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Category: History


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

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

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

 

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

http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf

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

Dept. of History and Philosophy of Science

 

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

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

 

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

http://www.bath.ac.uk/economics/staff/horst-feldmann/feldmann-2005-hayek-theory-of-cultural-evolution.pdf

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

 

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

 

 

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

http://www.firstprinciplesjournal.com/articles.aspx?article=1513&theme=home&page=3

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

 

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

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

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

 

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

 

http://www.firstprinciplesjournal.com/articles.aspx?article=1513&theme=home&page=3

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

 

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

 

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

 

http://www.firstprinciplesjournal.com/articles.aspx?article=1513&theme=home&page=3

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

 

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

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

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

 

F.A. Hayek was the chief conduit through which Hume’s moral, political, and social theory entered the mainstream of modern libertarian thought. In his article “The Legal and Political Philosophy of David Hume” (originally presented as a lecture at the University of Freiburg on July 18, 1963), Hayek bemoaned the fact that Hume’s legal and political philosophy had been “curiously neglected.” In addition to being “one of the founders of economic theory” and the greatest British legal philosopher before Bentham, Hume “gives us probably the only comprehensive statement of the legal and political philosophy which later became known as [classical] liberalism.”

http://www.libertarianism.org/columns/self-interest-social-order-classical-liberalism-david-hume  Self-Interest and Social Order in Classical Liberalism: David Hume, by George Smith, formerly Senior Research Fellow for the Institute for Humane Studies, a lecturer on American History for Cato Summer Seminars, and Executive Editor of Knowledge Products. Smith’s fourth book, The System of Liberty, was recently published by Cambridge University Press.

 

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

 

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

http://www.nhinet.org/raeder.htm

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

 

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

 

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

http://www.nhinet.org/raeder.htm

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

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

 

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

 

http://www.reasonpapers.com/pdf/33/rp_33_1.pdf

Symposium: Rand and Hayek on Cognition and Trade

Rand versus Hayek on Abstraction

David Kelley The Atlas Society

 

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

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

 

http://www.reasonpapers.com/pdf/33/rp_33_1.pdf

Symposium: Rand and Hayek on Cognition and Trade

Rand versus Hayek on Abstraction

David Kelley The Atlas Society

 

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

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

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

 

 

 

 

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

 

 
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.

 

 

 
Self-Ownership: A Conservative Conspiracy?

The Depclaration of Independence and Individual Rights are generally assumed to be based on the concept of self-ownership.  For instance, the article Who are the Real Liberals? in the American Thinker states “self-ownership entails an inviolable right to our lives, liberty, and property, which at the same time entails a prohibition from violating the rights of others.”  According to the Article Jefferson was even accused of plagiarizing John Locke in writing the Declaration of independence.  According to Nathaniel Branden in an article entitled Reflections on Self-Responsibility and Libertarianism argues that the United States stood “Freedom. Individualism. Private property. The right to the pursuit of happiness. Self-ownership.”  And Walter Williams, the conservative economist states “That Americans have joyfully given up self-ownership is both tragic and sad” in an article entitle AMERICANS HAVE GIVEN UP SELF-OWNERSHIP.  But now Leonard Peikoff, of the Ayn Rand Institute, says we got it all wrong and the idea of self-ownership is dangerous.  This issue goes to the source of all property rights.

Leonard Piekoff, the founder of the Ayn Rand Institute and a philosopher, in a podcast asks if there a difference between the principle of self-ownership and the principle of individual rights?  He first restates the questions as is there a difference between someone being the owner of their life and that he has a right to life?  His answer is yes there is definitely a difference. Peikoff argues that ownership is a relationship between you and some external object. As a result it makes no sense to say you own yourself. Next he suggests that ownership is about possession. Finally, he says this whole idea of self-ownership is some sort of Conservative conspiracy and a bad idea. Others have argued against self-ownership because if you can own yourself then it implies that you can be owned by others.

The conservative that Peikoff seems to be arguing with is John Locke, the 18th century philosopher responsible for the idea of Natural Rights that underpinned the US Declaration of Independence.  Locke stated “every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his.” (Second Treatise on Government, Ch. 2, Sect.27.)  Now some people have argued the preposition ‘in’ here does not imply self-ownership. This is based on a misunderstanding of property rights. A property right is a moral and/or legal claim to a right of action. Or as Ayn Rand, the philosopher and author of Atlas Shugged, states it “Bear in mind that the right to property is a right to action, like all the others: it is not the right to an object.[1]”  Self-ownership then is the right to action with respect to oneself. Peifoff has used the wrong definition of property and variously confused property with possession and only applying to external objects. Possession may be one right that comes with property rights, but you may own a house and then lease it to someone else. If you do that you have traded your right to possession. Property is often confused with the object itself or with possession of the object, but as Rand’s definition makes clear this is conflating different concepts.

Peikoff also provides no justification for his idea that property only relates to external objects. This inconsistent with Ayn Rand’s definition and is inconsistent with how we use ownership in normal language. For instance Rand variously states:

Money rests on the axiom that every man is the owner of his mind and his effort. (For the New Intellectual, p. 89.

 

“What greater wealth is there than to own your life and spend it on growing?”

–Ellis Wyatt, Atlas Shrugged, Pt. 3 of book.

 

“For centuries, the battle of morality was fought between those who claimed that your life belongs to God and those who claimed that it belongs to your neighbors — between those who preached that the good is self-sacrifice for the sake of ghosts in heaven and those who preached that the good is self-sacrifice for the sake of incompetents on earth. And no one came to say that your life belongs to you and that the good is to live it.”

