Category: History
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 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:
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.
As I began to explore this idea that entropy was a key concept in understanding economics and putting it on the path of a true science, I investigated whether other people had made this connection. I found that Edwin Schrödinger, Nobel Prize winner in physics, wrote the book, What is Life.[1] He pointed out that life was a struggle against entropy. There is also a field of study called thermoeconomics or biophysical economics, which focuses on the role of entropy in economics. An article in Scientific American featured the ideas of 
thermoeconomics. According to the article:
Central to their argument is an understanding that the survival of all living creatures is limited by the concept of energy return on investment (EROI): that any living thing or living societies can survive only so long as they are capable of getting more net energy from any activity than they expend during the performance of that activity.[2]
This appears to be completely consistent with my thesis. From this hypothesis thermoeconomists draw the conclusion that peak oil is real because it takes more and more energy to extract oil. They even acknowledge that technology could allow for greater efficiencies.
“It isn’t that there’s no technology,” Hall said. “The question is, technology is in a race with depletion, and that’s a whole different concept. And we think that we can show empirically that depletion is winning, because the energy return on investment keeps dropping for gas and oil.”
The article argues that it use to take 1 barrel of oil to extract 100 barrels of oil in the 1930’s and in 2006 in the U.S. it now takes 1 barrel of oil to extract 19 barrels of oil. Their prediction is that at 1 to 3 ratio the system fails. Neoclassical economics look at the inflation adjusted price of oil and argue that there is no evidence of diminishing returns for oil. The thermoeconomists’ response is that prices are a poor way of measuring diminishing returns for energy.[3] If the price of oil has not increased appreciably and the cost of extraction has increased, then some other factor must have decreased. For instance, the cost of transporting oil may have gone down. The neoclassical economic approach to this question seems to take into account all the factors that define the energy return on investment. The value of oil is not just in the extraction, but in the transportation and refining of the oil. If the cost (energy) to extract oil goes up, but the cost (energy) of refining oil goes down an equal amount, the energy return on investment remains the same.
This debate about peak oil is an example of a bigger debate in economics that I believe is the cornerstone of many of the arguments in economics. The bigger debate is whether it is possible to escape the Malthusian Trap. Is the present situation where humans have escaped this fate temporary? The two camps are pessimists who believe that it is impossible for humans to escape the Malthusian Trap permanently versus the optimists who believe we can permanently escaped the Malthusian Trap. Pessimists always point to the diminish supply or return associated with various natural resources. The pessimists have about 489,800 years of human history on their side. They also point to projections based on science that various natural resources will run out.
The optimists point to the repeated scare stories of natural resources or more commonly food running out that did not come true. For instance, ever since oil was found people have been projecting the end of oil. The pessimists have data showing trends based on scientific evidence that the present course is unsustainable. The optimists have evidence that during the last 200 years the pessimists’ scenarios have been wrong time and time again. Optimists point out that the pessimists ignore that people invent substitutes and therefore the doomsday scenarios, no matter how logical, do not occur – at least not during the last 200 years.
This point about substitutes was studied by Howard Barnett and Chandler Morse in their paper Scarcity and Growth where they concluded that resource scarcity did not threaten economic growth.[4] In an updated version of their paper they state:
The efficiency with which raw resources are converted into what physicists call “useful work” has improved markedly over the past few centuries. This finding is entirely consistent with the results derived by Barnett and Morse and later optimistic authors. If, however, progress is tied to the consumption of particular resources rather than being “disembodied,” the scarcity of such resources would constrain growth.[5]
Using this thought process we should rephrase the question of peak oil as will we hit peak energy. The question of peak energy is not a question of a lack of natural resources but lack of inventions. Berkeley astronomer Don Goldsmith reminds us that the earth receives about one billionth of the suns energy, and that humans utilize about one millionth of that. So we consume about one million billionth of the suns total energy.[6] Civilizations can be characterized as Type 1, 2, and 3 on the Kardashev scale. A type I civilization is able to harness all of the power available on a single planet. A type II civilization is able to harness all of the power available from a single star. A type III civilization is able to harness all of the power available from a single galaxy.[7] Physicist Freeman Dyson of the Institute for Advanced Study estimates that, within 200 years or so, we should attain Type I status. In fact, growing at a modest rate of 1% per year, Kardashev estimated that it would take only 3,200 years to reach Type II status, and 5,800 years to reach Type III status. Living in a Type I,II, or III civilization.[8] Based on this modest growth rate of 1% in energy use, it seems entirely possible for technology to keep up or exceed this growth rate.
