Marshall Phelps wrote an excellent response in Forbes to an anti-patent editorial by The Economist. The article is entitled Do Patents Really Promote Innovation? A Response To The Economist. He provides overwhelming evidence that patents are the driver of new technologies. I and others have shown that the reason the industrial revolution occurred when and where it did was because of the introduction of the first practical patent systems, i.e., property rights for inventions. The article also points out that the most inventive countries are those with the strongest patent systems and these countries also have the greatest technology dispersion. The article also points out that the patent system encourages the dissemination of information about technologies, which has been shown empirically and logically. It is time the anti-patent crowd admit that their position is a matter of faith, not logic an evidence.
I have one beef with the article when it says you cannot prove that patents lead to more inventions and you cannot prove a free market (with patents) leads to economic growth. Both of these have been shown empirically and the causal connection is clear. Property rights ensure that the creator benefits from their creation. People have to work to live and when the product of their work is stolen from them, they cannot be as productive. For more see my book Source of Economic Growth and my talk at Atlas Summit 2015.
This book, Capital in Disequilibrium: The Role of Capital in a Changing World by Peter Lewen, is supposed to be Austrian Economics’ answer to “new growth theory”, which recognizes that new human knowledge is the most important component to economic growth. As opposed to the “old” ideas on growth which claimed economic growth was the result of increases in land, labor, or capital. Old school growth theories focus primarily on increases in capital. Perhaps the two biggest figures in new growth theory are Robert Solow and Paul Romer. Robert Solow won the Nobel Prize in economics for his econometric study showing that technological change was the key driver in the US economy. Sadly he then said technological change was not part of the study of economics, it was like background radiation and beyond our control. Paul Romer takes over from Solow by making technological change part of the study and policy recommendation of economics.
This book suffers from many of the same problems other economists who have explored new growth theory have had. They attempt to graft the findings of new growth theory onto their preconceived ideas about economics. For example, Robert Solow is a Keynesian so he has attempted to just tweak Keynesian ideas to fit this new information, instead of understanding that this new information required a whole new look at and approach to economics. Paul Romer is what I would call a “mathematical Keynesian” and is also trying to fit a square peg into a round hole.
This book attempts to take the finding s of new growth theory and meld them into Austrian Business Cycle Theory (ABCT). ABCT claims that economic growth is the result of increases in capital/savings. There is no evidence that increases in savings or capital in anyway result in economic growth and plenty of evidence to the contrary. Pasting some of the ideas of new growth theory onto ABCT neither solves the problems with ABCT nor adds anything to new growth theory.
The author’s ideas on scientific and technical knowledge come from Karl Popper, who has argued that knowledge is impossible. This is not surprising as it is consistent with Hayek’s ideas of cultural evolution, which argues that reason is limited and it is conceit to suggest that anyone can use reason to determine a correct societal structure. Both Hayek and the author are fans of David Hume (See Lewin’s youtube “Peter Lewin on Austrian Capital Theory – Part 1”). David Hume you will remember said causality was an illusion and brought us the “is ought” problem in ethics. In other words, Hume attacked the very basis of reason, logic, and ethics. Hume is part of the Scottish Enlightenment, which elevated emotions above reason. The Scottish Enlightenment underpins all of Austrian Economics. The other philosophical tradition behind the Austrians is philosopher Franz Brentano who raised the psychology of the person to a primary.
It is not surprising then that the author concludes “The superior performance of capitalist economies cannot be logically ‘proved.’” Under the author’s ‘implications for policy’ section we get this,
“It involves not only, or primarily, the addition of existing capital equipment but rather the introduction of progressively more technically advance equipment, the production of which is made possible by an institutional environment in which the discovery of such technical advances is encouraged.”
Interestingly enough the author never explains what encourages technological advances and he never even mentions property rights for inventions, i.e., patents. Even Solow and Romer realize that they cannot ignore patents, however contrived their arguments are for dismissing them.
One of the reasons the author ignores patents is that he emphasizes what he calls “tacit knowledge.” Tacit knowledge is something we know but cannot prove or of which we are not conscious. This is perfectly consistent with the Austrian ideas that reason is limited or ineffectual. As a result, he talks a lot about innovation and never mentions inventors. He talks about organizations, but never individuals. He talks a lot about production and ignores invention. Austrians like to scream they are capitalist or free market, but they are certainly not pro-individualistic. This is not surprising as this would require a commitment to the power of the individual mind to understand the world. The author further reveals his collectivist ideas when emphasizes that the knowledge that is important to the economy is “social knowledge.” The Austrians are collectivists. They believe central planning interrupts the functioning of the process of gaining “social knowledge.”
