A conversation with George Gilder, for Agefi Magazine

george-gilder201209271600  George Gilder is a venture capitalist and Senior Fellow at the Discovery Institute and American Principles Project, Editor-in-Chief of the Gilder Technology Forum (from Forbes).

Grégoire Canlorbe: It is not uncommon to hear that the global weakness of the contemporary USA lies in the worsening of income inequalities. The best predictor of social and economic class is nowadays the social and economic class of parents. People like the Rockefellers or the family of Mitt Romney are born into the 1% and pass that position along to their children. In other words, the USA have a plutocracy, like it or not; and that plutocracy should at least pay a higher tax rate and a higher death tax—a higher tax for passing along its wealth to its kids. America works best when it can open the path for dirt-poor kids with drive and intelligence to rise—as Abraham Lincoln rose from the poverty and mud of his father’s farm in Illinois.

  What is your opinion on this popular view?

  George Gilder: The popular view is nonsense. Inequality is irrelevant. Under free markets, capital flows not to those who most quickly spend it but to those who can best expand it. It goes to suppliers rather than demanders. What matters is mobility and creativity. Forbes magazine shows ever more rapid arrivals and departures from their lists of rich people. However, the “hypertrophy of finance” in the world economy that I describe in The Scandal of Money is fostering more inequality based not on merit but on government privileges.

The world’s central banks have become a fourth branch of government that centralizes economic activity and renders the system fragile and unfair. This is a serious threat to the future of capitalism. Futile and meaningless currency trading is now 73 times larger than all world trade in goods and services. Yet it fails to establish money more stable than the economic activity it supposedly measures. The perversion of money under socialism is the leading cause of immutable inequalities based on power and privilege rather than on knowledge and on contributions to the economy.

  I believe that new forms of money based on the Bitcoin blockchain and gold will evolve in coming decades and emancipate the world economy from its central bank socializers. I also believe that this popular hostility towards income inequalities as such—and the inability to recognize that only inequalities based on privilege are illegitimate—is the symptom of an even more general misunderstanding of the nature of material progress.

  As I have demonstrated in Wealth and Poverty, material progress is ineluctably elitist: it makes the rich richer and increases their numbers, exalting the few extraordinary men who can produce wealth over the democratic masses who consume it. Material progress depends on the expansion of opportunity: geniuses identify themselves chiefly through their works rather than by their inheritance or test scores. Material progress is difficult: it requires from its protagonists long years of diligence and sacrifice, devotions and risk that can be elicited and financed only with high rewards, not the “average return on capital”. Material progress, although democratically demanded, is procedurally undemocratic: it means the expensive support of activities thoroughly beyond the ken of the people, and often even their leaders.

  Grégoire Canlorbe: “One of the problems with organized religion,” affirmed Hugh Hefner, “is that it has always kept women in a second-class position. They have been viewed as the daughters of Eve.” How would you assess these statements by the founder and chief creative officer of Playboy Enterprises?

  George Gilder: Feminism condemns women to inferiority by subjecting them to the standards of male achievement. Feminists want to present women as victims, which means inferiors. Hefner celebrated the superiority of women’s bodies, which feminists decry. But Hefner, for all his philosophastering, did not have ideas any more interesting than the vanities of feminism. Generally speaking, he did not articulate nor materialize the true spirit of capitalism.

  To the extent that both conservatives and socialists believe the engine of economic growth is driven by consumer demand, they agree to see permissiveness as favourable to growth under capitalism. In reality, demand, whether avaricious or just, is impotent to impel growth without disciplined, creative, and essentially moral producers of new value. All effective demand ultimately derives from supply; a society’s income cannot exceed its output. The output of valuable goods depends not on lechery, prurience, lust, and license but on thrift, sacrifice, altruism, creativity, discipline, trust, and faith. To the extent that pornography and promiscuity debauch the moral capital of the society—to the extent that they distract workers and entrepreneurs from the long-term effort to create new value—these sources of “demand” actually undermine economic growth.

  By that measure, the sexual revolution embodied by Hugh Hefner and his magazine clearly retards economic progress and prosperity. It distracts, demoralizes, obsesses, and depraves the men and women who must forgo immediate returns, sacrifice immediate pleasures, master difficult disciplines, and respond to the needs and desires of others if they are to create successful businesses. Capitalism has been incomparably the most productive economic system in the history of the world because it best evokes the effort and creativity—the moral quality and productive energy—of workers and businessmen who put the interests of others before their own gratifications.

  Grégoire Canlorbe: Your analysis and your appraisal of capitalism are based on a profound theory of information, which was recently synthetized in Knowledge and Power. Could you remind us and develop the main outlines of this highly integrated view of information, technology and entrepreneurship?

  George Gilder: Based on the mathematical ideas of Claude Shannon and Alan Turing, information theory is an evolving discipline that depicts human creations and communications as transmissions across a channel, whether a wire or the world, in the face of the power of noise, with the outcome measured by its “news” or surprise, defined as “entropy” and consummated as knowledge.

  Since these creations and communications can be business plans or experiments, information theory provides the foundation for an economics driven not by equilibrium or order but by falsifiable entrepreneurial surprises that yield knowledge and wealth. Entropy is a measure of surprise, disorder, randomness, noise, disequilibrium, and complexity. It is a measure of freedom of choice. Its economic fruits are creativity and profit. Its opposites are predictability, order, low complexity, determinism, equilibrium, and tyranny.

