This summer I’ve been really into the work of George Gilder, a Silicon Valley stock picker turned public intellectual. At age 79, Gilder is still out there writing books and doing podcasts (where he’ll occasionally shill Blockstack and rag on Bitcoin’s 21M hard cap). But Gilder often says insightful and incisive things, especially about tech and the financial system. Overall, his work is in line with the nihilist-refuting libertarian tech set, not far from the work of Cowen or Thiel.
In particular, I was floored by Gilder’s 2015 essay titled The 21st Century Case For Gold: A New Information Theory of Money (there’s a free PDF here), which goes into monetary policy. To spoil very little, Gilder tears into the central banking system with panache. More importantly though, it builds into his larger thesis that money has become divorced from true capital-k Knowledge and progress. Gilder makes the case that measuring everything with something gold-like would fix this.
I’ve been following bitcoin since 2013, and I never truly understood the tinfoil-hat-wearing, sky-is-falling goldbugs who are drawn to it. If anything, though, this book by Gilder opened my mind as to why the status quo is a wild distortion of reality, and how crypto could alleviate this. Below, I’ll go into his ideas, particularly, his ‘Information Theory Of Money,’ which I think should be a well-known concept.
Again, resources to check out:
- Gilder on the Village Global podcast (pro tip: you’ll want it sped up)
- The 21st Century Case For Gold: A New Information Theory of Money (a quick afternoon read / listen)
I’ll try to distill the ideas into cliff note sampler. But they’re going to be better heard and read firsthand. (I’d say start with the pod, and then try the essay.)
Wealth is knowledge, growth is learning
Gilder kicks it off pretty philosophically. What is wealth? What is knowledge? How is it created?
Gilder says wealth *is* knowledge, in the form of recipes and inventions. Basically, knowledge is everything that separates us from our ancestors. And it takes many failed experiments and business plans to get there.
Today, we use dollars as a measuring stick for quantifying this wealth. In theory, if you’re doing provable work (which involves some failure), you contribute to knowledge, and you should get the dollars if the experiment is successful.
Most educated people understand that knowledge leads to wealth creation, but this understanding is incomplete. It is not that knowledge creates wealth — wealth, in its deepest form, is knowledge. Matter is conserved, as physics teaches us. The Neanderthals had every natural resource we have. Wealth is created by the learning curves that result from a million falsifiable experiments by economic actors in mostly free market economies.
If knowledge is wealth, growth is learning. The most important role of money is as the measure of that learning. Money is the channel that carries the information to investors, workers, small businessmen, major corporations and entrepreneurs. All need to gauge the success or failure of their attempts at growth.
Gilder’s mantra: wealth is knowledge, and growth is learning. We use money as a “vessel of information,” telling you about knowledge in a certain time and place.
Obviously, in our world of fiat currencies, money exists in relative terms. There’s quantitative easing, interest rates, and speculation that distort what a dollar is, and how far it gets you.
Ultimately, Gilder says, economic indicators should correlate to how much wealth/learning/recipes we’re creating. But we’re in a world that’s far from that. He says: “Manipulating the value of money, whether by printing currency or artificially suppressing interest rates, does not create wealth. Instead, it is the equivalent of manipulating the data of a scientific experiment after it takes place.”
As you can imagine, Gilder puts the whole system of central bank tinkering on blast. Today’s measuring stick of money has little to do with the experiments being done on the ground. It’s dictated by governments and high finance.
“The great Achilles Heel of the world economy today is the eclipse of money. Money has been turned from an instrument of Knowledge, a measuring stick that gauges wealth, into an instrument of power of governments that tries to force economic growth by guaranteeing it… And I believe the reason capitalism succeeds, it’s that it incorporates the scientific method into its processes. The growth of knowledge involves business plans that are not guaranteed, [with] business plans that can go broke.
While it’s easy to see his thesis as cantankerous complaining — the economy works just fine for many — there’s good reason to think it puts the little guy at a disadvantage. At an extreme, perhaps it could drive another crisis.
