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Category: Economics


The Austrian Business Cycle Debunked

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

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

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

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

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

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

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

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

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

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

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

 

 

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

 

 

 
The Irrational Foundations of Austrian Economics

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

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

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

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

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

 
Competition is for Losers

This statement is from a Peter Thiel interview.  Peter Thiel is a founder of Paypal, investor in Facebook and many other technology startups.  Mr. Thiel is talking about entrepreneurs and businesses and that you want to create a unique company and dominate your market space.  I have just finished a manuscript for a non-fiction book that makes this point from an economy wide point of view.  Wealth is not created by manufacturing undifferentiated, me-too products, it is created by new technologies.  There is no contradiction between what is good for the economy and what is good for an entrepreneur, despite the statement of economists on perfect competition.

One of Peter Thiel’s interview questions is tell me something you know to be true that no one else knows is true?  How would you answer that question?

My answer is that the source of real per capita growth is inventions and patents, property rights in inventions, are the key to stimulating people to invent, resulting in the Industrial Revolution and our present standard of living.

 
PATENT=MONOPOLY – A LEGAL FICTION

The authors (Sven Bostyn and Nicolas Petit) of this paper, PATENT=MONOPOLY – A LEGAL FICTION,  argue that patents are not a monopoly based on standard antitrust analysis.  It is very unusual for an academic paper to take such an unpopular position.  They must have not got the memo that the goal of all academics is to vilify inventors, patents, and property rights.  Below are some the lines I thought were interesting and my comments are below.

“No other IPR is so thoroughly examined and evaluated as a patent.”

No other property right is so expensive, time consuming and expensive to obtain title to.

“In 2011, approximately 1,000,000 patents were granted across the globe.  This would mean that 1,000,000 monopolies would have been created worldwide. This clearly, cannot be true.”

“Competition is very valuable, but innovation is probably equally, if not more, valuable.”

 

My main critique is that they did not explain how patents are a property right or the history of property rights and patents.  Under Locke’s theory of property rights, patents and copyrights are property rights – they are granted because of the creative effort (labor) of the inventor/author.  This was picked up by Sir William Blackstone in his Commentaries, where he affirms that patents and copyrights are property and therefore natural rights.  This was enshrined in the constitution as “securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

 

A recent study report on PatentlyO  clearly shows that President Obama and the histrionic chorus of the surge in lawsuits by Patent Assertion Entities (Mythical Patent Creations) is just not true.  Changes in the law under the American Invents Act (AIA) that prohibited the joinder of defendants for the infringement of the same patent are the only reason for any apparent change and this was a known outcome of the AIA.  The complete paper “Patent Assertion Entities (PAEs) Under the Microscope: An Empirical Investigation of Patent Holders as Litigants” can be downloaded here.

 

 

Cotropia, Christopher Anthony and Kesan, Jay P. and Schwartz, David L., Patent Assertion Entities (PAEs) Under the Microscope: An Empirical Investigation of Patent Holders as Litigants (November 10, 2013). Illinois Program in Law, Behavior and Social Science Paper No. LBSS14-20; Illinois Public Law Research Paper No. 14-17. Available at SSRN: http://ssrn.com/abstract=2346381

 
What is not Economic Growth: Consumption and Destruction

Now that we have some idea of what wealth and economic growth are, let’s look at some examples of what is not economic growth.  When Tony slaughters a cow and eats it he has consumed some of his wealth.  He has one less cow, but he has food in his belly that he needs to live.  Is he wealthier now?  Well he needs food to eat in order sustain his life.  If he starves to death, he is certainly not wealthier.  However, Tony now has less of what he needs to sustain his life in the future.  Wealth is the surplus above what one needs to live today.  Consumption is not wealth.  Interestingly, being overweight was traditionally considered an indicator of wealth.  The excess fat meant you could sustain yourself without eating for longer because you could not find food, or because you were sick and could not hold food down.  In fact, it was fashionable for women and men to be overweight in the 1700 and 1800s.  Fat was an indicator of wealth, both because the person could sustain themselves without food longer and because it indicated that the person had plenty of food, compared to the calories they consumed.  In societies that live on the edge of starvation or what is called the Malthusian Trap, being overweight is a source of wealth.

