State of Innovation

Patents and Innovation Economics

What is economic growth?

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

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

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

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

October 7, 2013 Posted by | -Economics | , | Leave a comment

Long Term Economic Predictions 2011

Background

It has been two year since I published my book The Decline and Fall of the American Entrepreneur: How Little Know Laws and Regulations are Killing Innovation.  The book explains that the only way to increase real per capita income is by increasing our level of technology.  This can be accomplished by capital equipment purchases, which upgrade plant and equipment with newer technologies or by creation of inventions.  Since the United States is a leader in technology, we do not have the choice of just upgrading to new technologies produced in another country.  So we must create new technologies if we want our economy to grow.  There are two ways to encourage the creation of new technologies; government funding or private investment in inventions.  Government spending on research and development is not nearly as effective as private spending – see Solyndra.  A study by the Small Business Administration shows that most emerging technologies are invented by small entrepreneurial start-ups.  Unfortunately, since 2000 the U.S. has undermined the three foundations on which technology start-ups are based.  Those three foundations are intellectual capital, financial capital, and human capital.  We weakened the intellectual capital foundation by weakening our patent system, we weakened the financial capital foundation with the passage of Sarbanes Oxley, and the human capital foundation was weakened by the accounting rules that required the expensing of stock options.

Since my book was published the intellectual capital foundation has been undermined this year by the passage of the America Invents Act and the financial capital foundation has been undermined by the passage of the financial reform bill (Dodd Frank).  There has been no change on the human capital front.  There is mixed news on the intellectual capital front.

These problems are being exacerbated by the budgetary issues associated with aging baby boomers.  The Obama and Bush administrations compounded these problems by expanding Medicare to prescription drugs and the passage of Obama Care.  In 2010, Medicare/Medicaid and the Children’s Health Insurance Program (CHIP) represent 21 percent of the federal budget.  Social Security represents about 20 percent of the federal budget and interest payments represent about 8 percent of the federal budget.  It is estimated that about 10,000 baby boomers will go on Medicare per day for the next twenty years.  However, about 5000 seniors are dying per day.  Each Medicare recipient costs about $10,500, so Medicare costs will expand by $185 billion dollars (today’s dollars) or another 5% of the federal budget.  Roughly, the same calculation applies to social security.  So Medicare and Social Security will consume approximately 50% of the U.S. federal budget by 2020.  In addition, the interest payments are likely to consume around 30% of the U.S. federal budget.  This means that 80% of the federal budget will be spoken for.  This does not include any additional costs for Obama Care.  It is unlikely that the federal budget as a percentage of the economy can grow, since the U.S. had to borrow one third of the federal budget in 2010.

Here are my predictions for the next decade based on this background.  I provide an optimistic, most likely, and pessimistic scenarios.  Note these scenarios are based on what I believe is most likely to occur, not what I believe is the best that could be done or the worst that could be done to the U.S. economy.

Predictions Common to all Scenarios

Properties rights of all kinds will continue to be weakened.  It appears that you can get a PhD. in economics (or even win the Nobel Prize) without understanding even the most basic ideas of property rights and how they affect a free economy.  Even so called free market economists forget that Reagan not only cut tax rates, he strengthened property rights.  Particularly he strengthened patent rights – for more information click here.  He also strengthened property rights by weakening regulations and weakening the power of unions.  A number of so-called free market economists do not understand that property rights are based on productive activity.  As a result, they have joined in an all attack on property rights for inventions – patents.  For more information see Scarcity Does it Prove Intellectual Property is Unjustified.

One change from last year is that all the Republican candidates have come out for repealing or curtailing Sarbanes Oxley and the Financial Reform Bill.  There may be hope that entrepreneurial companies will no longer be starved for financial capital if the Republican’s win the presidency.  It appears unlikely we will strengthen property rights for inventions or property rights generally or signficantly strengthen our capital markets so they work for start-up companies, the most optimist scenario is limited to subpar growth.

The growth of the Internet will result in a continued decline in commercial real estate values under all scenarios.  Commodity prices are likely to increase, inflation adjusted, under all circumstance.  Growth in China and inflation will drive this increase in commodity prices.

Optimistic Scenario (This is Unchanged from 2010)

This scenario assumes that the U.S. faces up to its budgetary problems, repeals Obama Care, and rationalizes it tax structure.  This scenario assumes that Obama is not elected for a second term.  Government spending will grow slightly as a percentage of GDP.  Supply Side economists would probably consider this enough to create vigorous economic growth.  However, it does nothing to really encourage investment in new technologies.  As a result, real inflation adjusted GDP growth over the decade will probably be around 2%.  Median household family income after taxes will be stagnant.  This will be two decades during which median household income has not grown in the U.S.  I believe that will be the first time in the history of the U.S. this has occurred.

The housing market is likely to be stagnant since family incomes will be stagnant.  Inflation is likely to run 4-6% (Note that it appears that government is determined to lie about the inflation numbers, so it will be hard to determine the real inflation rate), but this will not be enough to cause appreciation in housing prices.  In fact, inflation adjusted housing prices will likely decline.