  A capitalist economy is not chiefly an incentive system based on stimulus and response. This theory has failed in psychology; its survival in economics stultifies the science. Rather capitalism is an information system in which wealth is knowledge and economic growth is learning. Increasing revenues come not from a mere scheme of carrots and sticks but from the development and application of productive knowledge.

  Entrepreneurs are creators, not mere production functions. Creativity is disequilibrium, it is surprise: not order. Physics tells us that matter is conserved. What separates our age from the Stone Age is the growth of knowledge through human creativity. As I quote MIT’s Cesar Hidalgo in The Scandal of Money: “When an expensive car collides with a wall, all its value is lost, though all its material atoms and molecules are preserved. Value is information. The car is knowledge.”

  The information in the information theory of capitalism is surprise—measured by entropy or disorder, unexpected outcomes. It is not order or equilibrium. Entropy is higher or lower depending on the freedom of choice of the creator. Interest rates register average returns; real profit or loss is entropy: unexpected returns. The greater the entrepreneurial freedom: the higher the entropy and information in the message or creation. To bear high entropy creations, it takes a low entropy carrier of law and morality that is not spontaneous. Information theory both enables and describes our digital world. There is nothing orderly or spontaneous about it. It is a creation of entrepreneurs.

  Grégoire Canlorbe: As a professed techno-utopian, what is your point of view on Transhumanism, i.e., the belief that humanity could, and should, strive to higher levels through advanced technology?

  George Gilder: I am no kind of utopian. The future I predicted exists today. There is nothing new or interesting in so-called “trans-humanism.” Humans have always “striven to higher levels through advanced technology.” But the idea that a computer can become a conscious mind that threatens humans is preposterous.

  Composed of binary silicon switches, computers can know nothing, have no will or consciousness, and do not compete with humans for resources. They are inexorably dumb machines that complement humans as Peter Thiel explains in his incandescent Zero to One. Humans cannot even think of making intelligent machines until they move beyond the limits of silicon to carbon-based devices. We can begin to make some tentative advances with materials such as grapheme and carbon nanotubes. We have yet seriously even to contemplate Neal Stephenson’s Diamond Age.

  Grégoire Canlorbe: In the Austrian tradition of von Mises, Rothbard and Kirzner, the entrepreneur is the agent who reaps profits by identifying and grasping opportunities to improve the coordination of economic agents under the division of labour. In this regard, Kirzner describes “alertness” as the fundamental characteristic of the entrepreneur.

  For instance, the entrepreneur may identify a price differential for a certain product and therefore an arbitrage opportunity; or he may expect a speculation opportunity due to a discrepancy between the present price and the anticipated price of that product. In both cases, his profit derives from the services he performs in terms of homogenization and stabilization of the markets.

  The entrepreneur’s alertness may also detect a general undervaluation of certain factors of production. By hiring and reallocating these factors that were underprized and undercapitalized, he can earn more than the going rate of interest. By shifting them from production of lower discounted marginal value product to production of higher DMVP, he allows a more productive use of these factors, which is rewarded by his profit.

  The entrepreneur may finally be alert for demand for a product that has not hitherto been manufactured. He may then decide to supply that new product himself and consequently make an innovation profit.

  In a nutshell, the entrepreneur has a role to play in the economic cooperation due to the ignorance and the mistakes on the part of other agents, exhibited by the structure of prices. In his quest for profits, he constantly remedies these imperfections and adjusts the economic cooperation in direction of a more optimal state. Do you hold this analysis for relevant?

  George Gilder: Entrepreneurial creativity is real and absolute. Human beings are creative in the image of their creator. Contrary to what Austrian economists tend to claim, entrepreneurship is not mere arbitrage, opportunity scouting, or other derivative activities. Thiel writes: “Humans don’t decide what to build by making choices from some cosmic catalogue of options given in advance; instead, by creating new technologies, we rewrite the plan of the world.”

  In the Austrian vision, capitalists tend to be detectors of pre-existing exchange opportunities: the extent of these exchange opportunities determines the possible range for the division of labour. In other terms, the degree of the division of labour depends on the extent of the market. In my view, there is no market without the entrepreneurs who create and expand it.

  Nowadays, the disdain for businessmen is scarcely less common among thinkers on the Right than on the Left. For socialists, however, this attitude poses no problem. They can feel free to denounce business and urge the dissolution of the business class. But this solution will not work for conservative, liberal, and libertarian theorists who understand the benefits of capitalism for the production of wealth and the promotion of freedom and democracy. Even though the conservative thinker often has little more respect for capitalists than the socialist does—variously regarding businessmen as vulgar, self-serving, stuffy, unrefined, un-idealistic, amoral, and uninteresting compared to intellectuals—the conservative’s ideology requires that he favor business. This conflict poses a genuine problem for conservative thought. The dilemma was resolved, however, at the very beginning of the industrial revolution by the leading philosopher of classical liberal economics.

