Friday, October 06, 2006

The ID dilemma

George Gilder, a Senior Fellow of the Discovery Institute, gave May 1, 2004, a speech to The Philadelphia Society at their national meeting in Chicago, Illinois. The text of the speech is avaiable as Market Economics and the Conservative Movement.

According to this article, Gilder said:

Now, at the Discovery Institute, with my friend of 40 or more years, Bruce Chapman, we are again carrying this essential concept of ordered liberty, this reconciliation of cultural conservatism and economic conservatism forward with the focus on my part on science and technology, the implications of the new findings in science and technology for a deeper understanding of the themes of ordered liberty.

So, for Gilder, "findings in science and technology" have political implications. The term 'ordered liberty' rhymes with 'designed randomness', doesn't it? But what then are those findings?

One is Information Theory. Now, Information Theory was conceived by Claude Shannon at MIT and Bell Labs in the late 1940’s. He was focusing on determining how much information could be transmitted down a particular communications channel. And the key insight was that information, real information, consists of surprise and he measured surprise in terms of what he called entropy as an analogy to a concept in physics. The crucial insight was that information is not equilibrium but disequilibrium. Information is not predictable data. Information is unexpected data. Information is news—what you don’t expect. A crucial insight of Information Theory, absolutely central, is that it takes a low entropy carrier to bear a high entropy message. In other words, you have to have a predictable carrier in order to bear a lot of information.

And how is that relevant to ordered liberty?:

What you need is economic systems that are predictable; that can bear a lot of the good news, the unexpected boons of human creativity. Creativity always comes as a surprise to us. If creativity was not surprising you could plan it and socialism would prevail. But surprise is what defines creativity. It is news. It is unexpected data. In order to have an environment that can result in the surprises of human creativity you need to have a predictable, stable environment of law; stable law, stable families, stable money, stable property. These are essential to a productive economy. So, Information Theory is an absolutely vital finding that underlies almost the entire information economy—does underlie the information economy. And it also fully supports the Philadelphia Society’s concept of ordered liberty, which combines the low entropy of order with the high entropy of creativity. The crucial point, however, is that an economy is an information system not a material system. So, it’s ruled by the laws of information not by the laws of matter.

That is, order (= low entropy, when order = high predictability) furthers creativity (= high entropy). Sure, in a predictable economic environment you can better allow investments in creativity, because an immediate return of investments isn't needed. It's a question of calculated riscs, just to come up with yet another way of saying 'ordered liberty'. The better you can calculate the riscs, the more riscs can you allow yourself to take.

Besides the finding that information is disequilibrium, what more findings can Gilder mention?

The second key discovery about information during the twentieth century was Kurt Gödel’s demonstration and Gödel’s proof that no mathematical system is coherent or self-sufficient in itself. Any mathematical or logical system is necessarily dependent on premises beyond itself and irreducible to the system. In other words, Gödel’s proof sustains the second great theme of ordered liberty of transcendent order under God.

What Gödel demonstrated is that no first-order system capable of producing the whole numbers with a finite number of axioms can prove all true statements about the whole numbers. That is, any such system "is necessarily dependent on premises beyond itself". And it is beyond me, how that sustains the theme of ordered liberty of transcendent order under God.

Luckily, Gilder has the power to enlighten us:

The key point is that every logical system and ultimately all logic is reducible to mathematical propositions and is dependent on premises beyond itself. And order is necessarily transcendent. It’s not reductionist and that is the critical insight. It is hierarchical, not reductionist.

That any theory needs additional ad hoc hypotheses when applied to the real world is hardly surprising these days. And I still don't see, what Gilder means by 'order'. Are there some additional premises that he has left out?  

So, this means that the world began not in a primordial soup, it began—“In the beginning was the Word”—not a primordial soup. These divergent themes of conservatism: ordered liberty and transcendent order really have been fully and deeply confirmed by the most important scientific discoveries of the twentieth century. A lot of conservatives sort of adopt an intuitive resistance to the discoveries of science without a full grasp of how deeply they affirm conservative insights and how leftist scientism—this sort of materialist reductionism—has been completely overthrown by the twentieth century scientific discoveries.