The best economic opportunities will be in government related jobs or businesses.  Commodity based business will also prosper.  Technology entrepreneurs will be few and far between.  Unemployment numbers will hover between 7-9% throughout the whole decade – this will be the new normal.  The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. may fall below the top ten in the world.  The U.S. will also be one among many equals in technological and scientific leadership.  All social ills will increase slowly including crime, number of welfare dependents, and black market transactions.

Most Likely Scenario

This scenario assumes that the U.S. will not face up to its budgetary problems and Obama Care will not be repealed completely.  Under this scenario, the U.S. will go from financial crisis to financial crisis.  Each financial crisis will be meet with a short term band-aid solutions.  Federal government spending will grow to at least 30% of GDP and total government spending will be 50-60% of GDP.  Inflation will grow to 10-14% by the end of the decade.  Despite this, housing prices will not keep up with inflation.  Median household family income after taxes will decline by 2-7%.  Official GDP numbers will show slightly negative growth, but this will over state the actual growth rate.

The best economic opportunities will be in government related jobs or businesses.  Commodity based business will also prosper.  The financial differences between those who are in the government’s favor and those who are not will be huge.  Technology entrepreneurs will be almost nonexistent.  The brain drain from the U.S. will be apparent and a cause for anxiety.  Unemployment numbers will hover between 9-15% throughout the whole decade.  The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. will fall well below the top ten in the world.  The U.S. will also be a declining power in technology and science.  All social ills will increase moderately including crime, number of welfare dependents, and black market transactions.  The chance of a major war in the world will be moderate.

Pessimistic Scenario

The U.S. will not face up to its budgetary issues even to get through a crisis.  The U.S. will either literally default on its debt or inflation will be over 20% or both.  Multiple states will go bankrupt and be bailed out by the federal government.  Tax burdens will skyrocket as will the black market.  Housing prices will decrease significantly except in extremely exclusively neighborhoods.  Social order will collapse.  The pretense that the U.S. is a nation of laws or that the Constitution has any meaning will be completely destroyed.  There is a possibility (15%) that there will be a military coup.  Alternatively or in combination there is a possibility that the U.S. will break up into a number of separate countries.  Many parts of the U.S. will decide that it no longer makes sense to support Washington, Wall Street and parts of California that have become use to crony capitalism and government handouts.  The brain drain from the U.S. will be well known and huge.  This may be the driver for politicians and voters to demand real reform.  China and India will dominate the world economy.  Unfortunately, neither will likely fill the U.S.’s shoes and become a technological and scientific leader.  Singapore will likely be the richest country in the world on a per capita basis by a large margin.  They will be the major center of technological and scientific research.  The chance of a major war in the world will be probably.

Caveats

The best reason to be more optimistic is that the U.S. has never had two bad decades in a row.  In the late 1930s and late 1970s there was no reason to suppose that the U.S. would right itself economically.  We pulled out the 1930s because Roosevelt realized that he had to adopt pro-business policies if the U.S. was to have any chance of winning World War II and so did the voters.  In the 70s, there was little hope that the U.S., let alone England, would pull out of the inflationary spiral, increasing unionization, increased regulation, increasing government spending and entitlements.  However, there was the glimmer of Ronald Reagan and a surge of free market economists such as Milton Friedman, who still understood property rights.  Unfortunately, I do not see a Ronald Reagan on the horizon and many of today’s free market economists are overly focused on the detrimental effects of Federal Reserve and high marginal tax rates.  Very few seem to understand the importance of strengthening property rights, particularly for inventions or the need to free up our capital markets from regulation.  I hope I am wrong and there is a politician who understands property rights, particularly for inventions, and the need to free up our capital markets, while having the strength to stand up to government unions and special interests.

I cannot decide if we are seeing the collapse of Western Civilization under the weight of the welfare state (socialism) or if we are seeing the last hurrah of the welfare state.

December 22, 2011 Posted by | -Economics | , , | Leave a comment

The Science of Economic Growth: Part 2

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

Part 1 

Part 2 

Part 3 

Part 4 

Part 5 

 

Homo Economicus, Entropy, and Invention

Homo sapiens also consume food and create shelter to overcome the effects of entropy.  Unlike other living organisms, homo sapiens organize their environment to minimize the effects of biological entropy.  For instance, humans have invented agriculture to increase their supply of food (energy).  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.  For instance, our bison standing on coal will never be able to harness the potential energy in that coal unless the species evolves to eat the coal.

The distinguishing characteristic of homo sapiens is their ability to reason.  Man is a rational animal according to Aristotle’s classical definition.[1]  Man uses his reason to alter his environment (invent) and increase the energy available to him.  Note that I am not limiting myself to the arcane definition of invention provided by the law.  Anything that man creates to solve an objective problem is an invention.  If a device/service is not found in nature separate from man then it is an invention.  For example, the ability to create fire or harness it is an invention of man.  No other animal has the ability to create or harness fire.  Man did not have some sort of inherent knowledge of how to create or harness fire.

