State of Innovation

Patents and Innovation Economics

Dale Halling – Economics, Evolution, and Rand’s Meta-Ethics: Atlas Summit 2016

D of the DK Halling authors of the Hank Rangar series has been selected to give talk on Economics, Evolution, and Rand’s Meta-Ethics.  This year’s Atlas Summit will be held in Las Vegas July 11-13 just proceeding FreedomFest at the same location.  Here is the description of my talk:

A scientific, Objectivist school of economics would start with the very nature of man as does Rand’s ethics. From an evolutionary and economic point of view the unique feature of man is that while all other organisms adapted to their environment, man adapts his environment to his needs. This shows that inventions are the evolutionary equivalent of positive genetic changes. It also shows that the key resource in economics is man’s mind. The relationship between Rand’s meta-ethics, evolution, and economics will be examined.

Presently my talk is scheduled for Tuesday, July 12 from 4:00–5:00 PM, however this is subject to change.  I have been told that I can invite anyone to my talk and they can hear my talk for free, although they will not be able to see the other fine talks at Atlas Summit.

AtlasSocietyNote that right now there is a $100 discount for early registration and this also gives you access to FreedomFest.

I hope to see many of you there.

February 8, 2016 Posted by | bioeconomics, Innovation, News | Leave a comment

Intellectual Capitalism: Fundamentals Part 1

This post is part of series on Intellectual Capitalism.  The first post in the series is Intellectual Capitalism: Philosophy.

 

 

Every science is defined by the questions it asks.  According to a sampling of websites three of the major questions economics asks are:

1) What goods will be produced?

2) How will the goods be produced?

3) For whom are the goods produced?

Under free market capitalism (the system of economics that occurs when peoples’ natural rights are protected by the government ) the answers are: 1) those goods that produce a profit, 2) by the people who want to make a profit by producing them, and 3) for those people willing to pay for them.  When I say pay for them, I mean by their own productive effort in producing other goods.  Under any other political system the answer is the government and then economics boils down to the psychology of those people in power – in other words it is arbitrary.

These questions and answers are pretty boring and provide no great insight into the world.  We could explore in more depth how the goods will be produced, but this is really a question of engineering and management.  We could ask why those goods produce a profit and eventually we will start studying supply and demand, and pricing.  These are the standard discussions of economics, however I still don’t think the questions being asked are very interesting.

The most important question in all of economics is:

What is the source of real per capita increases in wealth?

The second most important question in economics is:

What is the cause(s) of the Industrial Revolution?

The second question is important, because it is the first time in history that large groups of people escape the Malthusian Trap (living on the edge of starvation) and their incomes start to grow.

The answer to the first question is by increasing one’s level of technology, which can only be accomplished for the world as whole by inventions (human creations with objective results) the answer to the second question is Patents (property rights for inventions).

In my book Source of Economic Growth I provide copious evidence and logic for these answers and I will not repeat those here.  In this article I want to layout some of the fundamental principles of my system of economics, which I call Intellectual Capitalism.  These questions are much more profound than the ones posed by mainstream economics and more relevant to most people.

These questions and answers lead to a system of economics that is consistent with man’s unique nature; his ability to reason.  When man applies his reason to the problems of survival he invents.  Production, which is really about reproduction or replication, is not the driver in economics as the questions from mainstream economics imply.  In economics the chain of cause and effect is:

Invention comes first, then production, and then trade or consumption.

Keynesian economics focuses on consumption, so it is on the far wrong side of the cause and effect chain and as a result, almost everything taught by Keynesian economics is nonsense.  Keynesians will make the argument that you will not produce the hamburger until I order it, so consumers are as important as producers.  As I will explain in more detail below, try that living on a deserted island (Robinson Crusoe economics).  Most of economics focuses on production, which is better than the Keynesians but is an intermediate step and not what causes economic growth.  Generally, this branch of economics focuses on capital as the source of economic growth.  This has been shown over and over to be a mistake.  The paper that is given the most credit for showing capital is not the source of economic growth is Robert Solow’s “Technical Change and the Aggregate Production Function.” As econgrowth.smallI show in my book, Source of Economic Growth, the capital theory of economic growth does not explain the Industrial Revolution.  Some libertarians, such as Matt Ridley, have proposed that trade is the key to economic growth.  This is almost as bad as the Keynesians on the scale of cause and effect.  Other economists focus on monetary issues, such as central bank policies and financial markets.  Money is a way of facilitating trade or a way of transferring capital and is not the source of economic growth.  Now there have been inventions in finance that have contributed to economic growth including: fractional reserve banks, stock and bond markets, and limited liability corporations, among others.

