Innovation: Making Information Valuable. In the previous posting “On Value, Capital and Energy” we sought to make sense of this short definition of innovation by considering what is meant by “Value”. For this we needed to go back to the works of the classical economists who concerned themselves very much with this particular subject. Now we shall do the same for “Information”.
To state that information can be valuable is hardly controversial. Information can be extremely valuable. Knowing in advance information that could affect the price of a company’s shares can lead to financial gains. Insider trading is illegal as it distorts a stock market in which all agents are intended to have equal access to the same valuable information. High frequency trading can expedite access to this information by milliseconds, a short interval that also can be important.
In On Value, Capital and Energy the creation of value is associated with the bioenergetics of the innovator, and specifically with the treatment of value as a form of potential energy. To discuss information in the same terms it is necessary to form a similar association between information and energy.
Information is physically encoded in many forms. Indeed whether it is the storage of information in DNA, in computer memory or in the neural circuits of people, one can assume that information is at least in part formed through the organisation of some physical material.
The organisation of a physical system with higher information content is associated with the system’s energy. This is most famously demonstrated by Maxwell’s Demon. In 1867 Scottish physicist James Clerk Maxwell imagined an intelligent being capable of operating a trap-door in a wall inside a closed gas-filled chamber and thereby segregating fast moving “hot” gas molecules from slow “cold” ones where normally these molecules are randomly mixed together. By making this selection the Demon can produce a machine that does mechanical work (a Szilard Engine) – in doing this the Demon can convert pure heat to mechanical energy. This is impossible according to the 2nd law of thermodynamics – it suggests perpetual motion is possible and that time can reverse its direction!
Figure 1: Maxwell’s Demon
It appears that to resolve this Maxwell’s Demon paradox, the intelligent Demon must identify each fast moving molecule, operate the trap-door and then forget the information before repeating the cycle (or at least have a finite memory). It is in the act of deleting information that energy (heat) is released and the entropy of the universe is increased to remain compatible with the laws of thermodynamics. In a more practical sense, this same concept appears in Landauer’s Principle that has shown that the irreversible deletion of information in a computational operation must be accompanied by a dissipation of energy as heat. On the other hand, the replication of information does not necessarily require any additional energy input. Such considerations lead to a physical theory of information.
The deletion of information in a dynamic sense is the irreversible flow of information from its physical media of storage. If such an information outflow ends with the increase of entropy, it is reasonable to posit a hypothesis that information content in a physical system is linked to the system’s energy.
In the biological domain, the commencement of information replication could be considered to coincide with the origins of life. In this most primitive form, information must have been encoded in chemical sequences on molecular strands such as DNA, which must have had the essential and original property of self-replication, thereby automatically copying information and initiating a mechanism for population growth through replication. From this simple molecular replication has arisen the development of cellular entities where information content has increased and which is now encoding physical signals that determine the survival of the organism. Evolution of living systems can be considered as the development of the information content of an organism in response to environmental challenges it faces. In this case, one might consider evolution through natural selection as a means to increase the “value” of this information.
This association of innovation and evolution is further discussed in New Economics of Innovation.
The information content of living organisms has thus evolved to become a principal determinant of their survival. Information that confers advantages to an organism to be better adapted to its environment, as might be achieved by a mutation of genetic coding for example, could be construed to have value to the organism and indeed to the species. One genetic sequence is then not the same as another, as the more valuable is associated with superior attributes. This long process of biological evolution has led to the eventual development of an intelligence extending the concept of value beyond that which favours simple genetic replication and into epigenetic mechanisms by which information allows organisms to be increasingly responsive to their environment. Information such as an aversion to snakes will aid survival, and this valuable information is shared as a natural reaction by many different biological species.
From this epigenetic well-spring, the value of information can thus be traced as an energetic phenomenon, driven by a growth of the brain and the intelligence that the organ bestows, and which is a consequence of metabolic biological energy transformations.
At some point between the emergence of self-replicating biomolecules and the world as we know it today economic activities became established, in which the notion of value is further enlarged to be related to the production and trade of goods and services. Here information must be embedded in the traded commodities and transactions are based on an appreciation of value that this information conveys.
In an advanced society, the path has moved away from value as being related directly with survival, to a more extensive set of social objectives that we might list as being the ingredients of daily life.
The bioenergetic transformations converting food to the physical and mental activity of the worker have been described. The transformation of the raw materials into the finished goods through expenditure of the worker’s energy fundamentally is a process of adding information and through this adding value. Capital deployed in the production facility serves to improve productivity by enhancing this value creation.
As a component flows down a production line, at each stage with more labour and capital deployed, more value is added as more information content is added into the component. Finished goods will then be shipped through global distribution channels, with the additional energies of labour and transport combining to further increase the value of the goods as they are brought into proximity with their eventual customer. At the same time, information about the products is flowing through multiple marketing and advertising channels, with the intention of further enhancing the value of the products in the minds of the consumer. Either by the information gained by direct contact with the goods or through the surrogate means of advertising, the value of the goods is perceived in the minds of consumers and compared with the price. If the comparison is favourable the goods can be sold and money should flow in the opposite direction as all intermediaries in the chain of supply are reimbursed.
We have developed a Value Surface representation in which the amalgamated perception of value for a population of consumers of a particular commodity can be linked to the energy involved in the creation and replication of this value. Now we are able to interpret the height of the Value Surface to be fundamentally related to the product information that is received by the consumer. Delete this information and the associated energy is lost, according to Laudauer’s Principle.
The role of the innovator and the entrepreneur is to ensure that energy expended on the fabrication of their commodities has created and disseminated information that is perceived to be of sufficient value for the goods to be sold at a price that satisfactorily reimburses the producers. The innovator’s job is to make the commodities easy to lift in a prevailing economic potential field. In other words: Innovation is Making Information Valuable.