State of Innovation

Patents and Innovation Economics

Can Patents be a True Property Right When They Expire?

Opponents of patents often like to refer to them as a monopoly, which is a thoroughly discredited idea (see here, here, here, here, and here).  Another argument they often raise is that “real” property rights do not expire, they go on in perpetuity.  Since patents and trademarks expire after a certain econgrowth.smallperiod of time, they cannot be true property rights.

To answer this question, it is necessary that examine the nature of property rights more carefully.  You obtain property rights in something because you made it productive or created it.  Of course you can also trade your rights in something you created for currency and then contract to buy something else, thus obtaining property rights in the item.  Your rights in say land are limited by the activity you undertook to obtain those rights.  For instance, if you farmed the land and say put a house on it, then you have a right to continue those activities and ones reasonably related to them.  However, this does not mean that your property rights extend to the center of the earth or up infinitely into space.  It also does not mean you can put a huge pigsty on the edge your land next to your neighbor’s house.  Note this was/is true under common law, no need for regulatory law or home owners’ associations.

Property rights are part of the system of natural rights, which are based on the foundation of self-ownership or self-sovereignty.

Is man a sovereign individual who owns his person, his mind, his life and its products – or is he the property of the tribe …[1]

Capitalism: The Unknown Ideal, What is Capitalism, p 10.

Locke also based natural rights on self-ownership or self-sovereignty.  These ideas are not axioms but derived from observation and logic.[2]  You obtain property rights in something because you created it or made it productive.  Since you own yourself, you own those things you create, however the limits of your property rights are determined by what you created (made productive) and some practical legal implications.

When it comes to land, most people obtain property rights in the land because they farmed it or made it useful for habitation or both.  These property rights do not go on forever as commonly conceived.  Dead people cannot own something, only living people can have property rights.  When a person dies their property rights expire including their property rights in land.  The heirs do not acquire the property rights in the land (assuming they were not an active part of making the land productive), they just receive the first right to acquire the property rights in the land, by making it productive.  If they are unable to make the land productive or they are otherwise not a productive people they will quickly have to sell the land to someone who can make it productive.

You might argue that the law does not precisely follow the philosophical basis of the law and that would be correct.  However, the law has to consider factors that the pure philosopher does not, for instance, efficiency, evidentiary issues, and certainty of title.  If the ownership of land and other property were not passed to the heirs in the form of first right to acquire, then every time someone died there would be a free for all to acquire the land, etc.  This would lead to fights, both legal and physical.  This would defeat the legal goals of efficiency, evidentiary clarity, and title clarity.  However that is not to suggest that the system we have “inherited” for the disposition of estates is perfect or the best.

In the case of patents/copyrights the most philosophically correct position for the length of a patent/copyright (from this point forward I will just discuss patents) would be the inventor’s life.  However, this would cause all sorts of practical patents.  The patent for a first inventor could issue and one day later the inventor could die, while another inventor could live for another seventy years.  This would be unjust.  More importantly it would make it very difficult to verify if a patent was still active.  Last it would make it very risky to invest in company built around an invention that was patented.  Imagine that you are asked to invest in company whose main asset is an invention that could be worth hundreds of millions of dollars, however if the inventor dies tomorrow the company would lose its most important asset.  These practical realities of the law mean that patents should have a certain set period of time.  The patent cannot go on in perpetuity because the inventor’s heirs cannot make the asset productive as in the case of land, so they cannot reacquire the patent rights.  The US has tried out a number of different term lengths for patents.  Presently, it is 20 years from the date of filing and that makes it essentially uniform with the rest of the world.  My suggestion would be to make the term of a patent closer to half a person’s life, since most people do not invent things as a child and there is absolutely no macroeconomic evidence that stronger patents have ever inhibited the economy.

[1] Rand in other places states that Rights are based on the right to life.  She necessarily had to mean the right your own life, to be consistent with inalienable rights.  It is clear that she was not opposed to the idea of self-ownership and did not see this inconsistent with the idea of natural rights.  It is also easier to understand natural rights from a self-ownership point of view than a right to (your own) life.

[2] It is beyond the scope of this paper to explain the derivation of natural rights by Locke and Rand.

October 6, 2015 Posted by | -Economics, -Law, -Philosophy, Innovation, Patents | , , , | Leave a comment

Response to The Economist on Patents

Marshall Phelps wrote an excellent response in Forbes to an anti-patent editorial by The Economist.  The article is entitled Do Patents Really Promote Innovation? A Response To The Economist.  He provides overwhelming evidence that patents are the driver of new technologies.  I and others have shown that the reason the industrial revolution occurred when and where it did was because of the introduction of the first practical patent systems, i.e., property rights for inventions.  The article also points out that the most inventive countries are those with the strongest patent systems and these countries also have the greatest technology dispersion.  The article also points out that the patent system encourages the dissemination of information about technologies, which has been shown empirically and logically.  It is time the anti-patent crowd admit that their position is a matter of faith, not econgrowth.smalllogic an evidence.