 

Definition of Economics

With this background we can now define what the study of economics is: it is the study of how man obtains those things necessary to live.  There is no rational distinction between living and thriving from an economic point of view as I explain in detail in my book Source of Economic Growth.  Some people have objected that this definition is too broad.  For instance, they argue that this might include the study of engineering.  However, there is no reason to repeat other subjects and the various branches of engineering are not about the study of how people obtain the things they need, they are about how to apply science to solve various problems of invention, production, or distribution.  However the study of invention is definitely part of the study of economics.  Very little work has been done on the study of the process and principles of inventing.  I have discovered six laws of invention and a short preview of these can be found here.  A more detailed explanation can be found in my book, Source of Economic Growth.

An important point of this definition is that it makes it clear that Robinson Crusoe economics (a solitary man) applies.  The cause and effect of economics is probably most clear in the case of Robinson Crusoe economics, it can also be useful for analyzing many other situations.  For some reason when trade or money is added to economic discussions people think that magic happens.  As a result, when you are analyzing a problem in economics and you get stuck, remove money (or trade) from the equation and most of the  time this will make the situation clear.

 

Ethics in Economics

Many economists subscribe to the idea that if economics is going to be a science it needs to be value free.  There is no such thing as a value free science.  All sciences are built on an ethics and a philosophy.  At a minimum this includes a commitment to the idea that there are not any supernatural forces as the cause of what we observe, a commitment to the existence of cause and effect, and the ethics to honestly report the data (evidence) and to follow the evidence to its logical conclusion.  Some people may argue that this is not ethics or philosophy because these things are logical, however a short sampling of history shows that this ethics is incredibly unique in the history of humans and even today.

Different sciences may have other philosophical/ethical foundations.  For instance, medicine has the ethical limitation that doctors are not just studying the effect of disease, injuries, poisons, etc. on the human body.  Ethically doctors must use their knowledge to heal and save lives.  In various tyrannical regimes there have been doctors who have studied the effects of poisons or injuries or even the lack of love/affection on babies and these doctors have all been universally condemned.

Bad economic policies can induce more death and suffering than any doctor or group of doctors.  One only need look at the hundreds of millions of deaths that have been caused by economic policies that promote the various forms of socialism.  Economics is the study of how man obtains those things necessary to live.  Just as it would be unethical for a doctor to purposely cause injury to a patient in order to study the effects on the human body, it is unethical for economists to prescribe economic poison for their personal gain, or just because they think if would make an interesting experiment.  Thus the study of economics requires the ethical responsibility of searching for and prescribing policies that promote life.

 

Property Rights and Patents

This dispenses with the nonsense in economics for a need to define property rights in non-ethical terms.  Defining property rights in utilitarian terms is actually going backwards in history to the time when property “rights” were arbitrary grants by the King (government).  Property rights are an ethical concept and are earned by people when they create something useful for humans (or a single human).  The scope of these property rights is limited by the value the person has created.  The law may standardize some of these rights for practical reasons that are beyond the scope of this post.

Some people get confused about how this applies to employees or people who trade (buy) property.  For instance, I buy a house and the associated land, how does this give me property rights in the house since I did not build it?  The reason I have property rights in the house, is that I created something else of value, for instance let’s say a novel.  I trade my novel which I have property rights in for gold (money, currency) and I trade this for the house.  Part of my property rights include the ability to trade what I create for what someone else created.  So I have obtained property rights in the house because I created value.

In the case of an employee he creates value, but has agreed to trade the property rights he would have in the thing he created, let’s say part of an automobile, for a pay check (gold, money, etc.).  Some people are confused that there is no way the employee could have any property rights in the car he helped build because he did not own any of the parts going into the car.  That would be incorrect.  The employee would have a partial ownership in the car.  It is quite common for many people to have property rights in a single object.  For instance, multiple people may own a farm or thousands of people may own a corporation.  In the case of the employee he does not want (or the company is not willing) to have a situation with multiple owners, he wants to contract for immediately payment and relinquishs his property rights.

Now that we have a proper understanding of property rights we can determine if something is a real property right.  Is a taxi medallion a property right?  The question is whether the owner created value for the “rights” obtained with the medallion?  The government sold the medallion to the taxi company.  However, what did the government do to create the taxi medallion?  It limited other people from starting a taxi service.  That is not creating value and the money the taxi company paid to the city does not create value.  When someone trades a value for a non-value it destroys or at best just transfers the value from a producer to a non-producer.  The most common case of this is a swindler who takes value from the victim and provides nothing in return and this is what a thief also does.