–John Galt, Atlas Shrugged, http://aynrandlexicon.com/lexicon/good,_the.html

 

“There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life.”

Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 93

 

Without property rights, no other rights are possible.

Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 94

 

Now it is true that Rand also said that “The right to life is the source of all rights.”  (The Virtue of Selfishness, 93), but given all her other statements I think it is clear that she is talking about the right to one’s own life, not a disembodied right to life.

Neither Rand nor Locke argued that self-ownership was an axiom. Some people say Locke based self-ownership on god, but then why did he spend so much time explaining what rights we had a in a state of nature. As explained in Wikipedia, State of Nature:

For Locke, in the state of nature all men are free “to order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature.” (2nd Tr., §4). “The state of Nature has a law of Nature to govern it”, and that law is Reason. Locke believes that reason teaches that “no one ought to harm another in his life, liberty, and or property”

Clearly, Locke was not relying just on a deity for his support of self-ownership.

Rand’s genius in ethics was to show that self-ownership was the result of the unique nature of man, namely that he is a rational animal. His survival requires his ability to exercise his own reason and when others attempt to limit his ability to use his mind, they are acting in a way that is inconsistent with his survival.

Peikoff argues that being the owner of your life is different than the right to life and I agree. If you are the owner of your life you not only have the right to life, but you have the right to create property, the right to free association, the right to travel freely, and on and on. A naked right to life does not provide any of these things. Peikoff might argue that the right to life includes those things necessary to sustain that life. But if you are being provided food and shelter enough to be alive, your right to life is being observed even if you are a slave or in a prison.

Ownership of oneself is absolutely vital to Rand’s and Locke’s idea of the origin of property rights. If you own yourself then you own those things your produce, but if you do not own yourself then there is no reason why the things you produce would be your property. Image an unowned robot that produces furniture or cakes. Without self-ownership, there is no reason for the robot to own those things he produces.

Self-ownership is not the axiom on which individual rights are built, it is a derived intermediate concept. However, it is a common starting point in a conversation about individual rights because it is easy to comprehend and is familiar to people who grew up in the United States or most common law countries. The idea of self-ownership is incorporated into the Declaration of Independence and in common law. Sir William Blackstone’s Commentaries was the most important treatise on common law in the 19th century. Locke’s idea of self-ownership permeates Blackstone’s Commentaries. Starting with the idea of self-ownership one can build a logical system that is almost as exact as Euclidean geometry. That system explains why we have property rights, how they arise, and who is the rightful owner of the property.[2]  It also explains why murder is illegal, why slavery is illegal, why theft is illegal, in fact most of our common law criminal law. It also explains contract law, why we have a right to free association, right to self defense (including the right to bear arms), right to free speech and on and on. It is an extremely powerful tool.

Does self-ownership open up the possibility of you being owned by someone else?  If so this would be a powerful reason to avoid the concept of self-ownership. The default position is that you own yourself (morally) under self-ownership, so to be owned by someone else you would have to sell yourself. This means you would have to enter into a contract. But a contract requires two people who are able to enter into and fulfill it. Someone who does not own themself is not competent to enter into or fulfill a contract. The second you enter into a contract to sell yourself to someone else you no longer have the capacity to contract so the contract is invalid. In addition, for a contract to be valid it is necessary that both parties provide consideration. When you sell yourself into slavery you are not receiving any consideration, since you have no right to anything as a slave. Attempting to sell yourself into slavery is a logical contradiction. Self-ownership does not lead to the idea that you can be owned by others, but the exact opposite.

Some might complain that this argument is too legalistic. But we are talking about property rights and contracts and therefore the philosophy of law applies. Property rights and contracts have definitions and logical conclusions and one of those logical conclusions is that you cannot sell yourself into slavery because it is an invalid contract.

Self-ownership is not the axiom on which individual rights are built, but it is an intermediate concept that is consistent with individual rights. When starting from an intermediate conclusion it is always important to be aware of the underlying fundamentals to avoid making a mistake. Self-ownership means that you have a property right in your life and property rights are a right to action. This means that self-ownership encompasses the right to life, but it encompasses so much more.

 

 


[1] Ayn Rand Lexicon, Man’s Rights,” The Virtue of Selfishness, 93

[2] As opposed to the in vague idea that property rights are the result of scarcity.

 

This is an excellent post on the inventor Charles Brush from the excellent blog Ice Dynamo.

Charles Francis Brush was born March 17, 1849 on his family’s farm – a farm not so different from those sprinkled across Bainbridge. You can imagine the bemusement of his parents – both farmers – when seemingly from infancy Charles showed an insatiable interest in electricity. He was a mere twelve when he built his first static electric machine.

He graduated college when he was twenty, and immediately went to work repaying his student loan, granted to him by his uncle. Charles spent his days selling iron ore and his nights devising a new dynamo – an early version of the electric generator. He was twenty-eight when his tireless efforts earned him his first patent.

As abundant and reliable as electricity is for us today, it’s hard to imagine what Brush’s dynamo meant for nineteenth century Americans. At the time, electricity was so inefficient and uneconomical that it little more than a novelty; what lighting existed was almost exclusively in the form of kerosene lamps.

The dynamo was a great achievement, but for Charles Brush, it was just a stepping stone. He envisioned a world lit by arc lights (a technology similar to light bulbs). That vision required not only economical electricity, but efficient and reliable arc lights. Once he’d completed his dynamo, he turned his focus to arc lights, and received his first of four patents in 1878.