If humans did not invent, then studying economics would be the same thing as studying the evolution of humans.  While trade is also unique to humans, trade is not the fundamental basis of economics.  Trade is an invention of man.  If everyone produces the same thing, then there is no reason to trade.  For instance, if we all produce wheat, then there is no reason or ability to trade.[2]  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 and production is severely diminished.

 

Diminishing Returns: Sustainability Isn’t Sustainable

Biological entropy implies diminishing returns.  For all species of life there is a limited supply of the resources (free energy) and conditions necessary to sustain a particular form of life at any point in time.  The concentration or ease of extracting these resources varies as a result of the non-homogenous nature of the universe.  A species of life thrives where it has a high concentration of resources (low biological entropy for the species) and as its population expands it has to expand to areas of low concentration of resources (high biological entropy), which results in diminishing returns.  The species are then constrained by the Malthusian Trap.

The way this is expressed in economics is that the use of any one resource results in diminishing returns for that resource.  The question of limited human resources has been the subject of Economics since Malthus and David Ricardo.  I will explore the idea of diminishing returns and its relationship to invention, by examining the idea of sustainability.  Sustainability is an attempt to overcome or at least manage diminishing returns.  There are numerous and conflicting definitions of what sustainability means.  However, most sources point to the World Commission on Environment and Development (WCED), also known as the Brundtland Report.  According to the 1987 Brundtland Report, sustainability is: “Meeting the needs of the present generation without compromising the ability of future generations to meet their needs.[3]  This definition is not testable and is incredibly vague.  What are the “needs” of the present generation?  Do we need the Internet, satellites, SUVs, etc.?  How do we know if this will compromise future generations ability to meet their needs?

Since this is not a productive path of inquiry, let’s take the word “sustainable” literally.  A sustainable technology would be one that can be used indefinitely by humans without side effects and without any diminution in its effectiveness.  This definition violates the laws of physics.  According to the second law of thermodynamics, entropy always increases in a closed system.  As a result, any use of technology at least produces waste heat – a side effect.  Sustainability taken literally is an attempt to create a perpetual motion machine.  Even the Sun’s energy will not last forever and it is not infinite.  This is true whether we are talking about absolute entropy or biological entropy.  Is the sustainability movement unrealistically optimistic?

A key issue for the sustainability movement is the use of so called non-renewable resources, such as the use of fossil fuels and the using up of other natural resources (diminishing returns).  The way this is often phrased today is Peak Oil, Peak Water, Peak _____ (Pick Your Favorite Resource).  Peak Oil (natural resource) occurs when the amount of oil that can be extracted reaches its maximum or the point at which we reach the maximum net energy output from oil.  The alternative definition takes into account that even if we can extract more oil, this is irrelevant if it takes more energy to extract the oil than we receive from the oil.  The supposed solution for our Peak Oil problem is to develop renewable energy resources.  The Clean Energy website provides the following definition “Renewable energy is natural energy which does not have a limited supply.  Renewable energy can be used over and over again, and will never run out.”[4]  What is a natural energy?  Either all energy is natural, comes from nature, or only animal muscle power is natural.  The natural qualification is complete nonsense – unless they really want us to go back to animal muscle only.  The “never run out” qualification violates entropy.  All energy resources will run out.  All energy sources, fossil fuels, solar, hydroelectric, tidal, biomass, hydrothermal, fission, fusion, etc are solar or at least stellar.  For instance, hydroelectric energy is the result of the Sun heating the oceans or other large bodies of water.  As the water evaporates and then condenses in the form of rain or snow on land masses it is collected in dams.  The dams convert the gravitation force of the water into electric energy.  Fossil fuels are created by plants converting sunlight into biomass (including animals).  The biomass is trapped underground by sea sediment and the pressure and heat converts the biomass into oil, coal, natural gas, etc.[5]  Fission is the process whereby heavy elements, generally Uranium, are split into lighter elements and energy is released.  These heavy elements were created in a star that has long since expired.  Thus, all energy is Solar or at least stellar.  The Sun will not last forever and does not provide unlimited energy.  The concept of renewable energy that “will never run out” and “can be used over and over again” is false.  So was Malthus correct?  Are humans doomed by entropy to eventually return to the Malthusian Trap or worse?  Is the defining characteristic of economics that diminishing returns (entropy) will always force humans back to the point that we are on the edge of starvation?  If so, will evolution pass humans by and humans will become extinct?