I believe this debate between the optimists and the pessimists about natural resources and technology is about what I call the instability postulate.
Instability Postulate: Present technology cannot support present population income levels.
I cannot prove this, so it is labeled a postulate. If we were still in the Malthusian Trap, the postulate would have just stated that present technology cannot support present population levels. Since we have escaped (presently) the Malthusian Trap I have to state that we cannot support the present population at its present life style (income) levels. This may be a restatement of the idea of diminishing returns. However, I believe that even if we could increase our technology at exactly the same rate as the projected diminishing returns of present resources this state is not stable. Various random perturbations in the environment make this perfect balance impossible. For instance, variations in the amount of rain or output from the Sun will upset this instability. The huge meteor that wiped out the dinosaurs is an example of such an instability.
If we accept the pessimist point of view on this argument we are condemning billions of people to death and the survivors to a subsistence life on the edge of starvation. Even if we fail, morally we have to side with the optimists. From a logical point of view, inventions are not subject to diminishing returns. Every invention is a combination of known elements – you cannot create something from nothing. This follows from the conservation of matter and energy. As a result, every invention opens up the possibility of more inventions. Creating these inventions takes real energy, but the number of potential inventions we can conceive increases with every invention we create. As a result, the number of potential inventions grows factorially. Thus, it appears entirely impossible to grow our technology faster than the limitations of diminishing returns and the instability postulate. Modest gains of 1% per year in energy will result in humans advance fairly quickly to a type I civilization, which are energy usage rates that seem unthinkable today. Invention is the key to escaping the Malthusian Trap and growing real per capita income.
Fundamental Observation of Economics (restatement): Inventing is the only way humans can increase real per capita income.
[1] Wikipedia, What is Life?, http://en.wikipedia.org/wiki/What_is_Life%3F_(Schrödinger), 10/6/10.
[2] Does Economics Violate the Laws of Physics?, Scientific American, October 23, 2009, http://www.scientificamerican.com/article.cfm?id=does-economics-violate-th, 10/9/10.
[3] Does Economics Violate the Laws of Physics?, Scientific American, October 23, 2009, http://www.scientificamerican.com/article.cfm?id=does-economics-violate-th, 10/9/10.
[4] R. David Simpson, Michael A. Toman, and Robert U. Ayres, Scarcity and Growth in the New Millennium: Summary, Resources for the Future, 2004, http://www.rff.org/documents/rff-DP-04-01.pdf, 10/10/10.
[5] R. David Simpson, Michael A. Toman, and Robert U. Ayres, Scarcity and Growth in the New Millennium: Summary, Resources for the Future, 2004, http://www.rff.org/documents/rff-DP-04-01.pdf, p. 8, 10/10/10.
[6] Kaku, Michio, The Physics of Extraterrestrial Civilizations, http://mkaku.org/home/?page_id=246, 10/11/10.
[7] Kardashev scale, Wikipedia, http://en.wikipedia.org/wiki/Kardashev_scale, 10/11/10.
[8] Kaku, Michio, The Physics of Extraterrestrial Civilizations, http://mkaku.org/home/?page_id=246, 10/11/10.
It is the premise of this post that economics is objective and therefore can be a hard science[1], based on empirical observation, logic, and reason. Some clear objective results in economics include that failure of a person to produce (consume) enough food results in starvation and death. It does not matter how much someone feels or believes (or has faith) that they should not have to produce (consume) enough calories, they will starve to death. There is overwhelming empirical evidence for this proposition, including the purposeful starvation of numerous people by totalitarian governments in the last century. Another example is that if the government raises the cost (or reduces the return) of performing an activity, you will have less of this activity than would have occurred without the government interference, as 
long as you have statistically large enough group. For instance, if a government raises the cost of food or reduces the return for producing food enough people starve. The empirical evidence includes numerous African countries that have held the cost of food below the cost of production and this inevitably results in mass starvation. This is true no matter how much faith the government has that it should not occur, or how much they feel it will not occur, or how much they believe it should not occur. Similarly, a person can deny the existence of gravity, but gravity will act on the person no matter what they believe about gravity. Gravity is not a matter of belief, it is a matter of understanding. It is clear that at least some of the laws of economics are as immutable as the laws of gravity.
All science is based on certain fundamental empirical observations. One of these fundamental observations is that reality is objective. This means that reality exists independent of any persons’ belief, hope, faith, or desire. The evidence for this proposition is overwhelming and includes all the incredible advances in physics, chemistry, biology, geology and the applied sciences (engineering).
