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Category: Economics


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

 
Basics of Heat Transfer: Understanding the Physics of Global Warming

The temperature on Earth is a heat transfer problem.  This post will outline the basics physics involved.  First of all you have to determine the sources of heat for Earth.  The main source of heat for the Earth is the Sun (S).  Much smaller sources of heating on Earth are the thermal heat from geothermal sources and stellar radiation.  Geothermal energy has been decreasing over the life of the Earth and presently is likely too small to have any significant effect on temperatures.  Stellar radiation probably varies over huge cycles as the Solar System orbits the Milky Way, but is still small compared to the Sun.

The next question is whether S varies as a function of time.  The answer is yes.  For instance, sun spots cause variations in S.  Unfortunately, our physics does not allow us to model S(t).  At best we only have a vague idea based on historical evidence and what we know about other similar stars.  However, no one with certainty can say that the Sun’s output will not change radically the next year.  We have data on the Sun’s output that at best goes back with any accuracy 800 years.  Eight hundred years is not statistically significant compared to the 5 billion years of Earth and statistical modeling would still just be a guess.  We know similar stars eventually expand to several times the Sun’s present size and its output changes radically.  In addition, the amount of Solar radiation reaching Earth varies based on the variation in Earth’s orbit Milankovitch cycles.  These can be predicted and show a strong connection with Ice Ages, although all the mechanisms are not known.

Some of the solar radiation that hits Earth’s atmosphere is absorbed and some is reflected.  In addition, the Earth radiates some of its energy into space.  The amount of solar radiation that is reflected varies over time based on the different spectrum of light hitting the Earth and based on changes in the Earth’s magnetic field and clouds.  These variations are not well known and cannot be accurately modeled.  The amount of solar radiation that is absorbed necessarily varies also.  Things that affect the amount of absorption include clouds, greenhouse gases, absorption by the surface of the Earth and changes in Earth’s magnetic field.  Of the greenhouse gases, water vapor makes up up 95% of the greenhouse gas effect – almost all water vapor in the atmosphere occurs naturally.  CO2 represents about 3.6% of the greenhouse effect gases.  However, only 0.117% of this is man-made.  All man-made greenhouse gases consist of only 2.8% of the total.  The whole theory of AGW (Anthropomorphic Global Warming) is based on this single factor.

Our model does not include the radiation of heat from the Earth, let’s call it E.  All bodies radiate heat.  Roughly the amount of heat radiated from Earth will be equal to the surface area of the atmosphere.  However, the surface area of the Earth will vary based on the temperature and solar wind.  PV=nRT.  As the temperature rises the Volume and Pressure will increase.  No one can accurately model this radiative cooling.  In addition, there will be cooling because of the loss of matter.

So far we have the energy part of the equation.  In order to convert this into a temperature on Earth we have to the specific heat of air, land – including the different geographic regions, and water.  While it would be possible to determine some sort of average with some accuracy, this will not suffice because the air and water will move based on localized heating.  This will cause variations in the surface temperature and the atmospheric temperatures, which would be difficult to relate back to the model and vice versa.  No one can provide a good model for this term.

So what we have is an equation for the temperature on Earth T(t) which is the product of the Energy absorbed times the specific heat.  The energy absorbed is a function of the energy hitting Earth, which includes the S – Sun output, stellar radiation and geothermal energy.  We do not have an accurate model of the Sun’s output.  We do not know if it will suddenly increase or decrease.  The best we know is what has happened in the recent past.  We do not know or have good model for the amount of energy that is absorbed.  We do not know or have good model of the amount of energy emitted from Earth and we do not have a good handle on the specific heat or how to relate it to observed temperatures.  Despite all this ignorance, we are to believe that the effect of man-made greenhouse can be accurately predicted.  This is not science, it is guessing.  To pretend we can predict average global temperatures within a tenth of a degree is absurd – it is debatable whether we can measure them with that sort of accuracy.)

 

Failures of AGW models:

1) They do not explain Ice Ages or subsequent warming periods.  (I welcome comments, but if you support AGW you must provide a model that shows why ice ages occur or it will be deleted – I am not going to waste my time going down rabbit holes.)

2) CO2 levels generally rise after the Earth has warmed not vice versa.  The likely reason for this is that the oceans hold enormous amounts of dissolved CO2.  When the temperature of the oceans increase they release CO2.

3) No rational explanation is given for why AGW models focus on CO2 and other greenhouse gases, while ignoring the problems in their model.

