This book sold a lot of copies, and i suspect mostly because the title is
I was interested because of its emphasis on "disorder, disequilibrium, and surprise", but i found the book
to be very confusing: a hodgepodge of quotations and misquotations,
personal interpretations of scientific theories, a clumsy summary of
economic theories and, last but not least, little or no substance.
Gilder's fundamental tenet is that "capitalism is not chiefly an incentive system but an information system". This leads to a discussion of Shannon's theory of information. At the same time, Gilder brings in the concept of entropy. The application of entropy to theory of information has always led to confusion because they are such different things. Entropy in an isolated physical system, entropy is maximized at equilibrium. This means nothing in the world of information. Shannon defined his entropy as maximized when the message cannot be further compressed: none of its bits can be summarized in a formula or otherwise guessed without listing them explicitly. This was Shannon's measure of information. Gilder correctly explains that Shannon's information is about "surprise" or apparent randomness. But that is not true of physical entropy. Gilder continues that train of thought and reaches the conclusion that "Entropy is thus a measure of freedom of choice"; which is hardly what physicists think of it. Next we learn that "Entropy is a measure of surprise, disorder, randomness, noise, disequilibrium and complexity... Its opposites are predictability, order, ... determinism, equilibrium and tyranny". This leads Gilder to vague and arbitrary statements such as "Measured by their entropy, their content and surprisal, new products face the test of the market that they create and the profits they engender". This convoluted sentence contains at least five different statements and definitions, none of which is obvious. Entropy would be best left out of discussions on information.
Gilder's insight is that the entrepreneur is the real creative force of the economic world (debatable) and that previous economists always left the entrepreneur out of their equations (i am not competent enough to judge whether this assertion is true or false). And please somebody explain to Gilder that these days entrepreneurs can also be women (Gilder consistently uses the "he", "his", etc).
Adam Smith viewed the entrepreneur as a tool of the market, whereas Gilder views him as the creator of the market. It is the entrepreneur that causes "surprise", i.e. information; it is the entrepreneur who shuns and overthrows equilibrium. He quotes Jobs: "People don't know what they want until you show it to them" (Allow me to rephrase it as "until highly-sophisticated marketing department convince them that they need them"). Gilder also quotes Henry Ford: "If i had listened to my customers, i would have built a faster horse". Ford forgot to mention that the vast majority of entrepreneurs also wanted to build a faster horse, not an automobile. Entrepreneurs are mostly as "dumb" as their customers. Whether we are entrepreneurs or customers, it is a general property of human beings that it takes us time to master novelties and that we are really bad at predicting the future (Gilder's books did not see the Great Recession coming, despite the fact that he had all the facts in front of him).
The fallacy, in Gilder's view, is to believe that demand creates supply, when in fact it is supply that creates demand. The market does not create the product: the entrepreneur creates the product. I am not sure how Gilder's view differs from Say's law of 1803 that supply creates its own demand (Keynes hated it). Gilder quotes Mark Skousen's calculations that consumer spending in the USA is dwarfed by business investment. Skousen also showed that the fastest growing economies in the 21st century so far have consistently been those who the save the most (spend the least): China in Asia, Brazil in Latin America, Germany in Europe...
Fascinated by a technology invented by Qualcomm, Gilder then comments that "it takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprisal)". The low-entropy (predictable) carrier is the government with all its rules and regulations. The high-entropy information is the (always surprising) dynamics of business creation and destruction by entrepreneurs. Later he comes up with the motto that probably gave the book its title: "To create wealth, knowledge and power must be merged". I assumed that now "knowledge" means "information" (high entropy) and "power" means the low-entropy carrier. It takes a while to find where he is going with that analogy, but eventually we learn that "the low-entropy side of the economy is demand", which is predictable, "the high-eintropy side is supply", which is full of surprises. One creates order for the other one to be able to disrupt order with its endless surprises. As Paul Romer, the original brain behind endogenous growth theory. argued, growth is due to technological innovation, and technological innovation is due to individual creativity.