I have one beef with the article when it says you cannot prove that patents lead to more inventions and you cannot prove a free market (with patents) leads to economic growth.  Both of these have been shown empirically and the causal connection is clear.  Property rights ensure that the creator benefits from their creation.  People have to work to live and when the product of their work is stolen from them, they cannot be as productive.  For more see my book Source of Economic Growth and my talk at Atlas Summit 2015.

September 18, 2015 Posted by | -Economics, Innovation, News, Patents | , , | Leave a comment

Capital in Disequilibrium: The Austrians’ Answer to New Growth Theory

This book, Capital in Disequilibrium: The Role of Capital in a Changing World by Peter Lewen, is supposed to be Austrian Economics’ answer to “new growth theory”, which recognizes that new human knowledge is the most important component to economic growth.  As opposed to the “old” ideas on growth which claimed economic growth was the result of increases in land, labor, or capital.  Old school growth theories focus primarily on increases in capital.  Perhaps the two biggest figures in new growth theory are Robert Solow and Paul Romer.  Robert Solow won the Nobel Prize in economics for his econometric study showing that technological change was the key driver in the US economy.  Sadly he then said technological change was not part of the study of economics, it was like background radiation and beyond our control.  Paul Romer takes over from Solow by making technological change part of the study and policy recommendation of economics.

humeThis book suffers from many of the same problems other economists who have explored new growth theory have had.  They attempt to graft the findings of new growth theory onto their preconceived ideas about economics.  For example, Robert Solow is a Keynesian so he has attempted to just tweak Keynesian ideas to fit this new information, instead of understanding that this new information required a whole new look at and approach to economics.  Paul Romer is what I would call a “mathematical Keynesian” and is also trying to fit a square peg into a round hole.

This book attempts to take the finding s of new growth theory and meld them into Austrian Business Cycle Theory (ABCT).[1]  ABCT claims that economic growth is the result of increases in capital/savings.  There is no evidence that increases in savings or capital in anyway result in economic growth and plenty of evidence to the contrary.[2]  Pasting some of the ideas of new growth theory onto ABCT neither solves the problems with ABCT nor adds anything to new growth theory.

The author’s ideas on scientific and technical knowledge come from Karl Popper, who has argued that knowledge is impossible.  This is not surprising as it is consistent with Hayek’s ideas of cultural evolution, which argues that reason is limited and it is conceit to suggest that anyone can use reason to determine a correct societal structure.  Both Hayek and the author are fans of David Hume (See Lewin’s youtube “Peter Lewin on Austrian Capital Theory – Part 1”).  David Hume you will remember said causality was an illusion and brought us the “is ought” problem in ethics.  In other words, Hume attacked the very basis of reason, logic, and ethics.  Hume is part of the Scottish Enlightenment, which elevated emotions above reason.  The Scottish Enlightenment underpins all of Austrian Economics.  The other philosophical tradition behind the Austrians is philosopher Franz Brentano who raised the psychology of the person to a primary.

It is not surprising then that the author concludes “The superior performance of capitalist economies cannot be logically ‘proved.’”  Under the author’s ‘implications for policy’ section we get this,

“It involves not only, or primarily, the addition of existing capital equipment but rather the introduction of progressively more technically advance equipment, the production of which is made possible by an institutional environment in which the discovery of such technical advances is encouraged.”

Interestingly enough the author never explains what encourages technological advances and he never even mentions property rights for inventions, i.e., patents.  Even Solow and Romer realize that they cannot ignore patents, however contrived their arguments are for dismissing them.

One of the reasons the author ignores patents is that he emphasizes what he calls “tacit knowledge.”  Tacit knowledge is something we know but cannot prove or of which we are not conscious.  This is perfectly consistent with the Austrian ideas that reason is limited or ineffectual.  As a result, he talks a lot about innovation and never mentions inventors.  He talks about organizations, but never individuals.  He talks a lot about production and ignores invention.  Austrians like to scream they are capitalist or free market, but they are certainly not pro-individualistic.  This is not surprising as this would require a commitment to the power of the individual mind to understand the world.  The author further reveals his collectivist ideas when emphasizes that the knowledge that is important to the economy is “social knowledge.”  The Austrians are collectivists.  They believe central planning interrupts the functioning of the process of gaining “social knowledge.”

This book does not contribute anything to new growth theory.  The only reason to read this book is to better understand the underlying principles of Austrian Economics, which are not pro-reason, pro-individual, or pro-capitalism (The economic system that occurs when the government protects individual rights.)