Charles Brush loved his own life too much to relegate himself to thankless toil in an obscure lab. He was eager for the world to benefit from his genius, and wanted to be remunerated for his effort. Thus, in 1880 he established the Brush Electric Company. It was a herculean undertaking; he competed directly with Thomas Edison’s titan of a company, General Electric. Nevertheless, in a few short years Brush’s arc lights illuminated the streets of cities such as San Francisco, Montreal, Boston and New York. His hydroelectric power plant in Minneapolis was one of the first in the United States to generate electricity from water.

When Brush was 42, he merged his company with General Electric and retired to the mansion he’d built in Cleveland. His home included a private laboratory in the basement and the world’s first automatic wind turbine generator. Even in retirement, he never stopped investigating scientific phenomena.

Charles Brush’s inventions – such as his dynamo – were incredible machines, but they were so much more. Those inventions were the product of a child who was born with a singular purpose, and never let being an iconoclast stop him from pursuing that purpose. They are the result of a young man’s inexhaustible dedication to his work, and an industrialist’s fearless determination to bring light to the world.

Which brings us to the article’s title. My favorite author described machines as “the frozen form of a living intelligence.”

 
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.”

 
Gary Boone Inventor of the Microcontroller Dies at 68

Gary Boone invented the microcontroller while working at Texas Instrument in the early 1970s.  I had the good fortune to know Gary Boone in the later part of his life, he had a brilliant mind and was a good friend.  It is sad day for the electronics industry and my heart goes out to his family.

IEEE did an Oral History with Gary that was lost for over a decade. You can see the agility and brilliance of this great inventor’s mind in the interview.  Please read the whole oral history.  Mr. Boone has a number of interesting insights in the interview.  For instance, he states that he invented microcontroller while at Texas Instruments because of boredom.  He was working in a group designing custom Integrated Circuits (ICs).  While designing these chips he began to feel “I’m tired of doing this.  I’m working long hours.  My family is not happy.  I have to find a better way of doing this.”  He also noticed that the basic requirements for all these projects were similar and this led to the idea that a general chip that was programmable could solve multiple customers’ requirements.  He also discusses the resistance in the community to this innovation.

After inventing the microcontroller, he moved to a start-up company, Litronix, that made handheld calculators.  The company was not aggressive about filing patents.  An overseas competitor was able to drive Litronix out of the market because of the differential tax rates, U.S. regulatory rules on consumer warranties, and their weak patent portfolio.

Because Mr. Boone was the inventor of the microcontroller, he ended being involved in numerous patent lawsuits.  This has caused him to have a unique perspective on the patent system.  One of the most interesting points he makes is that design teams often fail to review the patent literature before starting the design process.  Because of this, they often reinvent designs and reviewing patent literature results in better designs.

Gary will be missed by all that knew him.

 
Patents are Natural Rights

I have often pointed out that patents are a natural right under Locke’s theory of property rights.  Locke stated, in modern language, that you own yourself so you have the right to those things you create.  Many detractors have suggested that this absurd.  According to Locke the three chief natural rights are life, liberty, and property.  Locke states that protecting property rights is the main reason for forming governments.

Sec. 124. The great and chief end, therefore, of men’s uniting into commonwealths, and putting themselves under government, is the preservation of their property.[1]

Inventions are the result the inventor’s labor and therefore property under Locke.  Property is a natural right, so patents are natural rights.  Despite this logical connection, many people have continued to deny that patents (property rights in inventions) are a natural right.

Locke’s ideas were incorporated in the law of the United States by William Blackstone’s Commentaries on the Laws of England.  This treatise became the basis of common law in the US.  Here is what Blackstone said about patents and copyrights (intellectual property).  Note that he cites Locke’s ideas on property rights for his explanation for why intellectual property is Property.

There is still another species of property, which (if it subsists by the common law) being grounded on labour and invention is more properly reducible to the head of occupancy than any other; since the right of occupancy itself is supposed by Mr. Locke, and many others, to be founded on the personal labour of the occupant. And this is the right, which an author may be supposed to have in his own original literary compositions; so that no other person without his leave may publish or make profit of the copies. When a man by the exertion of his rational powers has produced an original work, he seems to have clearly a right to dispose of that identical work as he pleases, and any attempt to vary the disposition he has made of it, appears to be an invasion of that right.

Now the identity of a literary composition consists entirely in the sentiment and the language: the same conceptions, clothed in the same words, must necessarily be the same composition: and whatever method be taken of exhibiting that composition to the ear or the eye of another, by recital, by writing, or by printing, in any number of copies, or at any period of time, it is always the identical work of the author which is so exhibited; and no other man (it hath been thought) can have a right to exhibit it, especially for profit, without the author’s consent.

This consent may perhaps be tacitly given to all mankind, when, an author suffers his work to be published by another hand, without any claim or reserve of right, and without stamping on it any marks of ownership; it being then a present to the public, like building a church or bridge, or laying out a new highway: but, in case the author sells a single book, or totally grants the copyright, it hath been supposed, in the one case, that the buyer hath no more right to multiply copies of that book for sale, than he hath to imitate for the like purpose the ticket which is bought for admission to an opera or a concert, and that, in the other, the whole property, with all it’s exclusive rights, is perpetually transferred to the grantee.