4) The last 15 years have proven that AGW models are just plain wrong – but the excuse is we need more time.  However, they were selective in their time periods in the first place.  There was significant cooling in from 1965 to 1980, but they ignored this data and called anyone who pointed this out part of the Flat Earth Society.

5) There was significant warming from 1900-1940, but this is not correlated to increases in man-made CO2 and AGW models do not explain this.

6) The Japanese (IBUKU) satellite show that Industrial Countries actually are net carbon sinks.

7) The shows that AGW is a religion, it is not a science.

 

Supporters of AGW Lie, fudge data, or just make up data.

1) The 1st UN IPCC summary lied about what the scientists on the panel had said.

2) They lied about the temperature data in Climate Gate ignoring the Little Ice Age.

3) They claim that the number of polar bears is decreasing, this is just not true.

4) They claim the oceans are rising – this is not true.

5) They claim that the Greenland Ice Sheet is melting at an alarming rate – this is not true

6) They claim that the number of major weather events has increased – the evidence shows the exact opposite.

This list is almost endless, but I will stop here.

 

Supporters of AGW exaggerate the problems of a warmer Earth and ignore the Benefits

1) During the 5 billion years Earth has been around it has been in an Ice Age the majority of the time.  Only during the recent warming periods have human civilizations thrived.

2) The North Pole could melt completely and the Earth’s Oceans would not be one millimeter higher.

3) A warmer Earth will produce more crops and reduce weather related deaths.

 

Supporters of AGW hate Humans

AGW supporters are the same environmentalists that will tell you there are too many people on Earth.  Their solution to every problem is fewer human beings.  There have been several very inexpensive solutions proposed on how to deal with Global Warming if it were true.  The environmentalists were not interested in technological solutions, because are anti-technology, anti-human and EVIL.

 
Understanding the Coming Financial Collapse: Central Banking, Fraction Reserve Banking, and Legal Tender Laws

The Federal Reserve caused the financial crisis of 2008, according to many of its critics.  On the other hand, many people have credited the Fed with avoiding another great depression.  This debate often becomes confused because people intermingle the concepts of a central bank, fractional reserve banking and legal tender laws.  For instance, Ron Paul has argued that fractional reserve banking creates money out of thin air and intersperses this with his arguments to end the Federal Reserve.  A commonly proposed solution is a return to the gold standard.  Proponents of the Federal Reserve also seem to believe that these concepts are a package deal.

The idea of a modern central bank that controls the money supply, sets interest rates separate from market forces, and is allowed to create money to buy government bonds, is relatively new.  In the case of the US this dates from the creation of the Federal Reserve in 1913.  As explained in the article A Brief History of Central Banks on the Federal Reserve Bank of Cleveland’s website,

 A central bank is the term used to describe the authority responsible for policies that affect a country’s supply of money and credit. More specifically, a central bank uses its tools of monetary policy—open market operations, discount window lending, changes in reserve requirements—to affect short-term interest rates and the monetary base (currency held by the public plus bank reserves) and to achieve important policy goals.[1]

When you read this explanation of the functions of a central bank in black and white it is clear that it is a central planning system for a country’s money and credit.[2]  Central planning of economic activity has always resulted in market distortions and the Federal Reserve is no different.

A central bank is different from a national bank, such as the First National Bank (FNB) of the United States setup during Washington’s presidency.  The FNB was a private bank in which the federal government had a twenty percent equity interest.  It was forbidden from buying government bonds, had a mandatory rotation of directors, it could not issued notes or incur debt beyond its capitalization, and the federal government could withdraw its money from the FNB and place it with another bank.[3]  The FNB of the United States was a truly a private bank not a central bank.  It did not set the policies that “affect a county’s supply of money and credit.”

The First National Bank of the United States was a fractional reserve bank however.  A fractional reserve bank is a bank in which a fraction of the bank deposits are kept in reserve.  Or stated another way the bank’s loans exceed its capital.  The Riksbank, founded in Sweden in 1656, is commonly accepted to be the first fractional reserve bank.  Murry N. Rothbard has argued that fractional reserve banks are counterfeiting money.[4]  This is incorrect.  Unfortunately, in order to explain it is wrong it is necessary to delve deeper into the history of banking.  Originally, bank notes were issued by a bank to indicate that a depositor had so much gold or silver on deposit.  When the depositor wanted to retrieve their gold, they would present the bank note to the issuing bank.  Since bank notes were bearer notes, meaning the bank paid whoever presented the note, holders of the notes started exchanging these notes instead of going to the bank and pulling out coins.  The cost and risk of transporting large sums gold made bank notes a much more practical currency.  Think about a merchant living in England that needed to purchase large sums of tobacco in the colonies or spices from the Far East or lumber to repair his ship.

