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

Chapter 2. Justice before Growth

If an expensive car crashes into a wall, all the information and value disappears though all its atoms and molecules remain. Value is information. The car is knowledge.

—Cesar Hidalgo, Why Information Grows (2015)

Money is the central information utility of the world economy. As a medium of exchange, store of value, and unit of account, money is the critical vessel of information about the conditions of markets around the globe in both time and space. Monetary systems thus can be judged as moral systems—do they lie or tell the truth?

In my last book, Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World, I found that wealth is knowledge and growth is learning and that both are governed by the rigorous science of information.1 Prehistoric man commanded all the material resources we have today. The difference between our age and his is the expansion of knowledge. Knowledge expands through testable learning, “learning curves,” proceeding through entrepreneurial experiments.

Manifesting this process is the learning or experience curve in individual businesses and industries. Perhaps the most thoroughly documented phenomenon in all enterprise, learning curves ordain that the cost of producing any good or service drops by between 20 percent and 30 percent with every doubling of total units sold. The Boston Consulting Group and Bain & Company charted learning curves across the entire capitalist economy, affecting everything from pins to cookies, insurance policies to phone calls, transistors to lines of code, pork bellies to bottles of milk, steel ingots to airplanes.2

Growing apace with output and sales is entrepreneurial learning, yielding new knowledge across companies and industries, bringing improvements to every facet of production, every manufacturing process, every detail of design, marketing, and management. Crucially, the curve extends to customers, who learn how to use the product and multiply applications as it drops in price. The proliferation of hundreds of thousands of applications for Apple’s iPhones, for example, represented the learning curve of the users as much as the learning curve at Apple.

The most famous such curve is that described by Moore’s Law, which predicts a doubling of computer cost-effectiveness every twenty-four months. It has been recycled by the solar industry in the form of Swanson’s Law, showing the decline of the cost of silicon photovoltaic cells from seventy-six dollars per watt in 1977 to fifty cents per watt in 2014. The inventor and futurist Ray Kurzweil has put all these curves together in an exhaustive catalog that reaches a climax later in this century as a so-called “singularity,” when the capabilities of computers by many measures will surpass the power of human brains.3

All these curves document the essential identity of growth and learning as a central rule of capitalism. This process has marked the history of human beings since the Stone Age, yet it is only rarely addressed by economists, most of whom think prices should go up. In a famous 1992 paper, William Nordhaus of Yale showed that economists failed to measure the most dramatically dropping cost of the previous two centuries—a hundred-thousandfold decline in the cost of light, gauged in labor hours expended per lumen-hour.4 Nordhaus extended the curve from cave fires and candles to electricity and the power grid. It is now manifested in light-emitting diodes that extend the power of light into programmable display technologies of all kinds.

Growth in wealth stems not from an efflorescence of self-interest or greed but from the progress of learning, accomplished by entrepreneurs conducting falsifiable experiments of enterprise, their outcomes measurable by reliable money.

Rather than diverting profits to politicians, entrepreneurs who conduct successful experiments keep their winnings. Thus they can extend their success into the future. Resources gravitate to those best able to use and expand them. The central law of capitalism, pace Thomas Piketty, is that successful capitalists, not politicians, control the reinvestment of capital. If the government controls, guarantees, channels, or directs investment, it is not capitalism. Pivotal to the investment process is interest rates. For entrepreneurs to control capital, interest rates must reflect its real cost rather than merely the cost of printing money. Otherwise the money printers will dominate investment.

We can sum up the new information theory of money and capitalism in eight principles:

1.The economy is not chiefly an incentive system, but an information system. Greed has nothing to do with it, but justice—a system that rewards truth and filters out falsehood—is crucial.

2.Creativity always comes as a surprise. If it didn’t, socialism would work. Information is defined as surprise.

3.Information is the opposite of order. Capitalist economies are not equilibrium systems but lively arenas of entrepreneurial experiment.

4.Money should be a standard of measure for the outcomes of entrepreneurial experiments.

5.Interference between the conduit and the contents of a communications system is called noise. Noise in the currency makes it impossible to differentiate the signal from the channel.

6.A volatile market shrinks the time horizons of the economy. Gyrating currencies and grasping governments are deadly to the commitments of long-term enterprise.