On the other hand it is urged, that though the exclusive property of the manuscript, and all which it contains, undoubtedly belongs to the author, before it is printed or published; yet from the instant of publication, the exclusive right of an author or his assigns to the sole communication of his ideas immediately vanishes and evaporates; as being a right of too subtile and unsubstantial a nature to become the subject of property at the common law, and only capable of being guarded by positive statutes and special provisions of the magistrate.

The Roman law adjudged, that if one man wrote any thing on the paper or parchment of another, the writing should belong to the owner of the blank materials meaning thereby the mechanical operation of writing, for which it directed the scribe to receive a satisfaction; for in works of genius and invention, as in painting on another man’s canvas, the same law gave the canvas to the painter. As to any other property in the works of the understanding, the law is silent; though the sale of literary copies, for the purposes of recital or multiplication, is certainly as antient as the times of Terence, Martial, and Statius. Neither with us in England hath there been (till very lately) any final determination upon the right of authors at the common law.

But whatever inherent copyright might have been supposed to subsist by the common law, the statute 8 Ann. c. 19 hath now declared that the author and his assigns shall have the sole liberty of printing and reprinting his works for the term of fourteen years, and no longer; and hath also protected that property by additional penalties and forfeitures: directing farther, that if, at the end of that term, the author himself be living, the right shall then return to him for another term of the same duration: and a similar privilege is extended to the inventors of prints and engravings, for the term of eight and twenty years, by the statute 8 Geo. II. c. 13, and 7 Geo. III. c. 38, besides an action for damages, with double costs, by statute 17 Geo. III. c. 57. All which parliamentary protections appear to have been suggested by the exception in the statute of monopolies, 21 Jac., I. c. 3, which allows a royal patent of privilege to be granted for fourteen years to any inventor of a new manufacture, for the sole working or making of the same; by virtue whereof it is held, that a temporary property therein becomes vested in the king’s patentee. (emphasis added)

 

The idea that patents are a natural right is incorporated in early American law as the quote below shows.

“we protect intellectual property, the labors of the mind, productions and interests as much a man’s own, and as much the fruit of his honest industry, as the wheat he cultivates, or the flocks he rears.” (Davoll v. Brown, 7 F. Cas. 197, 199 [C.C.D. Mass. 1845].)

It is just obstinance or disingenuousness to suggest that patents are not part of natural rights.

 


[1] The Second Treatise of Civil Government; 1690; John Locke; CHAP. IX., Of the Ends of Political Society and Government.

 
John Locke vs. Ayn Rand

This paper is exploratory not definitive.  Comments and input is greatly appreciated.  My interest in the comparison between Rand and Locke started when I wrote my book The Decline and Fall of the American Entrepreneur.  My investigation was spurred on by reading the excellent book The Power and the Glory: The Key Ideas and Crusading Lives of Eight Debaters of Reason vs. Faith, by Burgess Laughlin.  In my opinion, John Locke is often misrepresented by both his supporters and detractors.  I admit that I do not have the time or energy to review Locke’s original writings in depth at this time.  Your input is appreciated.

Charles Murray has suggested that Ayn Rand’s ideas are just a rehash of Locke, Nietzsche, and Adam Smith.[1]  I reject this out of hand.  Nietzsche’s uberman influenced Rand’s fictional characters, but she rejected Nietzsche as her philosophical ideas matured.  Adam Smith’s book Theory of Moral Sentiments is not consistent with Rand’s ideas at all.  He wrote this book before he wrote The Wealth of Nations and the two do not appear to be entirely consistent with each other.  As a result, it is hard to pin Smith down on his ethics and epistemology.  The differences between Rand and Locke are more subtle.

My book mainly discusses patent law in terms of Natural Law or Locke, because that is the historical basis for the founding of the US and US patent law.  Readers of my blog State of Innovation  may wonder what this has to do with patent law.  My answer is everything, since this is about the fundamental basis of property rights.

 

Metaphysics

In my opinion all philosophers fall either into the camp of Aristotle or Plato.  Aristotle’s metaphysics is that we can trust our senses and there is only one universe or as Rand stated it A is A.  Plato’s metaphysics is that there is more than one world and our senses cannot be trusted to understand them or that our senses only give us a vague impression of the real world.  Rand and Locke are both Aristotelian in the realm of metaphysics.

Some people may object that Locke advocated there was a deity.  Locke did appear to make somewhat contradictory statements on god and faith, but he was writing at a time in which you could have your head cut off for being on the wrong side of a religious debate.  Locke appeared to be a deist and believed;

His philosophy on human progress proposed the following: a) human beings can progress by acquiring knowledge, b) reason and action are subject to natural law, and c) the mind (as consciousness) is subject to scientific inquiry (Smith, 1997).[2]

A Deist believes in god or a deity that created the laws of the Universe and has no effect thereafter.

 

Epistemology

John Locke’s epistemology was Reason.  Reason is the means of integrating and conceptualizing perceptions by means of logic.  It is distinguished from rationalism which starts with reveled truths and then applies a logical system derived from these assumptions.  This is distinguished from empiricism which holds that man’s only source of knowledge is his senses without any recourse to concepts.  The logical positivists did us one favor in showing that all logical systems are based on either an assumption, such as the Euclidean geometry’s idea that a straight line goes on forever and two parallel lines never intersect, or based on an observation.