[1] A Graphical Introduction to the Austrian Business Cycle Theory, Gaurav Mehra,, accessed 9/8/15

[2] [This] technique has been applied to virtually every economy in the world and a common finding is that observed levels of economic growth cannot be explained simply by changes in the stock of capital in the economy or population and labor force growth rates. Hence, technological progress plays a key role in the economic growth of nations, or the lack of it.


September 9, 2015 Posted by | -Economics, Innovation, philosophy | , , , , , , , | 2 Comments

Praxeology: An Intellectual Train Wreck

One of the foremost economists in Austrian Economics is Ludwig Von Mises.  One of his major contributions was praxeology, which is  is the deductive study of human action.  I have been trying to better understand praxeology.  I have consulted numerous websites, papers, and videos on point.  Most of them either ramble on saying nothing or they spend all their time attacking logical positivists or others.  I decided to review a paper from the Mises website and a video on point.  Together I thought these were the best sources on slightly different points of praxeology.  The video was a lecture by Dr. Walter Block who is the Harold E. Wirth Eminent Scholar Chair in Economics and Professor of Economics at Loyola University New Orleans and Senior Fellow with the Ludwig von Mises Institute.  Below are statements from the paper (1-4) and the video (5-12), with  my comments below.  Note that my criticism of praxeology and Austrian Economics is not an endorsement of any other school of economics including classical, neo-classical, Keynesian, monetarists, etc.  The fact that I am critical of praxeology does not make me or mean I am a logical positivist.   Also my critique is not to suggest that there are no valid points made by Austrian Economics.


econgrowth.small1) “Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals.”[1]  “Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper . . . “[2]

How can you tell the difference between non-goal directed action and goal directed action, if you cannot say what goals should be pursued or will be pursued?  If the goals are random or allowed to be random, how can you be sure the actions are not random?  The answer is that there is no difference between non-goal directed action and goal directed action where the goals are random.  This is part of the value subjectivism of Austrian Economics.

What is the goal directed action of a person committing suicide?  Or a vandal?  Or a teenager on a joy ride?

The human action axiom is meaningless when it is impossible to judge the goal.


2) “Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.”[3]

This means that praxeology is a branch of Philosophical Rationalism.  Descartes created a system of physics just by thinking about the world.  It was internally consistent.  In other words it was just like praxeology and it did not describe the world and could not be used to predict or understand how something would work.

3) “Mathematical logic is appropriate to physics.”  But not to economics.  “In physics the axioms and therefore the deductions are in themselves purely formal and only acquire meaning “operationally” insofar as they can explain and predict given facts.”[4]

There are no axioms in physics.  Physics is a science and science starts with observations, not axioms.


4) “That Austrian School economics rests firmly from the beginning on an analysis of the fact of individual subjective values and choices.”[5]

Note that the paper says “individual subjective choices”, which means that the word subjective here is not that each person makes their own choices.  It means that there is no rational way to evaluate people’s choices.  This subjectivism is why all major figures in Austrian Economics do not think that natural rights exist.  They do not believe that ethics can be based on reason.


5) Economics is pure logic – no need to verify in the real world.

That would make economics a branch of mathematics (logic), not a science.  (Also see the video


6) While economics is based on pure logic, the lecturer argues it is science.

Dr. Block does not know what the definition of a science is.  Actually, I do not think Mises made this mistake of confusing math/logic with science.


7) Total profits equal zero in the economy is an axiomatic (theorem) tendency according to the professor.

If this were true we would still be living in the Malthusian Trap.  The definition of zero profit in the economy would mean that on average people are living on the edge of starvation.  Profit means that you produce enough to have a surplus.  But this does not have to bother Dr. Brock, because economics is not an empirical science, which is an oxymoron.

It appears the professor was attempting to summarize the zero profit theorem, which is based on perfect competition.  Perfect competition is a flawed concept that denies property rights, something it has in common with Austrian Economics.  I discuss the many flaws of perfect competition in my book Source of Economic Growth and also in my lecture at the Atlas Summit 2015.

If what the Austrians are trying to say is “in a technologically stagnant economy the total profits tend to zero.”  Then that is true and I discuss this in my book Source of Economic Growth.  The reason for this is the second law of thermodynamics (entropy).  It is also probably true in a technologically stagnant market, profits tend to zero for firms in the market.


8) The Zero Profit theorem cannot be falsified.

That is the meaning of non-empirical, but what is amazing is that he says this straight up and I showed above that in fact the theorem as he states it is in fact incorrect.


9) You don’t test that a triangle has 180 degrees?

Yes you do.  Obviously Block is not familiar with the book flatland.  In fact there is an experiment in astronomy that is doing exactly this.  See


10) Block is using econometric modeling.  Econometrics assumes that economics is empirical.  Block is correct to criticize logical positivism, but logical positivism is not a correct philosophy of science.  (Also see the video


11) Trade – both parties expect to profit by a trade is an axiom/theorem of praxeology according to Block.