               The Malthusian Trap is named after Reverend Thomas Malthus (1766 -1836), who postulated that human population would always grow faster than the food supply, dooming humans to subsistence living, i.e., living on the edge of starvation.  Oddly enough Malthus was correct until about the time he died.  The advent of the Industrial Revolution changed this situation; first for the people of England and the US, then the West and today for at least half of the world’s population.  The economist Gregory Clark has shown that policies to alleviate human suffering in a non-Malthusian Trap economy just result in additional misery in a Malthusian economy.[1]

Another example of what is not economic growth, but our present GDP measurements do count as increases in wealth is known as the broken window fallacy.  This was first explained by the French economist Frederick Bastiat (1801-1850).  The fallacy is explained by this story.  A window to your house is broken by a windstorm and you hire window installer to fix it, the window installer and the person who makes windows have additional work and income.  The window installer is wealthier, but is this economic growth?  The house is now in the same position it was before the window was broken, but you are out the cost of the window.  The amount of profit the window installer has made is less than you paid, because window installer has costs, such as the cost of the gas to get to your house, the cost of the glass.  Even adding up the profits of all the people the window installer paid does not add up to the cost you paid for the window.  The reason for this is we have to consume food and other resources to stay alive as we discussed above.  What this means is that your broken window has actually resulted in less wealth not more.  This is not surprising.  If our fisherman, Randy’s boat is damaged he is not wealthier.  Even after he fixes his boat, he lost out on time he could have been fishing.  Destruction does not create wealth, it reduces it.  Unfortunately, you will hear politicians and economists talk about natural disaster causing economic growth all the time.  An article in NPR discussing Superstorm Sandy that hit the U.S. northeast in 2012 stated:

But there may be a silver lining to all that destruction: Some economists argue that reconstruction from Sandy could help stimulate the national economy in 2013.[2]

The reason economists are confused about whether destruction causes economic growth is that our measurement of the GDP does not count the destruction of property and life.  This is like the gambler who only counts his winning.


[1] Farewell to Alms: A Brief Economic History of the World, by Gregory Clark, Princeton University Press 2000.

[2] Could Post-Superstorm Sandy Rebuilding Energize The Economy?, by Joel Rose, NPR, December 31, 2012, http://www.npr.org/2012/12/31/168363901/could-post-superstorm-sandy-rebuilding-energize-the-economy.

 
George Reisman: Are Objectivist Economists Consistent with Rand?

It is my contention that classical economics is not completely consistent with Ayn Rand’s Objectivist philosophy and even economists who are Objectivists have failed to provide an economic theory that is consistent with her ideas.  For instance, George Reisman is one of the well known economists associated with Objectivism and Professor Emeritus of Economics at Pepperdine University.  In his book Capitalism on page 40 he states:

Patents … derive their market value from the fact that they make it possible for the intellectual creators of new and additional wealth to benefit from their contributions by temporarily limiting the increase in wealth that their intellectual contributions bring about.

Now how does Dr. Reisman square his ideas with Rand on this subject?  Dr. Reisman later states that patents increase the supply of goods, so he appears to be somewhat inconsistent.  But on page 449 he states:

Intangible assets (patents) no more constitute capital than they constitute wealth.

Dr. Reisman does define wealth in Chapter 2 as material goods made by man.  So it is consistent with his definition, but how does he square this with Rand who states in Galt’s speech:

He cannot obtain his food without knowledge of food and of the way to obtain it. He cannot dig a ditch––or build a cyclotron––without a knowledge of his aim and the means to achieve it. To remain alive, he must think.”  Rand 1992, p. 1012.

An example might be useful.  Joe is a builder and knows how to make concrete but is not presently making concrete.  Is he wealthier than Jim who is a builder, in essentially the same position as Joe, but Jim does not know how to make (or get) concrete?  Clearly Joe is wealthier.  I think Reisman’s definition of wealth is flawed.

I also think it is inconsistent with Ayn Rand, who in Capitalism the Unknown Ideal, states:

Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.[1]

Is the value of a building worth more in a country with property rights or one without property rights?  In the property rights country, the owner can collateralize his property, he can obtain income from his property without having to hire thugs to enforce his rights, he can justify investing in improvements in this building.  In both cases there is the same material good, but the value is totally different.  Property rights are wealth, their contribution to wealth is secondary to the underlying asset, i.e., the building or the invention.

My main problem with classical economics or Austrian economics is they have not built a system around the fact that man’s main tool of survival is his mind.  That is the source of his wealth and the only source of real per capita increases in income/wealth.


[1] Rand, Ayn, Capitalism: The Unknown Ideal, Signet, New York, 1967, p. 130.

 
What is economic growth?

