Anyone determined to provide a “new economics” must haul a heavy burden of proof up a steep slope of professional resistance. At the summits of academic prestige, economics presents a Delphic façade of math and marble.

A still higher barrier faces anyone suggesting major modification to the entrenched system of reasonably free markets and economic incentives associated with “capitalism.” Within recent memory, exponents of free markets—myself included—were celebrating a triumphalist “end of history.” Even China’s “Communist Party” and “Middle Kingdom,” self-consciously central in the order of the universe, were thriving as a self-evidently capitalist regime. China’s entrepreneurs were as “free to choose” as any “robber baron” of yore, particularly if their field was sufficiently technical to baffle the bureaucracy and so long as they didn’t under any circumstances compare their rulers to Winnie-the-Pooh.

With the U.S., Europe, and China all essentially organized by markets, dissenters retreated to government-funded universities, cranky leftist redoubts such as Harvard and the New York Times, and green movements thriving on money and lawyers from the disgruntled families of penitent or deceased entrepreneurs.

As autodidact supply-side paragon Jude Wanniski put it in 1980—with credit to economists Arthur Laffer and Robert Mundell—to most observers, capitalism is simply “the way the world works.” And Wanniski was proved right. I long had criticized him for his judgment that Communist regimes were merely capitalist in a disguise of incompetence. But even this view may prove prescient, as today market-oriented regimes are blithely donning the same disguise.

With banks essentially nationalized and stultified by regulators and no longer making loans to entrepreneurial companies; with the nation recently locked down and masked because of COVID at the caprice of germophobic governors; with energy usage regulated, subsidized, priced, and litigated by bureaucrats around the globe out of a demented fear of CO2 emissions; with education run by manipulative ideologues with lifelong tenure and government appointments, funded by $1.5 trillion in guaranteed student loans; with money pumped up and propagated like gilded gas—we live in a new twilight zone beyond capitalism and freedom.

Thomas Sowell is lapidary: “Freedom is not simply the right of intellectuals to circulate their merchandise. It is, above all, the right of ordinary people to find elbow room for themselves and a refuge from the rampaging presumptions of their ‘betters.’”

Still, for all the complaints in the air, let us give tribute to the far from dismal accomplishments of economic science. From the epoch of Adam Smith, author of The Wealth of Nations in the momentous year of 1776, through the expansionist 20th-century regimes of the Keynesians, Austrians, and mathematical financiers, to the current days of Sowell and his magisterial six editions of Basic Economics, the profession has wielded an impressive array of tools and insights. They have provided theories of considerable beauty that have helped to explain and inspire the greatest of economic accomplishments: the elevenfold rise of populations and a near-doubling of life expectancy. The planet held a stagnant level of some 600 million souls three centuries ago, each lucky to have survived childhood, let alone make it to middle age. Today we are near 8 billion souls, each living an average of more than 70 years.

As Sowell explains, “when India and China—historically two of the poorest countries in the world—began in the late twentieth century to make fundamental changes in their economic policies [moving from bureaucratic planning to increasingly free markets], . . . 20 million people in India rose out of destitution in a decade, and more than a million Chinese per month rose out of poverty.”

“Things like this,” writes Sowell, “are what make the study of economics important.”

Beginning with Adam Smith, economics arrived at a panoply of often paradoxical wisdom. Wrought from an intricate mathematical pattern of incentives, the findings were a skein of counterintuitive identities.

The marginal revolution of the Austrian school showed that prices are set by the last, or most recent, transaction—not some average, or measure of cost, or interplay of class interests, or intrinsic properties, or accumulated labor. Consumers, not producers, are the final arbiters of price.

Consumers, though, do not define the products or propel the innovations. A hopeful consumer’s demands are meaningless without the offer of something in exchange. In general, citizens must supply their own labor or product in order to demand the goods and services of others. Thus, in the words of Jean-Baptiste Say, “supply creates its own demand.” In economics, supply and demand are ultimately an identity.

Further paradoxes abound. Focus on spurring demand, and you will assure that the demands will not be fulfilled. Focus on liberating supply, however, and in the process you will create the demand you need. Demand ultimately grows through forgoing consumption, or saving, as economists define it. Saving, moreover, is ultimately debt, as your deposit is worthless unless the bank lends it out. The abiding rule of capitalist value is that you can keep your wealth only if you are willing to give it to others.

