The Book That Predicted Obamacare’s Failure — And America’s Rebirth

In three short months, Obamacare has exposed, with 200 proof concentration, the fundamental mismatch between government’s limited knowledge and its unattenuated power.

The Administration is now “discovering . . . that insurance is complicated to buy” – and to assemble, price, purvey, and regulate. Many health care experts predicted Obamacare’s failures with amazing specificity. But why did the Administration’s claim that Healthcare.gov is now “operating with private sector velocity and effectiveness” prove such a deep self-indictment?

In his latest book, Knowledge and Power, George Gilder shows — fundamentally — why enterprise excels, and government often fails, at these complex tasks. From top to bottom, foundation to spire, atom to bit, Gilder has integrated economics with the most powerful force of our time — the science and technology of information.

Eighty years ago, Hayek told us how complicated the world is, and Mises how important the entrepreneur. They lost many of the immediate battles, but through the West’s triumph, won both the Cold War and the war of economic ideas. So thorough was the victory that in 2007 the liberal Nobel laureate economist Robert Solow, referring to the third member of the Austrian economic triad, declared that, “Schumpeter’s star probably outshines Keynes’s.”

And then, just a few months later, came the financial crisis, the Great Recession, a $4 trillion Federal Reserve balance sheet, a Keynesian resurgence, and a great divergence and even diffusion in economic thinking. Suddenly, no one knew anything, and neither liberals nor conservatives agreed among their respective tribes on coherent explanations or policies.

The stagflation of the 1970s, although distinct in its particulars, had produced a similar confusion among economists. The liberal Keynesian Phillips Curve was nowhere in sight, yet for most of the decade conservatives had no effective retort.

Then came Robert Mundell, Art Laffer and the supply-siders, including Gilder, who, in his worldwide bestseller Wealth and Poverty, brought the entrepreneur back to the center of the economic model. The tax, monetary, and welfare policies of the 1970s crushed the economy because, Gilder showed, they crushed private initiative and the creative ventures that produce new technologies and new products and thus productivity and growth. Absent from all economic models, Gilder insisted, was the intangible but crucial factor of creativity. Gilder frequently quoted economist Albert O. Hirschman of Princeton, who wrote that “creativity always comes as a surprise to us,” thus rendering futile central planning and socialism.

With Wealth and Poverty, Gilder called for opening the economy to the creative surprises of the future, and the embrace of that idea — in Washington, London, and even Beijing — ended the first half-century of Keynesianism (and Communism) and launched a 25-year entrepreneurial boom, in America and around the world.

The audacity of central planning is back, however, and it was time for Gilder to go back to work. After Wealth and Poverty, Gilder went to Silicon Valley, to Caltech, and into computers, semiconductors, fiber optics, and the theory of information itself. He said an emerging network called the Internet would revolutionize television and all media. He stumbled upon a tiny company called Qualcomm and said it would transform the world with its wireless innovations. He declared that tiny pocket computers, what he called the teleputer and we call the smartphone, would be the most popular products in the world. And he found a deep connection between information and economics, not just in the practical effect IT has on the economy but at the deepest theoretical level.

For at the heart of information theory is the notion of surprise. The key function of an information network or a computer chip is the transmission of unexpected bits. If you knew the bits the other party was transmitting, or the bits the hard disk is storing, you wouldn’t need to transmit or store them. In 1948, Bell Labs mathematician Claude Shannon helped launch the information age by answering a few basic questions: how do we replicate information over distance and time, and how do we measure our capacity to do so?

He defined the relationship between bandwidth and transmission capacity and showed how to encode information to improve its efficiency and reliability, leading to the digital computer, the digital radio, and digital storage. At the heart of information is entropy — news, unexpected bits, or surprise. If information is what we know, entropy is what we don’t know. Gilder summarized a further crucial insight: “A high entropy message requires a low entropy carrier.” Surprising messages are most effectively transmitted by an unsurprising medium — like a blank white page, or the pure silica of fiber optic glass, or, most fundamentally, the absolutely regular electromagnetic spectrum.

If surprising entrepreneurial ventures drive the economy, Gilder analogized, they require unsurprising foundations of law, property rights, low tax rates, sensible regulation, free trade, and stable money. Scientists working with government funding can of course conduct fruitful basic research, yielding new knowledge. But beyond that, governments should chiefly be suppliers of low entropy carriers, not the messages, simple foundations, not the builders above. When government confuses its mission, it disrupts the flow of information, generates misinformation, and impedes the creation of new knowledge. Despite the unrelenting confidence of its centralized experts, ambitious government almost always disrupts the far more powerful networks of diverse, decentralized firms and entrepreneurs who can, individually and collectively, generate far more useful knowledge and wealth, not least because their experiments in technology and commerce can fail.

The fundamental tension, Gilder believes, is the contrast between the knowledge of the entrepreneur and the power of government.

It was no accident that Gilder found this deep insight in information technology. The digital arena offers the purist distillation of economic forces we’ve yet encountered. With fewer frictions and purer information flows, it operates faster, and more transparently than most industries, with quicker shifts between modularity and integration. Its knowledge platforms offer powerful tools to ever wider circles of entrepreneurs to build new products, services, content, and, in a never ending virtuous circle, yet further compounding, nested knowledge platforms.

(I am no unbiased observer: I worked with Gilder for years, launched my own firm based on this concept of info-economics, and have offered my own take here: Ignorance, the Ultimate Asset.)

There are dozens of sub-themes, connections, and unexplored suggestions in this basic insight, too many to cover here. But among the most immediately applicable is Gilder’s firm view that because we live in an economy of mind, the economy can change as fast as minds can change. With a change in policy, the economy can lift (or plummet) overnight. Thus, like the sudden and “inexplicable” transformation of the early 1980s economy, we can, despite our formidable debts and doubts, renew our belief in the future and once again serve as a light unto the world.