  In the notable year of 1776, Adam Smith invented the economics and business philosophy that governs the modern imagination, imprinting it with indelible images of mass production in a pin factory, comparative advantages in international trade, and a ubiquitous “distribution” of goods and incomes stemming from the increasingly elaborate “division of labour.” The Wealth of Nations depicts macroeconomics as a “Great Machine” in which every cog of every gear, governed by an “invisible hand,” functions perfectly in its time and place, as smoothly and reliably as Newton’s gravity. There were entrepreneurs, to be sure, but they “seldom meet together” without the conversation ending “in a conspiracy against the public, or in some contrivance to raise prices.”

  Adam Smith was at once an intellectual who shared all the typical prejudices against the business class and a libertarian conservative who knew the value of freedom and enterprise. His solution was to locate the source of wealth not in the creative activities of businessmen but in the “invisible hand” of the market. The Smith machine was not governed by inspired and unruly entrepreneurs or rambunctiously creative businessmen, but by a crude form of homo economicus, a utility-maximizing agent, calculating gains and losses, and galvanized by incentives for self-aggrandizement. Smith’s error was to found his theory on the mechanism of market exchanges themselves rather than on the business activity that makes them possible and impels their growth.

  In the end, Smith was the greatest defender of free enterprise and open systems and untrammelled trade between free peoples. But in his system just like in posterior Austrian economics, entrepreneurial creation is subsumed under the rubric of the “division of labour”— the extent of which, so he ordained, “is determined by the extent of the market.” That there is no market without entrepreneurs passed unnoticed in the two centuries that followed Smith’s work. Even the Austrian titan Friedrich Hayek missed it in his valiant defence of free markets after World War II. Among advocates of free markets, Hayek’s “spontaneous order”—in the lineage of Smith’s “Great Machine”—remains the prevailing image of economic organization.

  Amid all that spontaneous order and economic equilibrium, however, entrepreneurs and their creations continued to crop up disruptively. Beginning with Smith, economists acknowledged their importance. But nearly every leading economic theorist from Smith to Sigmund Sismondi, from Max Weber to Karl Marx, from Joseph Schumpeter to Frank Knight, from John Kenneth Galbraith to Paul Samuelson— whether a friend or foe of the free market— predicted the exhaustion and demise of the entrepreneurial role. Entrepreneurs might have their day and from time to time would win great glory, but with the increasing spread of the market (driven by trade agreements) and the ever-developing division of labour (driven by the expansion of the market), the entrepreneur would recede. Dominating the new economy would be giant institutions, which politics and scientific expertise would buttress, and which presumably would be too big to fail and too powerful to be challenged.

  Capitalism would evolve, even its proponents said, into a “stationary state” where abundance ruled, eclipsing the role of individual entrepreneurs reaping profits from scarcity. More modern theorists find free enterprise’s rough edges intolerable in light of the fragility of the environment. All these economists deem entrepreneurial leadership as a transitory and dispensable stage of capitalism, ripe for hierarchical regimes of expertise and specialization to supplant. At some point, they believe, the surprises will stop.

  In the same frame of mind, another key misconception of the popular versions of libertarian and Austrian economics is that political order can be spontaneous—that capitalism can thrive in anarchy. But central to the Austrian model is the power of prices for signalling economic conditions. Without the government’s enforcement of property rights and contracts and its maintenance of defence and a monetary system, the carrier fills up with noise. Information theory defines entropy as freedom of choice and surprise. It is intrinsically libertarian in its implications. But it does not presuppose libertarian anarchy. Legal codes and moral practices do not spring spontaneously from the interplay of the marketplace or from the self-interested conflicts of individuals. Progress in law and order does not spring from a Darwinian process of natural selection among random mutations. It is achieved through a heroic struggle to develop civilized institutions and defend them. Building these institutions are leaders, political and intellectual. The quality of political leadership is crucial to the development and defence of markets, and there is nothing spontaneous about it.

  Grégoire Canlorbe: So-called “Say’s Law”, in fact a cumulative argument by Jean-Baptiste Say, James Mill and David Ricardo, is the proposition at the heart of both classical economics and contemporary “supply-side economics”. It asserts axiomatically that the sale of goods and services to the market generates an income that is the source of demand for other goods and services. It infers from this that overproduction (or demand deficiency) cannot be a cause of recession. In other words, since it is production which opens a demand for products, the apparent failure of demand, which is how recession is perceived by Keynes and his followers, is in fact due to problems on the side of supply.

  As a well-known supporter of Say’s Law and prominent actor of its revival through “supply-side economics”, could you give your point of view on the 2008 crisis? How does our current recession illustrate Say’s Law rather than Keynesian analysis?

  George Gilder: In my humble opinion, financial crises are intrinsic to capitalism and key to its success. It is crucial to remedy them without vitiating capitalism.

  Looking at capitalism as an information system, it is easy to see its fragility. People want currency—which comes from the Latin word currens, “running”—and they want it now, to buy a burger or a grande latte or an iPhone or a broadband connection or a tankful of gasoline or a car or a house. They want liquidity, which comes from their bank deposits, their checks, or their credit cards. They don’t want anyone to ask questions beyond those needed to establish their identities. If they wish to avoid the identity issue, they use cash, which is completely devoid of information. Meanwhile the value of their money is created entirely through productive activities on the supply side. It is, contrary to what Paul Krugman will tell you, the supply of goods and services that creates all that demand—in conformity with the law of markets, as you specify.

