Rather than diverting profits to politicians, entrepreneurs who conduct successful experiments keep their winnings. Thus they can extend their success into the future. Resources gravitate to those best able to use and expand them. The central law of capitalism, pace Thomas Piketty, is that successful capitalists, not politicians, control the reinvestment of capital. If the government controls, guarantees, channels, or directs investment, it is not capitalism. Pivotal to the investment process is interest rates. For entrepreneurs to control capital, interest rates must reflect its real cost rather than merely the cost of printing money. Otherwise the money printers will dominate investment.
We can sum up the new information theory of money and capitalism in eight principles:
1 The economy is not chiefly an incentive system, but an information system. Greed has nothing to do with it, but justice—a system that rewards truth and filters out falsehood—is crucial.
2 Creativity always comes as a surprise. If it didn’t, socialism would work. Information is defined as surprise.
3 Information is the opposite of order. Capitalist economies are not equilibrium systems but lively arenas of entrepreneurial experiment.
4 Money should be a standard of measure for the outcomes of entrepreneurial experiments.
5 Interference between the conduit and the contents of a communications system is called noise. Noise in the currency makes it impossible to differentiate the signal from the channel.
6 A volatile market shrinks the time horizons of the economy. Gyrating currencies and grasping governments are deadly to the commitments of long-term enterprise.
7 Analogous to entropy, profit or loss represents surprising or unexpected outcomes. Analogous to average temperature in thermodynamics, the real interest rate represents the average returns.
8 The velocity or turnover of money is not a constant. Therefore it’s not the central bank that controls the effective money supply but the free decisions of individuals as they accumulate knowledge and decide whether to spend or save their output.
In a just system of growth, a business must be open to bankruptcy as well as to profit. When government puts its thumb on the scales of justice, manipulating money through guarantees and other exercises of power designed to stimulate economic growth or protect assets, it stultifies this learning process.
In entrepreneurial experiments, the governing constraint is the scarcity and irreversibility of time. With infinite time, anything is possible. Finite time imposes the necessity of choice and prioritization. Time is embodied in interest rates (the money value of time), in budgets (bounded in time), in contracts (with dates and deliverables), and in accounts (time bound). In economics, time is chiefly represented by money. In the deepest sense, money is time. This is not merely a play on Ben Franklin’s maxim “time is money” but a truth about the necessary scarcity of money. As an instrument for keeping accounts, setting priorities, and evaluating opportunities, money must be a measuring stick rather than a magic wand. It cannot be expanded or contracted at the will of the sovereign. In order to explain a willingness to exchange real goods and services for it, money must be strictly limited in quantity.
Paradoxically, to serve as a store of value, money cannot be hoardable. A holder of funds can refrain from using or banking them. But if money is not invested or spent, it eventually becomes worthless as no goods are produced that it can purchase. Time is the quintessential Heraclitean stream; it cannot be hoarded. Time is the basis for Say’s Law—supply creates its own demand. In one way or another, depending on policy, savings are always invested or wasted.
As an economy grows, with ever more abundance deriving from ever more learning, only one resource grows relatively scarce in proportion. That resource is time. It is the most real and irreversible of all constituents of value.
The expansion of per capita wealth and income in an economy means an increase in choices and possibilities, ways of using your time, claims on your attention. Although some new goods and services increase your efficiency and some extend your years of good health, the growth of an economy inexorably presses in on the residual resource, the hours in your day.
These hours (and minutes and seconds) are what you actually spend or waste, invest or splurge, save or sleep away. Money offers an accurate measure of earnings and expenditures chiefly as it reflects these costs of time. These costs are tallied in two irreversible ledgers—physics and biology: the speed of light and the span of life. If it does not represent these fundamental scarcities of human life, our economics will diverge from reality and betray us and the cause of justice.