This is a review of Carl Menger’s book Principles of Economics published in 1871. I will be judging this book on three criteria: 1) Is it adhering to the philosophy of science? 2) Does it address the question of what is the cause of real per capita increases in wealth? and 3) Does it address the question of what was the cause of the industrial revolution? These last two questions are the most important in all of economics and it is impossible to write something that is profound if it does not address a profound question. I will also be analyzing Menger’s “subjective” theory of value and prices.
Philosophy of Science
Menger addresses this issue in the Preface. He discusses the remarkable advances of the hard sciences and the high regard in which they are held. He also laments that economics is held in very low regard.
This method of research, attaining universal acceptance in the natural sciences, led to very great results, and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge, and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science. (P.47)
Menger however never states why it would be improper to use the philosophy of natural sciences. He implies that he is using the “empirical method” however he never explains what he means by that. The rest of the book has almost no empirical evidence in support of Menger’s positions. Menger’s lack of clarity on this point is consistent with much of the rest of the book. This means that it is often possible to argue that Menger held two contrary positions and find support for both in this book. This in and of itself is support that Menger did not follow the philosophy of science, however it is a useful rhetorical tool. In addition, his major protégé, Ludwig Von Mises, explicitly rejects the philosophy of science, in favor of philosophical rationalism.
Menger’s major intellectual influence was Franz Brentano, an Austrian philosopher best known for his works related to psychology. Brentano wrote a book entitled Perception is Misception, in which he claims that perception is erroneous. “In fact he maintained that external, sensory perception could not tell us anything about the de facto existence of the perceived world, which could simply be illusion.” Since Menger considered Brentano a friend and intellectual influence and Menger did not refute this position, it is reasonable to assume that Menger was sympathetic to Brentano’s anti-perception idea. This anti-perception point of view is very reminiscent of Plato. Plato’s ideas are not consistent with science.
The overwhelming evidence is that Menger did not follow the philosophy of science. This means that none of the major Austrian economists, Menger, Von Mises, or Hayek based economics on the philosophy science. Austrian economics is not a science.
Source of Economic Growth
This section, The Causes of Progress in Human Welfare p. 71, is the part of Menger’s book I consider most important. It also appears to be the payoff for pages of description of first, second, third, etc. order goods. Even Menger admits that his definition of these is a bit vague, however first order goods appear to be consumables or consumer goods. Menger argues that economic growth is the result of creating more second or high order goods. This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists. Not only has this already been said by other economists, but it is wrong. He also has one throw-away line about human knowledge.
“Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.”
He never builds on this, he does not explore how human knowledge is created, how it results in increases in economic wealth, or what knowledge is important to economic growth. His followers, such as Mises also do not build on this, they all focus on increases in savings and capital as the cause of growth in the economy.
In a technologically stagnant economy adding more capital at best can lead to some sort of optimum output, but can never exceed this level. (I describe and provide evidence for this in much more detail in my book Source of Economic Growth). As a simple example, imagine Robinson Crusoe fishing with a spear. The spear is a second order good or higher under Menger’s approach. Now if Crusoe creates more spears will he have more fish? No, since he can only use one spear at a time. At best having more spears will allow him to replace his spear more quickly if he breaks or loses a spear. Another example is that if every farmer that can use a tractor has one, then giving them more tractors will not increase the production of first order goods. This has been shown empirically and Robert Solow’s paper (Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320) is just one of many that prove this.
Menger fails to answer the question of what causes real per capita increases in wealth.
Menger never mentions the industrial revolution in this book. The Industrial Revolution is the first time that people escape subsistence living (the Malthusian Trap) in large numbers. It is the most significant event in the economic history of the world and Menger shows no interest in it. By the time Menger wrote Principle of Economics the Industrial Revolution was at least seventy years old and had exploded in the United States. This shows a profound disinterest in the empirical side of economics. It would be like an astronomer ignoring and eschewing the telescope or biologist who refuses to do or even explore the results of dissections.
Menger does not compare the economies of different countries or the economy of a country at different times, despite the profound differences in the economies of countries around the world. This is not how a scientist thinks or works. Instead Menger examines propositions in his own head, like the monks of the middle ages arguing over how many angels can dance on a pin head. Menger’s style is completely consistent with Mises praxeology – philosophical rationalism.