Some people argue that Locke was an empiricist.[3]  Locke was attempting to use the techniques of science to analyze ethics and political philosophy.  (Note that he also defined the metaphysics and epistemology used by science.)  People who argue that Locke was an empiricist usually argue that modern science is based on empiricism.  This is incorrect based on the definition given above.  Science builds on observation, but it is highly conceptual and many discoveries in modern physics derive from following the logical consequences of theory.  For instance, the Higgs Boson particle was first predicted by following the math of field theory and now may have been verified by experiment.  Locke was not an empiricist either, based on the definition given above.  He is widely quoted as having said “logic was the anatomy of thought”, which would be inconsistent with empiricism.

Rand’s epistemology was Reason also.  One difference is Rand’s refutation of Kant’s epistemology that emotion is a valid path to knowledge and his attempts to limit reason.  However, Locke came before Kant and therefore could not have commented on Kant.  Ayn Rand spends a lot of time explaining how concepts are formed and how they relate to the real world or specific instances.  An example is reproduced below:

The same principle directs the process of forming concepts of entities—for instance, the concept “table.” The child’s mind isolates two or more tables from other objects, by focusing on their distinctive characteristic: their shape. He observes that their shapes vary, but have one characteristic in common: a flat, level surface and support(s). He forms the concept “table” by retaining that characteristic and omitting all particular measurements, not only the measurements of the shape, but of all the other characteristics of tables (many of which he is not aware of at the time).[4]

It is my understanding that Rand is explaining in modern language the concepts of Aristotle or refining them.  This seems consistent with John Locke’s epistemology.

 

Ethics

This is where we see the major differences between Rand and Locke.  In my brief survey of Locke’s ethics, I found two competing concepts for Locke.  One is his ideas about Natural Rights and the other is a hedonistic perspective on ethics.  Locke’s hedonistic perspective on ethics is in conflict with Rand’s selfishness and I would suggest in conflict with Natural Rights.

Locke’s hedonistic ethical views start with the idea that people naturally want to maximize their pleasure and minimize their pain.  Locke’s Natural Rights starts with the idea that moral laws are divine, but he does state these divine laws are discoverable by reason.  This second part makes it consistent with his deist metaphysics.  He does not seem to reconcile these two competing ethical systems.[5]  I will focus on Locke’s Natural Rights ethics.

Locke’s formulation of Natural Rights starts with his concept of man’s rights in a state of nature.[6]  In a state of nature a man owns himself.  Since he owns himself he has a right to defend himself.  Man also has a right to those things he creates, which is where the right to property comes from.  From these concepts the moral repugnancy of slavery follows as well as most of traditional criminal law, contracts, and property law.  Locke does not explicitly state that man is an end in himself like Rand, however ownership in one’s self certainly implies this.  To the extent we focus on Locke’s Natural Rights, Rand and Locke are not in conflict and I would suggest Rand’s ideas are a refinement and provide a deeper insight.  Like Relativity and Quantum Mechanics expand our knowledge over Newtonian physics, but are not in conflict with it.[7]

Ayn Rand’s ethics starts with idea that human life has value and ethics is the actions necessary to allow man to live.  By live she does not mean mere existence, but thriving.  Everything else she derives from an evolutionary point of view.[8]  In Galt’s speech she states,

There is only one fundamental alternative in the universe: existence or nonexistence—and it pertains to a single class of entities: to living organisms. The existence of inanimate matter is unconditional, the existence of life is not: it depends on a specific course of action. . . . It is only the concept of ‘Life’ that makes the concept of ‘Value’ possible. It is only to a living entity that things can be good or evil.

From this she focuses on man and his unique tool of survival, which is his mind.

In order to sustain its life, every living species has to follow a certain course of action required by its nature. The action required to sustain human life is primarily intellectual: everything man needs has to be discovered by his mind and produced by his effort. Production is the application of reason to the problem of survival.[9]  (Emphasis added)

It is reason that requires an ethics of individuality, where each person’s life has value separate from the species.  This is not true of other organisms.

Man’s mind is his basic means of survival—and of self-protection. Reason is the most selfish human faculty: it has to be used in and by a man’s own mind, and its product—truth—makes him inflexible, intransigent, impervious to the power of any pack or any ruler. Deprived of the ability to reason, man becomes a docile, pliant, impotent chunk of clay, to be shaped into any subhuman form and used for any purpose by anyone who wants to bother.[10] (Emphasis added)

Thus Rand ends up with an ethics in which each individual person is their own end.  The exercise of their mind is the means by which they attain values to live.  In order to achieve their values they must not only think but act.  In order for this to be true, man must own himself, which is the starting point of Locke.  The main difference between Locke and Rand is that Rand starts with a scientific or metaphysical basis of the nature of man to derive her ethics.  Locke starts with the assumption that each man owns themselves, but Rand proves why this must be true.  Her starting point is that every living organism must value its life or go extinct.  Note there are ethical systems that do not value human life, so this cannot be taken as a given.  We will explore these more later.  The second biggest difference between Rand and Locke is she shows the central place of reason and the mind in man’s existence.  Evolution had not been discovered at the time of Locke, so he could not use it to develop his ethics.  Another major achievement of Rand was to debunk the supposed is-ought dichotomy.

