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How Can Information Theory Help the Economy Grow?

New information is the true source of new wealth; everyone wins when we learn how to produce it more efficiently
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First, what makes an economy grow? As economic thought has developed over the past few centuries, economists have slowly moved from a zero-sum perspective (winner gets all) to a win-win perspective on how economies work. Originally, economists focused on divvying up the economic “pie” so that everyone had at least enough to live on. However, it came as a surprise to many that the economic pie kept growing in diameter. There was so much more to divide.

Compared with the way our ancestors lived, even the poorest among us have a better standard of living, despite the fact that there more of us today. Thus, the pie must have grown faster than the number of contributors. Understanding how and why this happens is an important part of economics. Otherwise, we may accidentally kill the goose that laid the golden egg.

Information theorists often use analogies from making bets to understand the impact of information on economics. Perhaps surprisingly, there are many structural similarities between betting at a casino and betting on a business (by starting or investing in it). Both start with outlays of capital which may decline to zero, be partially returned to you, or (as you hope) returned as a multiple. The difference is that, at the casino, the casino sets the odds for a payout. In business, the odds are set by external factors. But why is it that so many people can make money in business but few if any make money gambling at a casino?

The difference is that, in business, we can introduce “side information” to the problem of increasing our capital. Side information is information that we know but it isn’t simply dictated to us by the environment. Before the iPhone was invented, there was no known price that an iPhone would sell for. Apple CEO Steve Jobs had to draw on his own side information about what users wanted, needed, and would pay for, in order to make the bet that the iPhone would work out. It wasn’t a guarantee and Apple could have lost its investment. As it happened, the side information that Jobs brought to the table allowed Apple to not only make money for itself by selling phones but create opportunities for users to create wealth themselves, thus adding to overall wealth. This was all done by using side information on what users wanted and needed in a phone.

This phenomenon of side information has been described primarily by two economists— George Gilder and Peter Thiel. In Zero to One (2014), Thiel boils down the subject of side information to one single question that investors or entrepreneurs can ask themselves: “What important truth do you know that very few people agree with you on?” That is your side information; it allows you to increase your odds of winning beyond zero-sum by adding wealth.

On the other side of the question, in Knowledge and Power (2013), George Gilder focuses on the need for a society that seeks to expand the economic pie to allow information to be known and tested. He asks, what are the underlying societal requirements for recognizing, testing, and communicating truth? In other words, once side information is known, how do we make sure that everyone benefits from it?

To see why these questions matter, imagine the opposite case, a society in which all true knowledge is assumed to flow from or through the political theory of those in power. The current distribution of goods, services, and social esteem, whether it seems just or not, is held to be the will of the Great Liberator who established the society. Chances are, citizens are not very free to test side information and the pie would not expand very quickly, if at all. The pie may well shrink.

On a deeper level, though, another question arises: Where does this side information come from, to begin with? How do people develop genuinely new ideas? This question was recently explored by information theorist Eric Holloway. Holloway notes that, for any starting point, neither randomness, determinism, nor their combination will ever generate side information. That is, there exists no fixed mechanism by which side information can be generated within a system. That explains why, for instance, “get rich quick” schemes never work. They usually propose a fixed, mechanical system for making money. However, as Holloway shows, no mechanical system can reliably work that way.

What makes side information (and thus economic growth) possible is the human ability to perform non-algorithmically. That is, the human mind can infer truths about the world which were not known before. Holloway calls these truths, “Plato’s Library.” He notes that what gives humans the ability to increase in prosperity is our ability to “read” from Plato’s Library, thus providing the ever-growing side information that powers the economy.

Why is Plato’s Library important? It lets us see more clearly that the engine that powers the economy by creating information is the human mind (“reading” Plato’s Library). It is then tested, transmitted, and preserved within the economy. However, because the source of the information is inherently non-mechanical, it also cannot be forced or called into existence through mechanical means.

This is one of the important benefits of freedom within an economy. A free economy allows its participants to participate in unpredictable ways, thus allowing them to use any side information that they have. A regimented economy, by contrast, operates according to fixed sets of rules, where freedom (and thus openness to new side information) exists only within a small group at the top. Freedom is necessary to economic growth because it allows all participants to read Plato’s Library for themselves and make the world a better place, using the knowledge gained.

Jonathan Bartlett

Jonathan Bartlett is the Research and Education Director of the Blyth Institute.

Also by Jonathan Bartlett: Google Search: Its secret of success revealed: The secret is not the Big Data pile. No, Google found a way to harness YOUR wants and needs


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How Can Information Theory Help the Economy Grow?