Fundamental Observation: Reality is Objective[2]
The second fundamental observation of science is that reality is understandable or discoverable using observation, logic, and reason. In science, we follow logic and reason even if it seems counterintuitive. For instance, the implications of special and general relativity predict that clocks on GPS (Global Position Satellites) will run at a different rate than clocks on earth.[3] This appears counterintuitive, but empirical evidence shows that this is true and that failure to account for this difference will result in meaningful navigational errors.
Fundamental Observation: reality is understandable or discoverable using observation, logic, and reason
If economics is going to be a science, it must be based on these two fundamental observations/assumptions. Some people may object that science is based on observations. It has been shown that all logical systems are based on either an observation or an assumption, in the case of mathematics. For instance, Euclidean geometry is based on the assumption that a line goes on forever and two parallel lines never intersect. Spherical geometry is not based on these assumptions. It assumes that a line will wrap around on itself. In science we do not arbitrarily pick the starting point, we base them on observations. Unfortunately, the science of economics is in the same state as physics before Newton.
Life is a fight against entropy, the second law of thermodynamics. Entropy is normally defined as the measure of the disorder of a system. Entropy was discovered as part of thermodynamics (statistical mechanics) and it explains that a perpetual motion machine is impossible. Entropy always increases in a closed system. Luckily for us, the Earth is not a closed system. For instance, we receive energy from the Sun. The only way to increase order is by the input of energy. Life represents increasing order and therefore just to sustain life at its present level requires energy to overcome entropy. Edwin Schrödinger, Nobel Prize winning physicist, proposed this in his 1944 book, What is Life.[4]
Fundamental Observation: Life is a fight against entropy
Plants create this energy by photosynthesis. They convert carbon dioxide into sugars (energy) using light. They use this energy to create order. Animals eat plants or other animals and use the energy to create order. Note that when animals eat plants or other animals, they are increasing the disorder of the plants and animals they eat. Thus, there are two general mechanisms which increase the entropy of life forms: 1) internal and 2) external. Internal mechanisms are those that result from the failure to consume enough calories (energy) and aging. Animals require oxygen, water, and food in that order to survive. Without oxygen, the animal cannot oxidize enough sugar (fat, protein) to survive – overcome entropy. Without water, the animal’s cells are unable to absorb energy and expel wastes.[5] As a result, the animal does not receive sufficient energy to overcome entropy. Aging is a process of increasing disorder – entropy. This disorder is caused at least in part by disorder in genetic information.[6] External mechanisms include being eaten or attacked by other living organisms, diseases, accidents (for animals), and the elements.
In general, living organisms use energy to overcome entropy first and then to increase their size. However, some animals also create simple shelters or seek shelter to ward off the entropy increasing effects of the elements and predators. Rain, sun, hail, snow, heat, or cold all contribute to the increase in entropy of living organisms (disorder). A living organism dies when its entropy increases above a certain level. Life has two main methods of overcoming the effects of the second law of thermodynamics: 1) food consumption and 2) shelter creation (inhabitation).
A species of life becomes extinct when the species as a whole reaches a certain level of entropy either because it cannot consume enough energy or because external mechanisms increase its entropy to the extinction level. A species reaches the Malthusian Trap when increases in population of the species results in the total required energy (food) to support the population is greater than supply of food. Total available energy is less than the energy required to overcome the total entropy of the species population. Most life forms exist in the Malthusian Trap, including humans until the Industrial Revolution.
Homo sapiens also consume food and create shelter to overcome the effects of entropy. Unlike other living organisms, homo sapiens also organize their environment to minimize the effects of entropy. For instance, humans have invented agriculture to increase their supply of food (energy) and therefore order. Humans also harnessed the physical strength of animals, created internal combustion machines, electric lights, electricity, washing machines, tractors, computers, the internet, email, lasers, fiber optics, etc. All of these are inventions. Humans alter their environment by creating inventions. This is different from every other animal. This should not surprising, since the distinguishing characteristic of homo sapiens is their ability to reason. Man is a rational animal according to Aristotle’s classical definition.[7] Being rational is the distinguishing characteristic of humans. Man uses his reason to alter his environment (invent) and increase order for himself. Invention is the unique way in which man is able to create order – this is the fundamental observation of economics.
Fundamental Observation of Economics: Man’s unique ability to increases order (wealth) is his ability to invent.