What is economic growth?  We all think we know the answer to this question.  It’s when GDP (Gross Domestic Product) is growing or positive, would be a typical answer.  That is an abstract answer for most of us.  We tend to focus more on the likely results of a growing economy, such as there are more high paying, high quality jobs; you are more likely to receive a raise above the inflation rate; you are more likely to have more money in your bank account; your access to education, health care, quality of food, etc. generally increase.  But if population growth is 5% and GDP growth is only 2% then none of these good things happen.  What we are interested in is real per capita increases in wealth.

              But what is wealth?  Is it the number of digits in your bank account, how many dollars you have in your pocket, how many dollars your 401K is worth?  The people in Venezuela have seen a huge increase in the number of digits in their bank accounts, and the number of dollars (Bolivars) in their pockets have increased, however they are getting poorer.  So did the people in the Weirmar Republic in the early 1920s, many of whom were billionaires (in Marks).  Wealth cannot be confused with the amount of currency (Dollars, Bolivars, Marks) one has.

Using currencies to denote wealth often causes confusion.  Let’s look at some examples separate from currency.  Image a farmer, we’ll call him Tony.  Tony has two cows, a dirt house with a thatch roof and no running water or electricity.  A year later Tony has ten cows and running water.  Clearly Tony is now wealthier than he was a year ago.  In fact, the quantity of livestock one owns has been a traditional indicator of wealth in many societies.  Wealth means having more of the things necessary to sustain one’s life.  But people in the US and the West are not like Tony, most of these people have more than they could possible need to sustain their life –right?  Actually, no.  A rational person, let’s call him Randy, does not just worry about whether they have enough food for today.  Randy’s a fisherman and just because he catches enough fish to feed his family today, does not mean he should stop fishing.  What if the fish are not biting tomorrow?  What if there is a storm tomorrow and he cannot fish?  What if his boat needs repairs and he cannot fish for a week?  Because Randy is rational he keeps fishing even after he has caught enough fish to feed his family that day, if there are fish to be caught and the day is not over.

But the average American, call him Sam, is not like Tony or Randy.  Sam has so much to eat he is overweight.  He is wealthy beyond the wildest dreams of Tony or Randy.  He lives in a nice house, has running water, electricity, three televisions, five cell phones, why should Sam care about being wealthier?  Well what if Sam gets sick and can’t work, what if he loses his job, what if his car breaks down, what if his child gets accepted to Harvard?  Only the uber wealthy have enough wealth to meet all their needs for the rest of their lives.  When you consider that a prolonged hospital stay can cost over million dollars, it would require a net worth in today’s economy of around ten million dollars or more.  All except the uber wealthy have a rational desire for economic growth (i.e., increasing wealth) and even the uber wealthy benefit from the new technologies and opportunities provided by economic growth.

 
How to Fix the Economy: USA falls to 17th on Index of Economic Freedom

Ever wonder why the US has a record number of people on food stamps now, why the median family income is declining, why the labor participation rate is the lowest since Jimmy Carter?  You need look no farther than the fact that the US has fallen from 2nd or 3rd in 2000 in the Cato/Fraser index of economic freedom to 17th.  It is not just our economic freedom we are losing as the NSA and IRS scandals make clear.  This is not just an academic exercise either.  As the report makes clear longevity, access to medical care, education opportunities etc all deteriorate with a declining of economic freedoms.

The irony of this report is that the CATO Institute has been inconsistent at best about supporting property rights, which is the key issue underlying economic freedom.  CATO has adopted a utilitarian basis for “property rights” that suggests they are just a useful artifact for efficiently distributing scarce resources.  So in fact, they do not support property rights but property grants or privileges.  This also means that they are confused that patents are not property rights.  Patents are the single most important property right to economic growth, especially in a developed country.  CATO is therefore in the position of being for property rights at an empirical level, but arguing against them on a philosophical level.  Interestingly this also means that CATO is inconsistent about supporting our Constitution, which requires that Congress secure the rights of inventors to their inventions.  No wonder the US is an economic basket case.

 

I have written extensively on the problems I see with IPXI’s model to market licensing rights to patents.  Their model is based on a commodities contracts type of model, where unit licensing rights can be bought and traded.  I believe a model based on how Amazon sells books would be more effective and open up the patent licensing market to smaller entities and inventors.  This sort of retail licensing system would allow inventors to post an invention that they are willing to license with a unit licensing rate for one instance of the invention.  For software enabled inventions the unit licensing rate might be based on a per execution basis or a time limited period.  The retail licensing system would issue a certificate that the licensor would use to prove that they had bought a license and only be good for one instance or execution.  It is my assumption that the unit licensing rates would be so low that it would be easier to license the invention than infringe.  The license would not come with any warranties of validity or non-infringement, but would come with a warranty of ownership of an issued patent.  In addition, there might be bulk unit licensing discounts and a chance for the inventor to sell their engineering talent to help implement the invention.