A new invention is creating value and therefore a person obtains a property right in their invention.  Academics, Libertarian, Socialists, and Austrian Economists have filled the ether with numerous nonsensical arguments against patents.  I deal with these in depth in my books The Decline and Fall of the American Entrepreneur and The Source of Economic Growth as well as other posts on my blog and will not repeat them hear.

A property right can never be a monopoly.  Economist attempt to show patents or other property rights are monopolies based on perfect competition.  In fact they base their anti-trust analysis on perfect competition.  (I explain this in more detail in my book The Source of Economic Growth)  However, perfect competition is a recipe for the destruction of wealth and therefore human life.  Perfect competion is a value laden concept whose value is not the man’s life, but the destruction and sacrifice of mens’ lives and their productive efforts.

Intellectual Capitalism specifically rejects the concept of perfect competition as a valid economic concept or ideal and also as being useful to analyze any real life economic situations.  As a result, Intellectual Capitalism rejects the whole anti-trust and rent seeking analysis based on perfect competition, and as a result rejects all anti-trust laws (as formulated in the United States, but not the original Statute of Monopolies) as wealth destroying economic policies.

A monopoly is an abrogation of proper property rights and is created by government decrees that impinge of proper property rights  When the government does this and creates laws that give a single company (person) the right to a market say for salt or telephone services then it creates a monopoly.  When the government’s laws just limit access to a market by impinging on valid property rights then the company or companies (people) who are the beneficiaries are rent seeking.  The proper response when one of these situations is found is to restore people’s valid property rights.  The analysis of monopoies or rent seeking starts with and ends with an analysis of property rights.  As should be apparent Intellectual Capitalism rejects the whole idea of natural monopolies, which are abrogations of peoples’ property rights.

 

Supply and Demand and Spontaneous Order

Supply and demand is one of the most fendamental concepts/tools in economics.  The price of an item is set where the supply curve and the demand curve overlap.  Note that these curves are conceptual not quantitative.  The whole analysis is based on the idea that markets will drive towards this equalibrium point.  Unfortunately, this whole analysis is based on a technologically stagnant economy.  In addition, it can give the incorrect impression that demand or consumption is just as important in economics as production.

The requirement of supply and demand that the economy be technologically stagnant means that supply and demand only applies in the most unimportant part of the economy.  Supply and demand curves do not tell us how wealth is created or how to create wealth.  Some people see supply and demand plus the pricing information as ordering the economy.  This in fact is Hayek’s spontaneous order argument.  Again this is only true of a technologically stagnant market (and one with essentially free trade).  However, prices plus supply and demand rules do not tell people what to invent.  Now it is true that people, who live in a country with property rights for inventions, tend to invent in the largest markets, however there is no way to create or even postualte a supply and demand curve for such a situation.  Most experts saw no need for a device that transmitted voice.  What the experts (people with the money) wanted was a way to send telegraph signals faster or more of them over the same wire.  So the demand was almost nil for an invention that transmit voice signals before it was invented and for sometime there after.  No price could have been determined for an invention that could send voice signals.  Hayek’s spontaneous order did not direct the economy to invent telephones or any other major inventions.  Hayek’s spontaneous order is interesting, but hardly earth shattering and limited to the most uninteresting, low value areas of the economy.

Supply and demand curves are useful as long as there limitations are properly recognized.  As a result, they are part of Intellectual Capitalism, but only of minor import.

 

 

January 18, 2016 Posted by | -Economics, Innovation, Intellectual Capitalism | , | Leave a comment

Is Capitalism a game of the Survival of the Fittest?

It is quite common to be in a discussion about economics and proposing a capitalist solution when someone pipes-in “that’s just survival of the fittest.” What they are talking about is “Social Darwinism” and the image they mean to conjure up is that capitalism is like a bunch of gladiators fighting it out to the death until there is just one winner. Unfortunately, this tends to trip many of us because we often say that capitalism is about competition and that competition is what makes America great. In fact some economists (e.g. University of Chicago– see Pure and Perfection Competition: By What Standard?) have gone so far as to say the very definition of capitalism is ‘perfect competition.’ George Reisman has shown that perfect competition is really collectivism in the article Platonic Competition. The idea of unrestrained competition also is used by Libertarians and others to attack the property rights of inventor (patents).

econgrowth.smallSocial Darwinism refers to a group of ideas that relate to sociology, economics, and eugenics that are supposedly extensions of Charles Darwin’s ideas on evolution. Herbert Spencer is considered the father of Social Darwinism and he was the one, not Darwin, who coined the term ‘survival of the fittest.’ Spencer defended capitalism based on Social Darwinism. However, plenty of socialists including the National Socialist Party in Germany also used the ideas of Social Darwinism to support their version of eugenics.