This concept of peak resources is not new.  You can find numerous examples of “Peak Oil” historically.  For instance, the fertilizer crisis of the 19th century.  In 1830 it was discovered that bat guano was an excellent fertilizer.  Population exploded, as guano was used in Europe because of the additional food (energy) produced as a result of this excellent fertilizer and mechanization.  The best sources of guano began to run out fairly quickly.  People predicted the equivalent of “Peak Guano.”  The question was not whether we would have “Peak Guano,” but Peak Fertilizer.  In other words, we did not have a guano problem we had an invention problem.  The Haber-Bosch process was invented in 1909, which allowed fixing nitrogen in air and solved the “Peak Guano” problem.[6]

Reason magazine in the article Peak Everything? discussed how logical, scientific projections showed we would run out of lithium, neodymium, and phosphorus.[7]  Peak lithium was going to limit the batteries necessary for electric cars.  In fact, we would run out of lithium faster than we would run out of oil.  The solution is a new invention that replaces lithium with zinc air batteries.  Note the solution was not a better way to extract lithium, but to make the supply of lithium irrelevant.  New invention creates a paradigm shift.  Peak neodymium is going to limit our ability to build the electric motors of hybrid cars as well as other products.  Interestingly, neodymium magnets were invented to overcome the problem of peak cobalt.  In the area of permanent magnets, it appears that a new induction motor will eliminate the need for permanent magnets.  Peak phosphorus is a repeat of Peak Guano.  Peak phosphorous threatens our ability to provide enough fertilizer for our agricultural needs.  One solution is to expoit human waste.  Phosphorous is a byproduct of human urine.  The phosphorous can be recycled using a no mix toilet.

Paul Romer has observed, “Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered.  And every generation has underestimated the potential for finding new recipes and ideas.  We consistently fail to grasp how many ideas remain to be discovered.  The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.”[8]

The computer industry has also been beset by predictions of impending doom, when it could no longer achieve Moore’s law of doubling the number of transistors every eighteen months.  Ray Kurzweil has shown that if you restate Moore’s law as computational power, every time a technology reaches its limit to improve computational power a new technology takes over.  Using this he shows that computational power has been growing exponentially since 1900.  The first computational devices were electromechanical.  When these devices reached their limit, they were replaced with relay devices; these were replaced with vacuum tubes, then transistors, and finally integrated circuits.[9]  However, if you trace the speed of machines beginning with the invention of the steam engine, it peaks at around supersonic flight.  It is hard to determine if this is an economic/technological limitation or political limitation.

Diminishing returns for a given natural resource in a technology static scenario occurs because high order areas of the natural resource are exploited first.  It takes more energy to extract lower order areas (high biological entropy).  For instance, man first exploited gold nuggets picked up from the ground.  Eventually, man dug for the gold or panned, which required more energy because it was less ordered.  Note that even this change required new (additional) technologies – a shovel and pick or a tin pan.  Modern techniques of gold mining, e.g., cyanide leaching, have allowed formerly unprofitable mines to be reopened.  This is because the new technology allows us to exploit even lower order areas of gold.  Diminishing returns only apply in a technology static environment.  These diminishing returns can be modeled as a decaying exponential.

 

Are Inventions Subject to Diminishing Returns?

Every invention is a combination of known elements – you cannot create something from nothing.  This follows from the natural law conservation of matter and energy.  As a result, every invention opens up the possibility of more inventions by building on earlier inventions.  Creating these inventions takes energy, but the number of potential inventions we can conceive of increases with every invention we create.  As a result, the number of potential inventions grows factorially.  There are four ways in which inventions could be subject to diminishing returns: 1) the number of inventions are limited, 2) the inventions in a narrow area of technology are limited 3) the returns on devoting more resources, as a percentage of total resources, to inventing declines, and 4) the cost of creating the next invention in any technology could increase.

The number of potential inventions, however,  is not subject to diminishing returns.  In fact, the opposite is true.[10]  The number of potential inventions grows factorially as new inventions are created.

Inventions in a narrow area of technology are subject to diminishing returns.  Early inventions would appear to provide the greatest return and latter inventions appear to provide more limited returns.  Ray Kurzweil has studied this and found that new technologies appear to follow an S-curve with the greatest return in the middle of the S and eventually declining in return.[11]  Cross pollination between the primary area of technology and other areas of technology appears to prevent diminishing returns in a narrow area of technology, similar to how substitute resources prevents diminishing returns for natural resources.[12]

Would it logically follow, if a greater and greater percentage of a country’s or the world’s resources were devoted to discovering inventions you would hit a point of diminishing returns?  The answer is no country has ever come close to testing this hypothesis.  Countries throughout history have under invested in inventions and provided little or no incentive for inventors.  Those countries that have devoted the most resources to inventing, have seen the greatest economic returns.  The U.S. has historically devoted the most resources to invention.  It has historically had the strongest laws protecting the rights to inventions, which has resulted in greater resources being devoted to invention.  England had some of the strongest laws protecting inventors at the beginning of the Industrial Revolution and it was the hotbed of invention at that time.  The Italian city states of the 15th and 16th centuries had some of the first laws protecting inventors and they had a much higher standard of living.  Among their inventions were modern glass making techniques and a modern banking system.  There is a minimum amount of resources that must be devoted in a country to agriculture and maintenance just to keep up with the decline due to human biological entropy.  If inventive activity were so large as to crowd out those activities necessary to overcome biological entropy, you would have to assume that there are diminishing returns at that point.