Inventing first results in the increased success of the species. Homo sapiens populated most of the world in less than 500,000 years because of this unique ability. As long as the rate of technological progress is slower than the growth in population, man is stuck in the Malthusian Trap. Sometime around 1800 in Europe and the United States, the rate of invention exceeds the rate of growth in population and man escapes the Malthusian Trap at least in the West. When man escapes, he is no longer subject to biological evolution. As far as we know, homo sapiens are the only species to ever escape the Malthusian Trap.
Trade enhances man’s ability to invent. By trading the products of each others’ inventions both trading partners can specialize in the inventions and both end up wealthier. David Ridardo explained how both parties are better off because of trade using the example of England trading cloth for Portuguese wine:
England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it in her interest to import wine, and to purchase it by the exportation of cloth. To produce the win in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced with less labour than in England.[8]
Using the example above if England produces twice as much cloth as it needs, it has invested 200 man hours. If Portugal produces twice as much wine as it needs it has invested 160 man hours. Now if England and Portugal trade their excess cloth for the excess wine, England has invested 200 man hours for all its cloth and wine, while Portugal has invested 160 man hours for all its cloth and wine. If England had produced both all its cloth and all its wine locally, then it would have invested 220 man hours for the same goods. This means that England requires 10% more man hours if it does not trade. If Portugal had produced both all its cloth and all it wine locally, then it would have invested 170 man hours for the same goods. This means that Portugal requires 6.25% more man hours if it does not trade.
Trade is a rational activity and humans are the only animals to engage in trade of non-like items and trade between non-related individuals.[9] Classical economics has focused on trade and the related supply and demand curves instead of the role of invention in economics. This might have occurred because the beginning of classical economics was in reaction to the Mercantile system and its limitations on trade. Adam Smith’s book, The Wealth of Nations, is often seen as a refutation of the Mercantile system. Matt Ridley, in his book, The Rational Optimist, has suggested that trade is the key to creating wealth. This emphasis on trade has been misplaced. Invention proceeds trade. If everyone produces the same thing, then there is no reason to trade. It is only because someone has invented a new product that trade becomes a rational choice. For instance, one group of people may have invented a process for skinning animals and using them as clothing. They may have traded this with people who had access to flint and invented a system for making simple axes. Invention has to proceed production, which has to proceed trade logically. Of course, without trade the value of invention is severely diminished.
[1] Hard science, such as physics, chemistry, and biology, as opposed to “soft science”, such as psychology, sociology, and political science. In general, soft sciences are not science at all. For instance, Freud’s formulation of the id, ego, and super ego is not science. This formulation is not testable and is not based on objective empirical evidence. In fairness, psychology to the extent it is based on neurobiological processes is real science. The first step in any science is categorization and psychology has attempted to categorize various behaviors. Unfortunately, many of these categorizations are too vague to be testable or objective. As we have gained more information some formally vague definitions have become objective. Political science is not a science it is a study of politics. Sociology also has no basis in science. This is not to say that there is no value to studying politics or the interaction of groups. History and literature do not call themselves a science, but there is great value in the study of history and literature. History even uses science to discover new facts about history, but it is not a science. The soft sciences use the nomenclature of science to aggrandize themselves. This propaganda has undermined the value of science in the eyes of the general public.
[2] Even the bizarre results of quantum mechanics are repeatable and independent of the observer’s hopes, desires, faith, opinion.
[3] Real-World Relativity: The GPS Navigation System, http://www.astronomy.ohio-state.edu/~pogge/Ast162/Unit5/gps.html, October 3, 2010.
[4] Wikipedia, What is Life?, http://en.wikipedia.org/wiki/What_is_Life%3F_(Schrödinger), 10/6/10.
[5] BNET, Physiological Effects of Dehydration: Cure Pain and Prevent Cancer, http://findarticles.com/p/articles/mi_m0ISW/is_2001_August/ai_78177228/, 10/6/10.
[6] Hayflick, Leonard, Entropy Explains Aging, Genetic Determinism Explains Longevity, and Undefined Terminology Explains Misunderstanding Both, PLoS Genetics, http://www.plosgenetics.org/article/info:doi/10.1371/journal.pgen.0030220, 10/7/10.
[7] The Philosophy of Aristotle, Adventures in Philosophy http://radicalacademy.com/philaristotle4.htm, 10/7/10.
[8] Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Haper Collins, New York, 2010, p. 75.
[9] Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Haper Collins, New York, 2010, p. 56.
The author, Matt Ridley, has written an excellent book that is epic in the scope of issues he tackles. The book covers why homo sapiens thrived while other members of the homo genus fail. He shows that on average the human condition has gotten consistently better and this increase in wealth has been especially true in the last 200 years. He destroys the noble savage myth. He shows the intellectual failings of Marxism, environmentalism, self sufficiency, and renewable energy. His two main themes underlying these vast topics are: 1) 
trade leads to division of labor, which leads to invention and 2) the inexorable march of human progress.