John Maynard Keynes identified what he called the “paradox of thrift,” whereby efforts to save may reduce total savings by reducing demand and slowing growth. But Keynes’s theory was manifestly wrong. More evident over time is a “paradox of consumption”—efforts to promote consumption end up reducing total consumption.

Historically—and empirically—savings have not subtracted from demand. From Singapore to China, from Hong Kong to Chile, from the heyday of Japan to the post-war rise of Germany, the fastest-growing economies in the world maintain the highest levels and shares of savings. By expanding investment—which entails purchasing goods and services today for the production of future goods and services of greater value and volume—savings are not a sump of demand but its most catalytic source. Through the miracle of markets and the insights of economic science, savings and investment become an identity.

Smith offered many such revelations. Correcting for the human inclination to recoil from foreigners or to prey on strangers, he discovered the division of labor whereby production is maximized whether in a single factory or in a world economy. He offered the example of the manufacture of pins.

In Smith’s model, an economy of specialists could grow far faster—using a thousand times as many pins, sewing their shirts and mending their sheets—as an economy of virtuoso generalists. Smith showed how, in British philosopher Lord Matt Ridley’s trope, we specialize as producers in order to diversify as consumers. We drill in more narrowly in our work in order to widen the scope of the goods and services we can buy from other specialists around the world.

Immortally explaining the power of focus and exchange, Smith demonstrated that wealth springs from dependence on others rather than from self-sufficiency and independence. The hard truths of comparative advantage—the mandate to do what you do best and trade for the rest—erected a bulwark, against narrow nationalism and mercantilism, that is a monument to the power of economic methods.

Trade always balances, because nations generally do not trade—individual producers and consumers ultimately exchange goods and services. Any national “imbalance” in the exchange is voluntary and rectified by capital movements and trade in bonds, equities, real estate, and other assets. Foreign holders of a unit of currency can spend it on goods or investment, but not on both at the same time. In another improbable identity, a trade gap is an investment surplus.

A foreign investment in the shares of Apple adds to a gap in trade, diverting scarce dollars that might otherwise be spent on U.S. goods and services. But the investment in Apple reflects a fuller endorsement of the United States and its institutions than does a foreign import of our orchard apples that is purely positive in our trade balance.

The investment surplus is also more beneficial. A foreigner buys our apples and eats them. He buys shares of Apple, and we keep the company while attracting the positive interest and even loyalty of foreigners. Similarly, the foreigner buys our Treasury bills, and we keep the money.

Ah, money . . . economists have had much to say about money: a unit of account, a medium of exchange, a store of value, and a mire of muddle. Through much of the last 300 years, until 1971 when President Nixon ended the 1944 Bretton Woods agreement, money was essentially gold. Whether consisting of the metal itself or of currencies valued as a particular weight of gold, the world possessed only one ultimate valorem.

Spurning the unwelcome wisdom of immutable money, Nixon pledged his loyalty to the “quantity theory of money” espoused by his eminent adviser Milton Friedman. Forget gold. By assuring a steady expansion of the money supply, central banks could enable smooth economic growth and progress. Excess quantity of money expresses itself in inflation, or the decline in the value of a currency. An insufficient volume of money results in higher real interest rates and higher currency values. Powerful and prescient central bankers could follow the logic of incentives to steer their way between these perils and toward equilibrium.

In countries suffering from trade “imbalances,” Friedman on the right and Paul Krugman on the left—both of them Nobel laureates—converged on one fateful observation. It is always far easier and more efficient to change the value of a country’s currency than to adjust the price and payment levels in all contracts across an entire economy.

This belief has come to rule a world full of nations and politicians reluctant—in the words of William Jennings Bryan in the 1890s U.S.—to “press down upon the brow of labor this crown of thorns, [and] crucify mankind on a cross of gold.” Bryan would be grateful to Friedman today for the removal of these harrowing burdens on our brows.