In answer to those philosophers who claim that no relation can be established between ultimate ends or values and the facts of reality, let me stress that the fact that living entities exist and function necessitates the existence of values and of an ultimate value which for any given living entity is its own life. Thus the validation of value judgments is to be achieved by reference to the facts of reality. The fact that a living entity is, determines what it ought to do. So much for the issue of the relation between “is” and “ought.”[11]

This issue was supposedly first raised by David Hume who lived after John Locke died.  As a result, this was not a problem which Locke could address.  In fairness to Hume, Rand starts with one assumption or observation in order to solve this problem, mainly that a living entity has to value its own life.  As I pointed out earlier it is impossible to have a logical system that is not based on at least one assumption or observation.[12]

I have suggested that a deeper understanding of these issues can be had by understanding that evolution is the application of the second law of thermodynamics (entropy) to living organisms.  Note I am not the first person to suggest that evolution and entropy are related.  Applying entropy concepts to living organisms is fraught with potential logical errors.  I have attempted to avoid them in my writings, but in passing these around I have found that even my most ardent supporters found them a little difficult to get through.  My most well received post along this line is Sustainability isn’t Sustainable.  My other posts on point can be found below.[13]

Life is a fight against entropy.  Entropy as applied to economics is the concept of diminishing returns.  It shows that inventions are the only way to overcome entropy – production without invention leads to the Malthusian Trap.  As a result, this idea is consistent with Rand’s idea that the mind and reason are the primary means of survival but refines this to the understanding of the critical role of inventions.

Why is this important?  Because the intellectual battle today is against those people who have combined an incorrect interpretation of entropy with Kant’s emotion driven epistemology.  These people do not believe human life is valuable, in fact they believe humans are evil because they believe we accelerate the entropy of the Universe.  Other living species do not harness and use energy (outside their physical body) so they do not accelerate the entropy of the universe and therefore are not evil.  These people advocate the death of at least five billion people as a moral good.  The basis of their morality is founded on a flawed understanding of entropy and physics.  For more information see The Pseudo Scientific Basis of Environmentalism.  Defeating this evil philosophy intellectually is vital to anyone who values human happiness.

 

Property Rights

Locke formulation of property rights is based on the Labor Theory of Property, which is commonly stated as when you mix your labor with natural resources you obtain property rights in your creation.  This has been purposely mischaracterized and attacked by Locke’s opponents.  Adam Mossoff has an excellent paper on point entitled Locke’s Labor Lost.  Locke’s concept of property is that your productive effort crates a property right in the thing you created.  One problem or misinterpretation of Locke’s theory of property rights is that labor means physical labor.  This is most likely a mischaracterization, but leaves open the question of whether intellectual property such as patents is property.

Rand’s theory of property rights is that they derive from your right to life.

The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. The man who produces while others dispose of his product, is a slave.[14]  (Emphasis Added)

But Rand’s understanding that man’s mind is the most important tool for survival causes her to put intellectual property rights as primary.

Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.[15] (Emphasis Added)

Ayn Rand’s more detailed understanding of man leads to the primacy of man’s mind and reason as his tool of survival.  This leads to a deeper understanding of property rights and the primacy of intellectual property rights.  My refinement of Rand’s ideas leads to the primacy of property rights for inventions.

 

Conclusion

Locke and Rand are not in conflict philosophically, but Rand provides a coherent ethics based on the fundamental nature of man and living organisms, which Locke did not.  Rand’s main difference in her epistemology is to dispense with the need for a deity, even one whose only effect was to create the world and her tackling of Kant’s emotion is a path to knowledge.  I see the relationship between Rand and Locke as the difference between Newton and Einstein or Algebra and Analytic Geometry; refinement not opposition.  I believe that Rand’s ethics can be further refined by understanding how entropy and evolution are related.  This leads to a slightly different understanding of property rights, but more importantly provides a direct argument against the religion of environmentalism and the related “we are running out of natural resources” Malthusian economic argument.

 


[1] Ayn Rand’s Critics, Capitalism Magazine, by JAMES VALLIANT, http://capitalismmagazine.com/2011/08/ayn-rands-critics/, accessed 3/20/13.

[2] RESEARCH ON JOHN LOCKE’S INFLUENCE ON THE PHILOSOPHY OF DEISM DURING THE AGE OF ENLIGHTENMENT, Robert Waxman, http://www.robertwaxman.com/id85.html, 3/18/13.

[4] “Concept-Formation,” Introduction to Objectivist Epistemology, 11–12

[5] Locke’s Moral Philosophy, Stanford Encyclopedia of Philosophy, http://plato.stanford.edu/entries/locke-moral/, accessed 3/20/13.

[6] The state of nature concept has been much maligned by Marxists and others.  They have purposely distorted his argument into an anthropological statement.  This clearly was not Locke’s intent and shows an intellectual dishonesty on the part of Marxists.

[7] For those people who do not know, Relativity and Quantum Mechanics are in complete agreement with Newtonian physics except in the realms of very fast systems, very high gravitational fields, and very small distances.  This is part of how we know they are correct.

[8] It is surprising that Rand was indifferent on the idea of evolution.  Her ethics is clearly based on the same concepts.  I believe the reason for this is she was worried it would lead to erroneous ideas about Determinism.

[9] What Is Capitalism?” Capitalism: The Unknown Ideal, 16

[10] The Comprachicos,” Return of the Primitive: The Anti-Industrial Revolution, 84

[11] “The Objectivist Ethics,” The Virtue of Selfishness, 17

[12] This is a favorite argument of Christians.  They believe it shows morality is impossible without god.  This is inconsistent with both Locke and Rand.

[13] The Science of Economic Growth 1-3, http://hallingblog.com/the-science-of-economic-growth-part-1/, http://hallingblog.com/the-science-of-economic-growth-part-2/, http://hallingblog.com/the-science-of-economic-growth-part-3/; and

The Pseudo Scientific Basis of Environmentalism http://hallingblog.com/the-pseudo-scientific-basis-of-environmentalism/.