What the banks had done with bank notes is securitize the gold they had on deposit.  However, gold and silver are not the only things of value.  Banks realized that they could securitize other property.  For instance, quality farm land had significant value.  There was a difference of course.  You cannot put your land on deposit with a bank.  However, the bank could have a contingent legal title to the land.  The bank did not need land, so it would provide you with a loan against this contingent title, known a mortgage or deed trust.  The borrower would pay the bank back in bank notes or species that he earned from his farm.  If the farmer defaulted, then the bank would take legal title to the land and sell it.  A bank could only loan money from its capital reserve making it a 100% reserve ratio bank.  But there is no logically reason that bank notes should only be backed (secured) by gold.  If I want to buy some land adjacent to my farm, but I do not have the funds it makes economic sense to take out a loan.  I could pledge to pay the widow who owns the farm over time.  This might work, but she may have pressing financial needs and a payment plan is not a good solution for her.  This problem is compounded if the farmer/borrower needs to buy extra seed corn, build a barn on the property, and pay extra laborers to realize the full economic potential of the farm he is buying.  He cannot promise to pay all these people on time.  The bank steps in and issues bank notes that are recognized as currency secured by the land owned by the farmer.  If the farmer dies, becomes disabled, or is just not able to pay back the loan, the bank takes over the farmer’s loan and sells it for currency, which could be bank notes or gold coins.  This ensures that they have enough gold on hand to pay off any holder of their bank notes.  In a fractional reserve bank, the bank has not created money out of thin air they have backed their bank notes by both gold deposits, their capital reserve, and the farmers land or whatever other collateral they have for the loans they have made.

It may be legitimate to require a bank to disclose that they are a fractional reserve bank to their depositors.  I asked a former president of a bank if they ever did disclose this to customers when they setup an account.  The answer was no.  As a lawyer, it seems that banks should have to disclose that they are a fractional reserve bank.  However, in discussions with mid-level bank employees, most of them do not know they work at a fraction reserve bank.

Bank securitization of farms is no different than a company selling bonds against its assets and future earnings.  The bonds it issues are not backed by gold, they are backed by the assets of the company.  You might argue that the purchasers of the bond have given gold to the company.  This may be true, but a company does not hold the gold in reserve.  It spends the gold for plant and equipment or expansion.  You may argue that a bond is not money.  That is true in this day and age of legal tender laws, but before legal tender laws there was very little difference.  Even today if you owe someone $10,000 you might sign over some bonds to that person to pay them.  Clearly, those bonds are acting like money.  Money is anything that functions as a medium of exchange and a store of value.  Rocks, tobacco leafs, paper, bonds, stock options, gold, silver, computer entries and bonds, are just a few of the ‘things’ that have functioned as money in history.  An interesting experiment in money is being conducted by the company Bitcoin.  Bitcoins have appreciated significantly against other currencies in the last couple of years and they are just computer entries.

Legal tenders laws mandate that certain state approved money can be used to satisfy debts within the country.  The first legal tender law in the United States was passed by the North during the Civil War.  Eventually this law was declared unconstitutional in Hepburn v. Griswold, 75 U.S. 603 (1870).  The Court reasoned that the Constitution allowed the federal government to coin money, but not the power to make paper legal tender.  The government argued that since it had the power to carry out war and the issuance of the legal tender was necessary for carrying on the war, then legal tender laws fell under the “necessary and proper’ clause of the Constitution.  The Court rejected this argument and also pointed to the fact that the Constitution prohibited the states from interfering with contracts.  The Constitution did not specifically, prohibit the federal government from interfering with private contracts, but it would be against the spirit of the Constitution to allow the federal government to do so.  Unfortunately, this case was quickly overruled by the Knox v. Lee, 79 U.S. 457 (1871) Supreme Court decision.  Multiple competing bank notes were the norm at that time.  According to the Cato Institute, “the government did not entirely monopolize issuance of notes until 1935, but the laws that made the monopoly possible date from the Civil War.”[5]  Today the legal tender law in the US is 31 USC § 5103 which states:

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

Legal Tender laws are necessary for government counterfeiting[6] to be successful.  Without legal tender laws, people would quit accepting the money government printed.  A central bank is not necessary for the government to counterfeit money.  The Union was able to print $450,000,000 of counterfeit money without a central bank.