Despite Mr. Ridley’s incredible breadth of knowledge, there is a logical gap in his first thesis when he attempts to explain the industrial revolution and why it took off in England. This logical gap is the result of his misunderstanding of intellectual property.
This misunderstanding of intellectual property is most likely due to his open source utopianism. This utopianism leads the book to conclude “Thanks to the internet, each is giving according to his ability to each according to his needs, to a degree that never happen in Marxism.” P. 356. Even with this imperfection, this is an incredible book that I highly recommend to anyone.
Population Density – Good or Bad for Wealth Creation?
The book argues that population density is necessary for trade and division of labor, which is the route to economic prosperity. It also argues that the division of labor leads to inventions, which leads to further specialization. Specialization requires a large enough market to support it and as a result population density is the friend of economic progress. However, later in the book it argues that increasing population caused a decline in the living standards of Japan and Denmark. This decline supposedly occurred because the increasing population decreased the value of labor and therefore the market for specialization and inventions. England escapes this fate because of coal and phantom land in the colonies. This contradiction between the need for human density for specialization and economic progress and the idea that increased population density reduced the value of labor destroying the market for inventions is not adequately resolved.
The book argues, starting on page 52, that trade is what allowed homo sapiens to succeed where other apes failed and even other humans failed such as Neanderthals. It provides numerous examples of how various groups of humans regressed technologically because of inadequate population densities to support specialization, such as Tanzania. The book summarizes the lessons by quoting economist Julian Simon “population leading to diminishing returns is fiction: the induced increase in productivity is scientific fact.” P. 83.
In a chapter entitled “Escaping Malthus Trap,” Ridley discusses how Japan after a period of prosperity gives up its technology. He states “that sometime between 1700 and 1800, the Japanese collectively gave up the plough in favour of the hoe because people were cheaper to hire than draught animals.” P. 198. The reason for this according to Ridley was rapid population expansion due to paddy rice technology. This population boom made labor cheap and killed the market for technology. Denmark follows the same path as Japan and by the 1800s becomes “trapped by its own self sufficiency.” P. 200. Britain escapes the Malthusian trap that Japan, Denmark, and Ireland suffer, according to Ridely, because of selective breeding (maybe p. 200), ghost acres provided by the colonies (p. 202), release valve emigration to the colonies (p. 202), and coal (sustained industrial revolution p. 216.)
There is a logical inconsistency between the conclusion early in the book that population density is necessary for prosperity, but later in the book arguing that prosperity stalled after a burst in population in various countries. The explanation of selective breeding, does not explain why the US or Australia prospered. These countries were heavily populated by British rejects. Similarly, the ghost acres provided by the colonies were eventually used up. It might be argued that there was some tipping point that could only be achieved with ghost acres. I think this fails also, because it flies in the face of the book’s earlier argument that increased population densities allow more specialization and invention to increase everyone’s standard of living. The release valve emigration fails for the same reasons as the ghost acres. The emergence of coal is also unsatisfying. Coal mining was known before the birth of Christ and trade in coal occurred in England as far back as the 1300s, according to Wikipedia. The book also argues that many surges of economic growth were extinguished by parasitic political systems. However, it never states this is why Japan’s and Denmark’s prosperity was reversed.
What was new in the industrial revolution was not coal, but the machines to use coal and numerous other inventions. The book argues that these inventions were not in general due to new scientific discoveries, p. 255, and I agree. So why at this particular point in time did we have a sudden increase in rate of technological advance, including machines that used coal? The beginning of the industrial revolution coincides with the recognition of property right’s in inventions. The US constitution states (Article 1, section 1, clause 
that inventors have ‘RIGHTS” in their inventions. Patents, which are legal title to an invention, are the only free market system for encouraging people to invent. While Britain had a patent system at least back to the Statute of Monopolies, 1623, it did not recognize a right to property in one’s invention. It was a royal grant, subject to the whims of the ruling monarch. As a result, it was expensive and arbitrary. However, when the United States recognizes that inventors have a property right to their invention, this provides a whole new incentive to inventors and their financial backers. No doubt this attitude towards inventions also infected Britain. For more on the correlation between real per capita increases in income and patent systems see Source of Economic Growth.