The idea that the cost per invention could increase to the point of diminishing returns, seems to have credence if we look at a narrow technological area.  For instance, the cost of improving the aerodynamics of airplanes is extraordinarily expensive.  However, modern electronics allow us to improve the aerodynamics of planes by putting in control systems that allow a plane to be unstable aerodynamically.  Commercial supersonic flight was not feasible economically in the 1970s because of aerodynamic drag.  This problem can be solved today fairly inexpensively with electronic control systems.  The cost of inventing in electronics grew tremendously with the advent of the integrated circuit.  The advent of personal computers and software have driven down the cost of inventing in electronics and a wide variety of other areas.  There is evidence that the cost of inventing is decreasing over time, if we do not limit inventing to a narrow area of technology.

Diminishing returns can be modeled as a decaying exponential.  Inventions across all areas of technology are not subject to diminishing returns.  Potential inventions grow factorially, which is much faster than diminishing returns shrink.  Thus, it is entirely possible to grow our technology faster than the limitations of diminishing returns.  However, it is not foreordained that humans will invent.  Humans are volitional beings and they can choose not to invent.  There is plenty of evidence that when humans choose not to invent then they become subject to diminishing returns and their society declines or becomes extinct.  For example, Jared Diamond’s book Collapse[13] argues that many societies collapsed because of environmental problems.

 

In a technologically stagnant society, entropy and diminishing returns will prevail and that society will become extinct. 

 

            It appears that the sustainability movement is overly optimistic, in a technologically stagnant society.  However, if humans choose to invent in broad technological areas, then they can escape this fate.  Invention is the key to escaping the Malthusian Trap and growing real per capita income.  This is consistent with Robert Solow’s paper “Technical Change and the Aggregate Production Function” paper and the subsequent work in this area of economics which shows all real increases in per capita income are due to increases in technology.[14]  It is also consistent with groundbreaking econometric studies of Jacob Schmookler, in chapter V, “Productivity Advance: A Case of Supply and Demand” of his book Invention and Economic Growth.[15]

 

In a technologically dynamic society, inventions will result in growth that outstrips entropy and diminishing returns.  People will escape Malthusian Trap and their per capita income will grow. 

 

The question about whether humans are doomed to a Malthusian existence, where economic growth cannot keep up with population growth, has been one of the most vexing questions since the beginning of economics.  Malthus was clearly correct for all of human history other than the last 200 years.  Even since then he has been correct for the majority of humans until the last 40 years or so.  On the other hand, critics of Malthusian theories have pointed to the West’s ability to overcome all predicted population bombs and resource limitations during the last 200 years.  Critics often point to the famous bet between Paul Ehrlich and Julian Simon over the price of commodities.  The reason this debate has been so contentious and has not been resolved is clear.  There is no predetermined answer.  It depends on whether large groups of people decide to invent fast enough.  I say large groups because Matt Ridley has shown in his book, The Rational Optimist, that small population groups cannot even sustain their initial level of technology.[16]  The book 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.”[17]

 


[1] The Philosophy of Aristotle, Adventures in Philosophy  http://radicalacademy.com/philaristotle4.htm, 10/7/10.

[2] Some animal trade like items across time.  If I have extra wheat, I give it to someone who does not have enough and they return the favor later.  Usually this only occurs between family members in other species.

[3] Brundtland Commision, Wikipedia, http://en.wikipedia.org/wiki/Brundtland_Commission, 11/7/10.

[5] Note that have been some alternative explanations proposed for how oil is produced that does not involve this biomass conversion

[6] Mark Ridley had numerous “Peak Oil” examples in his book The Rational Optimist: How Prosperity Evolves, Harper Collins, 2010, New York, pp 121 -156.

[7] Bailey, Ronald, Reason.com, Peak Everything?, April 27, 2010, http://reason.com/archives/2010/04/27/peak-everything, 10/16/10.

[8] Bailey, Ronald, Reason.com, Peak Everything?, April 27, 2010, http://reason.com/archives/2010/04/27/peak-everything, 10/16/10.

[9] Kurzwiel, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 67.

[10] If there is a limited amount of matter and energy in the Universe, which is open to debate, there may be a limitation to the number of potential inventions.  However, this limitation would be so large as to be meaningless for all practical purposes.

[11]  Kurzweil, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 44.

[12]  Kurzweil, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 44.

[13] Diamond, Jared, Collapse: How Societies Choose to Fail or Succeed, Penguin Group,New York, 2005.

[14] Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320

[15] Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966, pp 86-103.

[16] Matt Ridley in his book The Rational Optimist shows that self sufficiency is an economic dead end.  Only large groups of humans can afford to have people specialize so some or all their time is devoted to inventing.

[17]  Ridley, Matt, The Rational Optimist: How Prosperity Evolves,Haper Collins,New York, 2010,p. 83.

