| The True About Wealth, Knowledge, and Learning For instance, wealth is often mistaken for power. Politicians often want to persuade you that if you give them enough power — for a long enough time — they will create wealth for all. They will even promise to have it distributed equally, sweet and swish as a yogurt in a smoothie. The socialist smoothie lie is that wealth is a blend of power and politics. The truth is that wealth is essentially knowledge — a creation of individual minds. As Thomas Sowell has written, "The Neanderthal in his cave had all the physical resources we have today." The difference between the cavemen and us is the accumulation of knowledge. Making the same point for our own time, Cesar Hidalgo of MIT observes that "when an expensive car crashes into a wall, all its value disappears, though every atom and molecule remains. Value is information. The car is knowledge." The increase of knowledge is called learning. That is the definition of economic growth, learning. It's not like learning. It's not learning as a metaphor for something else. It is learning. Now, capitalist economies register this learning process through learning curves. The learning curve ordains that with every doubling of total sales, the unit costs of producing a good or service drop between 20-30%. Learning curves are the most thoroughly documented phenomenon in capitalist business. That means that the pursuit of wealth always entails learning. Learning means finding out things you don't know yet. Across an entire economy, learning uncovers things — new economic knowledge — that no one knows in the present. This knowledge reflects innovation and surprise. It is often signified by price-changes. The centrality of surprising new knowledge in capitalism is an important insight closely aligned with Claude Shannon's "information theory." You see, in 1948, he showed that all information is defined as surprise: binary bits that are unexpected and measured by their degrees of freedom of choice. His measure for surprisal in the conveyance of information is a metric he called entropy. A critical moment in the development of my information theory of capitalism came when I read an essay by Princeton economist Albert Hirschman on the success or failure of UN development projects. The key was not good plans or available resources or virtuous developers. What differentiated successful from unsuccessful projects was entrepreneurial creativity. "Creativity," he wrote, "always comes as a surprise to us. If it didn't we wouldn't need it. And planning would work." As I added later, if creativity could be planned — if it were not surprising — socialism would work! Now, if both information and entrepreneurial creativity could be measured as surprise… I realized I could link the two together in an information theory of capitalism. The Importance of Failure Put simply, capitalism is not chiefly an incentive system, driven by rewards and punishments… or by greed and desire. It is an information system, driven by curiosity and imagination, experiment and learning. So entrepreneurial ideas must be presented in a form that they can be refuted by failure or bankruptcy. They prosper because they follow the scientific method, which ordains that to yield knowledge, experiments must be open to failure. If a venture cannot fail, it cannot product new knowledge or wealth. Socialism, for instance, is based on the use of government power to guarantee outcomes. And government guarantees incapacitate the processes of learning that comprise all real economic growth and progress. When the Federal Reserve Board tries to guarantee economic growth through printing money, it prohibits growth. Real money depends on entrepreneurs with projects that they expect to become profitable. Under real capitalism, as opposed to crony capitalism, the amount of money banks can lend is determined by the existence of projects that entrepreneurs are willing to pursue by borrowing money. This means real projects that seem promising enough to induce entrepreneurs to face the risk of failure. When the government bails out banks, it redistributes wealth but undermines the creation of new wealth. By prohibiting failure, it falsifies the scientific method of capitalist experiment. Banks are only creative when they are open to surprise. Guaranteed loans are not loans; they are subsidies or bequests. When the government attempts to create economic growth by expanding government spending and consumer demand it suppresses growth. The more the government exerts its power, the less it enables the surprises of human creativity and new knowledge, the sources of wealth and growth. This is the central rule of capitalism. It is illiquid. Capitalists can only keep what they give away. Regards, 
George Gilder
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