  On the supply side, however, schedules are radically different. The producers of these goods and related wealth have to develop skills and deploy capital over many years to make the items available. Time to market may be decades. That Apple iPhone is full of Qualcomm microchips manufactured in a wafer fabrication plant that takes at least five years to build and equip. The chips are the product of a multi-month, seven-hundred-step manufacturing process that has been designed, debugged, and tested by engineers over at least a four-year period. During all that time, little or nothing is “liquid.” The capital is tied up in cement and steel and silicon and chemical systems and photolithography equipment and fibber optic lines and real estate and airfreight and expensively trained engineers and executives in companies around the globe.

  Banks and financial institutions bridge the enormous gap between the blind immediacy of the demand side and the deliberation, delay, and information density of the supply side; between transactional cycles and business cycles. Most of the time, they accomplish this prestidigitation marvellously well, but not always. In this regard, what was going on, in 2008, was not conventional disruption of macroeconomic circular flows, but an acute information mismatch between short-term low-entropy money, which banishes transactional surprise, and the long-term high-entropy quests for upside profit in the assets behind it.

  In Wealth and Poverty, I summed up this kind of mismatch in more poetic terms: “Perhaps the central secret of capitalist success is its ability to convert the search for security, embodied in savings, into the willingness to risk, embodied in enterprise. The financial markets [chiefly in banks of various kinds] enact this crucial alchemy, turning fear into growth, caution into creativity, timidity into entrepreneurship, and the desire to conserve into the drive to build and innovate. This is a key capitalist industry, processing the abundant raw materials of anxiety about the future into the rare assets of faith in it and provision of productive facilities for it. One role is performed chiefly by an elite of businessmen, the other by millions of savers, but the two impulses are indissolubly linked at the heart of capitalism; they are the systole and diastole of the production of wealth and the circulation of income.”

  A financial crisis is an acute coronary fibrillation in this vital process of intermediation between the mismatched impulses at the heart of the economy. The mismatch is inherent in all economies and is most acute when entrepreneurial risk-taking is most unbridled. Runaway enterprise expands the gap between audacious creators and the fearful savers who fund them. It makes people doubt the financial bridges between the two impulses of growth, in banks and other financial institutions.

  Money economies are based on a particular information structure. At the bottom—in the “physical layer,” as defined by information theory—transparency rules, and information is dense and specific. Here debt is based on detailed information. The originator of a mortgage, auto loan, business line of credit, venture outlay, angel investment, or bank card debt knows the specifics of the purchase, the borrower’s credit record, and the value and recoverability of the items acquired or other specified collateral. At this level, information is high but liquidity is low— retrieving the money entails messy and costly procedures such as foreclosure, bankruptcy, or seizure of property.

  As we move up the economic pyramid, through financial intermediation by banks and other institutions, we lose specific information and gain liquidity. Unlike water, which becomes transparent as it liquefies, financial instruments become more opaque as they approach the liquidity of money. This is not a flaw of money and demand deposits; it is their enabling feature. The history of the money in your pocket— the ultimate sources of its value— is unknown to you. That’s why money and deposits can be used anywhere for any legal (or even illegal) purpose. If you had to prove the value of your money, it would not be liquid. It would take hours or days to negotiate even a simple transaction.

  Creating liquidity—making zero-entropy money out of high-entropy investments—is the job of financial intermediation. Banks’ output is debt. They do not manufacture it out of thin air, as many critics of fractional reserve banking seem to believe. In fact, banks tend to be stingy. Behind every loan they extend is a lien. Palpable collateral backs every debt. By guaranteeing the value of the debt at par, banks remove information and entropy. The defining characteristic of money and deposits is no surprises. With no-surprise money, an economy can sustain billions of transactions a day and entrepreneurs can plan many years in advance.

  The purpose of banks is to drive entropy out of debt in order to produce money. Transparent money is an oxymoron. Financial crises have their roots in this fundamental difference between the supply and demand sides of the economy. The demand side—the money side—is nearly devoid of information; the supply side is full of it. The distinction derives from the difference between business cycles and transaction megacycles, between time to market for a business idea and the velocity of money. Real investment, which is long-term and specific and high-entropy, is inexorably in conflict with consumption and transaction demands for liquidity, which are short-term and ideally zero-entropy.

  The issue is not whether government should act in a crisis. In the history of capitalism, there has scarcely been a case of bank runs or panics where government stood aside and allowed the failure of the financial system. When money and banking are exposed to the world, the authorities will always rush in to cover their nakedness. When the mismatches of timing between instant money and long-term loans are revealed in a crisis, the government always mitigates the crisis with bank holidays, moratoria, delays, and other measures to rectify the phase differences between saving and investing, fear and faith. Before the creation of the Federal Reserve in 1914, a clearinghouse system arose to enable collective action by banks. But even that system could not deal with the repeated bank runs of the period without the intervention of a deus ex machina like J. P. Morgan. Since the creation of the Fed (after Morgan got tired or jaded), the frequency of crises has diminished. Deposit insurance has rendered bank accounts more opaque and money more robust. The Fed has often succeeded in tempering crises and making time by reconciling the phase clashes of capitalist money and investment.