The work of correcting and recorrecting the (now constant) changes in money values in the absence of the gold standard is now the world’s largest industry: currency trading. The money shuffle proceeds at a rate of some $8 trillion a day—that’s up 50 percent in the last four years alone—to a level some 35 times global GDP, and some 70 times the trade in goods and services. Profligate governments around the world thank their banking stars for this market miracle that continues to expand while trade and currency wars seethe and economies stagnate.

The worldwide abandonment of the gold standard led not only to runaway currency trading but also to a huge, utterly unexpected accumulation of gold by the world’s central banks, led by China. It has in turn prompted the rise of crypto­currencies, such as Bitcoin and Ether, that allegedly mimic gold. Intelligent economists understand that the world is more complicated than they could possibly know.

Nonetheless, free markets seem to make an improbable magic. How do they work? Adam Smith and Karl Marx agreed that capitalism is most essentially an incentive system. At the heart of the mathematics of every economic model resides Homo economicus, a Latinate function of material appetites and aversions, rewards and punishments. Self-interest plays the determinate role in economics that gravitation played in Isaac Newton’s physical model of the universe.

Incentives lead, “as if by an invisible hand,” to growth and prosperity—so said Adam Smith in 1776, and so the celebrants of capitalism have repeated ever since. In the 20th-century Austrian revision of Smith, incentives spring from and sustain a “spontaneous order,” as the system seeks equilibrium in a process biased toward “perfect competition.”

The Left, however, has discovered what it believes to be a flaw in this model. The incentives motivate capitalists to prey on a physical substrate of “natural resources.” This limited earthly endowment is the source of sustenance and provides the setting for an all-out contest in a struggle for survival.

In such different ideas as the “entropy” theory of Nicholas Georgescu-Roegen and the entrepreneurial model of Paul Romer, the chemical elements of a finite earth provide a limited palette of possible combinations.

Free-enterpriser Romer stresses the huge multiplicity of possible chemical reactions and recipes for entrepreneurs to tap. Georgescu-Roegen and his ecologist followers stress the finitude of the earth. They see humanity as steadily dep­leting a physical order doomed by the second law of
thermodynamics—entropy—to ­­­deteriorate in time toward the heat death of the universe.

To leftist economists in the thrall of their materialist superstitions, capitalism is a con game headed toward a twilight-zone denouement. More than nullifying the profits and other gains of enterprise is environmental deterioration and depletion.

But following Adam Smith and conservative economics, both Romer and Georgescu-Roegen see rational economic agents—whether workers or entrepreneurs, classes or tribes, nations or planetary movements—scraping their life support from the periodic table in the crust of a finite planet.

In response to demands for redress of the damage, governments are plighting their troth to “sustainability.” Without so much as a clue to what is going on, they are all mimicking King Canute, promising to abate the tides, control the weather, recycle fuels, stomp out viruses with lawyers, and print prosperity.

But a revolution is at hand.

In 1994, in a Promethean 30-page essay, “Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not,” William Nordhaus, of Yale, introduced the idea of measuring human progress by the time that workers have to spend to earn the wherewithal to purchase particular goods and services.

“Time prices” measure value not with notional money but by the number of hours and minutes you must labor to buy a good or service. Advances can happen without anyone’s noticing. In the early 19th century, economists pursued what Thomas Carlyle derided as a “dismal science,” and William Blake inveighed against early industrial factories as “dark satanic mills.” But Nordhaus showed that the time a worker in one of those mills had to labor to buy lights to illuminate the dark had plummeted. Furthermore, he estimated that the error was a hundred thousandfold over human history.

Nordhaus detailed this exponential progress—from the Neanderthal cave fires, through the candles at Versailles, to the whale oil and later kerosene lamps of past centuries, through the cascading revolutions of electrical illumination—and underscored how it had all been unrecognized. As the workers of the world expanded the realms of light, domesticating the night, economists assumed that this technology was stagnant.

Nordhaus did not fully pursue the reach of his own insight. In his title, he merely “suggested” that this vast economic error might continue today, applying broadly across the economic landscape. He did not apply his findings to, say, the relevant statistics compiled in government agencies and economic consultancies around the globe.