While this is true, it violates the zero profit tendency.


12) Inputs to the economy are land, labor, capital, and entrepreneurs.

How are entrepreneurs a separate input?  Are not entrepreneurs just a combination of people and capital, at least in Austrian Economics?

The additional input and the only input of importance is human knowledge and when we are talking about economics that means inventions.



I only commented on the first 15 minutes or so of the video.  There were other errors, but explaining them would take too long.  Of course there were many valid points.

The bottom line is that praxeology is not a science and to the extent that Austrian Economics is based on praxeology it is not a science.  Block points out that there are sort of two schools of Austrian Economics and the other one is based on Hayek’s ideas.  Hayek rejected praxeology and his somewhat equivalent theory is his theory of Cultural Evolution, for more see the video Hayek: Friend or Foe of Reason, Liberty and Capitalism?  Cultural Evolution is an inherently collectivist that is based on the idea that reason is limited or totally ineffectual.  It is not a science either, since it rejects the use of reason.  No matter which branch of Austrian Economics that you investigate it is not a science.  The result is that it makes numerous errors, which I have detailed elsewhere, but include an improper definition of property rights, an improper definition of capitalism, the false model of the Austrian Business Cycle, and others.

Austrian Economics is not the only school of economics that is not a science.   However, if economics is to ever advance it has to be a science based on the nature of man and understanding that  his unique tool of survival is his ability to reason.  In my book the Source of Economic Growth I lay out the principles for a school of economics that is a science, that is consistent with Objectivism, and is consistent with Natural Rights.









September 8, 2015 Posted by | -Economics, philosophy | , , , | 10 Comments

Source of Economic Growth: The talk and the Book

Dale B. Halling’s new book Source of Economic Growth is now available.  This book examines the two most important questions in economics: 1) What is the source of real per capita economic growth, and 2) What caused the industrial revolution? The industrial revolution is important, because it is the first time any large group of people escape subsistence living (Malthusian Trap) and their incomes start to grow. By examining these econgrowth.smallquestions, the book devises a science of economics that is consistent with natural rights, the founding of the United States, and is tied to the biological reality of life.

Mr. Halling gave a related talk at Atlas Summit 2015 entitled The Source of Economic Growth.  No school of economic thought is consistent with Objectivism, which is why Ayn Rand, in the very first sentences of “Capitalism: The Unknown Ideal”, said “This book is not a treatise on economics. It is a collection of essays on the moral aspects of capitalism.” Patent attorney and novelist Dale Halling proposes a science of economics that is consistent with Rand’s philosophy. The path to that understanding of economics results from examining the source of real per capita increases in wealth, which puts man’s mind at the center of economics. No other school of economics puts emphasis on man’s mind, which is one reason why Rand had a tenuous relationship with even free market economists.

September 1, 2015 Posted by | -Economics, -Philosophy, News | , , , , | Leave a comment

Hayek: Friend or Foe of Reason, Liberty and Capitalism?

I have been accused of taking the Austrian School of Economics out of context.  Rather than range all over the topic, I will address one Austrian economist, Friedrich Hayek, primarily with respect to his epistemology.  However, his sense of ethics follows directly from his epistemology so this will be discussed.  As well, his metaphysics will be touched on.

My criteria of whether Hayek is a friend or foe will primarily focus on whether he is an advocate for reason (logic and evidence) as best defined by Rand and Locke.  I focus primarily on Hayek’s Theory of Cultural Evolution, which lays out his ideas on epistemology.  There are dozens of papers on this subject and below I will provide quotes from a number of papers that analyze Hayek’s theory.


Austrian economist, political philosopher, and winner of the 1974 Nobel memorial prize –[Hayek] spent a good part of his career developing a theory of cultural evolution. According to this theory, rules, norms and practices evolve in a process of natural selection operating at the level of the group. Thus, groups that happen to have more efficient rules and practices tend to grow, multiply, and ultimately displace other groups. The theory, of which Hayek himself was proud, is on all accounts central to his economic, social, and political project. In the present paper, I explore the history of this theory of cultural evolution. (Emphasis Added)

The History of Hayek’s Theory of Cultural Evolution, Erik Angner

Dept. of History and Philosophy of Science


It is clear from the quote above that ethics is a group level, not at the individual level.  The ethics of a group are random and the dominate ethical rules are determined by some sort of evolutionary success.  According to the paper this is not a side issue or something Hayek scribbled out that is separate from the rest of his ideas.

It is hard to believe that Rand or Locke would have been impressed with the idea that ethics are determined by the success of groups.


According to Hayek, reason was not the driving force behind cultural evolution, but rather co-evolved in the course of this process.  (Emphasis Added)

Hayek’s Theory of Cultural Evolution a Critique of the Critiques, by Horst Feldmann


This paper suggests that reason is the result of cultural evolution just like ethics.  It is hard to see Rand or Locke agreeing with this.



