How modern economic debate completely misses the role of surprise and creativity

Image from Moneyball (2011)

Modern progressives misunderstand what makes capitalism work, entrapped as they are in a worldview that suggests only greed can drive the sort of developments that have lifted the world out of eons of abject poverty. George Gilder, in a seminal National Review piece, posits that what makes capitalism deliver—for all—is its ability to tap the core tenet of information theory: how human knowledge, prosperity, and growth derive from experiment and creativity.

Using the tools of information theory, we can permanently refute the idea of an economy as a great machine or as a class struggle over material resources.

Building on the foundational unities of free market economics--supply is demand; savings are investment; imports are exports; savings is debt--we can add three more redemptive identities to the panoply:

Wealth is knowledge. Growth is learning. Money is time.

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By treating capitalism not as an information system but as an incentive system, driven by rewards and punishment, the prevailing economic theories provides no simple way to answer the socialist charges that capitalism is driven by greed. It fosters the idea that entrepreneurs need to make billions to motivate rewards for themselves.

But this misses the point entirely. Under capitalism, capital migrates not to those who can spend it best but to those who can expand it best. To expand capital requires information, knowledge and experience, not merely incentives. 

Seeking to replicate the determinism of Newtonian physics, economists have eclipsed the creativity of entrepreneurship which, as Albert Hirschman of Princeton wrote, ``always comes as a surprise to us. If it didn't we wouldn't need it and government planning would work."

By banishing surprise from economic models, economists banished creativity as well. It became explicitly exogeneous and hidden in the advance of science and education. Entrepreneurs were left shuffling chemical elements.

Economics thus mostly missed out on the prime tools and insights of the science of modern technology, from computers and communications to biotechnology and pharmacology. 

This article originally appeared in National Review. Read the whole thing here (behind paywall).

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• Economics discipline rejects Marx’s ideas, while Humanities depts wax Marxist extremism

• Left, Right, or Muddle

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