Mr. Ridley argues that patents at best have marginal effect on the rate of invention. However, Mr. Ridley shows an appalling lack of knowledge about patents and intellectual property. He also has a number of inconsistent statements about intellectual property. For instance, on page 267, he states that copyrights have little effect on the creativity of musical composers. However, on page 326 he states that Nashville was saved by music entrepreneurs using good local copyrights in the 1930s. Not only are these two statements contradictory, there is no such thing as local copyrights in the United States.
Patents
The book has numerous other errors about intellectual property. For instance, it states that intellectual property is not like other property, because it is useless if you keep it to yourself, p. 262. This statement is nonsense. The Coca Cola formula is not shared and this is the only reason it has any value. A patent to an invention (legal title to an invention) only has value if there is some ability to exclude others from using it – as opposed to knowing about it. If everyone can make a laser without pay royalties, then it may have value to the world but it has no differential value to the inventor. Patents are derived from exactly the same philosophical basis as real property. Namely, Locke’s theory of Natural Rights. For more information see Scarcity – Does it Prove Intellectual Property is Unjustified? Below are a list of some, but not all, of the book’s errors related to patents:
1) The book then states that people get rich by selling each other things and services not ideas, p. 263. What are authors, professors, engineers, scientists, really selling? Authors are not selling books, they are selling ideas that just happen to be embodied in books. The Kindle proves this. The Kindle does not allow the user to buy a book, but to buy the ideas in a book. Professors are either selling the teaching of ideas or just an expensive way to bore students. Engineers are selling a service, which encompasses ideas not the paper (digital ones and zeros) on which it is written. Most companies do not make money manufacturing things, they make money with inventions (ideas) that are implemented in things. When a company only sells things with no (new) ideas in these things, then their profit margins are extremely narrow. One of the limitations on growth has been this Luddite refusal to allow inventors to specialize in inventing. This book’s premise is built on the division of labor, but the author rejects this idea when it comes to inventing.
2) Mr. Ridley also seems to be confused between the spread of information related to inventions and the legal right to use that information to build an invention. It is a major goal of modern patent systems to spread information about inventions so that they can be used by other people to build other inventions. In the U.S. we built patent depository libraries to spread the wealth of information in patents (before the internet). Patents encourage people to share the information associated with their inventions instead of keeping them a trade secret. Countries without patent systems tend to invent mainly things that can be protected with a trade secret. (See Switzerland before they adopt a patent system) As a result, other inventors do not get learn from these inventions and the rate of technological progress is inhibited.
3) The book perpetuates the first mover advantage alternative to patents. Xerox had the world’s greatest first mover advantage in plain paper copiers, when it agreed to settle an antitrust lawsuit in 1975 by giving away its patent portfolio. Its market share went from almost 100% in plain paper copiers to 14% in just four years. The first mover advantage is a fairy tale.
4) The book argues, p. 264, that there is no evidence that patents are what drive inventors to invent. This statement is completely illogical. Real property rights are not what drive farmers to farm or builders to build houses. Nevertheless, there would be a lot less building and less efficient farming, if we did not have real property rights. Just look at countries, where property rights in buildings and land are hard to impossible to obtain.
5) The book states that a number of inventions were never patented, p. 264, such as automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers. While it is possible that the first version of some of these inventions were not patented, all of these inventions were subject to numerous patents. This can be easily verified with a simple patent search. For instance, there are at least 20 patents and probably hundreds of patents on automatic transmissions. The same is true of ballpoint pens, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers. A simple internet search shows that chemist Leo Hendrik Baekeland (1863-1944) invented and first patented the synthetic resin that we know as Bakelite in 1907.[1] Jacques E Brandenberger was granted patents to cover the machinery and the essential ideas of his manufacturing process of the new film (cellophane).[2] The assertions of no patents for the zipper is also easily shown to be incorrect. Elias Howe, who invented the sewing machine received a patent in 1851 for an ‘Automatic, Continuous Clothing Closure’ (zipper).[3]
6) The book argues that the Wright brothers, enforcing their patent on airplane control surfaces, supposedly shut down the airplane industry in the US. This is the typical propaganda of open source community. First of all the Wright brothers were building airplanes, so the industry was not shut down by enforcement of the patents. Second stealing other people’s property is not shutting down industry, it is shutting down theft. We would not say that someone stopped the harvest of wheat, because they did not let someone else reap the wheat they planted on their land.
7) The patent thicket argument is repeated by Mr. Ridley to suggest that patents inhibit advances in technology. A number of papers[4] have shown that there is no empirical evidence for the patent thicket argument and that the logical analogies on which it is based are flawed. For more information see Intellectual Property Socialism: Part IV USPTO Takes Aim at Inventors.