This is all very unscientific, and crowned by the statement that the "second law of thermodynamics is not only futile and demoralizing; it is ultimately wrong", a statement which is based on Howard Bloom's "The God Problem" (2012) and that is meant to summarize the fact that the universe seems able to create order despite the fact that the second law of thermodynamics forces entropy to never decrease. Except, of course, that Non-Equilibrium Thermodynamics has long explained how that can happen (at the expense, alas, of entropy creation somewhere else). It is obviously not true that fracking and the likes have "ended the energy crisis" in the USA: in 2015 the USA is still the biggest importer of oil in the world, and therefore the easiest for oil producers to blackmail. He mentions that the water is scarce in Israel and the response is "informational", whatever that means at this point; but the response has been very physical: the Israeli government has funded and built desalination plants whose production capacity in 2015 is almost 600 million cubic meters of water, i.e. 70% of the country's consumption. I am not surprised that Gilder mentions Ludwig von Mises as a great economist: Mises, besides being a fan of Mussolini, gave economists a bad reputation as being unscientific.
Besides the science, that is, at best, superficially explained, and, at worst, misinterpreted, there are little problems that raise doubts on the reliability of the many facts and people he quotes. He mentions the Fairchild "1211" transistor (actually sold as 2N918) but the only source for that story is Sanders. There seems to be nobody else who remembers that story. William Nordhaus' 1993 study of lighting (concluding that candlelight was way more expensive than electrical lighting) makes no sense to me: the cost of candlelight did not include the cost of building, maintaining and running (on fossil fuels) the power stations, of creating and servicing the distribution grid, of cleaning up the environment after the pollution caused by fossil fuels, not to mention fighting a dozen wars in the Middle East. His friend Paul Romer keeps repeating that technological progress has increased rapidly over the last 200 years, but history shows that there have been other periods of rapid technological progress (the "golden century" in Medieval Europe, for example), and in any case he never truly explained why 200 and not, say, 160. There was certainly a boom in inventions at the end of the 19th century, one of the periods of highest innovation ever, but then not so much between the 1930s and the 1960s, and after that it is all speculation how future generations will see us. I just wouldn't assume that technological progress is a feature only of our age.
To prove his point Gilder also throws in Godel's Theorem of Incompleteness and Turing's forgotten Oracle Machines of 1939, further confusing the reader. Gilder draws the conclusion that "the universe is not a mechanistic logical machine", which is the most naive conclusion that an illiterate person can draw from Godel's theorem, the simplest out of the thousands that have been proposed. In the next chapter he throws in Quantum Theory, explaining that the universe must be now be viewed as stochastic, not deterministic. But Schroedinger's equation is purely deterministic. Gilder is, again, presenting a naive version of science.
Part 2 delves into the Great Recession of 2008. Gilder should begin with a disclaimer that he is one of the economists who did NOT see it coming. Andrew Redleaf did, Gilder did not. Nonetheless, Gilder has no doubt: "The crash has a clear and identifiable cause... capitalism wihout capitalists" He then goes on to criticize government's intervention because it sent money not towards the entrepreneurs but towards government programs. Gilder advocates the marriage of knowledge and power, which really that government should remain "low-entropy" (do little or nothing) so that most capital flows to the people who know best, the entrepreneurs. A high-entropy government (a government that decides where money should flow) is bad for you. Never mind that it is the government that funded the railways and the canals that made the USA great. Never mind that it is the government that funded the Internet and the GPS. Never mind that it is European governments that funded the computer and the World-wide Web. Gilder thinks that the world would be better without all of these things, He has a point when he rants against government regulations. Any small business hates all the rules and regulations that are time-consuming and costly and that seem to exist in a world of their own. But that is not the only thing that a high-entropy government does. Gilder curses the Sarbanes-Oxley Act, devised by the government after the Enron scandal, but doesn't spend a word telling us what he thinks of the entrepreneurs who caused that scandal. Gilder's comments can be as original as your favorite drinking buddy's. He points out how difficult it is for an over-regulated US company to compete with the "rough-and-ready rivals in Asia". First of all, he will be the first one to write a best-seller when China's economy crashes and to point the finger at its "rough-and-ready" economy. Secondly, are we supposed to all live in the abysmal pollution that affects millions of Chinese simply because otherwise our entrepreneurs are too dumb to compete with Chinese