The cause of real per capita increases in wealth is increasing levels of technology (new inventions) and the cause of the Industrial Revolution is legally enforceable property rights for inventions (patents) as William Rosen, shows in his excellent book The Most Powerful Idea in the World and I show in my book Source of Economic Growth.
Menger does not discuss inventions, technology, knowledge, patents or their importance in economics. Menger fails to add anything useful to the two most important questions in all of economics.
Menger is generally credited with the idea of subjective value in economics. This is described as a reaction to the labor theory of value described in classical economics, which is an intrinsic theory of value. Despite this many people have argued that Menger was not advocating a subjective theory of value. Note that when modern Austrians use the term subjective value they mean that values are disconnected from reality – they are peoples’ arbitrary decisions. The interesting thing is that in his Principles of Economics you can find support for both positions. For instance, if you want to argue that Menger was advocating an objective theory of valuation you can provide the following quotes:
Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115
Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs. p 116
Menger also makes this distinction between real and imaginary goods. He appears to be making a point about objective values, however he never does anything with these concepts once he introduces them.
Note that Menger never defines what he means by needs. Are needs anything someone wants? Menger never says. Then he talks about the satisfaction of needs. Is this a personally, subjective decision? Menger never says.
On the other hand if you want to say Menger was advocating the modern value subjectivism of Austrians, then you can find these quotes.
It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. P. 121
The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146
Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals. P.146
Another factor favoring the subjective theory of values is that Menger is clear that ethics and morality are outside the study of economics.
But it seems to me that the question of the legal or moral character of these facts is beyond the sphere of our science. P. 173
Here he is talking about the morality of charging interest, however it is clear that this statement is a more general statement about economics. This suggests that Menger’s ethics, like most Austrians, is some version of Utilitarianism, which means he rejects Locke’s and Rand’s Natural Rights. Another quote that supports this point of view is Menger’s ideas of property.
The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves. P.76
Property, therefore, like human economy, is not an arbitrary invention but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods. P. 97
The first quote is really Menger’s definition of property. Note that this over 200 years after Locke. It is a clear rejection of Locke and Natural Rights.
The second quote is a forerunner of the inane idea that property “rights” are socially useful tools for allocating scarce resources adhered to by Austrians.
Menger’s position on subjective value is confused. Note that this is not the work of scientist, which shows once again that Menger’s ideas are not based on the philosophy of science. Despite this Menger’s rejection Natural Rights, rejection of ethics in economics, and the direction his students took suggests that on balance Menger was an advocate of the radical subjective theory of value.
I undertook this task because a number of people I have respect for argued that Menger was not the same as Hayek or Von Mises. In addition, a number of well-known Objectivists have tried to reconcile Austrian Economics with Objectivism. I have analyzed in depth the irrational roots of the two main branches of Austrian Economics: 1) Hayek and 2) Von Mises. I have shown that the positions of Austrians on a number of positions are absolutely flawed including their position on property “rights”, the Austrian Business Cycle, their position on fractional reserve banking, and their position on intellectual property. Carl Menger has not proven to be the savior of this fall from grace. This is not to say that other schools of economics are better or that there is nothing useful in Austrian economics. For instance, Menger’s marginal utility is a useful concept, but hardly profound.
I found Principle of Economics boring, repetitive, and written in the pseudo-scientific style of many pop management books or psychological self-help books. This is consistent with other books I have read by Austrians. The best writer among the major Austrians is Hayek.
I did not force myself to read every word of Principle of Economics because it is boring, repetitive, and non-scientific. I will not apologize for not reading all of a book that is clearly not based on science. I also will not waste my time reading anymore books by Austrians. I know more about the underlying tenants of Austrian economics than many of its proponents, just as I know more about the underlying tenants of christianity than many of its proponents.
Objectivism and Austrian economics are incompatible. I think many Objectivists are fooled into supporting Austrian economics because they talk about free markets. Austrian economics is not the product of reason, the Enlightenment, and the philosophy of science. It is best described as a branch of the Scottish “Enlightenment”, which really was a counter enlightenment movement. If Objectivism wants to make progress in economic science it needs to wall itself off from Austrian economics.
 https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.