Mr. Ridley further demonstrates his ignorance of patents by repeating the concern that the US Patent Office was issuing patents for human genes in the 1990s, p. 265. What the Patent Office did and does was issue patents on “isolated genes.” This is similar to patents on things like isolated forms of vitamin B12, which was patented. For more information see Gene Patenting Debate Continues.
9) The book also mistakenly calls a patent a “temporary monopoly.” A patent is a property right, just like property rights in land, houses, cars, etc. The logical basis for patents is exactly the same as other property rights. Property rights are based on Natural Rights, which states that since you own yourself you own the product of your labor (physical and mental). For more information see The Myth that Patents are Monopolies.
10) He also implies that patents are top down solution to encouraging invention. Nothing could be further from the truth. All a patent system does is provide property rights to inventors for their inventions. This is similar to property rights for land, which is a bottom up way to increase the productivity of farming for instance. Just giving pseudo property rights to peasants in the USSR and China caused enormous increases in farm production. Property rights are a bottom up solution, not a top down solution. In fact, the genius of the United States patent system (as opposed to Britain’s) is that it was accessible to all people, including women and slaves that had no property rights under their state laws. This encouraged a torrent of inventive activity in the U.S. that propelled it from a backward farming country to an economic and technological powerhouse in the world in less than 60 years. For more information see the excellent book by B. Zorina Kahn, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920.
Open Source
I am convinced that Mr. Ridley’s poor research on patents and intellectual property is due to his infatuation with the open source movement. On page 356 he opines that genetic research will soon go open source. He is so excited about open source that he eventually suggests a Marxist’s open source utopia – “Thanks to the internet, each is giving according to his ability to each according to his needs, to a degree that never happen in Marxism.” P. 356
The open source movement has been a dismal failure. Its biggest success has been to extend UNIX (LINUX) to personal computers, other platforms, and add new features. Open source has mainly extended existing technologies, much like the incremental invention that can be expected from large companies. The open source movement deludes itself into believing they are fighting some sort of David versus Goliath battle against large corporations and the patent system. The reality is that open source developers are giving large corporations, such as IBM, their efforts for free and weakening the bargaining power of technical personnel. The open source movement plays right into the hands of large corporations and other large institutions, by weakening the property rights of developers in their work. It should be no surprise that open source has been an abysmal failure, since this exactly the situation most of the world lived under until 1800. Before modern patent systems, new inventions were rare and the return for the invention was often controlled by a trade guild. The members of the trade guild profited equally, meaning there was little incentive for the inventor to spend time creating. Per capita income of the world before 1800 had been stagnant for millennia. Where modern patent laws were adopted around 1800, incredible increases in per capita income occurred. Mr. Ridley trumpets this progress throughout his book. In areas without patent systems, we see stagnant growth in per capita income. For instance, Japan’s per capita income does not take off until they copy the US patent system in the 1860s.
It is unfortunate that this excellent book is disfigured by the author’s irrational infatuation with the open source movement. This infatuation causes the author to embrace the logical contradiction that increases in population density increase economic growth and also causes the Malthusian trap (decreases in economic growth). It also causes him to reject the solution to the Malthusian trap, which is the recognition of property rights in inventions.
[1] http://bakelitecollector.com/bakelite-history 7/21/10
[2] http://inventors.about.com/od/cstartinventions/a/Cellophane.htm 7/12/10
[3] http://inventors.about.com/library/weekly/aa082497.htm
[4] Ted Buckley, Ph.D., The Myth of the Anticommons, Bio, www.bio.org (2007); Epstien, Richard A., Kuhlik, Bruce N., Is there a Biomedical Anticommons, Regulation, (Summer 2004), pp. 54-58
There has been a lot of anger at corporations lately and many people are wondering when and why the courts ever stated that corporations have the rights of a “legal person.” The case Citizens United v. Federal Election Commission, recently overturned the limits on corporate spending on elections based on the idea that corporations have free speech rights under the 1st amendment. This upset many people and many questioned why the court believed that corporations should have rights under the 1st amendment. The crony capitalism of the Bush and Obama administrations has added to this frustration at corporations. The British Petroleum Gulf oil spill 
debacle is adding fuel to the flames. Is this idea that a corporation is a “legal person” with rights some sort of judicial activism?
The first US case to recognize that a corporation is a “person” for legal purposes, able to sue and be sued was Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 4 L. Ed. 629 (1819) (see http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=17&invol=518)
This 1819 case was really about the Contract Clause of the Constitution and in today’s world would be characterized as a property right’s issue.
