain growth while the new projects are nurtured.

Has a demand side force regulation must be low entropy and predictableBecause businesses on the supply side can respond only over long spans of time.

Hi entropy regulation crowds out high entropy enterprise.

Just about every product or service that makes our lives better requires a mass marketOr it’s not economic to bother offering.Those who invent and produce for the mass market get rich. Income equality may widen, but consumption equality will become more the norm.

Capitalism’s distribution of wealth makes sense, but not because of the virtue or greed of entrepreneursOr because of the invisible hand of the market. The reason is not incentives or carrots and sticks or just desserts. The reason capitalism works is because the creators of wealth are grantedThe right and burden of reinvesting it or choosing the others who receive it in the investing process.

In general welcome bro only if the people who created it control it. Divorce the financial profits from the learning process and the economy stagnates.

Most people think they are above the gritty and tedious details of life that allow the creation of wealth.They leave it to the experts. But in general you join the 1% of the 1% not by leaving it to the experts But by creating new expertise. Not by knowing what the experts noBut by learning what they think is beneath them. Entrepreneurship is the launching of surprises.

Of all people on the face of the globe it is the legal owners of businesses Who have the clearest interest in building wealth for others rather than spending it on themselves. End it is usually only the legal owners who know enough about the sources of their wealth to maintain it

Even if you put professional management at the helm of great wealth value will grow less rapidly than if you gave the owners control.

Governments can expropriate wealth but they cannot appropriate it or re-distribute it. Similarly in the United States,I left word administration can destroy the value of the 1% propertyBut Kenneth sees it or pass it on. Under capitalism wealth is less a stock of goods and more a flow of ideas and entropy.

In this Mindscape of capitalism all riches finally fall into the gap between thoughts and things.Governed by mind but embodied in matter, To retain its value an asset must create an income stream that can be expected to continue.The expectation can shift as swiftly as thought but the things alas are all too solid and slow to change.

Most of Americas leading entrepreneurs are bound to the masts of their enterprises. They are allowed to keep their wealth only as long as they invest in others. It has been given to others in the form of investments. It is embodied in a vast Webb enterprises that retains is worth only through constant work and sacrifice. In a real sense they can keep only what they give away. Capitalism is a system that begins not worth taking but giving to others.

The abiding delusion of economic managers is that they can guarantee the value of things rather than the ownership of them. Ownership bears consequences, whether profits or losses. The great mistake of the Bush and Obama administrations was to shield the owners from the costs of their mistakes. By guaranteeing things, government tends to destroy their value, which depends on dedicated ownership. In the United States the constitution guarantees only the right to property, not to it’s worth.

Whatever the inequity of incomes, it is dwarfed by the inequality of contribution to human advancement.

As science fiction writer Robert Heinland wrote, “Throughout history poverty is the normal condition of man. Advances that permit this norm to be exceeded, here, there, now and then, are the work of an extremely small minority.”

If the rich are stultified by Socialism and crony capitalismThe lower economic classes will suffer the most as the horizons of opportunity close.High tax rates and oppressive regulations do not keep anyone from being rich.They prevent more people from becoming rich.High tax rates do not redistribute income or wealth, they redistribute taxpayers - Out of productive investment and into overseas tax havens, Out of offices and factories and into beach resorts and municipal bonds. But if the 1% and 0.1% are respected and allowed to risk their wealthAnd new rebels are allowed to rise up and challenge themAmerica will continue to be the land where the last regularly become the firstBy serving others.

Perhaps the simplest and most aggressive definition of entropyIs as a measure of freedom of choice. The higher the entropy the higher the bandwidth, or range of selection. A high entropy economy is, necessarily, a free economy. Within a free economy entrepreneurial creations will appear to be random, whether measured by their earnings or profits or stock value.

A capitalist economy or a stock market is not a casino or a lottery. Nor is it a physical or material system. It is an arena of information governed by mathematical laws of information similar to the laws that govern the capacity of telephone lines and wireless spectrum. The same laws that shape biological information through genetic code or shepherd calls through your cdma digital smartphone. In markets the winners are the people with the best information, mostly inside information.