This system would reduce the cost of licensing.  Avoid some of the problems of IPXIs model, such as having a limited number of unit licenses and it would open up the market to individual inventors and small entities and spark an inventive wave that we would all profit from.

 
Hayek vs. Rand: Patents and Capitalism

David Kelley gave a talk on Ayn Rand vs. Friedrich Hayek On Abstraction.  (If you want to read Mr. Kelly’s paper on point click here)  This is a very important talk and explains the difference between Austrian economists and free market (objectivists).  It also helps explain why Austrian economists who say they are for free markets are against patents, which are property rights in one’s invention.

Ultimately, Hayek is a warmed over Platonist.  According to Hayek our perception and reason are limited (Plato).  It is this limit to reason that is Hayek’s justification for a free market.  Basically, Hayek argues that because our reason is limited it is sheer folly to suggest that central planning can ever work.  Rand on the other hand sees no limit to reason and notes that reason is man’s basic tool of survival.  But each man must reason for them self.  To force (central planning) someone to do something against their reason is immoral and eliminates the creativity and ingeniousness of everyone subject to the central planning decree.  This means we have a small group of people attempting to “solve” problems instead of many people and the people making the decision are not the ones that feel it’s effects.  As a result, central planning is an open loop process, which as any engineer knows is a very inaccurate process.  In addition, central planning does not take all the variables into account, since only each individual can know exactly what their circumstances and needs are.

I believe Austrians gravitate to Hayek’s ideas because it saves religion (Christianity) from reason and the free market.  Hayek’s ideas on the limits of reason puts him in the company of Kant, Hume and Plato.  Hayek in that sense is both anti-reason and anti-science, which leaves plenty of room for religion.

It also explains why Austrians do not understand patents.  Property rights to Austrians are based on social convention or utilitarianism but not based on reason.  According to the Austrians we have property rights (privileges, arbitrary grants) because of tradition or because they believe (not know – reason is limited) it results in the best use of resources.  As Hakek states:

[M]orals, including, especially, our institutions of property, freedom and justice, are not a creation of man‘s reason but a distinct second endowment conferred on him by cultural evolution.

Patents were once characterized as monopolies (see English history), so Austrians cannot reason out the difference between what were called patents before the Statute of Monopolies and what are patents today.  For Rand, creation is the basis of property rights and all human creations start with one man’s mind.  Because of this Rand made it clear patents/copyright (Intellectual property) are the basis of all property rights.

For more see Defending Capitalism: Ayn Rand vs. Hayek

 

More specifically on Hayek’s concept of Abstraction:

If Hayek’s ideas had any validity, then a person whose eyesight was restored after being blind from birth could immediately (visually) identify an apple or red, which we know is not true.  If Hayek’s ideas were true then we would have to have some inherent understanding of the double slit experiment in quantum mechanics or the idea that time slows down as we approach the speed of light, but this is clearly nonsense.

 
Steve Forbes is Wrong on Patent Pools

In an opinion piece on Fox News entitled “America’s patent system is all wrong for today’s high-tech world”, Mr. Forbes argues that “patent holding entities that do not produce anything in the way of devices or technology are disrupting the free market and stifling innovation for consumers.”  Patent pools were first created during the sewing machine patent wars in the 1850s.  (For more information see Adam Mossoff’s excellent paper The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s.[1] )  During the sewing machine wars it was found that overlapping patent rights made it impossible to produce the best sewing machine for the customer.  As a result, a patent pool was created to clear these rights and allow manufactures to produce state of the art sewing machines.  A patent pool is nothing more than a clearing house for people’s rights in their inventions, much like ASCAP works for copyrights.  Patent pools allow for the efficient division of labor between inventors and manufactures and reduce wasteful litigation.  In this sense they are similar to how title insurance works for “real” property.[2]  Patent pools were and are a free market device that allows for the efficient clearing of property rights by contract.  Patent pools combine people’s right to their property with their right to contract.  Both of which are part of a free market.  It is disappointing that Mr. Forbes who styles himself a free market proponent has missed these obvious facts.