For very similar reasons, investors are currently leaving stocks for “non-productive” assets like gold, bitcoin, and even negative-yielding bonds. Ray Dalio recently presented a very bullish thesis for gold, citing a ‘paradigm shift’ in central banking. Gilder’s argument explains a lot of this investor behavior.
Related ideas:
- James O’Beirne’s Bitcoin For Safety
- Ray Dalio’s “Paradigm Shifts”
Information theory of money
Gilder then extends this thesis into worlds of science and information theory. This part (Part 4 in the ebook) gets complicated but it’s important.
Gilder says the logical conclusion of money is tethering the measuring stick to time.
In entrepreneurial experiments, the governing constraint is the scarcity and irreversibility of time. With infinite time, anything is possible. Finite time imposes the necessity for choice and prioritization. Time is embodied in interest rates (the time value of money), in budgets, in contracts, and in accounts. In economics, time is chiefly represented by money. In the deepest sense, money is time.
Irreversibility is a function of time. Government control of the distribution of money and credit gives rise to endless opportunities to rerun the race against time in a way that the government’s favorite children always win. The principal attraction of both gold and recent attempts to create digital money is precisely that both solutions give us a money as irreversible as time itself.
Then, Gilder invokes Claude Shannon and information theory. I don’t quite get it 100%, but the TLDR is that “information” is fundamentally surprising news: “information is not order but disorder—not the predictable regularity that contains no news, but the unexpected modulation, the surprising bits.”
In an information-driven world like ours—where you’re building processors and synthetic biology and whatnot—you’re working with complicated processes and the laws of physics. You’re taming disorder, and you need something stable and uncorrelated to properly measure knowledge.
At the end of the day, the most neutral and unhackable measure for this is time.
The lesson of information theory—the new System of the World—is that irreversible money cannot be the measure of itself, defined by the values it gauges. It is part of a logical system, and, like all such systems, it must be based on values outside itself. It must be rooted in the entropy of irreversible time.
This is where gold and bitcoin come in.
For one, gold worked as a measure of time for centuries. It can’t be hacked, counterfeited or reverse engineered. Most importantly, the price of gold is a function of the time and entrepreneurial effort in extracting it.
Similarly, gold and its digital equivalent bitcoin “cancel out” advances in technology and capital. The difficulty is priced in.
Gold and Bitcoin both exclude from the measuring stick the advance of physical capital or technology and even the learning curves of labor. If the measuring stick changes in response to economic progress, it cannot measure that progress. In order to bear creative changes, it must not change itself. In order to have a gauge that is exempt from the turmoil of markets, it must be rooted outside those markets. It must somehow cancel capital, technology, and learning.
Instead a reliable metric of value, central banks impose a top-down signal (based on growth and progress) to distort the time value of money. Right now, the Fed’s telling the world the opportunity cost of spending today is zero, which could only be true if you die tomorrow, Gilder notes hilariously. With the cost of time near-zero, existing assets get bidded up, leaving little incentive to make new things.
As Gilder summarizes: “The point about bad money is not that it converges with the worth of the paper it is printed on. It is worse than that. Falsifying the information basis of all prices, it stultifies entrepreneurs, deceives savers, and fosters tyranny.”
Final thoughts
Gilder’s ideas are pretty heady, but I think they arrive at something profound that’s going on with markets currently. Value no longer equates to entrepreneurial knowledge. The finance sector is a bloated subsidiary of government. Everyday people and investors are questioning this status quo, as evidenced by what Stephen Hawking called a global revolt against experts.
It seems like we’re witnessing a breaking point. Having value determined by central planning is being met with skepticism, and for good reason. Technology is also hastening this. For the first time ever, Bitcoin and cryptocurrencies are competing with sovereigns, which have a monopoly on money.
Gilder’s work adds some incisive commentary here. Read his stuff and let’s chat. Hopefully you find it as eye-opening as I did.
NpappaG 