Who has claimed that the world began in a primordial soup? There seems to be some equivocation here, doesn't there? Anyway, Gilder appears to forget that there also is the rightist biblicism; the belief that each and every true statement can be derived from the Bible, although the Bible is finite. And how do we know that a false statement doesn't slip in, while we interpret the Bible?

Now, Gilder doesn't go there. Instead he recommends budget deficits as the solution to the economic problems:

So, information is disequilibrium not equilibrium. This is one of the problems of much economics because economists always tend to favor equilibrium. They seem to believe that somehow the correct system is always in balance. But, I believe that science tells you that economies should have balanced law, families—all these—property rights and stable money. But the basic forces of growth are disequilibrium. The effort to reduce economics to equilibria is deadly and destructive. I think it took a long time for the Republican Party really to recognize this fact. For a long time the Republican Party resisted lower tax rates in the name of a totem of a balanced budget from the time of Hoover through Eisenhower and Nixon and Ford. Equilibrium economics prevailed. It wasn’t really until Ronald Reagan that we had a president who reconciled these two great principles of ordered liberty and brought disequilibrium to the fore.

Gilder's semantic leaps can be somewhat hard to follow, so let's try to make the logic a bit more explicit.

Information is surprise. If you live in an area, where there's a 90% probability of rain on any one day, you won't be surprised, if the weather forecast tells you that it's going to rain the next day. Neither is this much information, because it's what you would have expected, even without the weather forecast. If the weather forecast tells you it's going to be clear and sunny the next day, there's more surprise and more information, because it's contrary to expectations. Now, Shannon's entropy measures the average surprise, it measures so to speak uncertainty. And a decrease in uncertainty is an increase in information.If you know everything, that is, if you have no uncertainty, you cannot gain any new information.The concept of entropy is also used in thermodynamics and here refers to the uncertainty of the microstate of a thermodynamic system given a certain macrostate. Let's assume we have two equally big containers, A and B, connected through a valve. Assume A to be filled with air molecules and B to be completely empty. This is a system in disequilibrium, because there is an ueven distribution of molecules. The macrostate is given by the combined volume of the two containers and the total energy of the air molecules. The microstate could be defined as the number of molecules in either container. At first, there is no uncertainty regarding the microstate: all air molecules are in A. If we open the valve, air molecules will start moving from A to B. Pick out an air molecule at random (equal probability for all molecules), is it in A or is it in B? At the very beginning we would be very surprised, if it were in B, because it takes time for air molecules to move - perhaps not much time, but we are measuring really quick here. That is, at the beginning, we can be pretty certain that a randomly chosen air molecule will be in A. With time, however, uncertainty will increase, as more molecules move from A to B. At equilibrium, half of the air molecules in A and the other half in B, the process grinds to a halt. Air molecules will still move around, and an air molecule may move from A to B, but it's equally likely that an air molecule moves from B to A.

At the start we have maximum disequilibrium and no uncertainty. When equilibrium is reached we have maximum uncertainty. Since, for Shannon, information is negation of uncertainty, there is more information in a system in equilibrium (because there is more uncertainty) than in a system in disequilibrium (because there is less uncertainty).

Let's say that all people in a society have the same number of dollar bills. Pick a dollar bill at random, who owns it? We here have a system in equilibrium - everybody has the same number of dollar bills - and we have maximum uncertainty, since the probability is the same for each person to own the dollar bill in question. Now, let 10% of the population own 90% of the dollar bills, and 90% of the population own 10% of the dollar bills. That's disequilibrium, and we won't be much surprised. if a randomly chosen dollar bill belongs to someone in the richest 10% of the population.

Now, of course, what Gilder is after is that money makes the world go around. The rich people can't use all their money for consumption; maybe the richest 10% of the population will spend 90% of their money on investments and even charity. Investments means production, and productions means products that can be sold and purchased. Charity means a sure ticket to heaven for the giver and money that can be used for purchasing products for the receiver.