7.Analogous to entropy, profit or loss represents surprising or unexpected outcomes. Analogous to average temperature in thermodynamics, the real interest rate represents the average returns.

8.The velocity or turnover of money is not a constant. Therefore it’s not the central bank that controls the effective money supply but the free decisions of individuals as they accumulate knowledge and decide whether to spend or save their output.

In a just system of growth, business must be open to bankruptcy as well as to profit. When government puts its thumb on the scales of justice, manipulating money through guarantees and other exercises of power designed to stimulate economic growth or protect assets, it stultifies this learning process.

In entrepreneurial experiments, the governing constraint is the scarcity and irreversibility of time. With infinite time, anything is possible. Finite time imposes the necessity of choice and prioritization. Time is embodied in interest rates (the money value of time), in budgets (bounded in time), in contracts (with dates and deliverables), and in accounts (time bound). In economics, time is chiefly represented by money. In the deepest sense, money is time. This is not merely a play on Ben Franklin’s maxim “time is money” but a truth about the necessary scarcity of money. As an instrument for keeping accounts, setting priorities, and evaluating opportunities, money must be a measuring stick rather than a magic wand. It cannot be expanded or contracted at the will of the sovereign. In order to explain a willingness to exchange real goods and services for it, money must be strictly limited in quantity.

Paradoxically, to serve as a store of value, money cannot be hoardable. A holder of funds can refrain from using or banking them. But if money is not invested or spent, it eventually becomes worthless as no goods are produced that it can purchase. Time is the quintessential Heraclitean stream; it cannot be hoarded. Time is the basis for Say’s Law—supply creates its own demand. In one way or another, depending on policy, savings are always invested or wasted.

As an economy grows, with ever more abundance deriving from ever more learning, only one resource grows relatively scarce in proportion. That resource is time. It is the most real and irreversible of all constituents of value.

The expansion of per capita wealth and income in an economy means an increase in choices and possibilities, ways of using your time, claims on your attention. Although some new goods and services increase your efficiency and some extend your years of good health, the growth of an economy inexorably presses in on the residual resource, the hours in your day.

These hours (and minutes and seconds) are what you actually spend or waste, invest or splurge, save or sleep away. Money offers an accurate measure of earnings and expenditures chiefly as it reflects these costs of time. These costs are tallied in two irreversible ledgers—physics and biology: the speed of light and the span of life. If it does not represent these fundamental scarcities of human life, our economics will diverge from reality and betray us and the cause of justice.

Under capitalism, more and more goods and services are generated and used in less and less time. Governments can pretend that some goods intrinsically cost more (gasoline or gold) or that some should be free (medical care) or that some items are becoming more expensive (education, medical instruments). People with political power can push particular prices up or down (tuition, taxes, or interest rates, housing or high fructose corn syrup or the costs of launching a new business or a new pharmaceutical). But time remains irreversibly scarce and uninflatable. Money with roots in time—unlike our dollars today—forces real costs to go down in proportion to the learning curves across the economy. Declining prices are the natural condition of capitalism.

Even financial inequalities do not affect the underlying scarcities of time and attention, speed of light and span of life, playing out across the real economies of our days. Time is remorselessly egalitarian, distributed with rough equality to rich and poor alike. Registering the radical increase in equality around the globe is a massive flattening of comparative life spans.5 The rich cannot hoard time or readily seize it from others. It forces collaboration with others. Without surprises, all time is low value and boring. Entropic surprises are what lend energy and directionality to time and to economies.

Static measures of inequality of wealth and incomes mislead many. Under a rigorous time regime, it takes work to accumulate the knowledge that builds wealth. Learning entails labor. The top quintile of households contains an average of six times as many full-time workers as the bottom quintile.6 The more “wealth” a person commands, the more time is entailed in managing and investing it. Most wealth is illiquid, defended by barriers of time, property rights, covenants, corporate structures, and payment schedules at the heart of investments and economic growth. To extract wealth prematurely—to “liquidate” it—is a costly and disruptive process that entrepreneurs undertake only rarely. On scales of unequal wealth, comparing the invested funds of entrepreneurs with the wages and salaries of workers is deeply unjust.

When government redistributes this wealth, it upsets the scales of justice that underlie it. Government can properly foster the conditions under which knowledge—yielded by millions of falsifiable experiments in entrepreneurship—grows. But the lessons too many people learned under communism still constitute the central economic lesson: power cannot command wealth—surprising new knowledge—into being.