Hayek argues, however, that the demand for rational, conscious (“political”) control of the concrete particulars of social life is based upon a misunderstanding of the process of cultural evolution and on a hubristic and dangerous overestimation of the capacity of the conscious reasoning intellect. As we have seen, Hayek contends that civilization is not the creation of the reasoning mind, but the unintended outcome of the spontaneous play of innumerable minds within a matrix of nonrational values, beliefs, and traditions. The desire of modern constructivists to “make everything subject to rational control” represents for Hayek an egregious “abuse of reason” based upon a failure to recognize the limits to reason’s sphere of competence.63 Such limits, again, stem from the fact that reason is confronted by an immovable epistemological barrier: its irremediable ignorance of most of the particular, concrete facts that determine the actions of individuals within society. The constructivist’s main error is the refusal to recognize that reason is only competent in the realm of the abstract. Hayek observes that the “rationalist . . . revolt against reason is . . . usually directed against the abstractness of thought [and] against the submission to abstract rules” and is marked by a passionate embrace of the concrete. He sums up the constructivist error in this way: “constructivist rationalism rejects the demand for the discipline of reason because it deceives itself that reason can directly master all particulars; and it is thereby led to a preference for the concrete over the abstract, the particular over the general, because its adherents do not realize how much they thereby limit the span of true control by reason.”64 (Emphasis Added)

Hayek on the Role of Reason in Human Affairs, Linda C. Raeder, Palm Beach Atlantic University


“Matrix of nonrational values, beliefs, and traditions” are responsible for civilization?  It is clear that Hayek does not think there is anything special about Natural Rights or the United States or any other country or their values.  The best we can say is that it is the best based on its success at this time.

“Rejects the demand for the disciple of reason”?  This sounds like it comes straight from an environmentalist or a modern socialist.  It is clear that Hayek is not just talking about the limits of the knowledge of a central planner, he is attacking reason itself.  The best possible spin is that Hayek is only attacking reason with respect to knowledge of human affairs, i.e., economics, social sciences, ethics, law, political structures, literature and the arts.

It is clear from Hayek’s rejection of reason that he does not agree with an Aristotelian or Objectivist idea of an objective reality that is knowable.  At best Hayek’s metaphysics is consistent with Plato’s theory of forms, where we can only get a vague glimpse of reality.


“The picture of man as a being who, thanks to his reason, can rise above the values of civilization, in order to judge it from the outside . . . is an illusion.”83 For Hayek, morals, values, and reason are entirely natural phenomena, evolutionary adaptations which have enabled man to survive and flourish in his particular kind of world.

Hayek on the Role of Reason in Human Affairs, Linda C. Raeder, Palm Beach Atlantic University


Does the first sentence above sound like Howard Roark or Ellsworth Toohey?  Hayek is pushing the worst sort of collectivism.  It is a collectivist attack on the mind itself, on the independence of the mind based on reason.  Hayek would have stood hand and hand with the Catholic Church in condemning Galileo to death.


For Hayek, the rules of morality and justice are the same as they were for David Hume: conventions that have emerged and endured because they smooth the coordination of human affairs and are indispensable, given the nature of reality and the circumstances of human existence, to the effective functioning of society.87 For Hayek as for Hume the rules of morality and justice are not the products of reason and they cannot be rationally justified in the way demanded by constructivist thinkers. And since our moral traditions cannot be rationally justified in accordance with the demands of reason or the canons of science, we must be content with the more modest effort of “rational reconstruction,” a “natural-historical” investigation of how our institutions came into being, which can enable us to understand the needs they serve.88

Hayek on the Role of Reason in Human Affairs, Linda C. Raeder, Palm Beach Atlantic University


Morality is not based on reason according to Hayek, it is based on convention.  David Hume was the philosopher that came up with the ‘is-ought” problem in ethics that is the basis for moral relativism.  Solving the “is-ought” problem was one of the major accomplishments Rand’s ethics.

Hume also attacked cause and effect and therefore reason, arguing that the best we can say about events is that they are closely related or probablistic.  I consider Hume worse than Kant, partly because he is more understandable than Kant and because he inspired Kant.  Here is what Rand had to say about Hume.

“If you observe that ever since Hume and Kant (mainly Kant, because Hume was merely the Bertrand Russell of his time) philosophy has been striving to prove that man’s mind is impotent, that there’s no such thing as reality and we wouldn’t be able to perceive it if there were—you will realize the magnitude of the treason involved.”