I was visiting the Neanderthal Museum in Mettmann, Germany, when I was confronted by a display of a homo sapien sapiens, or a modern man. The display explained that homo sapien sapiens have a brain that is only 2% of their mass, but consumes 20-25% of all the calories they take in. That makes modern man an incredibly risky evolutionary experiment, one that almost failed. Those calories and that brain do not provide any immediate evolutionary advantage, they do not allow humans to run faster, or give them stronger jaws to tear flesh, or a hard shell to protect them from predators. However, the ability to reason allows humans to create all these things and more.
It turns out for all those dieters out there that it does not matter whether we think hard with our brains or just leave them in idle. This means the brain has very high fixed costs, but very low marginal costs. It seems like something that a venture capitalist might invest in. This reminded me of the following connection between economics and evolution:
If humans did not invent, then the study of economics would just be the study of human evolution.
Now this might strike you as odd, however if I can convince you it is true or even plausible, you would have to admit that it would have profound consequences. Some of the most important discoveries are those that connect two areas of knowledge that were thought to be separate, such as electricity and magnetism, or geometry and algebra, or physics and chemistry.
Plants and animals adapt to their environment, while humans adapt their environment to them. In evolution when a plant or animal mutates (changes) so that it is better adapted to the environment, then their population increases (as does their range) until they again reach an ‘equilibrium’ between their food supply or resources and the size of their population. This idea was first proposed by Thomas Malthus with respect to man and Charles Darwin was the one that applied it to evolution.
Once the organism has reached this equilibrium, it either has to change again, or some other organism does so. Less successful organisms go extinct or evolve into other more successful life forms. Evolution is a process for producing those life forms that are best adapted at converting energy into life.
Most free market people have rejected Malthus’ ideas in the realm of economics, however it is important to point out that Malthus was correct for all of human history until the Industrial Revolution. Humans do not evolve biologically to become more successful, instead they create things, i.e., they invent. In many ways a man with a spear or bow and arrow is not the same thing from an evolutionary point of view as a man whose only technology is a stone hand axe, who is not the same organism from an evolutionary point of view as a man whose technology includes agriculture. Our inventions allow us to create a great diversity of beings that can survive in dry hot deserts, wet tropical forests, and frigid antic conditions. We can do this despite the fact that homo sapien sapiens are genetically very non-diverse. The point I am making is that:
Inventions are the equivalent of genetic changes from an evolutionary point of view.
Like other organisms when we changed to become more successful at converting energy into life our population grew. For instance, when man invented agriculture, the population of humans increased exponentially as did the territory over which man spread. This is exactly what would happen with a species that had a positive genetic change.
The sad point is that the humans who were part of the initial agricultural revolution were probably somewhat wealthier than previous generations, however that wealth went into increasing the population until the average person was no wealthier than before the agricultural revolution. This is known as the Malthusian Trap and it is where the average person’s (organism) income is just sufficient to keep them from starving to death or what people call a subsistence income.
This is a depressing perspective. How did humans ever escape the Malthusian Trap? Extrapolating from what we have learned, it is clear that humans had to increase their technology (new inventions) faster than their population grew. In other words, we had to do more thinking (inventing) and less procreating. Modern economic research has confirmed this. Robert Solow won the Nobel Prize in Economics for a paper that showed exactly this. He studied the sources of economic growth in the U.S. economy and found that it was not increases in land, labor, or capital, but increases in the level of technology that increased real per capita incomes.
This has the following implications for economics:
- The per capita wealth of a technologically stagnant people will be stagnant or declining.
- The only way to increase real per capita incomes sustainably is to increase our level of technology.
- The only way to increase our level technology in the long run is to create new inventions.
The first statement has a perfect analogue in evolution, if you replace technology with genetic changes and per capita wealth with increasing population: a species that does not evolve will have a stagnant or declining population. The reason I suggest that that income (population) will fall is because of ‘entropy.’ In my book Source of Economic Growth, I make an analogy between entropy and the classical economics idea of diminishing returns, however that is beyond the scope of this article.
This area of economics is called bioeconomics or thermoeconomics. Most of the economics profession has ignored this area of study, probably because it usually devolves into successive proofs that we are doomed by the Malthusian Trap. Despite this I think there is much to be learned in this area. For instance, Edwin Schrodinger’s failed attempt to tie life to entropy is eye opening. An interesting economist in this area is Gregory Clark, who wrote Farewell to Alms. I do not agree with all his conclusions, but he asks the right questions, which is more important that having the right answers to the wrong questions. Clark’s analysis of the results of economic policies in an economy stuck in the Malthusian Trap is unassailable.