December 21, 2011 Posted by | -Economics, Innovation | , , , | 16 Comments

The Science of Economic Growth: Part 1

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

 

Part 1 

Part 2 

Part 3 

Part 4 

Part 5 

Introduction

Since economics is the study of how man meets his needs, the paper will first examine the nature of man.  Man is like other life forms in that he is subject to laws of evolution.  Evolution is the result of entropy.  However, it is not absolute entropy but what is defined herein as biological entropy that controls life forms.  The paper starts with an examination of biological entropy. 

Every species has unique features that allow it to compete in its evolutionary struggle.  Homo Sapiens ’ unique feature is their ability to use their rational mind to alter their environment or invent.  If humans did not invent, then the study of economics would be the study of human evolution.

The defining condition of most life is that it exists in the Malthusian Trap, which is the forcing function of evolution.  An important question is whether humans can escape the Malthusian Trap.  The Malthusian Trap is the result of biological entropy, which implies diminishing returns.  Escaping the Malthusian Trap requires humans to overcome diminishing returns.  Whether humans can invent their way out of diminishing returns is explored.

The paper shows that the answer to this question is that it depends.  If large groups of humans invent quickly enough, then humans can permanently escape the Malthusian Trap.  However, it is clear that in a technological stagnant environment, humans will eventually fall back into the Malthusian Trap.  This leads to more mainstream economic questions, such as whether inventing is endogenous or exogenous?  The paper shows that it is clear that inventing is endogenous.  Another more mainstream economic question that is examined is whether dissemination of new technologies is inhibited by property rights in inventions?  This question logically leads to the question of whether perfect competition or monopolistic competition encourages economic growth?  The paper shows that incentives are not only necessary for the creation of new technologies, but for the dissemination of new technologies and that perfect competition destroys technology creation.

These ideas are then applied to an understanding of the Industrial Revolution, which was the first time that large groups of humans escaped the Malthusian Trap.  It is shown that the Industrial Revolution, which was really a constant invention machine, occurred because of specific incentives for ordinary people to invent.

Finally, given the central role of invention to economics the paper examines whether there are any natural laws that apply to inventions.  Six natural laws of invention are presented.

 

How Does Entropy Apply to Life?

Life requires energy to exist because of entropy.  Otherwise a living organism could just not expend energy and it would live forever.  This setups a struggle between organisms and between species for energy sources, which forms the basis of evolution.  According to Peter A. Corning in “Thermoeconomics:

Beyond The Second Law” the idea that evolution and entropy are related has been long recognized.[1]  This connection has been espoused by Jean Baptiste de Lamarck, Herbert Spencer, Ludwig Boltzmann, Alfred Lotka, and Erwin Schrödinger, in his book What is Life?[2]  However, Corning warns us about confusing energy entropy, information entropy, and physical order.  Keeping this in mind, we need to define entropy in a consistent manner.  As used herein entropy does not mean information entropy or physical order or strictly energy entropy, which I will call absolute entropy.  Entropy means biologic entropy or the ability of an organism or a species to extract useful energy from their surroundings.  While this is related to absolute entropy in that it is about extracting useful energy, what matters in biology is the organism’s ability to extract energy from its environment to sustain its life not the absolute amount of useful energy available.  For instance, a buffalo (Bison) standing on a vein of coal in an open pit mine is surrounded by useful energy or low absolute entropy.  However, the buffalo cannot turn the coal into useful energy for itself and if there is not any grass or sage around, it is an area of high biological entropy for a buffalo.  Let’s explore this idea of biological entropy in more detail.  When a bison dies it has not reached a point of maximum absolute entropy, its carcass may still provide useful energy for vultures, mountain lions, and people.  Despite this, the bison’s biological entropy has reached a maximum, meaning its biological entropy has increased to a level that it no longer is alive.

On an individual organism level I define maximum biological entropy as the point at which the organism dies.  Many things can cause the entropy of an individual organism to reach it maximum and organisms use a variety of mechanisms to overcome biological entropy.  Plants create useful energy by photosynthesis.  They convert carbon dioxide into sugars (energy) using light.  They use this energy to reduce their biological entropy.  Animals eat plants or other animals and use the energy to reduce their biological entropy.  Note that when animals eat plants or other animals, they are increasing the biological entropy of the plants and animals they eat.  Thus, there are two general mechanisms that increase the biological entropy of life forms: internal and 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.[3]  Without oxygen, the animal cannot oxidize enough sugar (fat, protein) to survive – overcome biological entropy.  Without water, the animal’s cells are unable to absorb energy and expel wastes.[4]  Aging is a process of increasing biological entropy.  This is caused at least in part by disorder in genetic information.[5]  This genetic disorder results in the organism not being able to create enough useful energy to survive or increasing the amount of energy necessary to survive.  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 biological entropy first and then to increase their size.  However, some animals also create simple shelters or seek shelter to ward off the biological entropy increasing effects of the elements and predators.  Rain, sun, hail, snow, heat, and cold all contribute to the increase in biological entropy of living organisms.  Life has two main methods of overcoming the effects of the biological entropy: 1) food (energy) consumption and 2) shelter creation (inhabitation).

