Freeman

FEATURE

Information Ages

Knowledge, Survival, and Progress

AUGUST 15, 2013 by RICHARD W. FULMER

Our era is often called the "Information Age," yet humanity has only survived this long because of our ability to use information. We do not have the sharp teeth and claws, tough hides, or thick fur needed to adapt to our environment; we survive by adapting our environment to ourselves. That can be done only by accumulating knowledge about our world and putting it to practical use.

By and large, this means communicating with others in order to enable cooperation and coordination. Information in isolation dies with its possessor. When shared—particularly via some sort (or several sorts) of language—it greatly enhances mankind’s chances of not only survival but also of progressing far beyond mere survival to thriving. The more effective and efficient the methods of communication, the greater the progress.

In Genesis we read of Adam naming the earth’s birds and beasts; it’s presumptuous, this idea that, by stringing meaningless sounds together and declaring that such a string signifies a particular animal, we somehow know something about it because we know its “name.” Yet this absurdity lies at the root of all human knowledge and invention. By assigning names to things we can share information about them with each other. 

Not only is the spoken word the greatest human invention, but most other world-changing inventions—everything from mathematics to printing—are also information-based or deal with its generation, transmission, or storage. 

Without such information-based constructs no other inventions would be possible, for none of the things with which nature surrounds us become resources in any meaningful sense without information. A rock is simply a rock until someone thinks to use it as a hammer; oil is just foul-smelling goo until we learn that it can serve as fuel; sand is no more than something to walk upon until we discover that it can be turned into glass and microchips, which require complicated processes. With the exception of the rock, perhaps, not one of these discoveries was the product of a single genius. Rather, each was the product of countless individuals working at different times and places. Each evolved in fits and starts, “the result,” as Scottish philosopher Adam Ferguson observed, “of human action, but not the execution of any human design.”

 

Money and Markets

No list of information-based tools is complete without two other products of “spontaneous order”:  markets and money. While these may be surprising additions, together, they form the most powerful knowledge-generating dynamic the world has known. Market prices reflect globally dispersed, deep knowledge. They convey the information, some of which cannot even be articulated, that allows people to determine the value of what they create in relation to other products and to compare that value of their goods with that of other possible uses for the resources needed to make them.

"I, Pencil," Leonard Reed’s seminal essay, vividly illustrates the seemingly miraculous way in which market prices coordinate the activities of hundreds of thousands of people around the world to create a seemingly trivial object. He explains how no one person knows how to make a pencil from scratch—yet millions of pencils are made every day through the cooperation of countless people who have never met; some of them may never have even seen a pencil.

All the information needed for this miracle of cooperation is gathered and transmitted through market prices, which economize on the information people need. Information is costly to obtain, after all. Consider changes in supply and demand. No one in the factory needs to know that six years ago a baby boom occurred and demand for pencils in elementary schools has now increased. All they need know is that more people are willing to buy their product. The same goes for anyone at any point in the process. All that suppliers of any pencil component have to know is the price they must pay for their materials and the price they can obtain for their products. They need not know the reasons for those prices—indeed those reasons may be unknowable even in hindsight.

Market prices are not just a convenience, they are essential. Without them, we have no way of learning whether our products are worth more than the resources needed to make them. Knowing the relative value of input and output is vital not only for an economy, but for life itself. To live, each of us must consume more calories than we burn in gathering, preparing, eating, and digesting those calories. In short, we must make a net energy profit or we will die. Fortunately, we have a built-in alarm system called “hunger” that warns us when we have not eaten enough.

Similarly, if an oil company’s efforts are to have any value, it must produce more energy in the form of oil than it takes to discover, extract, transport, and refine it. Because a company is not a single organism, however, it has no built-in warning system to tell it whether to abandon a marginal oil well or to complete and produce it. But even if a task as monumental as adding up all the energy involved in every aspect of the company’s operations—then comparing that to the energy it expects to produce—were feasible, knowing that producing a particular well will result in a net energy profit is not enough. For instance, will pumping out all the oil a well is capable of producing make us better off or just leave us with a storage problem? The energy balance doesn’t tell the company what the demand for its product is. Nor does it tell the company whether it is better off investing its resources in a particular well or using them for some other purpose.