Economies today are hamstrung by absurd regulations and there would be an immense, but one-off benefit in freeing up the economy. Then the question arises—once completely free, how does this economy continue to grow? Statement II follows from I and has an analogy in evolution: The only way for a species to increase its population (in the long run) is for it to evolve (change, mutate). Most economists want to place their emphasis on manufacturing and trade. Manufacturing and trade are about the dissemination of new technologies (or replacement of worn out equipment) they are more similar to increasing the population of a species and spreading out its territory once the species has had a successful mutation.
People can only increase their level of technology by creating new inventions, which means they can only become wealthier by inventing faster than their population increases. Now this is a confusing statement, because population can be counted easily, but what does it mean to say that inventions or technology are increasing and how does that compare to the population. We know that the increases in productivity due to the new technologies must be greater on a percentage level than the increases in the population for per capita incomes to grow. One of the interesting self-correcting outcomes of this proposition is that the more people there are, the more likely someone will come up with a new invention. This means that a declining population or even a stagnant population is not the driver of real per capita increases in wealth. Indeed, declining populations often also lead to a problem in the demographic pyramid—the ratio of the very old and infirm to the productive.
The key question in economics is how do we encourage people to create these positive mutations (inventions)? In the history of the world, the rate at which new inventions were created was roughly proportional to the size of the population and somewhat to population density until the Industrial Revolution. It is also clear that inhibiting peoples’ right to act freely will inhibit the creation of new technologies. It was not until around 1800 that England, and then, the United States, created an explosion in the rate of new inventions on a scale the world had never seen. This resulted in large numbers of people escaping the Malthusian Trap for the first time in history. What these countries had in common is that they created effective property rights for inventors for large numbers of people for the first time in history.
Inventing for humans is analogous to genetic adaptations in other organisms. Originally, human inventions resulted in population increases, just like successful adaptations in other species resulted in population and territory increase for them. A technologically stagnant human civilization is like a genetically static species and in both cases their population (or income) will be flat or declining. The study of economics is about how we create, produce, and distribute these inventions (genetic adaptions). If humans did not invent then the only way for us to become more successful would be genetic adaptation, which would mean that the study of economics would be the same thing as the study of human evolution.
Mr. Halling discusses these ideas in more depth in his book, Source of Economic Growth.
 Other animals have brains with a similar or greater brain to body mass ratio, but humans consume the most energy as a percentage of total calories on maintaining their brains.
 The term invention is poorly defined in common usage and in economics and law. An invention is a human creation that has an objective result. A human creation that has a subjective result is art.
 The word entropy here is analogous to that used in physics and chemistry, but not exactly the same. In fact, the way entropy is defined in these areas is not perfectly consistent, but that is the subject of another article.
 The two most important questions in economics are: 1) What is the cause of increasing real per capita income, and 2) What was the cause of the industrial revolution (the first time people escaped the Malthusian Trap)? I believe I got both of these questions from Professor Clark.
 It is hard to find great examples of this in human history but three are the Vikings on Greenland, the Anasazi around Chaco Canyon, and the European dark ages.
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 period 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 …
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. 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.
 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.
 It is beyond the scope of this paper to explain the derivation of natural rights by Locke and Rand.
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 logic 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.
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.
This 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). 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. 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.)
 A Graphical Introduction to the Austrian Business Cycle Theory, Gaurav Mehra, https://mises.ca/posts/articles/a-graphical-introduction-to-the-austrian-business-cycle-theory/, accessed 9/8/15
 [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. http://en.wikipedia.org/wiki/Growth_accounting.
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.
1) “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.” “Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper . . . “
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.”
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.”
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.”
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 https://www.youtube.com/watch?v=aTXxvWa11Lg).
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 http://www.mathaware.org/mam/05/shape.of.universe.html.
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 https://www.youtube.com/watch?v=aTXxvWa11Lg)
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.
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 questions, 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.
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.”
http://www.libertarianism.org/columns/self-interest-social-order-classical-liberalism-david-hume 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.
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