The Scandal of Money: Why Wall Street Recovers but the Economy Never Does - George Gilder (2016)

Key Terms for the Information Theory of Money

A Disordered Glossary of Counterintuitive Truths

Monopoly money: Money issued by sovereign states that block all competitive moneys in their domains, whether by regulation or by taxes not imposed on the sovereign currency. It’s what we have in America and the rest of the world. Friedrich Hayek, the author of The Road to Serfdom, declared that “the source and root of all monetary evil [is] the government monopoly on the issue and control of money.” Like most state-run monopolies, the money monopoly serves the interests of politicians rather than entrepreneurs, power rather than knowledge, old wealth rather than new ideas. Gold and bitcoin are the chief alternatives to monopoly money.

Hypertrophy of finance: The growth of finance beyond the rate of growth of the commerce it intermediates. For example, international currency trading is seventy-three times more voluminous than all global trading in goods and services and an estimated one hundred times as voluminous as all stock market transactions. Oil futures trading has risen by a factor of one hundred in some three decades, from 10 percent of oil output in 1984 to ten times oil output in 2015. Derivatives on real estate are now nine times global GDP. That’s not capitalism, that’s hypertrophy of finance.

Information theory: Based on the mathematical theories of Claude Shannon and Alan Turing, an evolving discipline that depicts human creations and communications as transmissions across a channel, whether that channel is a wire or the world. Measuring the outcome is its “news” or surprise, defined as entropy and consummated as knowledge.

Entropy is higher or lower depending on the freedom of choice of the sender. The larger the available alphabet of symbols—that is, the larger the set of possible messages—the greater the composer’s choice and the higher the entropy and information of the message.

Since these creations and communications can be business plans or experiments, information theory provides the foundation for an economics driven not by equilibrium or order but by falsifiable entrepreneurial surprises.

Information theory both enables and describes our digital world.

Noise: Distortion of content by its conduit. A high-entropy message (full of surprise) requires a low-entropy channel (with no surprises). Surprises in the signal are information; surprises in the channel are noise.

Wealth: Tested knowledge. Physical law dictates that matter is conserved: material resources have not changed since the Stone Age. All enduring economic advances come from the increase of knowledge through learning.

Economic growth: Learning tested by falsifiability or possible bankruptcy. This understanding of economic growth follows from Karl Popper’s insight that a scientific proposition must be framed in terms that are falsifiable or refutable. Government guarantees prevent learning and thus thwart economic growth.

All expanding businesses and industries follow a learning curve that ordains a 20 to 30 percent decrease in costs with every doubling of total units sold. Classical learning curves are MOORE’S LAW in SILICON VALLEY and METCALFE’S LAW in networking. Raymond Kurzweil generalized the concept as a “law of accelerating returns.”

Moore’s Law: Cost-effectiveness in the computer industry doubles every two years. This pace corresponds closely to a faster pace in the number of transistors produced, signifying a learning curve. Formulated by Intel founder Gordon Moore and inspired by Caltech professor Carver Mead’s research, Moore’s Law was originally based on the biennial doubling of the density of transistors on a silicon chip. It now chiefly relies on other vectors of innovation, such as parallel processing, multi-threading, lower voltages, and three-dimensional chip architectures. Moore’s Law has become an important principle of INFORMATION THEORY.

Metcalfe’s Law: The value and power of a network grows by the square of the number of compatible nodes it links. Named for the engineer Robert Metcalfe, a co-inventor of Ethernet, this law is a rough index and deeply counterintuitive. (It would be preposterous to claim that the Internet is worth the square of its six billion connected devices.) But the law applies to smaller networks, and it explains the vectors of value creation of companies such as Facebook, Apple, Google, and Amazon, which now dominate stock market capitalization. Metcalfe’s Law may well apply to the promise of new digital currencies and ultimately assure the success of a new transactions layer for the Internet software stack.

Wall Street: The symbol of the financial industry, from investment banks to insurance companies, from credit card vendors to payday lenders, from brokers to hedge funds. Today Wall Street is gorging itself on the HYPERTROPHY OF FINANCE. Ideally, finance intermediates transactions across time through interest rates and across space through currency-exchange rates. But today both these functions are falsified by government manipulation. They face disintermediation by gold, by a new transactions layer in the Internet software stack, and by new cryptographic blockchain currencies. In the hypertrophy of finance, Wall Street was bloated by MONOPOLY MONEY created by the Federal Reserve and channeled to the U.S. Treasury by banks, never touching MAIN STREET.

Main Street: The symbol of the real economy of workers paid hourly or monthly and sealed off from the circular loops of WALL STREET moneymaking. Perhaps the street where you live, Main Street is the site of local businesses and jobs.