firms? That's precisely what he implies when he writes "China, where emissions of mercury and other pollutants, as well as of carbon dioxide, are nearly five times as high per thousand dollars of national output". No, he is not writing that sentence to denounce China and warn against doing the same here: he is writing that sentence because he is jealous that China's business can enjoy such a paradise. There are two ways to solve the problem: 1. is to deregulate the US industry so that it can pollute as the Chinese one does; 2. to force China to adopt the same kind of regulation. Gilder will be shocked to learn that Chinese citizens would prefer 2. He hails the great achievement of fracking, the achievement of a valiant entrepreneur named George Mitchell, at the same time when the Obama government was shifting money towards alternative energy, but forgets to mention where the motivation came from to develop fracking techniques: from the competition that alternative energy was creating. The oil and gas industry had no reason to discover new techniques until it came under threat from new forms of energy. Remove the subsidies to alternative energy and the oil and gas companies have no need for fracking: they would simply increase the price of gas and oil. And of course Gilder omits to say that most folks don't want any fracking in their neighborhood. Gilder pokes fun of "putative climate change" quoting old folks' stories that Greenland used to be a garden and Andeans people lived on mountains because the temperatures were higher in the past. All the scientists who claim otherwise are obviously part of a conspiracy against capitalism. Gilder thinks the government is all wrong about subsidizing alternative energy and this is an example of when "the high-entropy demand for specific technologies distorts and depletes the entire information fabric of the system".
No wonder that Gilder loves the current right-wing regime of Israel and devotes an entire chapter to obscure Israeli startups like Anobit (purchased by Apple in 2012 for $400 million), Intucell (purchased by Cisco in 20013 for $475 million) and ASOCS; but not to the many startups to come out of, say, left-wing Massachusetts. Israel and Massachusetts have roughly the same size, but the latter's GDP is way higher, $460 billion versus $300 billion, Instead of focusing on the success stories of the 2000s, which happen to be mostly socialist (China, Russia, Brazil, etc), he focuses on Israel, one of the few right-wing success stories of the 2000s. However, he omits the most important factors to explain that phenomenon: a) Israel's high-tech industry is largely subsidized by the Israeli government and directed towards military applications; and b) Israel is the only country in the world to benefit from billions of dollars of aid from the US government. In other words, the US government has decided to sponsor economic growth and technological progress in Israel, and does so through the Israeli government that directs into which technologies that money is invested. It not only violates Gilder's own rules of "low-entropy" government: it does it twice.
I simply loved the chapter on California, since that's where i have been living for 32 years. Gilder blames the environmental "green" law of 2010 to curb greenhouse gases for sanctioning the collapse of California. Maybe it is all an hallucination, but this is 2015 and a) business is booming, b) real estate prices are skyrocketing, c) the whole world wants to emigrate here, and d) California is home to Apple (the most valued company in the world), Google (#1 Internet company), Facebook (#1 social media company), Twitter (#2), Oracle (#1 in ERP), Intel (#1 in semiconductors), Cisco, HP, etc; and, last but not least, to literally thousands of startups. I challenge Gilder to tell us which other region of the world has experienced this kind of exponential economic growth since 2010 outside of communist (repeat: communist) China (i repeat "communist" because China is one place that proves Gilder wrong on just about everything, its economy being entirely state planned and state funded). Gilder picked the very wrong state. He makes fun of that 2010 law arguing that the reduction in greenhouse gases mandated by the state of California will actually destroy the planet causing another ice age (false, of course, not a single scientist ever said so). He calls California "a state in economic dementia". I hope he had a chance to visit this demented state, and particularly its very demented Silicon Valley, after his prediction of inevitable collapse. His words: "Leading the country in this retrogressive course is California". Whatever California has done to get where it is now, the whole world is trying to copy it. Scores of analysts, investors, inventors and ordinary gold diggers are moving to California to discover the secret of its success. Apparently, Gilder is the only one who comes to California to document its breathtaking implosion. Gilder must have visions of hordes of venture capitalists leaving California as quickly as they can, carrying all their money with them whichever way they can. Surprise: venture capital is booming in California, and flocking from every corner of the globe. No other region enjoys such a high rate of investment. No other region (in the entire world) can boast as many successful IPOs as the very liberal and very "green" San Francisco Bay Area.