Is Social Darwinism, especially as portrayed by the image of gladiators slugging it out, good biology or good economics? If evolution were a process in which the ‘goal’ was to destroy other species and then destroy all competitors within the species, life would have burned out long ago. The ‘goal’ of life and evolution is to convert as much energy into life as possible. By ‘goal’ here I mean the logical end result of the natural process of evolution, not that there is a conscious objective of individuals. Evolution is an optimizing system that selects those life forms that are best at converting energy in life in a variety of different environments. This results in a variety of different life forms. Even within a relatively uniform environment, the way to optimize the total amount of life is to have a variety of organisms that can exploit different sources of energy.

In economics the goal is not to have 500 firms creating model Ts, it is to have 500 firms all creating unique high value items (If everyone produced the same thing, what would be the point of trade?).  Human life, and then wealth, as we escape the Malthusian Trap, increases as we create more inventions that allow us to live in different climates for instance, or exploit new resources, just as different species maximize the amount of life. I do not want to make the same thing as my neighbor. I want him to make something that is of incredibly high value to me and I want to make something that is of incredibly high value to him.  We want competition to flourish because we don’t want to allow someone to become lazy (rent seeking), and freeride on the efforts of others. But competition is not what makes us wealthy.  We also need property rights to ensure that people do not free ride on the work of inventors.

I think the 100 meter dash is a good example of what competition (pure competition or competition for the same product) can accomplish. In 1891 the world record was 10.8 seconds. Today it is 9.57 or about a 13% gain. This kind of gain would not support the quadrupling of human population over the same period of time.

The goal of an economy is to increase the total wealth. A person’s wealth is not increased by destroying other people’s productive capacity. In fact, the wealthiest countries are those in which people are engaged in a wide variety of high-value activities and the poorest countries are those in which people are competing in a small number of industries. The way these high-value positions are created is by inventions that create whole new industries and can only exist in a legal environment in which inventor’s rights to their creations are protected by property rights (patents).

Interestingly, AvidGamerRants has shown that a number of games that appear to be setup with a ‘winner take all’ goal can often be ‘won’ most successfully, by rational cooperation rather than by eliminating other players  Game theory seems to support this  as this article, New take on game theory offers clues on why we cooperate, explains. For instance, in both Minecraft and Monopoly your chances of being successful increase, if instead of trying to kill off your fellow players, you collaborate with other players.

Social Darwinism as encapsulated in the statement ‘survival of the fittest’ is bad biology and bad economics; it’s even a poor gaming strategy in competitive games.

December 8, 2015 Posted by | -Economics, Patents, philosophy | , , , | Leave a comment

Carl Menger: Principles of Economics

This is a review of Carl Menger’s book Principles of Economics published in 1871[1].  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 Mengerquestion 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.[2]  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.”[3]  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.

 

Industrial Revolution

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.

 

Subjective Value

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.

 

Conclusion

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.

 

[1] https://mises.org/sites/default/files/Principles%20of%20Economics_5.pdf,

[2] https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.

[3] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

November 16, 2015 Posted by | -Economics, -Philosophy, Innovation, Patents, philosophy | , , | Leave a comment

Economics and Evolution: How We Think and Grow Rich

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.[1] 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.

econgrowth.smallIt 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.[2] 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:

  1. The per capita wealth of a technologically stagnant people will be stagnant or declining.
  2. The only way to increase real per capita incomes sustainably is to increase our level of technology.
  3. 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.’[3]  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,[4] 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.[5] 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.

 

[1] 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.

[2] 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.

[3] 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.

[4] 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.

[5] 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.

November 9, 2015 Posted by | -Economics, Innovation, Intellectual Capitalism | , , | Leave a comment

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 | , , , | 3 Comments

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, https://mises.ca/posts/articles/a-graphical-introduction-to-the-austrian-business-cycle-theory/, 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.  http://en.wikipedia.org/wiki/Growth_accounting.

 

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

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