The Federal Reserve uses a more sophisticated method of printing money.  The Federal Reserve can affect the money supply by either changing the interest rates or by buying and selling bonds.  However, the money supply in a free market also varies.  A fractional reserve bank is not a government creation and neither are bonds.  When a bond is issued or a bank funds a loan, they both increase the supply of money.  However, the amount of money that can be created in this manner is limited by the size of the economy, since bonds and loans have to be backed by productive assets.  If too many loans are funded, then the bank goes out of business, which shrinks the supply of money.  If too many bonds are floated, then they are not repaid and become worthless shrinking the supply of money.  The Federal Reserve can use its interest rate setting mechanism to encourage too many bad loans, but eventually this short term increase in the money supply will evaporate.  If the Federal Reserve wants to permanently increase the money supply, then it needs to use its open market operations to buy Treasury Bills or more recently to buy bad mortgages from private banks.  It is these open market operations that are used to create money out of thin air and why the Federal Reserve’s balance sheet is the best way to determine how much money the Federal Reserve has counterfeited.

The most effective way to stop the damage caused by government manipulation of the money supply and interest rates is to repeal the legal tender laws.  The North was able to print money without a central bank, but not without legal tender laws.  If the Federal Reserve attempted to flood the market with counterfeit money and there were no legal tender laws, the market would quickly discount the value of government issued currency and individuals would price their contracts in other more stable currencies.  This is why FDR outlawed the ownership of gold and gold clauses in contracts.  From a political point of view it will be easier to repeal the legal tender laws than to eliminate the Federal Reserve.

Presently, the Federal Reserve and other central banks are convinced that by counterfeiting money as fast as they can, they can create wealth.  Ben Bernanke believes that wealth can be created by the government dropping money out of a helicopter.[7]  If this were true, we could be really rich if every citizen were given the power to print money or just go online and change the amount of money in their bank accounts.  This insanity ensures that we are headed for a huge financial crisis that will make the 2008 recession seem trivial.  This financial crisis will be caused by both central banks and legal tender laws, but it will not be caused by fractional reserve banking.


[1] Bordo, Michael D., A Brief History of Central Banks, Federal Reserve Bank of Cleveland,

http://www.clevelandfed.org/research/commentary/2007/12.cfm, A Brief History of Central Banks, December 1, 2007.

[2] I think there is a quote on this from the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse Unfortunately, I do not have a copy of this book anymore.

[3] The book, Hamilton’s Blessing, is a great reference for this but I do not have a copy anymore.

[4] Rothbard, Murray N., Taking Money Back, Ludwig Von Mises Institute website, June 14, 2008, http://mises.org/daily/2882, This article originally appeared in The Freeman, September and October 1995.

[5] Schuel, Kurt, Cato Journal, Vol. 20, No. 3 (Winter 2001) p 454.

[6] Counterfeiting in an economic sense is any currency that is not backed by productive or creative effort that someone willing exchanged their creative effort for.  Gold is clearly not counterfeit money, since it requires productive effort to mine gold.  Buy paper money presents a problem.  It takes productive effort to make and print paper, but no one would trade twenty dollars of their effort for someone who printed a twenty dollar bill.  Economic counterfeiting is really a fraud where someone believes the other person has provided value that they did not provide and purposely withheld this fact from the other party.

 

The CPB (Corporation for Public Broadcasting) receives $445M a year in federal taxpayer money.  While this represents only 12% of CPB, it is still real money that arguably could make a HUGE difference in job creation.  Try this on for size- while Jim Henson Productions and the puppeteer/actor portraying Elmo are worth multi-millions (I guess I am a little confused how Sesame Street the show has a net yearly loss), The Patent and Trademark Office has lost $1B over the last decade in user fees diverted to other Congressional pet projects, including CPB.  The Patent and Trademark Office is the only self-funded agency within the Federal Government.  The diverting of these fees-some could say for Big Bird- is costing America jobs.  According to the Kauffman Foundation, ALL net new jobs in the US since 1977 have been created by startups, and most of these are high tech startups who rely on patents.  While patent applications languish at the PTO  for 4-10 years awaiting approval (due to the diversion of inventor-paid fees) companies can’t get funded. If they can’t get funded, it takes much longer to increase hiring. The SBA reports most transformative technologies are created by startups and individual inventors (not large, entrenched corporations).  So what do you think is more important – quality, high paying, skilled jobs or Big Bird?

 

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