Markets are more analogous to biological phenomenon. As the controlling knowledge of biology lies deep within the nuclei of cells, So to the controlling knowledge of economics lies deep inside the companies that make up the market.You cannot predict the future by examining the fractal patterns of the previous price movements.There is no information there.

The law for information disclosure by public companies and aspiring public companies prohibits the release of materially significant information unless it is published simultaneously to the world. This well-meaning rule is supposed to create a level playing field where no investors have the advantage of inside knowledge. But a level playing field means no information, since information is inherently unlevelling. Information, like life , creation, and enterprise, brings disequilibrium. US securities law manages to reduce the amount of real information in stock prices. Less information means more volatility and more vulnerability to outside influences.

Capital is not merely a flow of power. It is an accumulation of specific knowledge. 70% of federal spending, some $900 billion, devalues human assets by suppressing the learning process that results in productive citizens. The government is paying for people to be unemployed, unmarried, retired, sick, poor, homeless, helpless, indebted, disabled, drugged, or imprissoned. These benefits and guarantees amount to a huge tax on escaping from dependency, rendering most available jobs, opportunities, marriages, and careers, far less remunerative than promiscuous sloth.

Capital and labor are not competitive but complementary.As workers become more productive employers hire more you are.The Reagan productivity boom propelled a huge employment boom.Capital linked with the private sector knowledgeReleases creativity and stimulates new employment. Drastically lower tax rates on income and capital formation could endow millions more jobs at higher pay. Replacing America’s corporate tax rate, the worlds highest, with an 8.5%Business consumption tax, as Paul Ryan has proposed,Would remove the incentive to avoid taxes and profits And encourage creativity and entrepreneurship.

Perhaps the most obvious rule of public policy is that people will abuse any free good. Evoking unbounded demand while choking off supply free goods and free services destroy information and Lead to corrupt decision making. In the perverse feedback loop of free goods, free healthcare comes to mean hypochondria, and needless illness caused by needless exams and treatment. cues for an ever expanding political portfolio of Mediocre services and at the end of the line, euthanasia under government bureaucracy. Free drugs lead to widespread addiction of existing medications And an end to medical innovation. Free money, manifested in the 0% interest rate policy of the federal reserve, Diverts the wealth of savers two favorite governments and crony capitalists while creating shortages for everyone else. As has been shown throughout history, a change in policy on the supply sideCan affect an Instant and sharp improvement in the value of all entrepreneurial assets.

History tells us that the threat to prosperity is not debt but socialism.The key error of socialism is separating knowledge from power, Concentrating power at the foggy peaks of government rather than distributing it through the high entropy channels of a free economy. Socialism attempts to guarantee the value of things but not the ownership of them, and nothing destroys value more effectively than the erosion of ownership and responsibility.

The real argument for lower taxes, like the argument for less regulation, like the argument for capitalism itself, Only begins with simple incentives for productivity. The secret is not merely giving people an incentive to work harder or to accept more risk in order to gain a greater reward, The reason lower marginal tax rates produce more revenues than higher ones is that they release and endow creativity of entrepreneurs, allowing them to garner more information. They can move more rapidly down the curves of learning and experience.They can learn more because they can command more capital to use in their trade as capitalists. With more capital, they can attract more highly skilled labor from around the globe. They spend less time and effort on avoiding taxes and interpreting regulations and consulting lawyers and accountants. They can conduct more undetermined experiments, test more falsifiable hypotheses, try more business plans, and generate more productive knowledge.bWith fewer resources diverted to government bureaucrats Profits are managed by the people who earned them, and who thus learned how to invest them successfully. Seizing resources from entrepreneurs and re-distributing it politically is the death of creativity. A tax system based on antipathy to entrepreneurs will necessarily fail to produce the expected revenues because it ignores economic in human reality.

Human intelligence and its technological artifacts are merely extensions of evolution every biology, and they are intelligible by the principles of the science.