[14] “Man’s Rights,” The Virtue of Selfishness, 93

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

 
Wright Brothers Didn’t Invent the Airplane and Edison Didn’t Invent the Light Bulb

Fox News has an article, Wright brothers flew 2 years after Gustav Whitehead, Researcher Claims, that suggests that Wright brothers did not invent the airplane.  The article is correct; the Wright brothers invented the system that allows for controlled, powered flight.  Their plane used wing wrapping, but their patent application made it clear that they could use control surfaces (ailerons, elevators, and rudders).  Rudders were known before the Wright brothers.  The article suggests that Whitehead was the first person to achieve powered flight, but this is clearly incorrect.  There were numerous people before Whitehead and the Wright brothers who had achieved powered flight.  Others had also understood the need for a rudder, but only the Wright brothers understood the need for all the control surfaces.

I decided to investigate if Whitehead had any unique control surfaces?  Since most people do not understand what the Wright brother invented, this information is difficult to come by.  But as best as I can tell Whitehead had a rudder and shifted his weight in the aircraft to control the plane.  This was not unique when Whitehead undertook his flight.  In other words Whitehead’s flight was a demonstration of what was known, not an invention.

This article is typical of the ignorance in the debate about invention and patents.

 

For another example of this ignorance see Did Edison Invent the Light Bulb?

I would like to believe these are innocent mistakes – but I don’t.  I think they are a coordinated attack on the patent system and individual inventors.  The goal of this attack is to suggest that no one invents anything and therefore the patent system is unfair and should be eliminated.

 

 
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

 
The High Cost of Invention Theft: Why Channel 1 on TV Does Not Exist

Edwin Armstrong is the inventor of FM, the Regeneration receiver, Super Regeneration, Superheterodyne, and many others.  This creative genius’ life was wasted fighting RCA who blatantly stole his patents for FM and the FCC arbitrarily moved the FM radio range from 44-50 MHz to 88-108 MHz, where it is today, just to destroy the network of radio stations Armstrong had built up.  Channel 1 on you TV would be at 44-50MHz and this is why it does not exist.  The failure of our government to protect property rights and the arbitrary power given the FCC, kept all of us from enjoying FM radio decades earlier, arbitrarily destroyed the investment of hundreds of people, and diverted Armstong from inventing, which probably deprived us of other great inventions.  Mr. Armstong’s life encapsulates everything that is wrong with the United States today.

Here is a great article on Amrstrong http://www.k3dav.com/edwinhowardarmstrong.htm.

 Of course the anti-patent crowd does not believe in genius, at least in the technical arts.  Economist argue against that someone would of come up with these inventions because of market demand.  First of all there is no “market demand” for something that does not exist.  Second, all macroeconomic evidence shows that in the absence of property rights for inventions, technological change is glacially slow and mankind falls back into the Malthusian Trap.

 
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.

 

Twitter posted their Innovators Patent Agreement (IPA) https://github.com/twitter/innovators-patent-agreement/blob/master/innovators-patent-agreement.md  with much ballyhoo yesterday.  Despite the claim that Twitter will only assert patents defensively, part 2(b) of the IPA allows Twitter to assert patents against anyone who has asserted their patents.  This will only exclude a very few companies, mainly startups.  Twitter’s stated goal is to promote innovation, but the real result if Twitter is successful will be that companies will rely on Trade Secrets.  Trade secrets decrease innovation, because the information is not shared.  Inventors cannot build on the work of previous inventors and they are more likely to waste resources rediscovering other people’s work (reinventing the wheel).  History clearly shows that when a country relies on trade secrets instead of patents, innovation is impeded.  Those countries with weak or nonexistent patent systems are not innovators and their people live on the edge of starvation.

 
Forbes: Patent Litigation Debate Exposed

Forbes magazine has an excellent article that provides the real facts behind the so called patent litigation explosion entitled “No, the Patent System Is Not Broken.”   The article explains:

“The truth is that today’s patent litigation rate is less than half what it was in the mid-nineteenth century, a period widely recognized as the golden age of American innovation.”

The article puts today’s patent litigation rates in context.

According to Lex Machina’s authoritative “Database of U.S. Patent Litigation 2011,” the number of patent suits filed between 2001 and 2010 has held steady at less than 3,000 per year. Only about a hundred of these cases actually went to trial each year

To put it in even broader historical context, the estimated 100 patent suits currently filed in the smartphone industry is actually less than one-fifth the number of suits filed during the first “Telephone Wars” of Alexander Graham Bell’s time. Back then, the American Bell Telephone Company and its successor, AT&T, litigated a whopping 587 patent cases alone.

Perhaps even more importantly the article explains that a strong patent system creates a division of labor between inventors and manufacturers.  According to Adam Smith the division of labor is key to increasing our wealth.

“The growth of market trade in patents raised the returns to invention and encouraged a division of labor whereby technologically-creative individuals increasingly specialized in their comparative advantage—invention,” observed Lamoreaux and Sokoloff. “It was the expanded opportunities to trade in patented technologies that enabled the independent inventors of this golden age to flourish—and that stimulated the growth of inventive activity more generally.”

By 1865 the per capita patenting rate in the U.S. was triple that of Britain, and the vast majority of those citizen-inventors were what we now call “non-practicing entities,” or NPEs, who licensed their patents to others to commercialize into new products.  Indeed, patent and legal records from the nineteenth century indicate that more than two-thirds of the 160 so-called “great inventors” of the Industrial Revolution, including Thomas Edison, were NPEs.