This book does not contribute anything to new growth theory. The only reason to read this book is to better understand the underlying principles of Austrian Economics, which are not pro-reason, pro-individual, or pro-capitalism (The economic system that occurs when the government protects individual rights.)
 A Graphical Introduction to the Austrian Business Cycle Theory, Gaurav Mehra, https://mises.ca/posts/articles/a-graphical-introduction-to-the-austrian-business-cycle-theory/, accessed 9/8/15
 [This] technique has been applied to virtually every economy in the world and a common finding is that observed levels of economic growth cannot be explained simply by changes in the stock of capital in the economy or population and labor force growth rates. Hence, technological progress plays a key role in the economic growth of nations, or the lack of it. http://en.wikipedia.org/wiki/Growth_accounting.
One of the foremost economists in Austrian Economics is Ludwig Von Mises. One of his major contributions was praxeology, which is is the deductive study of human action. I have been trying to better understand praxeology. I have consulted numerous websites, papers, and videos on point. Most of them either ramble on saying nothing or they spend all their time attacking logical positivists or others. I decided to review a paper from the Mises website and a video on point. Together I thought these were the best sources on slightly different points of praxeology. The video was a lecture by Dr. Walter Block who is the Harold E. Wirth Eminent Scholar Chair in Economics and Professor of Economics at Loyola University New Orleans and Senior Fellow with the Ludwig von Mises Institute. Below are statements from the paper (1-4) and the video (5-12), with my comments below. Note that my criticism of praxeology and Austrian Economics is not an endorsement of any other school of economics including classical, neo-classical, Keynesian, monetarists, etc. The fact that I am critical of praxeology does not make me or mean I am a logical positivist. Also my critique is not to suggest that there are no valid points made by Austrian Economics.
1) “Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals.” “Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper . . . “
How can you tell the difference between non-goal directed action and goal directed action, if you cannot say what goals should be pursued or will be pursued? If the goals are random or allowed to be random, how can you be sure the actions are not random? The answer is that there is no difference between non-goal directed action and goal directed action where the goals are random. This is part of the value subjectivism of Austrian Economics.
What is the goal directed action of a person committing suicide? Or a vandal? Or a teenager on a joy ride?
The human action axiom is meaningless when it is impossible to judge the goal.
2) “Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.”
This means that praxeology is a branch of Philosophical Rationalism. Descartes created a system of physics just by thinking about the world. It was internally consistent. In other words it was just like praxeology and it did not describe the world and could not be used to predict or understand how something would work.
3) “Mathematical logic is appropriate to physics.” But not to economics. “In physics the axioms and therefore the deductions are in themselves purely formal and only acquire meaning “operationally” insofar as they can explain and predict given facts.”
There are no axioms in physics. Physics is a science and science starts with observations, not axioms.
4) “That Austrian School economics rests firmly from the beginning on an analysis of the fact of individual subjective values and choices.”
Note that the paper says “individual subjective choices”, which means that the word subjective here is not that each person makes their own choices. It means that there is no rational way to evaluate people’s choices. This subjectivism is why all major figures in Austrian Economics do not think that natural rights exist. They do not believe that ethics can be based on reason.
5) Economics is pure logic – no need to verify in the real world.
That would make economics a branch of mathematics (logic), not a science. (Also see the video https://www.youtube.com/watch?v=aTXxvWa11Lg).
6) While economics is based on pure logic, the lecturer argues it is science.
Dr. Block does not know what the definition of a science is. Actually, I do not think Mises made this mistake of confusing math/logic with science.
7) Total profits equal zero in the economy is an axiomatic (theorem) tendency according to the professor.
If this were true we would still be living in the Malthusian Trap. The definition of zero profit in the economy would mean that on average people are living on the edge of starvation. Profit means that you produce enough to have a surplus. But this does not have to bother Dr. Brock, because economics is not an empirical science, which is an oxymoron.
It appears the professor was attempting to summarize the zero profit theorem, which is based on perfect competition. Perfect competition is a flawed concept that denies property rights, something it has in common with Austrian Economics. I discuss the many flaws of perfect competition in my book Source of Economic Growth and also in my lecture at the Atlas Summit 2015.