Silicon Valley: A symbol of the high-tech entrepreneurial economy, centered in Santa Clara County, California, and largely funded by venture capital from SAND HILL ROAD in Palo Alto and Menlo Park. The high-tech economy is increasingly based on INFORMATION THEORY, which governs its infrastructure of communications and computing, particularly software. Silicon Valley sustains both MAIN STREET and WALL STREET by supplying them with new technology. Through Wall Street, Silicon Valley provides Main Street with opportunities for sharing in the equity of the ascendant sectors of the world economy.

In recent years, Silicon Valley has suffered from the HYPERTROPHY OF FINANCE, become bloated with MONOPOLY MONEY, and been bent by controls from the Wall Street–Washington axis. Like Wall Street, Silicon Valley has bypassed Main Street, which has remained trapped in its pedestrian time-based compensation and mindless index fund investments.

Sand Hill Road: The arboreal abode of California venture capitalists and their “unicorns,” stretching from the Camino Real near Stanford to Route 280 and into the clouds and wealth of Woodside and SILICON VALLEY.

Expansionary fiscal and monetary policy: The attempt by central banks to stimulate economic activity by selling government securities to pay for a governmental deficit. Keynesians believe that selling securities will impart a fiscal stimulus by enabling more government spending.

Monetarists, on the other hand, believe that to stimulate economic activity central banks should create money to buy government securities, money that supposedly is put into the economy. But this new money goes to the owners of the purchased securities, chiefly banks, which in recent years have used their money to purchase more securities from the Treasury. Thus Keynesianism and monetarism converge in expanding the government’s power to spend.

In an information economy, both measures attempt to use government power to force growth. But ECONOMIC GROWTH is learning (accumulating tested knowledge). Learning cannot be forced.

Real money: A measuring stick, a metric of value, reflecting the scarcity and irreversible passage of time—entropy based, equally distributed, and founded on the physical limits of the speed of light and the span of life. BITCOIN and GOLD are both real money in this sense. MONOPOLY MONEY is not.

Bitcoin blockchain: A method of secure transactions based on wide publication and decentralization of a ledger across the Internet, in contrast to current credit card systems based on secrecy and centralization, using protected networks and firewalled data centers filled with the personal information of the transactors.

The public ledger of transactions is collected in blocks roughly every ten minutes, beginning with the current block and going back to the “Genesis block” created by Satoshi Nakamoto, the pseudonymous inventor of bitcoin. Each block is confirmed when at least half the participants in bitcoin nodes—the “miners”—hash the block mathematically with all the previous blocks since the Genesis block. In order to change or rescind a transaction, therefore, more than half the computers in the system have to agree to recompute and restate all the transactions since Genesis.

Bitcoins are used to evaluate transactions based on the time taken to validate a block. Bitcoins thus are not coins but metrics or measuring sticks for transactions that are permanently registered in the BLOCKCHAIN.

Blockchain: A database, similar to a cadastre of real estate titles, extended to events, covenants, patents, licenses, or other permanent records. All are hashed together mathematically from the origin of the series, with the record distributed and publicized on decentralized Internet nodes.

Gold: The monetary element, tested over centuries. Usually thought to be money because it is a useful commodity—pretty, shiny, divisible, portable, scarce, and convertible into jewelry—gold is in fact the monetary element because it is useless. Money is not valuable because it is really jewelry; jewelry is valuable because it is really money. Gold is a metric of valuation based on the time to extract an incremental ounce, which has changed little over the centuries while gold has become more difficult to extract from deeper and more-attenuated lodes.

Shannon entropy: Information measured by surprisal, or unexpected bits, “news.” Counterintuitively, surprising information is a kind of disorder. The alphabet is ordered; crystals are ordered; snowflakes are ordered. Hamlet and Google are beautifully disordered alphabets conveying surprising information.

Physical entropy (a.k.a. Boltzmann’s entropy): Disorder. In a system divided between hot and cold entities, Boltzmann’s entropy begins as zero—when we know most about the arrangement of the system—and it reaches maximum entropy when those hot and cold entities merge and we know least. Boltzmann therefore identified entropy with missing information, or uncertainty about the arrangement of the molecules, opening the way for Shannon and INFORMATION THEORY.

Although the Boltzmann and Shannon equations are similar, Boltzmann’s entropy is analog and governed by the natural logarithm, e. Shannon entropy is digital and governed by the binary logarithm, log base 2.

Gödel’s incompleteness theorem: Every logical system depends on propositions outside the system that are unprovable within the system. The first person to appreciate and publicize the importance of Kurt Gödel’s demonstration in 1931 that mathematical statements can be true but unprovable was John von Neumann.

As von Neumann saw, Gödel’s proof depended on his invention of a mathematical “machine” that used numbers to encode and prove algorithms also expressed in numbers. This invention, absorbed by von Neumann and Alan Turing, launched computer science and INFORMATION THEORY and enabled the development of the Internet and the BLOCKCHAIN.