  What was different in 2008 was that all the politicians enlisted in the panic. Efforts to sort out bad investments from solid values marked to mist during the crisis gave way to efforts to read the minds of high-entropy government officials capriciously saving one company and dashing another. The Fed itself was engulfed by this process. The production of money became politicized and high-entropy, and the horizons of the economy darkened. As a result, some 30 to 40 percent of the economic profits during the mid-2000s came not from productive investment and entrepreneurial risk but from the zero-sum games of speculative investment and fiduciary risk shuffling. Public debt, under Parkinson’s Corollary, expanded to absorb and stultify all other means of finance.

  The government began guaranteeing everything—mortgages, deposits, pensions, healthcare, industrial conglomerates, leviathan banks, solar plants, small business loans, waterfront property, corn prices, college tuitions, windmills, kitchen sinks—except for the value of its currency, which since the time of Alexander Hamilton has been its job. Meanwhile, innovation became focused on a confectionary froth of social networking and financial derivatives. Little attention was paid to the physical layer underneath. Physicists began earning vastly more in finance than in the physics of entrepreneurial creations.

  Could it be that the fundamental cause of the crisis was that the monetary system, alone among the structures of capitalism, lacks a low-entropy physical layer? Over the centuries of monetary history, the remedy for unstable money has always been gold. Critics who say the gold standard has been eclipsed by an information standard based on the Internet do not grasp the essence of information theory, which measures the information content of a message by its “news” (expressed in digital form as unexpected bits or entropy). It takes a low-entropy carrier to bear a high-entropy, newsworthy message.

  The 130,000 metric tons of gold that has been mined in all of human history constitutes the supreme low-entropy carrier for the upside surprises of capitalism. Without guidance from gold, currency markets are subject to political high entropy. They resemble a communications system without a predictable carrier that enables the information to be distinguished from the noise in the line. Such free-floating markets lack any objective means to differentiate the news (change in economic conditions and prices) from the “white noise” of currency flux. The chief source of new financial wealth in such a system is the exploitation of the gyrations of monetary noise by entrepreneurs of ignorance.

  Money is an expression of productive services rendered, but by definition it is distinct from the services that are the source of its value. Without a baseline of gold, entrepreneurship in the world economy degenerates into the manipulation of currencies for the interests of profiteers and government insiders. This is a pathology of capitalism comparable to the manipulation of law by corrupt and profiteering lawyers.

  A remedy for crises of money is gold. It may not be feasible, under current circumstances, to implement a real gold standard. But anyone in the business of dealing with money understands the intrinsic monetary signal of the price of gold and knows that this signal cannot be defied with impunity. A prodigal government that destroys the information content of money and prices will necessarily prompt a flight to gold.

  A gold-based measure of money can play the role in economics that the Constitution should play in law. A gold link allows conversion between currencies around the globe; the absence of a gold link invites flights from fiat money and sovereign debt around the globe. Gold forestalls the volatility and high-entropy gyrations that spring from fears of government manipulation and banking fraud. It thus can extend the horizons of the world economy.

  What it cannot do is end the intrinsic scandal of banking. That scandal derives from the maturity mismatch at the heart of any capitalist system of long-term, high-entropy supply and instantaneous, low-entropy demand. You will hear about this scandal wherever libertarians gather. There is no money in the banks. Fractional-reserve banking is a fraud and a delusion. It allows unlimited production of money by the banks, which can issue money at will. The late Murray Rothbard and other goldbugs who believed in the scandal of banking propagated these fears. They believed that the gold had to be in the banks themselves and available for delivery at all times. The banks’ ownership of a gold mine of capitalist assets was not enough. The money had to be reified and liquid at the same time, simultaneously frozen and fungible. That can never be. The scandal of money is at the root of our wealth.

  Grégoire Canlorbe: Following Thomas Jefferson’s motto, most proponents of free market economy and individual liberties advocate “commerce with all nations” but “alliance with none”. In other words, the United States should stop all the wars they are currently involved in and end aid for Israel or other countries in the Middle East. Do you share this vision of foreign policy?

  George Gilder: The central issue in international politics, dividing the world into two fractious armies, is the tiny state of Israel.

  This central issue is not a global war of civilizations between the West and Islam or a split between Arabs and Jews. These conflicts are real and salient, but they obscure the deeper moral and ideological war. The real issue is between the rule of law and the rule of the leveller, between creative excellence and “fairness,” between admiration of achievement versus envy and resentment of it. Israel defines a line of demarcation. On one side, marshalled at the United Nations and in universities around the globe, are those who see capitalism as a zero-sum game in which success comes at the expense of the poor and the environment: every gain for one party comes at the cost of another. On the other side are those who see the genius and the good fortune of some as a source of wealth and opportunity for all.

  What I call the Israel test distils into a few questions: What is your attitude toward people who surpass you in the creation of wealth or in other accomplishments? Do you aspire to equal their excellence, or does it make you seethe? Do you admire and celebrate exceptional achievement, or do you impugn it and seek to tear it down? Caroline Glick, the dauntless deputy managing editor of the Jerusalem Post, sums it up: “Some people admire success; some people envy it. The enviers hate Israel.” The Israel test is a moral challenge. The world has learned to see moral challenges as issues of charity and compassion toward victims, especially the poor, whose poverty is seen as proof of their victimization. But the moral challenge of this century is not charity toward the poor but treatment of the productive elites who create the wealth that supports us all. A victim only of resentment, Israel epitomizes the plight of the productive elites under siege around the globe.