If what the Austrians are trying to say is “in a technologically stagnant economy the total profits tend to zero.” Then that is true and I discuss this in my book Source of Economic Growth. The reason for this is the second law of thermodynamics (entropy). It is also probably true in a technologically stagnant market, profits tend to zero for firms in the market.
8) The Zero Profit theorem cannot be falsified.
That is the meaning of non-empirical, but what is amazing is that he says this straight up and I showed above that in fact the theorem as he states it is in fact incorrect.
9) You don’t test that a triangle has 180 degrees?
Yes you do. Obviously Block is not familiar with the book flatland. In fact there is an experiment in astronomy that is doing exactly this. See http://www.mathaware.org/mam/05/shape.of.universe.html.
10) Block is using econometric modeling. Econometrics assumes that economics is empirical. Block is correct to criticize logical positivism, but logical positivism is not a correct philosophy of science. (Also see the video https://www.youtube.com/watch?v=aTXxvWa11Lg)
11) Trade – both parties expect to profit by a trade is an axiom/theorem of praxeology according to Block.
While this is true, it violates the zero profit tendency.
12) Inputs to the economy are land, labor, capital, and entrepreneurs.
How are entrepreneurs a separate input? Are not entrepreneurs just a combination of people and capital, at least in Austrian Economics?
The additional input and the only input of importance is human knowledge and when we are talking about economics that means inventions.
I only commented on the first 15 minutes or so of the video. There were other errors, but explaining them would take too long. Of course there were many valid points.
The bottom line is that praxeology is not a science and to the extent that Austrian Economics is based on praxeology it is not a science. Block points out that there are sort of two schools of Austrian Economics and the other one is based on Hayek’s ideas. Hayek rejected praxeology and his somewhat equivalent theory is his theory of Cultural Evolution, for more see the video Hayek: Friend or Foe of Reason, Liberty and Capitalism? Cultural Evolution is an inherently collectivist that is based on the idea that reason is limited or totally ineffectual. It is not a science either, since it rejects the use of reason. No matter which branch of Austrian Economics that you investigate it is not a science. The result is that it makes numerous errors, which I have detailed elsewhere, but include an improper definition of property rights, an improper definition of capitalism, the false model of the Austrian Business Cycle, and others.
Austrian Economics is not the only school of economics that is not a science. However, if economics is to ever advance it has to be a science based on the nature of man and understanding that his unique tool of survival is his ability to reason. In my book the Source of Economic Growth I lay out the principles for a school of economics that is a science, that is consistent with Objectivism, and is consistent with Natural Rights.
Dale B. Halling’s new book Source of Economic Growth is now available. This book examines the two most important questions in economics: 1) What is the source of real per capita economic growth, and 2) What caused the industrial revolution? The industrial revolution is important, because it is the first time any large group of people escape subsistence living (Malthusian Trap) and their incomes start to grow. By examining these questions, the book devises a science of economics that is consistent with natural rights, the founding of the United States, and is tied to the biological reality of life.
Mr. Halling gave a related talk at Atlas Summit 2015 entitled The Source of Economic Growth. No school of economic thought is consistent with Objectivism, which is why Ayn Rand, in the very first sentences of “Capitalism: The Unknown Ideal”, said “This book is not a treatise on economics. It is a collection of essays on the moral aspects of capitalism.” Patent attorney and novelist Dale Halling proposes a science of economics that is consistent with Rand’s philosophy. The path to that understanding of economics results from examining the source of real per capita increases in wealth, which puts man’s mind at the center of economics. No other school of economics puts emphasis on man’s mind, which is one reason why Rand had a tenuous relationship with even free market economists.
The Economist has printed another of their fantasy articles on patents entitled “A question of utility.” Gene Quinn has written a great article showing the numerous inaccuracies in The Economist’s article entitled “What ‘The Economist’ Doesn’t Get about Patents.” The Economist article argues that patents were irrelevant to the industrial revolution. Mr. Quinn shows the fallacy of this statement, but I want to amplify on what he said. The industrial revolution started in England and the United States, which were the two countries with functioning patent systems. The industrial revolution was not about industry but about a continuous invention revolution as the book “The Most Powerful Idea in the World” illustrates. Modern ‘New Growth Economics’ has shown that the only way to increase real per capita incomes, is to increase our level of technology and that means creating new inventions.