All of this because he doesn't like renewables and likes (or is paid to like) oil companies. He mocks California's plan for renewables as "a medieval system of windmills and druidical sun temples". Some statistics are really easy to doublecheck. The EIA publishes the cost of electricity in each and every state. This table shows that California now has by far the cheapest electricity of any major state. Gilder is correct to state that California also has the largest share of electricity produced by "a medieval system of windmills and druidical sun temples". I'll let him draw the logical conclusion. He tries to prevent an obvious objection: that the government has always subsidized the oil industry, so why not subsidize also the renewables. He tries to prove that the government did not give as much money as we know to the oil industry. To do this, he "cooks the books" in a way that makes him a worthy pupil of Enron. What he doesn't mention is that the government has not only subsidized the big oil companies but also the infrastructure that makes their oil valuable. Do you pay to drive on your roads? Probably not. In most of the world you do. Those roads are subsidized by billions of taxpayers' dollars, otherwise driving would be expensive, gasoline would be expensive, and cars would be expensive, and oil would be only for rich people. Gilder is defending a socialist system that has always decided to hijack the economy to favor the oil business. He is absolutely right that the technology of renewables is still disappointing, but government money does make a difference: if we fund research on renewables the same way we have been funding oil science for a century, maybe technological progress will be able to continue its march without the influence of oil-obsessed economists like him. Gilder even picks on Germany stating "Germany has so far failed to produce a discernible increase in the solar share of total energy". That would be 7% (35 gigawatts) as of 2013 up from 3% in 2011: more than doubled in two years. He shamelessly takes credit for predicting that Solyndra would go bankrupt when in fact he predicted it only in 2010, a few months before they filed for bankruptcy, a time when any high-school kid could have made the same prediction by reading any Silicon Valley blog (Solyndra was founded in 2005 and its government loan was received in 2009). While people like Gilder were influencing politicians to slow down the investment in renewables, China has become the world's main producer of solar panels, and it doesn't sound like this has greatly harmed its economy like Gilder predicts it will harm the USA. The one notable exception among major countries is Russia: Putin has done precisely what Gilder recommended, i.e. ignore completely the whole climate change hysteria and keep betting the economy on fossil fuels.
It gets better. Gilder's rant against green tech is all based on the premise that it hurts capitalism. At one point he is forced to admit that most of the financing for California's greentech does not come from the government, but from (take a deep breath) the venture capitalists themselves, the very people who, according to him, should be fleeing California at the speed of light. Pioneering the greentech industry are Kleiner Perkins, Khosla, Google Ventures and so forth, and not the state of California.
This second section of the book is so full of ridiculous nonsense that one has to wonder how the publisher did not blush reading it.
Gilder admits that the 2008 recession was "perhaps the first in history that economists caused". All of the economic theories of the past have been discredited at one point or another, either because recessions proved them wrong or because another economist proved them wrong. Personally, i think that Economics is very far from being a science, and this book confirms my suspicion that, ultimately, economists are simply failed mathematicians with excellent dialectical skills who know close to nothing of what they are talking about. Give them more power and they will cause more recessions. The one sentence that i liked in this book is at page 161: "Don't solve problems". I hope he meant it. Stay away from our problems. Go solve some other country's problems.