| "The Coming 'Reboot' is Great News," says #1 Futurist A Lesson from Claude Shannon In 1938, Claude Shannon formulated the information theory behind the computer in “A Symbolic Analysis of Relay and Switching Circuits.” This pioneering paper demonstrated that these circuits could perform Boolean algebra by processing binary code consisting of “bits” and “bytes.” Shannon went on in 1948 to explain the laws of networks in his “Mathematical Theory of Communications,” which developed ideas of information theory he pioneered during World War II, when he wrote a paper, immediately classified, on the theory of cryptography. A kind of inverted information theory using codes initially to hide rather than to transmit information, cryptography is now providing the foundation for the Cryptocosm of the blockchain and cryptocurrencies. These technologies address the two key crises of our economy: the hacking of the internet by bezzles and spies, and the hacking of world monies by central banks. Shannon always believed that his concepts also applied to the coded DNA system in biology and wrote a paper estimating the information in the genetic code called an “Algebra for Theoretical Genetics.” If information theory can explain biology, it can also illuminate the economic exchanges that sustain the lives of biological beings. In my view, the failure of economists to grasp the importance of these theories for their own profession has been crippling both to its scientific validity and to the survival of free economic institutions. By treating capitalism not as an information system but as an incentive system, driven by rewards and punishments, the prevailing economics provides no simple way to answer the socialist charges that capitalism feeds on greed. These theories of “capitalism” originated in Karl Marx’s Das Capital in 1857. In current forms, the incentive model fosters the absurd idea that entrepreneurs need to make billions to motivate or reward themselves. Seeking to replicate the determinism of Newtonian physics, economists have eclipsed the creativity of entrepreneurs, which as Albert Hirschman of Princeton told us “always comes as a surprise to us.” Banishing surprise from economic models, economists banished creativity as well. Surprise, however, is central to Shannon’s information theory. It defines information as entropy, which measures surprisal. It is also directly linked to liberty: surprisal depends on the degrees of freedom of the creator of the message. As knowledge grows through learning, Shannon’s measure of unexpected bits can capture economic advance through freedom. Far from failing to provide mathematical models, Shannon’s theory is fraught with mathematics at every point and enables calculation of the information bearing capabilities of specific computers and networks and the information content of computational data or life. The complaint against the lack of a deterministic mathematical model repeats the same claim that conventional economists have always mounted against the Austrian school, from Ludwig von Mises and Friedrich Hayek to Joseph Schumpeter and Mark Skousen. In a real sense, ironically denied by many current day “Austrians,” who tend to reduce their school to a set of narrow doctrines about business cycles, information theory entered economics through Hayek’s canonical essay “The Use of Knowledge in Society.” Published in the American Economic Review in September 1945, it ignited a conflagration of insights that won at least two Nobel Prizes. In Knowledge and Decisions, published in 1971, Thomas Sowell expounded the argument that wealth is essentially knowledge, not material resources, thoughts not things. He wrote, as I recall vividly today: “The Neanderthal in his cave had access to all the material resources we have today. The difference between our age and the stone age is entirely the accumulation of knowledge.” Many economists have written about knowledge and learning curves in economics and business. But they have not seen the applicability of the now fully established science of information and communications to economics. Today’s Prophecy In questioning the utility of my efforts, and the kindred insights of the Austrian school, they offer the contrast of predictive Keynesian mathematical models. The question, however, is not whether a theory can exactly predict the future. No economic theory can do that. The question is whether it is right and useful for analyzing economic phenomena and guiding economic policy. Now, building on the more partial insights of William Nordhaus and others, Gale Pooley and Marian Tupy have introduced time-prices as a radical new and simpler way to measure all economic activity. Their fascinating and revolutionary book will be out later this year. It obviates all the consumer price indices, GDP deflators, purchasing power parities, and other contentious devices that established economists use to compare prices and values across time and space. It asserts that true prices are measured in hours and minutes — the time you have to spend working to buy anything. The information theory marches on to new pinnacles of usefulness and authority. From learning curves to new gauges of value, it is giving all investors a new panoply of tools to enhance their powers. This prophecy could not do without it. Regards, 
George Gilder
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