A species of life becomes extinct when the species as a whole reaches a certain level of biological entropy either because it cannot consume enough energy or because external mechanisms increase its biological entropy to reach the extinction level.  The biological entropy level at which a species becomes extinct is the maximum biological entropy for the species.  A species reaches the Malthusian Trap when increases in population of the species results in the total required energy (food) to support the population being greater than the supply of food.  Most life forms exist in the Malthusian Trap, most of the time, including humans until the Industrial Revolution.

 

Evolution

It is widely known that Malthus’s Essay on the Principles of Population influenced Charles Darwin and shaped his ideas on evolution.  Darwin himself recorded in his 1876 autobiography the following:

In October 1838, that is, fifteen months after I had begun my systematic enquiry, I happened to read for amusement ‘Malthus on Population’, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The results of this would be the formation of a new species. Here, then I had at last got a theory by which to work.[6]

Evolution is then a way of selecting species or variations on species that have low biological entropy and causing those species with high biological entropy to go extinct.  The limited amount of food (energy) for each species ensures that evolution is a dynamic ongoing process.  The variations are the result of sexual recombination of the parent’s genes and mutations in the organism’s genes.  The unique feature of humans is that they alter their environment to fit their needs, they do not just rely on genetic variations that allow them to better adapt to their environment.  The way humans do this is by inventing, which will discuss more in the next section.

 


[1] Corning, Peter A., Thermoeconomics:

Beyond The Second Law, Journal of Bioeconomics, Journal of Bioeconomics, Vol. 4, No. 1. (1 January 2002), pp. 57-88, p. 58.

[2] Ibid

[3] There are few exotic life forms that do not need oxygen, but all require energy to overcome entropy.

[4] 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.

[5] 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.

[6] The Autobiography of Charles Darwin, location 680-686, by Charles Darwin (Mar 17, 2006) – Kindle eBook

 

December 20, 2011 Posted by | -Economics, Innovation | , , , , , | 13 Comments

Patents Cause Economic Growth: Another Academic Study Shows

Two Singapore professor show patents result in significant economic growth.  Their paper, Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries concludes “the effect of strengthening patent rights on economic growth was substantial in economic terms.” P. 16

In the abstract of the paper, they conclude:

Our results have important implications for public policy. One is that patent laws and their enforcement matter for economic growth. However, our findings also suggest that patent rights vary by country and industry. We show that patent rights have a smaller impact on economic growth in poorer countries and in less patent-intensive industries. Since patent intensive industries account for a smaller share of the economies of the poorer countries, our results imply that the welfare gain in terms of economic growth for these countries is more likely to be outweighed by the welfare loss due to lower end-usage, and hence, tip the balance towards weaker rights being socially optimal.  Abstract

The paper’s conclusion with respect to “poorer” countries being better off with a weak patent system is pure conjecture and was not part of their study.  The reason that poor countries do not see a big boost by having stronger patent laws is: 1) poor countries are technologically backward and can advance economically by copying (purchasing) existing non-patented technologies, and 2) poor countries have poor property rights systems diminishing the effectiveness of their patent systems.  A poor country is poor because of its low level of technology.  Just raising a poor countries level of technology to the same level as the United States twenty years ago would result in huge economic gains.  The reason poor countries have a lower level of technology is because they have weak property right systems that results in under investment in technology (Capital Spending).  The paper hints at this point:

Our patent rights index depended on an assumption that enforcement of patent rights was correlated with enforcement of property rights in general, as measured by the Fraser index (The Fraser Institute does a study of economic freedom for all countries once a year). P. 10

In Figure 1, we plotted the Fraser index against the GP index (Patent Strength) scaled up by a factor of two.  The two indices were highly correlated. P. 10

In other words, there is a strong correlation between the strength of property rights in general with the strength of a patent system in a country. This should not be surprising since patents are property rights in inventions.  If you did a study of arbitrary government grants or monopolies versus the strength of patents in countries, you would find they are highly uncorrelated.  Despite the nonsense that suggests that patents are monopolies.

Another interesting point in the paper:

Among 15 Western countries over several centuries, enactment of patent law was associated with higher rates of scientific discoveries, inventions, and innovations.

Hu , Albert G.Z. and Png , I.P.L., Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, August, 2010.

 

October 21, 2011 Posted by | -Economics, -Philosophy, Innovation, Patents | , , , , | 1 Comment

Evolution, Economics, and Patent Law

The study of economics would be the same thing as the study of evolution of humans if humans did not invent.  Without invention there is no reason for trade.  Why would we trade my berries for your berries if they are essentially the same berries?  If we both eat the same dead animals, what would the purpose of trade be?  Without trade, production is limited to the immediate needs of the person.  Perhaps you might store up some nuts, but everything else will spoil.  Note that shelter is an invention, unless it only involves taking over a cave or a hole in a tree.  The unique feature of man is that he is a rational animal and in the economic realm this means that he invents.  No other animal invents.  Only humans change their environment to meet their needs.

