Wednesday, April 3, 2019

Information realism and economic systems

A recent blog (1) that brings attention to information realism in physics with an abstract thought that matter is "unnecessary garbage," in a universe driven only by information, is thought provoking. More tactically, such questions could be asked of economic systems, such as businesses and countries. Most identify economic systems based on financial metrics such as profits and GDP, but one could argue that these concepts are unnecessary garbage. There appears to be ample evidence for the failure of economic systems, chasing these tangible metrics, as they leak information and become devoid of it.

In the context of physics, matter is a distraction in a universe driven only by information. Same could be argued about economic systems. Profits and such metrics are pure distraction for viable economic systems. If they do not grow information, they can be predicted to fail with high confidence. The value of a system can then be determined by the information it holds and the expected growth in such information. The latter is more critical as economic systems live in a competitive pool of bounded growth in information and their success and failure largely depend on taking a share of that growth. Thus, success of an economic system does not depend on its balance sheet, income statement or even the quantity of countable resources it holds such as humans, computers and mining rights. Rather, it depends on its ability to grow information - private and public.

For most conventional systems, the idea that countable metrics do not matter could be shocking. More provocatively, systems that count what can be counted are bound to fail. Assets of an economic system, thus, can be defined as entities that hold information or have the power to grow information. As we move toward a regime driven by technology, it is important for the leaders to think about accounting in terms of information content and not tangible and countable units. Financial markets are quick to catch up and they become efficient lot faster than real markets and decisions, contrary to popular views. Real markets show high inertia to change and in this rapid and deep transition, traditional companies become risky as evident in their risk premia. Size does not matter but more importantly if information per capita is not growing in a system, its market value will decline rapidly.

The information tsunami is here. Most economic systems are ill-equipped to survive in it.