“Trustees of Dartmouth College v. Woodward“, 17 U.S. (4 Wheat.) 518 (1819), was a landmark United States Supreme Court case dealing with the application of the Contract Clause of the United States Constitution to private corporations. The case arose when the president of Dartmouth College was deposed by its trustees, leading to the New Hampshire legislature attempting to force the College to become a public institution and thereby place the ability to appoint trustees in the hands of the governor. The Supreme Court upheld the sanctity of the original charter of the College, which pre-dated the creation of the State. (http://en.academic.ru/dic.nsf/enwiki/101008)
Since the case did not revolve around whether a corporation was a “legal person” it is my opinion that this was a generally accepted principle in the legal community at the time. As this case shows, if corporations are not treated as a “legal person” then the government will use this as an excuse to violate private property rights. The idea that a corporation is a “legal person” is not new and makes sure that private property rights are not violated.
The U.S. has been the most innovative country in the history of world. “Virtually every major development in technology in the twentieth century – which was far and away the most important century in the history of technology – originated in the United States or was principally industrialized and turned into consumer products here.”[1] The economic success of the U.S. is due to its technological innovation. The first colony was only possible because of two new technologies – the full-rigged sailing ship and the joint-stock company. This inventive spirit has continued to the present with the Information Age, which was founded in the U.S. and based on the internet (ARPANET) invented in 1969.
Judge Newman, who I believe is one of the most brilliant jurists alive, discusses the reasons for the creation Court of Appeals for the Federal Circuit – click here. The severe recession of the late 1970s motivated the Carter administration to reexamine the U.S.’s industrial policies. Some of the findings included that regulation, tax policy, antitrust law and patent law were all conspiring in the 1970s to depress innovation and the economy. There are eerie parallels to the most recent decade – see Innovation – Regulatory Road Kill?
It is important to understand what is meant by innovating or inventing and what its properties are before embarking on how to encourage or measure technological innovation. Innovating is creating something new. What do we mean by new? Was the light bulb invented by Edison new? There were other electric light bulbs before Edison. Some people suggest that Edison did not really invent the light bulb. One website states “Contrary to what schools have taught for years, the American icon, Thomas Edison, neither invented the light bulb, nor held the first patent to the modern design of the light bulb.”[1] Most of Edison’s detractors point to Joseph Wilson Swan as the inventor of the incandescent light bulb. Swan was an English physicist and chemist and applied for a patent on his light bulb before Edison. However, Swan’s light bulbs were low resistance light bulbs. If you tried to setup an electrical power system to power Swan’s light bulbs, it would have required such a large copper conductor as to make the system economically unfeasible. Edison created the first high resistance light bulb, which made it possible to create a commercially feasible electric light system.
None of these securities laws were able to prevent the stock market decline of 2000. Sarbanes Oxley was passed in 2002 in reaction to several corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.
Sarbanes Oxley was passed in 2002 in reaction to corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. This law has effectively killed off the possibility of going public in the U.S.
Phoenix: Mythical Fed Chairman Muses on the Economic Growth of the 90s
The Federal Reserve Chairman was sitting in his office contemplating the fantastic problem that he and the other fed governors were trying to solve. The Federal Reserve, since its inception in 1913, had never faced such a dilemma. Huge federal budget surpluses were likely to wipe out the federal debt in the next couple of years and the fed chairman was concerned how the Federal Reserve was going to control the money supply. Buying and selling treasury notes was one of the major methods the Federal Reserve used to control the money supply. Controlling the money supply was necessary to control inflation, ease recessions and deal with banking crises, such as 1930’s style runs on banks. The Federal Reserve buys treasury bills when they want to increase the money supply and sells treasury bills when they want to decrease the money supply. If the federal deficit was paid off, then the Federal Reserve would have difficulty using open market operations to control the money supply. The Federal Reserve could still alter the discount rate or the required reserve ratio of banks to alter the money supply, but open market operations have a more immediate.
Note that this post is based on free audio CD, titled How to Make Your Patents a WMD- Weapon of Market Domination. If you want a free copy of the audio CD click here.
So how valuable are patents? The inventor of the air hockey game table, would have answered pretty darn valuable. He had no competitors during the lifetime of the patent on air hockey. Would you say that was powerful? I think you would agree that this patent on air hockey was a Weapon of Market Domination. Wouldn’t you like to have a patent that completely eliminated all your competition? What do you think your margin would be in a market you completely own. I should tell you the day the patent expired, the company that had invented air hockey had a dozen competitors.
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