  In countries where Jews are free to invent and create, they pile up conspicuous wealth and arouse envy and suspicion. In this age of information, when the achievements of mind have widely outpaced the power of masses and material force, Jews have forged much of the science and wealth of the era. Their pioneering contributions to quantum theory enabled the digital age. Their breakthroughs in nuclear science and computer science propelled the West to victory in World War II and the cold war. Their bioengineering inventions have enhanced the health, and their microchip designs are fuelling the growth, of nations everywhere. Their genius has lifted the culture and economy of the world.

  All around the globe today, the leaders of nations and international organizations, prestigious academics, and passionate writers denounce the very countries in which Jews are allowed to create and succeed. These leaders claim to be anti-Zionist, anti-Israel, anti-American, or anti-capitalist, but the distinctions dissolve in the crucial fact of their naked anti-Semitism. People who obsessively denounce Jews have a name; they are Nazis. The Palestinian Arab leaders have shown themselves to be mostly Nazis. Anyone who believes these men should command a nation-state ensconced next to Israel is delusional. There is only one answer to the claims and demands and threats of such people and that answer is “no.”

  The leaders of Iran are proud Nazis. Anyone who believes that the West can stand aside and conduct amiable negotiations while they acquire access to nuclear weapons is a gull who has failed to learn anything from the history of the twentieth century. The president of Syria is equally obsessed with Jews and Israel. The Wahhabis of Saudi Arabia in their madrasahs around the globe are cultivating new armies of young Brown Shirts. The civilized world must show enough courage of its quondam convictions to answer all the neo-Nazis with a resounding “no.” In the United States, however, most elite opinion believes that this is exactly the moment in human history when disarmament is a desirable option, a moment for intensified concessionary diplomacy in the Middle East, a moment when the supreme issue for domestic and international attention should be “climate change.” Such beliefs place the very survival of the United States into question.

  The Holocaust threat only begins with Israel. The entire West is vulnerable to the jihad. It can be stopped only through a combination of recognition, resolve and technology. On the front lines, Israel must face the menace earlier than the United States. Israel has already demonstrated the effectiveness of civil defence programs against missile attacks. By fleeing to underground shelters, by distributing gas masks to every man, woman and child, Israelis have incurred only a handful of deaths from thousands of hits on Israeli towns. The Israelis have maintained military forces that long succeeded in holding the jihad at bay. The Israel test forces the capitalist world to recognize the necessity of armament and civil defence. Today the nuclear threat seems chiefly addressed to Israel. But increasing steadily is the potential for importing nuclear weapons into American cities, exploding them offshore near American ports, or detonating bombs above America’s critical electronic infrastructure. The United States must mobilize all its capabilities of intelligence and defence against these threats.

  The Israel test impels us to forgo the illusion of opting out of the arms race. All too many Americans still subscribe to the “strangest dream” school of international relations, as I called it after singing along to an Ed McCurdy song with Joan Baez at Club 47 on Mount Auburn Street in Cambridge as a college student in the 1960s: “Last night I had the strangest dream / I ever dreamed before / I dreamed the world had all agreed / To put an end to war / I dreamed I saw a mighty room / The room was filled with men / And the paper they were signing said / They’d never fight again.” The song and the sentiment are as infectious and deadly as the Oxford peace movement that anesthetized Britain before World War II, as the Peace Now mantra that inebriates Israel and many American Jews who believe themselves to be “supporters” of Israel, as the campaigns for nuclear disarmament that seduce American liberals. The single greatest domestic threat to the United States is not the jihad but the peace movement. Countries that fail to meet the challenge of qualitative armament, of military technology, end up at war.

  Ronald Reagan’s best moment was his commitment to build anti-ballistic missiles. His worst, most self-indulgent, and foolish moment was his speech advocating the destruction of nuclear weapons. Regardless of any caveats he included, the speech was a horrible blunder that played into the hands of America’s enemies and is still a major weapon in their portfolios. It was his strangest dream moment, and if it were to come true, it would doom the country that he loved. Now, entirely unsurprisingly, President Barack Obama also is entertaining this fatuous dream. At moments of particular weakness, he speaks of nuclear disarmament. Within a week of assuming office he spoke of destroying 80 percent of America’s nuclear stockpiles. He contemplates abandoning missile defence. His chief asset in making such proposals is his ability to cite Reagan as a precursor on the road to disarmament. To the extent he pursues it, Obama will jeopardize the very existence of this country. With nuclear weapons in the hands of others and without anti-missiles and lacking, too, other advanced technologies, the United States cannot survive as a free country. Arms races are the inexorable burden of all free peoples.

  No major nation in history has succeeded in preserving its integrity and sovereignty without meeting the challenge of ever-advancing armaments. For Israel, the issue is obvious. Without maintaining leadership in military technology, the country has no chance at all of survival. But many American intellectuals still imagine that the United States is different, that it is possible or desirable for us to negotiate an “end to the arms race.” Our enemies will always want to end the arms race because they know only free nations can win it. The crucial test of American leadership is to see through the constant stream of proposals for technological disarmament. All our enemies want to confront us without our qualitative superiority.