F.A. Hayek was the chief conduit through which Hume’s moral, political, and social theory entered the mainstream of modern libertarian thought. In his article “The Legal and Political Philosophy of David Hume” (originally presented as a lecture at the University of Freiburg on July 18, 1963), Hayek bemoaned the fact that Hume’s legal and political philosophy had been “curiously neglected.” In addition to being “one of the founders of economic theory” and the greatest British legal philosopher before Bentham, Hume “gives us probably the only comprehensive statement of the legal and political philosophy which later became known as [classical] liberalism.”  Self-Interest and Social Order in Classical Liberalism: David Hume, by George Smith, formerly Senior Research Fellow for the Institute for Humane Studies, a lecturer on American History for Cato Summer Seminars, and Executive Editor of Knowledge Products. Smith’s fourth book, The System of Liberty, was recently published by Cambridge University Press.


This clearly shows that David Hume was a big part of Hayek’s philosophical background.  Bentham is Jeremy Bentham, who is considered the father of utilitarianism and is known for being an intellectual father of the utopian socialist movement in England.


Perhaps no other area of Burke’s and Hayek’s thought is as congruent as their understanding of the role of reason in human affairs; their views are so close as to suggest that Hayek’s thought on this issue is merely an elaboration, although quite an extensive one, of Burke’s theme. Hayek developed several of Burke’s most crucial insights: 1) the priority of social experience (or “tradition”) over reason; 2) the notion that inherited social institutions embody a “superindividual wisdom” 22 which transcends that available to the conscious reasoning mind; and 3) the impotence of reason to ‘design’ a viable social order. (Emphasis Added)

The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek:A Critical Comparison, Linda C. Raeder is Associate Editor of HUMANITAS and a Research Associate at the National Humanities Institute


Here is another attack on reason, an appeal to collective reasoning and another statement that reason is impotent.


Burke and Hayek, then, shared a common enemy as well as a common understanding: Enlightenment rationalism. Perhaps the most characteristic attribute of Enlightenment thought was its cavalier dismissal of ‘irrational’ tradition as mere superstition and prejudice.

The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek:A Critical Comparison, Linda C. Raeder is Associate Editor of HUMANITAS and a Research Associate at the National Humanities Institute

This statement makes it clear that Hayek was anti-reason and anti-enlightenment.


Hayek, by contrast, is a critic of what he calls ―constructive rationalism.‖2 His concept of rationalism is somewhat idiosyncratic, and is not equivalent to Rand‘s conception of reason. Nevertheless, it leads him to claim that ―no universally valid system of ethics can ever be known to us,‖3 which is obviously not consistent with her view. For Hayek, moral rules have a status lying ―between instinct and reason.‖4 (Emphasis Added)

Symposium: Rand and Hayek on Cognition and Trade

Rand versus Hayek on Abstraction

David Kelley The Atlas Society


This is another case discussing how Hayek did not think that ethics were based on reason or that reason could ever tell us anything about ethics.

This case for market freedom is essentially negative. Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system. But the inescapable ignorance of would-be planners excludes that possibility: ―If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.‖10

Symposium: Rand and Hayek on Cognition and Trade

Rand versus Hayek on Abstraction

David Kelley The Atlas Society


Hayek is not pro-liberty, at best he is pro-tradition, which is why it is not surprising to see so many religious people affiliated with the Austrian School of Economics.  He is anti-reason and specifically bases his justification for ‘free markets’ on the limitations of reason generally and on the inability of reason to create or understand morals.  His defense of the pricing mechanism of free markets is based not on liberty but on the idea of spontaneous order.  More fundamentally, Hayek bases his justification of the pricing mechanism on tradition and utilitarian grounds.

Hayek’s metaphysics appear to be Platonic, which is incompatible with Rand and Locke.  His epistemology is more consistent with Hume or Kant than Rand or Locke.  You might argue that Hayek was only discussing the limits of reason with regard to social sciences, however at the least he applies it to all areas of human interaction, which includes ethics, the law, and the political realm.  This means he is against Natural Rights and Locke, which means he is against capitalism.  Capitalism is the economic system that arises when the law protects people’s natural rights, particularly their property rights.  Hayek does not recognize property rights, at best he recognizes societies’ property conventions, which means he cannot understand capitalism.  This is more than enough for me to damn Hayek as an enemy of capitalism and a foe.

In my opinion, Hayek’s esteem of Hume, Bentham, and Burke point to a much deeper antipathy to reason.  His ethics is essentially majority rules with the modifier of natural selection.  He specifically thinks it is the most absurd folly to think any one person can use reason to judge a society.  This is consistent with his intellectual compatriots Hume and Burke.  Hayek’s ethics is perfectly consistent with the moral relativists that say we cannot judge and an ISIS or a USSR or christianity.  His ethics are antithetical to Rand’s and Locke’s.  Hayek is clear that he does not think Natural Rights can be justified by reason and that Natural Rights cannot claim any special place in the world.  Hayek is not a friend of reason, liberty, or capitalism.  Rand’s estimation of Hayek is similar to mine, although I think I have spent much more time analyzing the issue.