 

Disinformation

Prices provide all of that information and more—but only if those prices are generated by markets free from significant distortions. 

Every action by government distorts market information to some degree, if for no other reason than its activities must be financed by the productivity of its citizens. Taxes and tariffs necessarily affect the prices of goods on which they are levied. Wage and price controls obviously distort market-generated information—leading to artificial surpluses or unemployment if prices or wages are set too high and shortages if they are set too low—but the impacts of most government actions are far subtler. 

Consider, for example, the effects of a central bank’s control over its nation’s money supply. Rather than simply printing more money, central banks usually attempt to increase liquidity by driving interest rates down. In this country, the Federal Reserve (the “Fed”) does this by such actions as reducing the discount and the banking reserve rates, buying government notes from the Treasury Department, and buying securities from banks. 

As interest rates (the “price” of money) drop, the returns on bank deposits fall, so people tend to save less and consume more. At the same time, despite fewer savings, credit expands and interest-sensitive industries such as homebuilding and car manufacturing expand along with it. Prices are driven up as consumers vie with industry for scarce resources. Eventually, long-term projects that had appeared profitable when costs were artificially low are revealed to be bad investments.

It is significant that new money flows to some parts of the economy before others, raising prices in those areas relative to others. Because prices do not rise uniformly, an economy’s network of interrelated prices is distorted, reducing the market’s ability to accurately reflect relative values between dissimilar goods. One result is that producers may overbuild, creating goods that are actually worth less than the resources used to create them. This was typical during the housing boom when homes were built never to be lived in—serving only as investment vehicles for speculators who bought them just to “flip” them to the next speculator in line.

Business subsidies also distort prices. For example, only government largess keeps the price of electricity produced from wind turbines and solar panels competitive with that generated from conventional sources such as natural gas. Because of the subsidies we don’t know whether “green” utilities are making a net monetary profit. And because we don’t know that, we don’t know whether they are making a net energy profit; only free-market pricing can ensure that the energy cost of everything that goes into producing a good or service is taken into account. By the same token, we do not know whether subsidized biofuels such as ethanol contain more energy than is used to produce them. Estimates range from a 30 percent loss to a 30 percent gain, but, in the end, they remain only estimates.

 

Feedback

More often than not, government initiatives feature broken or distorted feedback loops. Without the possibility of profit or loss, the costs and benefits of government actions may be impossible to determine. Moreover, in a complex economy, myriad changes happen continually, so the link between government-driven causes and their market effects may be lost as well. With the quantity and quality of their output difficult or impossible to measure, government agencies are left with measuring input as a gauge of their impact. This means that agencies have little incentive to actually solve problems. If the “Department for Solving Problem X” actually solves problem X, it eliminates its own reason for existence. On the other hand, should its actions prove ineffective or even counterproductive, the most likely consequence is that the agency’s funding will be increased. 

The underlying problem with government action in general it that it disrupts the information feedback loops upon which survival and progress depend. The unique capacity that people operating in free markets have for self-correction is lost when these feedback loops are skewed or broken. When consequences are no longer based on cause and effect, but are driven instead by the political decisions of faraway bureaucrats unfamiliar with local conditions, we are left to stumble blindly in a world gone dark. 

We are information-based life forms whose survival and progress depend upon the subtle feedback loops that originated in language. We have prospered throughout all of our “information ages,” but we cannot progress, nor perhaps even survive, in an age of disinformation.

 

ASSOCIATED ISSUE

October 2013

ABOUT

RICHARD W. FULMER

Richard Fulmer is a freelance writer from Humble, Texas, and the winner of the third annual Beth A. Hoffman Memorial Prize for Economic Writing for his article "Cavemen and Middlemen," from the April 2012 Freeman

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