Mr. Forbes uses the standard rhetoric of the antitrust laws.  These laws are not part of the free market, and were championed by people who opposed the free market and property rights, such as Teddy Roosevelt.  The FTC’s attack on patent pools and licensing in the 1970s did more damage to the economy than the 911 attackers did.  For more information on the FTC’s traitorous attack on US property rights see Jobs, the Economy and Patents.

 

The article states a number of other fallacies.  For instance, Mr. Forbes repeats the idea that there were too many dubious software patents issued.  Any objective study of this issue has shown that it is nonsense.  For instance, see the paper Of Smart Phone Wars and Software Patent.

The article also asserts that patents that are about to expire necessarily have a lower market value.  First of all the market determines the value of patents, not Mr. Forbes arbitrary dictates.  Second, patents that are older and cover technology on which numerous other inventions are built are more valuable because they are building blocks.  Algebra is not less valuable today than it was when it was discovered, it is more valuable because other areas of math build on that knowledge.

 

Mr. Forbes suggestion in his conclusion that patents are regulations shows a profound ignorance of property rights and the free market.

 

America’s patent system is all wrong for today’s high-tech world

 


[1] My only complaint with Mr. Mossoff paper is that he suggests that a patent thicket existed.  A patent thicket cannot exists in a free market, at least as the term was originally defined.  There are a number of papers on point, if you want a link to them let me know.

[2] Real property in law refers to land and permanent structures.  This is similar to the use of real in math to refer to real numbers.  Imaginary numbers are real in that they exist as do patents, other intellectual property and personal property (Cars, tools, etc.).

 
Reason Magazine: Using Emotion and Faith to Advance their Anti-Patent Agenda

Reason Magazine has released a video, entitled How Patent Trolls Kill Innovation.  The magazine banner states that they support “Free Minds and Free Markets” but this video relies on the same irrational, emotion driven logic as the media.  I cannot point out all the errors in this video, but below I will highlight some of the major points.  Before I do that , let me show some of the sleazy attempts by Reason Magazine to use emotion and hidden assumptions to advance their argument, instead of reason and logic.

Emotion and Faith

*The video starts with the hidden assumption that patents are not property rights – faith not reason.

*The video uses the phrase “patent trolls” to immediately define who is right or wrong without actually proving their case – an emotional appeal.

*The video selects a small entrepreneur to narrate their story – using the typical liberal tactic of pretending this is a fight between a small virtuous entity against a big faceless entity.  The reality is that so-called “Trolls” sue large entities much more often than small businesses.  Emotional appeal, not reason.

*The video uses an “expert”, Julie Samuels, from a biased source, (Mark Cuban’s lobby group) who has no qualifications in the subject.  She has a degree in Journalism and Law, which means she is NOT A PATENT ATTORNEY and does not have the technical skills to understand the underlying technology of patents.  Faith not reason.

 

Title Search

The video never asks if Austin Meyer did a patent search and clearance opinion before building and selling his software.  You would not build a house without doing a title search to make sure you owned the land.  Given Mr. Meyer’s surprise that he was being sued for patent infringement, he almost certainly did not undertake this simple due diligence step.

 

Using Other Peoples’ Property

Mr. Meyer complains that he may have to pay the patent holder for the life of his product.  Yes, that is what happens when you use someone else’s property.  This is like a steel manufacturer complaining that they have to continue to pay for coal or pay rent for a building they do not own.

Note that the underlying technology is critical to Mr. Meyer getting paid, but he doesn’t want to pay for it.

 

East Texas

The anti-patent crowd always complains that these suits are brought in East Texas.  If someone refused to pay you rent for staying in your house, would you chose the slowest court in the country or a faster court?  Federal Court for the Eastern district of Texas has been one of the fastese to bring invention squatters to justice.

 

Patent Trolls

The video makes the implicit assumption that non-practicing entities (NPE) are evil.  However, Edison was a NPE, as was Tesla, as was almost every great inventor in the last 200 years, as our most major corporations, as most of our Universities and Government labs.  Our Founders looked at the issue of requiring inventors to practice their invention in order to keep their patent and rejected it.  They voted for a FREE MARKET system where people could be independent inventors, just like writers do not have to be publishers in order to obtain or keep their copyrights.  This is consistent with Adam Smith’s division of labor theory.

The video takes the stand that if you buy the patent rights instead of being the inventor,this is somehow evil.  First, all corporations buy their patents – often by paying wages.  Corporation don’t invent so they have to buy their patents.  Second, we do not argue just because you didn’t build your house you cannot rent it out .