Reviving the concept as the centerpiece of an economic revolution today are economists Gale Pooley, of Brigham Young University–Hawaii, and Marian Tupy, of the Cato Institute. As Pooley and Tupy show, the more the population grows, the more abundant so-called resources become.

Since 1980, while the global population grew by 75 percent, the cost in time prices of 50 crucial life-sustaining commodities dropped by 75 percent. By Pooley and Tupy’s measure, abundance of foods and fuels grew some 500 percent.

Measured in time prices, today’s living standards ride on a crowning golden tide of creativity. The data collected by Pooley and Tupy are conclusive. For nearly a century and a half, true economic growth measured in time prices has been rising at close to 4 percent a year.

In the face of all the inflation and runaway debts and sub-zero interest rates, the true growth rate may have even increased. The spearhead has shifted from California to China, India, and even Africa—but time prices shrink everywhere entrepreneurs are permitted to invent and create.

Distributed equally to all at 24 hours a day, irreversible and immune to double spending, time is egalitarian. Indeed, time prices show a rising tide of equality. From having to spend every waking hour chasing and collecting food to live, a typical human today earns his food in less than an hour. As Pooley shows, the plummeting time prices benefits the peasant who gains as much as seven hours a day of free time far more than it does the billionaire who gains a matter of minutes and seconds (while most of his wealth remains illiquid and serving the needs of others). This entrepreneurial creation in ever shorter time continues, despite academic denials, political ululations, and doomsday Adventists on the mountaintops of the media.

Nonetheless, because virtually no one has any real understanding of the sources of his good fortune—including the leading exponents of capitalism—we are in danger of letting it slip away. An acute cognitive dissonance is actively disabling the principles and institutions of a once free enterprise. This ultimately springs from a divergence between ideologies and practices of capitalism.

This problem was in the air at least 250 years ago, if not earlier. Suggesting an upper-class disdain for “men in trade,” Adam Smith expressed his belief that free enterprise can prosper despite their selfish “rapacity” through the “invisible hand” of the market.

Smith, however, did not name the system “capitalism” or define its operations in terms of economic classes. That was Marx in Das Kapital. Expounded in four dense volumes, with the first published in Germany in 1867 and the rest edited from his notes by Friedrich Engels, Marx’s work launched the term. And it followed Smith in an attempt to root and anchor capitalism in materialism.

The central dogma of materialism is that all human outcomes are ultimately explicable through the laws of physics and chemistry, filtered by Darwin’s theory of survival of the fittest. It is a flat-universe theory without the imaginative heights of individual creative minds.

It is a fundamental mistake that defies the very etymology of the name. Marx defined capital as embodied in machines and resources—yet the word and system derive from the Latin word caput, meaning “head.”

Free enterprise is supremely a mind-centered system, with material resources essentially as infinite as the atoms in the universe. What governs economic growth is human creativity, in the image of the creator. Creativity is not a machine; it is a miracle of mind, measured by its surprising outcomes.

In my book Wealth and Poverty, I note that “greed, as by an invisible hand, leads to an ever-growing welfare state.” As every citizen works to gain advantages from government, which in turn works to expand itself, an incentive-driven system tends toward socialism, not freedom.

Contra conventional wisdom, economics is primarily an information system, not an incentive system. The governing science of the 21st-century economy—reaching from physics to biology, from computer technology to genomics, from networks to industrial design—is information theory.

The theory defines information not as order, but as “surprise.” (This surprise is known technically as “entropy,” in a counterintuitive but mathematical parallel to the entropy of the second law of thermodynamics.) Using the tools of information theory, we can permanently refute the idea of an economy as a great machine or as a class struggle over material resources.

Building on the foundational unities of free-market economics—supply is demand; savings is investment; imports are exports; savings is debt—we can add three more redemptive identities to the panoply.

Wealth is knowledge, growth is learning, and money is time.

By treating capitalism not as an information system but as an incentive system, driven by rewards and punishments, the prevailing economics provides no simple way to answer the socialist charges that capitalism is driven by greed. It fosters the idea that entrepreneurs need to make billions to motivate or reward themselves.

Both defenders and critics of capitalism agree on the dominance of incentives. Writer and TV journalist John Stossel recently reported on a debate about the role of capitalist billionaires between veteran supply-side economist Dan Mitchell, of the Center for Freedom and Prosperity, and Robert Reich, former secretary of labor under President Bill Clinton.

