Key to Value in the Knowledge Economy: New Information Equations
first published in The Street | Apr 5, 2016

There is an ancient Jewish theological text written during Roman times that makes a curious statement having direct bearing on our modern information economy. It may guide investors in their attitude to many companies.

The statement is: “If there is no flour, there is no Bible [i.e., spiritual life of ideas]; if there is no Bible, there is no flour.” (See: “Ethics of the Fathers,” Ch.3, verse 21).

The second half of this slightly odd statement is easier to understand in conventional religious terms than the first half. The writer is trying to say that if we don’t follow the Bible or religious ideology we won’t get sustenance (flour).

The first half of the verse is more peculiar, as the writer seems to say that if we don’t have and consume material goods, we won’t be able to gain spiritual insight. Seemingly a very materialistic statement.

Yet, what the writer was saying is that if we don’t have food and sustenance, we won’t be able to read the Bible in the first place or get access to a certain world of ideas.

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In other words, to put it into the terms of modern physics, it requires mass or energy to sustain us and hence allow us to have higher thoughts. The brain in this case turns out to be a brilliant mechanism for converting mass/energy into ideas and nonphysical thoughts as well as emotions.

This statement is quite visionary, and it underpins much of the economics of our information economy. There simply has to be some correlation between mass/energy and idea flow.

This process of conversion of mass to ideas in the human case is very complex, and the mass/energy can produce many different types of ideas: linguistic expression, mathematical insight, artist sentiments, theories about the physical world, political and economic ideologies, emotions as well as moral and religious thought.

But the same thing happens in a simpler format in a binary computer system. Electrical energy is converted via carbon brushes and silicon chips to data, logical analyses and nontangible information.

So it seems that the whole information technology-based knowledge economy is also predicated on this type of idea, that we need “flour” to generate non-physical data and analysis. And indeed computer scientists can measure exactly how much computer-processing capability a particular computer system can generate, for instance, in megabytes or gigabytes.

The computer scientist can then say how much energy is required to have produced that given processing level.

And if this broad correlation that mass/energy is proportional to idea flow/information volume is true, it also then may suggest something even more peculiar.

The first law of thermodynamics is the principle of the conservation of energy. It essentially states that the total energy of a given system is constant; energy can be transformed from one form to another but can’t be created or destroyed.

In other words, when we create, say electrical energy it is conversation of one type of energy such as oil, gas or wind turbines into electro-magnetic energy.

So if the total mass/energy of the universe remains constant, it might follow that the volume of total ideas and information processing in the world must also have certain related constraints. This is very hard to understand when it comes to something as intangible as ideas.

But it may certainly be the case that the stock of economically useful ideas and processing is constrained within our system precisely because of the principle of the conservation of energy. Any new idea only comes about by taking a piece of mass/energy and converting it, and thus perhaps also the total volume of mass/energy plus ideas must always be constant.

So perhaps(?) the total collection of ideas too is bound by the principle of the first law of thermodynamics.

Financially speaking, the point is that increasingly the modern investor is going to find value where he or she sees the conversion of mass/energy into economically useful forms of processing capability such as Apple or Microsoft.

Economist John Maynard Keynes himself envisioned something like this when he predicted that manufacturing would go the way of agriculture, i.e., requiring fewer and fewer human resources because all our food, and increasingly all our goods, would be machine-made.

He was right about this vision, though he thought this would usher in a period of semi-nirvana. It would solve, he thought, the central problem of economics, that resources are finite, and we would all end up living relaxed and largely work-free lives.

But of course Keynes missed one critical element: that the information age creates wealth for those who own technology and processing capabilities such as Microsoft co-founder Bill Gates. But for the vast majority of people, the jobs required become scarcer as fewer people are required.

This doesn’t mean that I am a Luddite about the IT revolution or even believe in radical wealth redistribution, but there is no doubt that the emerging information age itself can create a new form of inequality. Those who own the processing capabilities win out over those who find it increasingly difficult to land anything other than a relatively meaningless service job.

Any serious investor must focus on these ideas and be constantly aware of how a company shows its ability to convert mass/energy into useful information sources and processing capabilities.

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For example, the real value creation in banking is probably no longer financial product innovation, but the greater use of intelligent back-office processing systems, electronic/Internet-based marketing, greater electronic rapidity in transaction execution, and more and more subtle uses of often self-learning algorithms to measure risk or underwrite loans, credit or any transaction. Think of Chief Executive and Chairman Lloyd Blankfein’s statement that Goldman Sachs is slowly becoming really a technology-processing business.

And so it is that innovation in virtually every sector now comes from how effectively mass/energy is used to create processing and technology that enhances the economic efficiency of any given firm. Companies that achieve this most effectively will likely be the winners in our new economic age.