The reason capitalism succeeds is not merely because it fosters the creation of ideas, But that it can bring those ideas to the marketplace. The system efficiently capitalizes inventions, which are always abundant, hence the throngs of disgruntled inventors, but difficult to sort out and prioritize. Capitalism assigns to the winners of previous profits the right to reinvest them in new ideas. Profits are crucial because they capture the unexpected upside of successful innovations beyond the predictable yields of the interest rate. It 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.

Capitalism begins with giving. Free markets and exchanges are characteristic of capitalism. But they are a result of entrepreneurship, not the cause of it. It is not the exchange that elicits the goods and generates the increase in their value. It is the initial gift that evokes the desire to reciprocate, and which thus induced exchange. Capitalism begins with a gift and continues with competitions and giving. A gift will elicit a greater response only if it is based on the understanding of the recipients needs. Has any baffled beneficiary of a costly but unwanted Christmas gift can attest, giving is difficult and requires close attention to the lives and longings, tastes and talents of others. In the most successful and catalytic gifts, the giver fulfills an unknown, unexpressed, or even unconscious desire in a surprising way. An unexpected gift startles and gratifies the recipient with the unexpected sympathy of the giver. In order to repay him however, The receiver must come to understand the giver. The contest of gifts leads to an expansion of human sympathies. The circle of giving, the profits of the economy, will grow as long as the gifts are consistently valued more by the receivers than by the givers. In deciding what new goods to assemble or create therefore, The givers or investors must be willing to focus on others needs more than their own. The difference between the value of an item to the giver and its value to the recipient is the profit. Profit is thus an index of the altruism of an investment. Say’s Law defines this sequence of providing first and getting later.

Dumb money does more harm than good. It is extremely difficult to transfer value to people in a way that actually helps them. Excess welfare hurts it’s recipients, demoralizing them or reducing them to an addicted dependency that can ruin their lives. The anonymous private donation may be a good thing in itself, it may foster an outgoing and generous spirit, But society as a whole is more likely to become charitable and compassionate if the givers are given unto, if the givers seek some form of voluntary reciprocation. Then the spirit of giving spreads and wealth gravitates towards those who are more likely to give it back, Who are most capable of using it for the benefit of others, Who are most knowledgeable and best informed, who’s gifts evoke the greatest returns. Even the most indigent families will do better under a system of free enterprise and investment And under is supposedly compassionate welfare system that asks no return. The law of reciprocity, that one must supply in order to demand,save in order to invest, consider others in order to serve oneself, is essential for a Humane Society. Indeed it is the genius of capitalism that identifies the difficulty of successful giving, understands the hard work and sacrifice entailed in helping one’s fellow men, and offers a practical way of living a life of effective charity. True generosity is not soft or sentimental. It consists not of giveaways but I’ve successful giving. It has little to do with the often lazy or degenerate good works of the gullible or with all the protests and programs of social change and equality urged by the sterile and predatory left. Capitalism transforms the impulse to give into a disciplined process of creative investment based on a continuous analysis of the needs of others. The investor cannot be fundamentally selfish. A self-centered capitalist is incapable of undertaking the risky but inspired ventures that depend most on an imaginative understanding of the world beyond himself.

It is not surprising therefore that the chief source of the misunderstanding of capitalism is the intelligentsia, who disdain bourgeois or middle class values and who deny the paramount rule of individual enterprise and the progress of the race.

The error of economist was to found their theory on the mechanism of market exchanges themselves rather than on the business activity that makes them possible and impels their growth. Capitalist exchange works indeed by computations of what might be termed self interest, as the participants negotiate a price agreeable to each. But this self interest has nothing to do with avarous. It reflects a mutual transfer of information, allowing an appropriate allocation of resources. The grander vision of economics fails because it violates a key principle of information theory. It subordinates a higher and more complex level of activity, the creation of value, to a lower level, its measurement and exchange.

At the heart of capitalist growth however, is not the mechanistic homo-economicus, but conscious, willful, altruistic, inventive man.