A budget deficit for the state, such as through lowering taxes, means more money to the tax payers, and with a bit of luck, increasingly more, the more they paid in tax. But for the system to work, there must actually be some production, which in turn means there must be some purchase - if no-one buys anything, production will also soon stop. So purchase is actually equally important, and therefore purchase-capable people are needed. The rich can't simply thrive on selling to themselves, because they can't spend all their money on consumption, if they also need to invest money to keep up production.

Gilder knows quite well that spending money is needed to keep the show going, though he sees low tax rates as an integral part of government spending:

Indeed, it is only with low tax rates that a nation can sustain the levels of spending necessary to support the defense and national security that is necessary to defend ordered liberty. For the entire 40 years of the Philadelphia Society’s existence countries with low or declining tax rates have been able to increase their government spending three times faster than countries with high or rising tax rates. If you want low absolute levels of government spending the best thing to do is to enact high tax rates and oppressive regulations because these will succeed in suppressing the surprises of entrepreneurial creativity on which human triumph always depends.

So, low tax rates increase the surprises of entrepreneurial creativity, and somehow that leads to the defense and national security necessary to defend ordered liberty. That is, somehow it is all tied up with military technology, and, of course, anyone familiar with military triumph knows that it is all a question of surprising the enemy. Just read Sun Tzu's The Art of War, if in doubt.

Yet, Gilder sees no problem in a purchase deficit:

This article [in the Regulation magazine from the Cato Institute] implies that balance is good for trade and budgets and stuff. Balanced tires or a balanced diet—they’re deeply desirable. But a balance of trade or a balanced budget is not necessarily desirable at all. Indeed, a trade gap signifies a capital surplus. It means that people want to send us money.

Maybe so, maybe not so. But Gilder claims it is so:

So, the way to think of this is: a foreigner with a dollar can do two things with it. He can buy an American good—buy an apple exported from the United States, for example—or he can buy an asset in the United States. If he purchases the apple, he eats it and we don’t have it anymore. If he purchases the asset in the United States, we keep it. And he registers a deeper commitment to America than he does in buying an apple, or a side of beef or any other kind of American product. When we begin to run a trade surplus I begin to worry.

But if the foreigner purchases an apple, the apple will be removed from the US, and the payment for the apple will be deposited in the US. The difference between a stock asset and an apple is that the purchaser doesn't get anything immediately from the asset, but hopes he can sell it some day for more than he gave for it. Where is that capital increase going to come from? If no-one buys anything but stock assets, there can be no production, and money will be only worth their waste paper value. A material production somewhere is needed in order for those money to really have any value - they can't be woth more money otherwise. Of course, the value of money can be measured in non-material goods - the US is taking up big loans in China, and the Chinese government buys a more friendly tone towards violations of humans rights in China and a lowered US support of Taiwan for those loans. Still, the money can't be used for anything good in the US, if there is no production there.

Gilder, of course, knows this, and sees entrepreneurial creativity as the solution:

So, the real solution is entrepreneurial creativity, which is a force of disequilibrium, “creative destruction,” said Shumpeter. This is a great era of entrepreneurial creativity in the United States.

An what's more:

The triumph of the entrepreneur is ultimately a moral triumph as well as merely a material triumph. Because, he ultimately is an information agent. The essential rule of enterprise is the golden rule. The good fortune of others is always your own. That’s the fundamental principle of capitalism. Where you get rich by serving others and where you, above all, hope that others succeed. Where always the biggest untapped market is the poor. The billions of people around the world who are now at last ascending toward the bounties of ordered freedom that the Philadelphia Society upholds. It’s not greed or self-interest but the service of others that propels the advances of capitalism. Equilibrium economics is an economics of death. Disequilibrium, entrepreneurial economics, the economics of surprise and creativity is the economics of life. The key message of ordered liberty is “choose life.”

Sure, the good fortune of others is always your own; you need rich buyers. This is why the biggest untapped market is always the poor.

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