  An end to the arms race would deprive the capitalist countries of their greatest asset in combating barbarism. The result would bring no relief from military competition but rather its transformation. Arms rivalry would shift from qualitative goals that favor free countries such as the United States and Israel toward quantitative rivalry that will favor our barbarian enemies.

  Grégoire Canlorbe: Darwin’s “dangerous idea”, in the words of the naturalistic philosopher Daniel Dennett, is that design can emerge spontaneously, i.e., without the hand of any deity. At first sight, free-market economics, especially the Austrian School, are in full harmony with this Darwinian conception (which was in fact anticipated by Herbert Spencer and even before by the Taoist philosophers).

  As we have seen above, Friedrich A. von Hayek notably described free market as a « spontaneous order », functioning without the hand of any planning authority, except to enforce the legal order and to provide essential public services. In a free market economy, price signals enable each decision maker to communicate dispersed and tacit knowledge to each other, which makes this « spontaneous order » able to solve the economic calculation problem, whereas bureaucratic or technocratic methods of allocation lack methods to rationally allocate resources.

  You don’t hide your distrust of the Darwinian theory. One may be tempted to ask how you can be both a supporter of free market economy and at the same time a despiser of Darwin’s “dangerous idea” at the heart of free market economics. What would be your reply?

  George Gilder: I agree with your description of free market economics. But “spontaneous order” is self-contradictory and explains no more than tautological gobbledygook “survival of the fittest.”

  The theory of spontaneous order maintains that complexity and equilibrium, such as are exhibited in economics, can emerge without planning or control, like biological ecosystems, planetary orbits, or human consciousness. Like “emergence,” the concept enables scientists to “explain” orderly phenomena that could not have been predicted or causally specified from their background conditions. As you point out, Hayek developed the idea, conveying his belief that economics and culture evolve with the same unguided spontaneity as biological systems. Over subsequent decades, spontaneous order became a dominant theme of economic thought. The precocious Paul Krugman invoked it in The Self-Organizing Economy, and it is found in Mormon philosophical blogs and Tea Party tracts. “I believe in spontaneous order” became a slogan of the right.

  Information theory finds all these concepts incoherent and self-contradictory. A capitalist economy epitomizes a complex dynamic system. In information theory, order is low-entropy. Characterized by regularity and redundancy, it tends to be predictable. It is low in information and surprise. Complexity, on the other hand, is high in information. It is high-entropy and the opposite of order.

  Things that are growing and changing are by definition high in entropy. Moving from a settled past into an undetermined future, they are always defined by their information, their news, their surprises. Spontaneous order is self-contradictory. Spontaneity connotes the ebullition of surprises. It is highly entropic and disorderly. It is entrepreneurial and complex. Order connotes predictability and equilibrium. It is what is not spontaneous. It includes moral codes, constitutional restraints, personal disciplines, educational integrity, predictable laws, reliable courts, stable money, trustworthy finance, strong families, dependable defence, and police powers. Order requires political guidance, sovereignty, and leadership. It normally entails religious beliefs. The entire saga of the history of the West conveys the courage and sacrifice necessary to enforce and defend these values against their enemies.

  A key principle of information theory is that it takes a low-entropy carrier to bear high-entropy creations. All the surprising singularities of creative capitalism depend on the boring regularities of political order. Maintenance of the low-entropy carrier cannot be left to some imaginary spontaneous order.

  The low-entropy side of the economy is demand and predictability; the high-entropy side is supply and surprise. Government and law are on the low-entropy side; they favor and foster rules of order. On the high-entropy side are entrepreneurship and spontaneity, the domains of creativity and surprise. Spontaneous order is an oxymoron that violates the fundamentals of any information system.

  This error of economics precedes information theory. Hayek struggled with its implications throughout his career. On some occasions, he spoke of spontaneous and self-organizing cultures and legal systems evolving from the bottom up without hierarchical guidance. At other times he was an earnest exponent of the need for deliberate constitutions and moral mandates. Addressing the issue, he wrote the Constitution of Liberty. But America’s libertarian tradition has embraced chiefly the spontaneity of order; its origins in an evolutionary bottom-up process; and its resistance to top-down cultural controls or influences such as religion, family structure, and legal constraints.

  Entropy is Janus-faced. Its upside surprises are redemptive and favourable to freedom. It is freedom of choice. But the carrier itself requires constant vigilance against entropic noise. Order is not spontaneous, but it is a necessary condition for all the surprises of freedom and opportunity.

  Grégoire Canlorbe: According to a widespread judgment, especially among Conservative circles, if Western societies, thanks to the full deployment of free market economy in the last centuries, allowed an increase in population, in wealth, in the standard of living, in intellectual development and in scientific knowledge, this material and intellectual progress however went hand in hand with a corresponding decline in moral values. Nowadays, narcissism, consumerism and savage individualism are at the very heart of our opulent, civilized societies.