The market is the conduit, not the content - the low entropy carrier, not the high entropy message. Capitalism begins not with exchange but with giving, not with determinist rationality, but with creation and surprisal.

The gifts of capitalism generate economic progress chiefly because they constitute an epistemic system, a way of making discoveries and exploiting them. Even the failures, in a sense, succeed, and the much remarked waste of the system is often redeemed by the accumulation of information and experience, intangible capital, held by both the entrepreneurs and society at large. Information alone however, cannot make the system grow. The successful enterprise imparts to the entrepreneur financial resources, as well as knowledge.

Capitalism is the most effective way of Expanding wealthNot because it offers the most powerful incentives, but because it links knowledge with power. It gives control over resources and the flow of future investment not to political bureaucracies of certified experts or to the most avidly self loving pursuers of leisure and luxury,But to the particular entrepreneurs who manage successful experiments of enterprise. It grants riches to those very individuals who have proved their ability to forgo immediate gratification in pursuit of larger goals and who refuse to waste or to hedonistically consume their incomes. It assigns further power to those very people, whomever they may be, however unorthodox or uncredentialed, who launch successful projects and commit to them their lives and savings. Under capitalism economic power flows not to the intellectual who manipulates ideas and basks in their light, but to the man who gives himself to his ideas and tests them with his own wealth and work. These often self-denying explorers, beyond the bounds of the existing marketplace and its inventories, not some mechanism of exchange, extend the frontiers of human possibility. The greatest damage inflicted by state systems of redistribution and industrial policy is not the distortion of markets, the misallocation of resources, or the discoordination of producers and consumers, but the deflation of capitalist energy, the repression of new, entrepreneurial ideas, and the stultification of wealth. Steeply progressive tax rates destroy not only incentives, more importantly they destroy information and preclude entropy. They take from the givers and prevent them from giving again, from reinvesting their winnings in light of new information that the original gift and its associated experiments generated. This entrepreneurial process is a method of unveiling surprises. It cannot be captured ore codified by a bureaucracy.

Innovation rides on an ever moving crest of entropic discovery and by the time the innovations have been fully codified, they are often obsolete.

Entrepreneurial entropy begins beyond the boundary of settled rationality.

Enterprises are also adventures with the future livelihood of the investor at stake.

Output is determined, above all, by openness to the upside surprises of entropy in a falsifiable entrepreneurial experiment.

Socialism is an insurance policy bought by all the members of a national economy To shield them from risk. But the result is to shield them from knowledge of the real dangers and opportunities in any economic environment. Rather than benefitting from a multiplicity of gifts and experiments, the entire economy absorbs the much greater risk of remaining static in a dynamic world. In a truly capitalist economy, with the risks chiefly born by the individual citizens and entrepreneurs and thus this vigilantly appraised and treated, the overall system is more stable.

Supply creates its own demand is the sequence in the cosmology that distinguishes the free from the socialist economy. Under capitalism reason ventures out into world governed by morality and providence. The gifts will succeed only to the extent that they are altruistic, springing from an understanding of the needs of others. They express faith in an essentially fair and responsive humanity. In such a world, a man can venture without the assurance of a reward. He can seek the surprises of profit, rather than the more limited benefits of contractual pay. He can take initiatives amid radical perils and uncertainties. When faith dies, so does enterprise. It is impossible to create a system of collective regulation, insurance, and safety that does not finally deaden the moral source of the willingness to face danger and fight, that does not dampen the spontaneous flow of gifts and experiments, that extends the dimensions of the world and circles of human sympathy. 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 in the darkness of time. The seeker of assurance and certainty lives always in the past, which alone is sure, and his policies, despite the progressive rhetoric, are necessarily reactionary. Certain knowledge, to the extent that it ever comes, is given to us only after the moment of opportunity has passed. The venturer who awaits the emergence of a safe market, the tax cutter who demands full assurance of new revenue, the leader who sees a settled public opinion, will always act too timidly and too late. The future is available only to entrepreneurs on the crest of creation seeking the entropy of giving.


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