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How, for example, does game theory deal with the situation in which repeated games unfold under dynamic conditions of information diffusion? Here, information is asymmetrically distributed when the first game takes place and is common knowledge by the time the last game occurs. This situation can also be made to work in reverse. Information can start off as common knowledge in a first game and become asymmetrically distributed by the time the last one occurs. Williamson takes this latter outcome as resulting from a ‘fundamental transformation’, wherein an initial large-numbers bargaining process by degrees gets transformed into a small-numbers bargaining process.

A downward vertical movement across isoquants and toward the origin in the diagram, by contrast, represents the generation of insight, the extraction of information from data to create new, more abstract knowledge concerning the structure underlying phenomena. This second movement—the joint effects of pattern recognition and computational activities—is discontinuous, reflecting the unpredictable nature of creative insights (Miller 1996). It makes it possible to reach the same output levels as before with less data processing and hence a lower consumption of data inputs.

Once you admit learning, development, and evolution into the picture, you admit irreversible processes. But our scheme also suggests that the entropy concept is but one side of the coin when dealing with the second law of thermodynamics. Irreversible processes can lead to emergent, order-creating outcomes as well as to entropic ones, those that allow living things to jump across isoquants and move toward the origin in pursuit of factor savings (Brooks and Wiley 1986). Although we may agree with Shapiro and Varian when they observe in Information Rules (1999) that the information economy has not yet repealed the laws of economics, we feel that it poses explanatory challenges to economics—well captured by the way that novelty and new knowledge emerges in living systems and organizations—that the discipline has yet to take on board.

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