I am willing to entertain any serious evidence that I have mischaracterized Rand or how the sources I am citing mischaracterized his arguments.  I am not interested in unsubstantiated claims that I have misunderstood or mischaracterized Hayek.  Do not complain that my standard is Rand and Locke, I told you that upfront.  I am not interested in arguments that talk about other leading figures in the Austrian School of economics.  Stick to the subject and provide actual evidence.


March 4, 2015 Posted by | -Economics, -History | , , , , , , , , , , | Leave a comment

The Austrian Business Cycle Debunked

This video, The Austrian Theory of the Business Cycle | Roger W. Garrison, from the Von Mises University does a good job of explaining the Austrian Business Cycle Theory (ABCT).  The key point is that increasing the rate of savings (capital) results in increased economic growth in the future.  The theory was worked out by Von Mises and Hayek.  The foundation of the theory is very similar to classical economics, which held that economic growth was the result of increases in capital.  The video has a number of charts and graphs to make it look more scientific, however no empirical evidence is provided to support the theory.  Other work may provide empirical evidence, but I know of counter evidence as well.

This article will first discuss ABCT of recessions and some small errors in the theory.  Then I will show that ABCT is incorrect about what causes economic growth and its failure to explain economic history, particularly the Industrial Revolution.

Austrians are always focused on showing that Keynes economic theories are wrong, and they are certainly right about this.  Austrians argue that there is a trade between investment and consumption, which they call the sustainable Production Possibilities Frontier.  Keynesian theory would say there is no difference between consumption and investment.  Certainly there is a trade between investment and consumption.  The Keynesians somehow argue that by eating your seed corn you will be wealthier.  However, a minor problem with ABCT is that it equates savings with investment.  The two are not necessarily the same.

ABCT then states that recessions are caused by Central Banks (the Federal Reserve in the US) arbitrarily lowering interest rates below the market rate, which causes mal-investment and reduces the saving rate.  Unless we narrowly define saving as putting money in a bank, savers have a number of choices which are not directly affected by interest rates.  For instance, savers can put their money in stocks or corporate bonds.  The return on stocks and corporate bonds is more related to the success of the underlying company than the interest rate set by the Central Bank, so the disincentive to save is not a strong as suggested by the ABCT.  The second question is why does this cause mal-investment but increased saving does not.  In both cases the investment intermediary is a commercial bank.  Now if we were talking about direct government spending then the case is clear.  In that case the government is not subject to the market.  However, commercial banks are subject to the market.  If interest rates are lower because of additional savings or because the Central Bank set them lower does not change their loan approval process.  In addition, the ABCT completely ignores tax and regulatory policy.  Are Austrians really saying that recessions can only be caused by Central Banks setting interest rates too low?  Why not too high?  This is why Austrians are obsessed with what Central Banks are doing and seem somewhat oblivious to other issues.

These are not my real complaints with the ABCT however.  My real complaints are 1) recessions happened before there were Central Banks and 2) economic growth is not caused by increases in capital.  Central Banks are a fairly new creation and fractional reserve banks did not exist in the world until around 1650s.  The United States did not have a Central Bank until 1913, but there were recessions before that in the US.  There were certainly recessions in the world before there were banks, including one huge one called the Dark Ages.  ABCT fails to explain the source of all recessions, including the recession of 2001.

ABCT is also wrong on what causes economic growth.  Robert Solow did an econometric study of the US economy to determine how much of the growth was due to increases in labor, how much was due to increases in capital, and how much was due to increasing levels of technology.  According to Wikipedia

[This] technique has been applied to virtually every economy in the world and a common finding is that observed levels of economic growth cannot be explained simply by changes in the stock of capital in the economy or population and labor force growth rates. Hence, technological progress plays a key role in the economic growth of nations, or the lack of it

Robert Solow won the Nobel Prize in economics for this work.  (This is not an endorsement of everything Solow says)

I would change the bolded part to state that the only way to obtain real per capita increases in wealth is through increasing levels of technology.  This becomes more apparent if you look over longer timeframes.  If we had the same technology as our ancestors in 1600, even with today’s total capital, would we be any wealthier than our ancestors?  We would not live longer, we would not be able to produce any faster, the only difference might be that we had more savings to fall back on or disseminate existing technologies.  However there was very little technological change at the time, so the increase in technological dissemination would have been small.  As a result, we would be essentially no wealthier than our ancestors.  Our standard of living is defined by our level of technology.  I discuss this in much more detail in my upcoming book, “Source of Economic Growth.”

Note that the ABCT does not account for technological change.  As a result, the theory should hold up in a technologically static world.  However, this is totally inconsistent with economic history.  The Industrial Revolution started in Great Britain and the United States.  There is no evidence that these countries had larger savings or capital stocks than say France or China or Holland or Japan.  The Industrial Revolution was really a perpetual invention machine, driven by inventions not by capital.  The source of all wealth is the human mind.  The application of the human mind to problems of survival is called inventing, which is how we increase our technological level.