Interest rates, for example, register the average expected returns across the economy. With a near-zero-interest-rate policy, the Fed falsely zeroes out the cost of time. This deception retards economic growth. Rather than creating new assets, low-cost money borrowed from tomorrow bids up existing assets today. It brings about no new learning and value, but merely destroys information by distorting the time value of money. Charles Gave of Gavekal explains: “When the bust arrives, assets return to their original values, while debt remains elevated . . . the stock of capital shrinks . . . and real growth slows.”7

In the name of managing money, the Fed is trying to manipulate investors’ time—their sense of present and future valuations. But time is not truly manipulable. It is an irreversible force impinging on every financial decision we make. The Fed policy merely confuses both savers and investors and contracts the horizons of investment, which in some influential trading strategies have shrunk to milliseconds.

The lesson of information theory—the new system of the world—is that irreversible money cannot be the measure of itself, defined by the values it gauges. It is part of a logical and moral system, and like all such systems it must be based on values outside itself. It must be rooted in the entropy of irreversible time.

With a theory of wealth as knowledge and growth as learning, the information theory of capitalism holds that justice is essential to growth. Justice is an effect not of the “spontaneous order” that is thought to emerge from free markets but of the constitutional order that is a planned effect of political leadership under the law. Unless citizens believe that the distributions of the market are just, they will not impose on themselves the discipline, devote the hours, or endure the risks and hardships of learning and growth. Self-interest will lead them as by an invisible hand to collaborate with government in pursuit of special privileges. Greed is the lust for unjust gains. It impels a drive for guaranteed outcomes in an ever-expanding welfare state—socialism not capitalism.

At the same time, without growth, citizens will find their horizons close in on them in a zero-sum world in which they can win only by preying on others. Justice must come first, and Republicans cannot shirk its claims. Justice is not spontaneous; it is what politicians achieve through visionary and prophetic leadership under the law. It is what soldiers and police defend with their lives under a banner of patriotism. It is what mothers and fathers in a fabric of families offer to their children as a path to the future. It is what judges and bureaucrats and teachers ought to provide in their daily administration of the rules of society. The scales of justice cannot be merely subsumed under a banner of growth.

Stifling opportunity and growth for most Americans today is a gross injustice. It affects the distribution of wealth, the exercise of power, the management of learning, and the administration of law. This injustice dwarfs all the other items in the ledger of national decline—from shrinking median incomes and deteriorating educational performance to preference for “socialism” among college students and the loss of entrepreneurial ambition among young people.

It is an injustice so vast that its shape is hard to see from within its increasingly suffocating confines. It springs from an implicit campaign among multinational corporations, universities, financial institutions, and government bureaucracies to capture and occupy the commanding heights of the culture and economy while protecting themselves from exposure to its risks. The agents of this injustice are familiar, from the White House to the Federal Reserve Bank, from the Congress to the corporatocracy, from the Ivy League to Wall Street.

To accomplish these goals, these elites have ceaselessly eroded the concept of money itself. Both government and financial institutions have transformed money from a neutral medium of exchange, a standard of value, a measure of learning and store of wealth into a manipulable lever of power and privilege. The Fed, acting as a fourth branch of government, regulating the banks and financing the government and its affiliates at zero interest rates; the Ivy League universities, embracing a secular religion of climate and “clean energy” that requires expert regulation of all production; the “best and brightest” disdaining manufacturing and swarming into finance, by far the world’s largest industry—all these elites have captured scores of trillions of dollars of unearned wealth.

This shift in the distribution of wealth is no tribute to meritocracy: it is flagrantly unjust because it has not, by and large, been earned by any acceptance of entrepreneurial risk or creative contribution. Productivity is the test. Coincident with this shift, productivity growth in the U.S. economy has rapidly converged with interest rates at near zero.

With money as a manipulable instrument of elite control and enrichment, government guaranteed finance, real estate, insurance, alternative energy, agriculture, and education. But if investments are guaranteed, they cannot yield learning or growth. They are by definition unjust. On this injustice has been built the economy of secular stagnation. It reflects a great monetary heist and it must be reversed.

But to reverse it, we must first grasp its sources in a deep misunderstanding of the nature of money itself.