My new book Source of Economic Growth tackles these important questions specifically it answers these two questions: 1) What is the source of real per captia increases in wealth? And 2) What was the cause of the industrial revolution? I provide overwhelming evidence that new inventions are the only way to increase real per capita incomes and property rights for inventions, i.e., patents, are the only way to provide a high enough level of inventing to escape the Malthusian Trap and enter the Industrial Revolution.
“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
John Maynard Keynes
Based on this quote you might think that the two most important people in the US presidential election are John Maynard Keynes and Friedrich Hayek. However, both of these men were influenced profoundly by two philosophers whose importance extends far beyond economics, Immanuel Kant and David Hume.
Kant’s influence on today’s leftist movements is hardly likely to be surprising to most people. Kant’s attack on reason and reality started the whole German philosophical movement, which has been written about extensively. For instance, Stephen Hick’s excellent book Explaining Postmodernism shows this connection as do many other people. The connection between Kant and Keynes may seem more tenuous except that American leftists are inevitably Keynesians. However, the paper “The Philosophy of John Maynard Keynes (A Reconsideration)” by Elke Muchlinski shows that Keynes and Kant shared a common epistemological approach.
Keynes delineated an epistemological approach to the theory of probability. He conceived probability in a broader sense, not only as a class which is capable of numerical measurement. He made a turning point to the categories of knowledge, ignorance, rational belief and precariousness. His method provides a background for his conception of convention which still encompasses the fragility and precariousness of knowledge. Keynes rejected formal logic as inadequate for his purposes to outline the process of acquiring knowledge. To defend his view of uncertainty inherently to all economic questions he relied to conceptions of degree of credibility, degree of confidence and conventional judgment.
Seeing Kant’s and Keynes influence on a Hillary Clinton or an Elizabeth Warren is probably pretty easy for many people.
What is perhaps less well known is David Hume’s influence on U.S. conservatives and Friedrich Hayek. The blog The American Conservative calls Hume “The First Conservative” and the First Principles, a conservative philosophical journal agrees. Hume gave us the problem of induction, denied that causality exists, and most importantly for this article, he rejected Locke’s natural rights and the idea of ethics based on reason. Locke’s natural rights are enshrined in the Declaration of Independence, form the basis for the Bill of Rights, and was the foundation of most of common law at the time. Ultimately, Hume attacks reason and science in order to make room for religion and tradition.
Hayek was highly influenced by Hume. This paper entitled, Hayek on the Role of Reason in Human Affairs, Linda C. Raeder, Palm Beach Atlantic University, explains:
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. 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.
It might be harder to see Hume’s influence on a Jeb Bush or Chris Christie, but it is there. The libertarians might argue that this argument does not apply to Rand Paul or a Ted Cruz, however the libertarian movement is also profoundly influenced by Hume and Hayek. For instance, the libertarian think tank Foundation for Economic Freedom (FEE) has a whole series of excellent lectures on the Scottish Enlightenment extolling the virtues of this philosophical movement, which definitely includes Hume and Hayek.
What is missing from this election is a candidate that represents John Locke, natural rights, reason – in other words the values on which the United States was founded.
Paraphrasing Ayn Rand, in a debate between two irrational positions, it is the one that asks its followers to believe in the most fantastical and the one that is willing to be the most ruthless that will win.
For those of us in the patent business this means we are unlikely to see any improvements as a result of this presidential election. Patent law is based in natural rights and reason.
State of Innovation has been inactive for several months because my web host abandoned me and I have had quite an adventure trying to get it up again. While I have been gone the anti-patent crowd has been busily trying to push another pro-infringer piece of legislation. However, due to the hard work of a lot of people including Randy Landreneau and the Independent Inventors of America and many other groups it looks like the so called The Innovation Act (H.R.9) appears to be dead for now.
In the meantime I gave a talk at The Atlas Society explaining that inventions are the key to economic growth and property rights to inventions (patents) are the reason the Industrial Revolution occurred. I gave a similar talk at FreedomFest.
Originally posted on Hank Rangar:
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I enjoyed this book enough to read it straight through. Hank Rangar didn’t disappoint, maintaining his personal commitment to helping those in government that like to practice predation and abuses of individual rights and liberties of American citizens, to achieve their just rewards.
If you believe in freedom of the individual and his rights and a limited role for those in positions of government power and enjoy complex characters in your stories, you’ll love this book and these authors.Verified Purchase
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