Austrian Business Cycle Theory does not hold up under scrutiny.  Austrians have misidentified the source of economic growth and have a defective model for what causes recessions. Naturally they prescribe the wrong medicine.  Austrian Economics is not pro-capitalism, it is not consistent with the enlightenment, reason, and science, which I have described in other posts.



PS: I mentioned above that the Austrians misdiagnosed the recession of 2001.  They love to say that Greenspan created a bubble economy, which implies that in fact there was no real economic growth in the late 1990s.  The narrative that Greenspan created a credit bubble by holding interest rates too low does not fit the facts.  The economic growth of the late 1990s was built on new technologies that have made our life immeasurably better.  Real incomes and industrial production rose significantly in the late 1990s.  In addition, the effective Fed funds rate in the late 1990s was between 5.5 and 6.5%, which looks tight by today’s standards.  The Federal Reserve’s balance sheet was stable.  There was an inverted yield curve in 2000, which happened as Greenspan was increasing interest rates.  The commodities index was falling slightly in 1999 and rose slightly in 2000.  M1 was essentially flat in the late 1990s and M2 was growing slowly.  The evidence is overwhelming that the recession of 2001 was not caused by Federal Reserve “printing” too much money.  In fact the evidence points to the idea that Greenspan was too restrictive and caused an inverted yield curve in his desire to cause the stock market to cool off, which caused the recession.  It is true that the stock market had gotten ahead of earnings, but recent experiments in economics show this is a common with new investors and is not necessarily the result of easy credit.



February 15, 2015 Posted by | -Economics, -History, Innovation | , , , , | 6 Comments

The Irrational Foundations of Austrian Economics

The Austrians, such as those on the Von Mises website, like to tout that they are pro-freedom, capitalists, and arch enemies of the socialists and Keynesians.  Strangely enough this means that they have aligned themselves with socialists in opposing property rights for inventors and attacking Locke’s ideas on property.  Even more fundamentally the Austrians seem to share intellectual roots with the socialist or more broadly the post-modernist movement, which is a reactionary movement opposing the enlightenment, reason, and science.  I have written on Fredrick Hayek’s anti-reason, anti-natural rights, moral relativist positions in Hayek vs. Rand: Patents and Capitalism.

However, Hayek was not the only Austrian with post-modernists roots.  Von Mises was clear that values and prices are subjective.  By this the Austrians do not mean that they are personal or that each person puts a different value on things, they mean unconnected in anyway with reality.  Von Mises also said that economics is a value-free science.  This may sound high-minded, but science is not value free.  Science starts with an objective reality, demands logic and evidence, and morally requires that scientist report data accurately.  These positions of Von Mises place him firmly in agreement with the post-modernists (socialists, Keynesians).  Some people think I am misinterpreting the Austrian position so here is a video of a talk from the Mises University that demonstrates that the Mises people are serious about the subjective theory of value.  They are not saying it depends on your circumstances, they are saying there is no connection to reality between prices or values in economics.  The meat of the video starts at 7:35 in which the speaker states “value is just a state of mind.”  At 7:57 he is clear that value has no extensive property, which means it is not related to the real world.  8:16 the speaker states that all we have is a state of mind – that value exists only in the mind of the individual.  9:23 value is a state of mind.  9:54 there is no relation between the external world (reality) and the judgments of our minds – this is as clear as it will get that the Austrians are ignoring reality and believe economics is separate from reality.  11:14 The speaker describes profit as subjective.

Of course this position cannot logically be held to be true so you will find contradicting statements in the talk.  Just like people who deny reality, meaning they deny A is A, the position cannot be held without contradiction.  But since they deny reality matters in economics, they free themselves from the science of non-contradictory thinking – logic.  This makes the Austrians consistent with the post-modernist (socialist) movement.  I cannot say that every Austrian economist makes this mistake, but it is the accepted position of the modern Austrian school of economics and it got its start with Von Mises.

The speaker is trying to destroy the intrinsic theory of value.  Classical economists followed the labor theory of value which is an intrinsic theory of value.  According to this theory the value of an item is the sum total of the labor that went into the item.  The Austrians are correct that the classical economists’ position was incorrect, but their solution is no better.  They want to say value is determined without reference to the real world – that is it is all in the mind of the valuer, while the classical economists said value could be determined without reference to the valuer.  Both are nonsense.  Objective valuation has to take the position of the valuer and the item being valued into account.  Ayn Rand has a great explanation of this topic in Capitalism the Unknown Ideal starting on page 13 I believe.

Capitalism is based in reality, reason, and the ethics of natural rights.  Austrians are not capitalists.

February 12, 2015 Posted by | -Economics, -Philosophy, Patents | , , , | Leave a comment


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