“I hope that we get 100 new super-billionaires,” Mitchell declared, “because that means 100 new people have figured out ways to make the rest of our lives better off.”

Reich replied that he would like to “abolish billionaires” through a wealth tax. “Entrepreneurs like Jeff Bezos would be just as motivated by $100 million or even $50 million,” he claimed.

Trapped by the incentive model that prevails among conservatives, Mitchell responded that with hundreds of millions less income and wealth, “maybe they just take it easy, . . . retire, . . . sail a yacht around the world, . . . consuming instead of saving and producing.”

But this misses the point entirely. Under capitalism, capital migrates not to those who can spend it best but to those who can expand it best. To expand capital—to enrich many lives, as Mitchell says—requires information, knowledge, and experience, not merely incentives.

Seeking to replicate the determinism of Newtonian physics, economists have eclipsed the creativity of entrepreneurs, which, as Albert Hirschman of Princeton wrote, “always comes as a surprise to us.” (“If it didn’t,” he added, “we wouldn’t need it and government planning would work.”) By banishing surprise from economic models, economists banished creativity as well. It became explicitly exogenous and hidden in the advance of science and education. Entrepreneurs were left shuffling chemical elements.

Economics thus mostly missed out on the prime tools and insights of the science of modern technology, from computers and communications to biotechnology and pharmacology.

In a 1938 paper titled “A Symbolic Analysis of Relay and Switching Circuits,” Claude Shannon formulated the integral steps for information theory that eventually allowed for the development of the microcomputer and the Internet. A 22-year-old MIT student at the time, Shannon demonstrated that basic switch components, common throughout the telephone and embryonic data-processing industries, could be organized to perform the algebraic logic of George Boole, the 19th-century mathematician who invented the symbolic logic that still informs modern computing. Shannon showed that if data were translated into binary “bits” and “bytes,” they could be processed by rudimentary switching circuits.

His thesis two years later, “An Algebra for Theoretical Genetics,” extended the model to biology, estimating the information in the genetic code. Although Shannon was cautious in applying his theories beyond computation and communications, he was one of the first to see the genome as an information system.

Shannon spent the war at Bell Labs, writing an immediately classified theoretical paper on cryptography, a kind of inverted information theory focused on noise. At war’s end came two 1948 breakthroughs at Bell Labs: the invention of the transistor (facilitating data-processing), and Shannon’s foundational paper on the laws of networks, “A Mathematical Theory of Communication.” This paper, which grew out of his wartime work, defined and measured the information that can be transmitted across a carrier in the presence of noise. Because the communication can cross space (in wires or air) and time (in memory devices), the theory can address the transactional complexity of economics.

Surprise is central to Shannon’s information theory. But as human knowledge grows through experiment and creativity, Shannon’s measure of unexpected bits and “surprisal” can mathematically capture economic advance and unexpected profit.

Meanwhile, a form of information theory entered economics through Friedrich Hayek’s canonical essay, “The Use of Knowledge in Society.” Published in the American Economic Review in September 1945, it ignited a conflagration of insights that won at least two Nobel Prizes and integrated information theory with our understanding of money.

In Knowledge and Decisions, published in 1980, Thomas Sowell expounded on the argument that wealth is essentially knowledge, not material resources—thoughts, not things. He wrote: “The Neanderthal in his cave had access to all the material resources we have today.” The difference between the Stone Age and ours rests entirely on the accumulation of knowledge.

With wealth defined as knowledge, it follows that economic growth is learning. Perhaps the most well documented of all business concepts is the learning curve, which holds that with every doubling of total units sold, costs drop by between 20 and 30 percent. Two major Boston-based consultancies—BCG and Bain & Company—have demonstrated learning curves across the entire economy, for everything from trucking miles and iron ingots to lines of software code and transistors on microchips, from poultry eggs to dollars of insurance policies. This ubiquity is no coincidence. It is evidence that growth itself is essentially a particular kind of falsifiable learning, regulated by markets and bankruptcies.