The driving function of evolution is the Malthusian Trap.  In the Malthusian Trap, food (things need to survive) is limited and population growth in any species is always greater than the growth of the food supply, except humans very recently.  This puts species into competition for food and selects for the species that are most successful in a given area.  The only reason that humans (some) were able to escape the Malthusian Trap was that they invented faster than their population grew.  Meaning the rate at which technology changed provided greater productivity growth than the expansion in the population.  Why after 20,000 to 100,000 years of human existence did people in England, the United States, and the West suddenly escape the Malthusian Trap?  Clearly, the rate of invention accelerated in these places so that productivity outstripped population growth.  But why there and why then?  There is extensive evidence that the introduction of property rights (individual – there is no such thing as group property rights) always provides a strong incentive to maximize return on an asset.  England and then the U.S. at the beginning of the Industrial Revolution were the first large groups of people to introduce property rights in inventions.  This provided the necessary impetus to invent new technologies and diffuse them widely.  Clearly, patents cannot provide this incredible benefit outside of a system of individual rights and property rights.  However, it was the linchpin that launched large groups of humans outside of the Malthusian Trap and the constraints of biological evolution.

For more information see:

The Source of Economic Growth

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention

Jobs and Patents

Are Patents Relevant

 

October 14, 2011 Posted by | -Economics, Patents | , , , , , | Leave a comment

If It’s THE ECONOMY STUPID: Then It’s ECONOMIC FREEDOM STUPID

A great video from the Economic Freedom blog shows how the U.S. has wiped out two decade of progress toward economic freedom in a nine years.  According to the video government spending and regulation take up 65% of the GDP.  Regulation by itself takes up 19% of GDP.  This means that the average goods and services in the U.S. have to be 23.4% higher in price just to pay for regulations.  Imagine how much “demand” would be opened up if the average price of goods and services were lowered by this amount.  To understand why the price of the average goods and services is 23.4% higher because of regulations see Austerity: Why it is Key for Both Short Term and Long Term Economic Growth.

 

October 12, 2011 Posted by | -Economics | , | Leave a comment

The Myth of the Sole Inventor: A Socialist Diatribe by Professor Mark A Lemley

The Myth of the Sole Inventor, By Mark A. Lemley, Stanford Law School http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1856610

Professor Mark A Lemley has written a paper suggesting that sole inventors and individual genius does not exist.  Mr. Lemley teaches patent law and intellectual property law at Stanford University.  However, Mr. Lemley is not a patent attorney, does not have a technical background and as his paper proves has not understanding of technology.  Mr. Lemley’s idea of collectivist invention ignores three basic facts:

1) Groups of people are made up of individuals.

2) Every individual has to think for themselves – you cannot think for someone else, which is a source of frustration for every parent (child).

3) Throughout history the rate of invention was very slow until we introduced property rights for inventions (patents).

Lemley purposely downplays Edison’s achievement.  The fact is that Edison created the first high resistance, long lasting, incandescent light bulb.  This was a huge achievement that made electrical lighting commercially feasible.  Many “experts” with Ph.D.s from the most prestigious universities at the time said electrical lighting was impossible commercially.  Lemley also has his history wrong.  Swan was the most important inventor of the light bulb, before Edison.  He mentions Man and Sawyer, who I find no reference to in any history of the incandescent light bulb.  Lemley appears to have no regard for facts.  His analysis of the Wright brother’s achievements is similarly sloppy and just plain wrong.

Lemley’s argument that great inventions are created by multiple people simultaneously has been examined by numerous scholars and found to be incorrect.  For instance, see Jacob Schmookler and his ground breaking book, Invention and Economic Growth, which examined this issue.  People like Lemley attempt to smear together multiple inventions as being the same invention.  For instance, they see Swan’s light bulb and Edison’s light bulb as simultaneous inventions of the light bulb.  Lemley may have made this mistake because he does not have the technical background necessary to understand the issues surrounding the invention of the light bulb.  However, I suspect that Lemley is not interested in the truth, he is interested in pushing a political theory of collectivist invention.  If Lemley’s ideas held any water at all, then you would expect either: 1) the USSR/North Korea should have been one of the greatest sources of inventions in the history of the World, and/or 2) the greatest population centers would be the biggest creators of new technology.  The facts are that neither are true.  The first is self evident.  The second appears to be true until the creation of property rights for inventions.  When England and the U.S. create an effective property rights system for inventors almost all significant inventions for the Industrial Revolution are invented in the U.S. and England, even though their populations are much smaller than France, China, India, etc.

Lemley is pushing an old worn out socialist idea that individuals do not matter only the collective.  This paper is not novel and its thesis has been proven false over and over again.  But socialists do not believe in an objective reality.

The paper is an example of the intellectual and moral bankruptcy of many of our academic institutions.

The Myth of the Sole Inventor, By Mark A. Lemley, Stanford Law School http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1856610

June 15, 2011 Posted by | -Philosophy, Patents | , , , , , , , | 9 Comments

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