  As Chateaubriand eloquently wrote in Memoirs from Beyond the Grave: “Material conditions improve, intellectual progress is made, and the nations, instead of benefiting, lose ground. This is how the decline of society and the rise of the individual are to be explained. If the moral sense developed in the same ratio as the intellect, there would be a counterbalance, and mankind would flourish without danger. But the exact opposite happens. Our perception of good and evil becomes dim in proportion as our intellect is enlightened; our conscience becomes narrower in proportion as our knowledge grows.”

  Could you share your thoughts on this pessimistic view commonly held?

  George Gilder: The assumption that scientific knowledge has anything to do with moral awareness is of course wrong. But it is equally wrong to assume that a decline in moral values could go hand in hand with scientific and material progress.

  In this regard, our central problem notably arises from a deep conflict between the processes of material progress and the ideals of “progressive” government and culture. Equality, bureaucratic rationality, predictability, sexual liberation, political « populism », and the pursuit of pleasure—all the values of advanced culture—are quite simply inconsistent with the disciplines and investments of economic progress and obstruct it.

  It is the idea of economic futility—not capitalist growth—that gives license to the culture of hedonism and sensuality. In an imperfect and suffering world, the possibility of progress implies a responsibility to attempt it. Only in a world of socialistically managed “limits to growth”, where human effort, enterprise, and creativity can never long prevail over needless poverty and suffering, can the progressive dreams of sexual liberation, leisure, redistribution, and sensual pleasure lose their onus of decadence and injustice. The dream of stagnation exalts the politician as well as the hedonist.

  Here again, we stumble on a familiar truth: it takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprise). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defence of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low-entropy carriers do not emerge spontaneously. They are the effects of political leadership and sacrifice, prudence and forbearance, wisdom and courage. Sometimes they must be defended by military force. They originated historically in a religious faith in the transcendent order of the universe. They embody a hierarchic principle. It is these low-entropy carriers that enable the high-entropy creations of successful capitalism.

  Grégoire Canlorbe: Thanks for your time and your insights. Would you like to add a few words?

  Georges Gilder: We are in a dangerous era in which intellectuals deny the existence of human mind and creativity. We move from sexual suicide, i.e., denying differences between the sexes, to intellectual suicide: denying the differences between human mind and machine computation. Since capitalism is the mind-based system, i.e., based on caput=head, this new delusional trahison des clercs threatens the global economy. The Information Theory of Capitalism attempts to correct this fatal deceit.

  The universe is not bottom-up or heterarchichal but top-down and hierarchical. Bottom-up empiricism constitutes the materialist superstition. It is a “flat universe theory” in which all is explained through the laws of chemistry and physics. But physical and chemical laws cannot explain the growth of knowledge and information, which is the new “system of the world,” developed from discoveries by Kurt Gödel, Alan Turing, John von Neumann, Gregory Chaitin, Claude Shannon and others. Morality is at a higher level of the universal hierarchical software stack than materialist science. It is a hierarchical universe. As long as intellectual elites remain stultified by the flat universe theory, embellished by the utter hokum of infinite parallel universes, they will remain in a moral wilderness and tend to push the world into their snake pits of futility.

  Dear Grégoire Canlorbe, thanks for your interest, expressed in extremely knowledgeable and provocative questions.

  Mr. Gilder pioneered the formulation of supply-side economics when he served as Chairman of the Lehrman Institute’s Economic Roundtable, as Program Director for the Manhattan Institute, and as a frequent contributor to A.B. Laffer’s economic reports and the editorial page of The Wall Street Journal.

  According to a study of presidential speeches, Mr. Gilder was President Reagan’s most frequently quoted living author. In 1986, President Reagan gave George Gilder the White House Award for Entrepreneurial Excellence.

  In 1996 Gilder was made a Fellow of the International Engineering Consortium. The investigation into wealth creation led Mr. Gilder into deeper examination of the lives of present-day entrepreneurs, culminating in many articles and a book, The Spirit of Enterprise (1986). Telling the saga of Micron Technology, the book was revised and republished in 1992. That many of the most interesting current entrepreneurs were to be found in high technology fields also led Mr. Gilder, over several years, to examine this subject in depth. In his best-selling work, Microcosm (1989), he explored the quantum roots of the new electronic technologies. A subsequent book, Life After Television, was a prophecy of the future of computers and telecommunications and a prelude to his book on the future of telecommunications, Telecosm (2000). Mr. Gilder followed with The Silicon Eye (2005), on a Caltech project that resulted in several companies, including Synaptics. In 2012, he wrote The Israel Test, on Israeli entrepreneurs and the sources of anti-Semitism. His YouTube video “Do You Pass the Israel Test” has been viewed nearly 900 thousand times.

  His latest project is to reinterpret economics through information theory. In 2013 he published Knowledge and Power: The Information Theory of Capitalism, which treats wealth as knowledge and growth as learning and was voted libertarian “book of the year” at the FreedomFest. His latest work, published in March 2016, is The Scandal of Money: Why Wall Street Recovers but the Economy Never Does, which explores the time and frequency domains of money. PayPal founder Peter Thiel wrote: “George Gilder shows that money is time, and time is real. He is our best guide to our most fundamental economic problem.”

  That conversation was initially published, in French, in Swiss journal Agefi Magazine’April 2016 issue

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