Growth as learning shows the radical character of information theory as the appropriate concept for a dynamic and creative economy. In classical theory, the supply curve—signifying the relationship between prices and volume—rises as prices rise. In a static system, only higher prices induce more supply. In learning theory, the supply curve rises as prices drop. The progress of learning unleashes a spiral of ever lowering costs and expanding volumes, which in turn elicits more learning. As Pooley puts it, information theory “inverts” the supply curve.

While many economists have written about knowledge and learning curves in economics and business, they have yet to apply the now fully established science of information and communications to economics. In an economy, the structure of laws and contracts and money and financial institutions plays the role of a carrier in a communications network or a computer system.

In conveying information across an economy, money is pivotal. In order to guide and gauge the course of economic trade-offs and transactions, priorities and goals, money must be scarce. What remains scarce when all else is abundant is time.

Time pervades, governs, and constrains all economic activity. When you run out of money, you are really running out of the time to earn more. Money, then, is the way the essential scarcity of time is fungibly translated into all the transactions, investments, and valuations of an economy.

Also governed by the cadence of time, Shannon’s information entropy is bounded by the degrees of freedom commanded by the creator of the message—for instance, the number of symbols in an alphabet or code and the time available to compose messages. The more freedom and time, the more information that can be transmitted. Thus, the economics of information theory becomes a creed of liberty and creativity rather than a model of manipulative incentives and materialist greed.

Bearing information across the economy is money. Money is time, but time is not money. In order for it to enable fungible transactions across an economy, money must be invented and managed. It must be tokenized and become a low-entropy carrier for high-entropy creations.

The two ways that coins or tokens are conventionally managed are by quantity and by price. They can be fixed in volume or fixed in value. If money is managed by its volume or supply, as monetarists and central bankers widely recommend, change in demand must be expressed in money’s price. It becomes so volatile and unsettled that it can scarcely serve any longer as a vessel of information.

Money controlled by volume becomes a vessel of speculation rather than a measuring stick or unit of account and transactions. Losing its authority as a metric of value and economic truth, it becomes a magic wand for central bankers and politicians to manipulate the economy. As Hayek put it: “The root and source of all monetary evil is government control of money.” The only path to true money is to peg the price to a physical constant—time—and let the volume grow as much as enterprises see profitable ways to use it.

The most successful form of money invented by humans is gold. The time price to mine or produce gold has scarcely changed in millennia. As capital and technology are applied to mining gold, the gold to be mined recedes to lodes more remote and diffuse. In the past, a man with a sieve could pan nuggets of gold from an open stream. Today, miners extract metal from slag heaps and contemplate the ocean floor and meteors in outer space.

In response to the current collapse of money as a measuring stick, a new movement of financial and monetary innovation has sprung up from cryptography, which Shannon explained as merely another facet of information theory. Most of them suffer from the same flaw that affects fiat money: They are controlled by their volume. However, the rise of the digital economy has launched a new era in money as an information tool. Cryptocurrencies on blockchains address the two key crises of our economy—the hacking of the Internet by bezzles and spies, and the hacking of world monies by central banks.

Coming to the fore as a spearhead of world economic growth and progress is Shannon’s insight that information theory also applies to the coded DNA system in our bodies. This system translates the durable DNA codes into temporary RNA molecules to program molecular machines called ribosomes to produce needed proteins. This process may lead to a revolution in pharmacology. During the COVID panic it was crucial in the creation of new vaccines by the pharmaceutical companies Pfizer and Moderna. The learning curve returns as an explanation of the biology of our immune systems, which can learn from our encounters with new viruses and vaccines in a globalizing economy of capitalist creativity.

By banishing greed as a driving force, materialism as a philosophy, and class struggle as a principle, the information theory of economics permanently banishes Marx. It transcends the critical cognitive dissonance that reverberates through our economy and society.

In our failure to fathom the implications of information theory in economics, we are careening into life after capitalism. What, then, is our future? Marx’s decapitated “capitalism” currently riding mankind into a twilight zone of tyranny? Or could life after capitalism instead usher in a panoply of new knowledge and value unfolding in the darkness of time and creation?

Information theory enables us to see humans not as mere mouths to feed or bodies that prey on the planet but as minds that create in spirals of surprising providence.