 

Please check out the full article at:

No, the Patent System Is Not Broken

 
Book Review:  It Is Dangerous to Be Right When the Government Is Wrong: The Case for Personal Freedom

It Is Dangerous to Be Right When the Government Is Wrong: The Case for Personal Freedom, by Andrew P. Napolitano

Judge Napolitano has written an excellent book on Natural Law from the perspective of an attorney.  He attacks legal Positivists, who believe the law is whatever the government says it is.  He points out the moral bankruptcy of Positivists by pointing out that they have no logical basis to be against Hitler’s final solution of wiping out all Jews – since it was a validly passed law.  He also rejects the non-sense of “majority rule” or Democracy.

He explains that Natural Law is like science.  He states:

Only man-made theories for what those rules are and how the operate may change.

However, without an explanation or understanding, those rules remain just as “true”: Penicillin will combat certain infections, and gravity will always pull things toward the center of the Earth, regardless of whether or not we understand how.

He also states something that will not sit well with conservatives:

Truisms reject moral relativism, and American Exceptionalism.  They compel and understanding of the laws of nature that animate and regulate all human beings at all times, in all places, and under all circumstances.  And truisms equal freedom.

The book starts off with the Declaration of Independents.  It moves onto eminent domain issues where the judge has a number of illuminating points.  I particularly liked the freedom of association chapter.  Napolitano I think is one of the few people to write about this issue.  I also found the right to petition chapter illuminating.  I believe that only someone with Judge Napolitano’s legal background could have done this chapter justice.  His chapter on the growth of the Defense Industry was illuminating.  While I did not agree with all his points, he makes it clear that the Defense Industry has grown completely out of control.  According to the Judge the US military is in over 130 countries.  The quote from Fredrick the Great comes to mind “in trying to defend everything he defended nothing.”  The US military has become just another welfare/crony capitalism project.  The military will complain that defense spending as a percentage of GDP is less than it was during the Korean War.  However, we did not have the Department of Homeland Security, the Department of Energy, the Border Patrol, etc, which are all really part of our defense spending at the time of the Korean War.

Unfortunately, the book is marred by two problems.  I am in complete agreement with the Judge’s emphasis on Natural Law, but he defines it in terms of “essential yearnings.”  Someone might have an essential yearning to torture people or kill them.  That does not make it a natural right.  It is enough to state that people have ownership of their body.  The rest of Natural Law and Natural Rights flows from this simple concept.  Once I own myself, I clearly own the product of my labor which leads to all of property law, including patents.  Criminal law comes from violating my rights in my body or in my property.  The “essential yearnings” adds nothing to the concept of Natural Law and Natural Rights.

The second problem with the book is Judge Napolitano’s analysis of fractional reserve banking.  The Judge and some Austrian economists incorrectly state that fractional reserve banking allows banks to create money out of nothing.  A fractional reserve bank is a bank that lends out part of its depositors money.  Fractional reserve banking is how all modern banks (since at least 1750s) operate.  Wikipedia defines a Fractional-reserve banking as a type of banking whereby the bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally on-loan to other customers. This means that available funds (called bank reserves) are only a fraction (called the reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.

The history of fractional reserve banking starts with the concept of an exchange bank.  I explain in my book, The Decline and Fall of the America Entrepreneur: How Little Known Laws and Regulations are Killing Innovation:

Modern banking started in the early 1600s with the Bank of Amsterdam.  Merchants could deposit coins with the Bank of Amsterdam and use this account to pay for transactions.  Using checks, a merchant’s account was debited and another merchant’s account was credited.  This meant that coins did not have to be transported from one merchant to another with the attendant risk of theft and loss or the cost of transportation.  The Bank of Amsterdam was just an exchange bank that facilitated transactions between merchants.  Next came the Swedish Riksbank established in 1656.  The Riksbank was not only an exchange bank, it also lent money making it the first modern fractional reserve bank.  Fractional reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.  Commonly, loans are made against collateral such as land or jewelry.  … Some people believe fractional reserve banking creates money out of thin air, but what really happens was the money for these loans were backed by some collateral other than coins or bullion.  The downside of other types of collateral is they are not as liquid as species (coins, bullion).  As a result, if large numbers of customers of a fractional reserve bank wanted species (currency) at the same time, the bank would not able to fulfill all its customer’s demands.  This is a classic run on a bank.  A run on a bank is a cash flow issue.  A sound bank may have plenty of collateral and performing loans, but if most of its customers demand species at the same time it will not be able to fulfill these requests.  Fractional reserve banks free up capital from low performing assets so that they can be invested in higher performing assets.  For example, if you owned a large tract of ranching land that was not highly profitable but represented a large amount of capital and you want to invest in an oil well, without fractional reserve banking you would have to sell some of the land in order to invest.  With fractional reserve banking you could convert your land into a generally accepted form of money, by pledging your land as collateral to a bank for a loan.  In the modern world, the loan to you is just a computer entry in your bank account.

It is clear from history that fractional reserve banks are not some sort of government institution, like the Federal Reserve.  Without fractional reserve banking it is would be very difficult to securitize (Collateralize) many assets, such as houses and land.  This would significantly impede the economic growth of a country.  Logically if you are against fractional reserve banking you should be against a stock market.  Both are just a way of securitizing assets.  The stock of paper money act as a claim against various assets and/or future earnings.

 

 

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