 

Old Technology

Mr. Meyer states in the video that the technology he wants to use is old, from the 80s.  If this were true, Mr. Meyer would be free to use it.  But, instead, he wants the updated version of the technology that ensures he gets paid, he just doesn’t want to pay for it.

 

The Patent Should Not Have Issued

Neither Mr. Meyer nor the so called expert, Julie Samuels, are patent attorneys.  They are NOT QUALIFIED to evaluate the scope of the claims of a patent.  It is interesting how lay people (I include attorneys who are not patent attorneys in this definition) believe they can just read a patent and evaluate it, but they would never try to do the same thing with a Warranty Clause in a contract or an Indemnity Clause.  No one would believe a Journalism major or an attorney (non-technical) is qualified to comment on software technology; but somehow they are qualified to comment on patents on software?  This is like asking a plumber to comment on the design of a Nuclear Power Plant.

 

Patents and the Free Market

Patents are property rights, just like a property right in a farm.  The basis for all property rights is creation.  Inventions are clearly creations.  Property rights are part of the free market.  Those countries that are the freest economically have the strongest patents laws, are the most innovative, and have the highest standards of living.  REASON MAGAZINE is pushing a point of view that is much more consistent with a Marxist’s labor theory of value than Capitalism.

 

 

REASON MAGAZINE is neither promoting REASON or FREE MARKETS in posting this video.

 

 

 

 

Reason Magazine: How Patent Trolls Kill Innovation

 
China Files More Patents that USA

According to the website China Briefing, China now files more patent applications per year than the US.  This is just one more sign of how far the US had fallen technologically.  Just twelve short years ago the US was the economic and technological leader of the world, today it is quickly slipping into the abyss of has been countries.  Detractors will point out that patent applications do not necessarily correlate to meaningful technological advances.  This may be true in the short run, but this is not the only indicator that the US has lost its way.  There are a plethora of warning signs the Sun is setting on what was the greatest nation in the history of the world, including a steeply declining economic freedom rating, and the fact that China is likely to have a larger economy than the US sometime in 2020s.  Our President is too busy pandering to dictators around the world and acting like Santa Clause with other people’s money to notice.  We have traded greatness for the USSA.

 
Dot-Com Bubble Myth

It is quite common for Austrian Economists and others to suggest that the Federal Reserve created a Tech Bubble (Dot-Com Bubble).  If by a technology bubble they mean that real wealth was not created in the 90s this is nonsense.  First of all the price of gold fell from 1998 until around 2001.  The price of gold is one of the best indicators of inflationary policies.  Second, the Fed started raising interest rates in June of 1999 from a Fed Fund Rate of 4.5% to 4.75%.  This persisted until January of 2001, when the Fed Fund Rate stood at 6.5%.  This is hardly an accommodative monetary policy.  Third, industrial production grew by about 42% from the end of the recession in the early 1990’s to the end of the recession in 2001.  Fourth, median household income increased by 34% in the 1990’s.  Fifth, the stock market had real gains even after the bust of 2000.  In the 00s, industrial production actually fell from the end of the recession in 2001 to the end of the recession in 2009, median household income declined, the price of gold soared, the Fed lowered interest rates to zero, the stock market did not grow at all.  To lump the 1900′s with the housing bubble of the 2000′s is wrong and misleading.

The facts just do not support the Bubble myth of the 90s.  Real wealth was created in the 1990’s.  The stock market had probably gotten ahead of itself, but the Fed’s attempt to engineer a soft landing just made the correction worse.  This caused Congress to get involved and pass Sarbanes Oxley that destroyed the IPO market.  They also made changes to the patent laws – weakening them, changed the accounting rules on stock options – requiring a phantom expense, eliminated pooling of interests accounting for mergers – making it less attractive for technology startups to merge.  But for these stupid policy changes, the technology market and economy would have started growing again.  In any large group of people, the only way to increase the per capita income/wealth is to increase the level of technology.  US policies since 2000 have stifled technological innovation.

The so-call Dot-Com bubble is a myth.  Misdiagnosis of what happened in the late 1990’s has resulted in bad policy decisions.  Jack Kemp exposed this issue in Criminalizing Corporate Behavior http://www.jewishworldreview.com/cols/kemp.html.

 

 

 

Dot-Com Bubble Myth, Dot-Com Bust, Tech Bubble

 

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