I have been criticized for pointing out that Austrian Economics, particularly Menger, Mises, and Hayek, is not consistent with reason, science, or Natural Rights and therefore not consistent with Capitalism. In this article I am going to apply the same standards to Milton Friedman, who is also often cited as a great advocate of freedom and capitalism.
Milton Friedman won the Nobel Prize in economics and is not part of the Austrian School of Economics. He is often classified as a monetarist or part of the Chicago School of Economics, I think the latter is more accurate. Ayn Rand was no fan of Friedman. She criticized his belief that economics must be morally neutral. In this video, Rand states that Friedman is not an advocate for Capitalism and an enemy of Objectivism.
Milton Friedman laid out his ideas on epistemology in the essay “The Methodology of Positive Economics” (1953). Some experts claim that the essay was a big influence on the Chicago School of Economics. In this article he essentially argues for a pragmatic approach to epistemology, which boils down to if a model (theory) is predictive it is correct.
Friedman’s methodology, which appears to justify the eclectic and pragmatic view that economists should use any model that appears to “work” regardless of how absurd or unreasonable its assumptions might appear, has been deployed in service of a rigid theoretical orthodoxy.
Friedman argues that economic models are generally judged by the reasonableness of the underlying assumptions/propositions, however he thinks this is incorrect.
In so far as a theory can be said to have “assumptions” at all, and in so far as their “realism” can be judged independently of the validity of predictions, the relation between the significance of a theory and the “realism” of its “assumptions” is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).
It is easy to show Friedman’s pragmatism is mistaken. Copernican Heliocentrism with its epicycles of the planets was highly predictive, but it was not science. In science/engineering this is known as a heuristic model. Heuristic models are often created by curve fitting the observed data. They predict how a system will work within very narrow circumstance, but do not explain the underlying physics (causes). As a result, heuristic models cannot be extended or built upon, when people attempt to do so they lead to false conclusions.
Friedman’s epistemology boils down to pragmatic “pure empiricism”, which means he accepts the evidence of his senses, but denies logic and concepts. Friedman disconnects assumptions/propositions from the results of the model, which is an attack on logic. An analogy would be that it might make no sense that doing a rain dance causes it to rain, but our empirical evidence says that it is predictive of whether it rains in the next couple of days so it is a good theory. As a result, we are supposed to ignore that there is no causal relationship between the rain and the rain dance.
Friedman’s epistemology is anti-reason. In one case Friedman argued that we need freedom because of this epistemological uncertainty. “I have no right to coerce someone else, because I cannot be sure that I am right and he is wrong.” This is common position of libertarians and Austrians – lack of knowledge requires freedom. This position not only undercuts all of science, it removes reason as the foundation of ethics, political philosophy, and law. It is also unadulterated nonsense.
Friedman is not proposing to do science, he is proposing to collect data that never leads to knowledge. Science is based both on reality and reason/logic. Friedman wants to ignore the reason/logic side of science. While Friedman has different reasons for not proposing to do science, he is otherwise consistent with the Menger, Mises, and Hayek in rejecting science in economics. Ultimately, Friedman’s ideas on science are just a rehash of Karl Popper’s misguided concept of science.
Friedman is consistent with the Austrians in suggesting that economics must be value free – that is devoid of ethics. Friedman argues in his paper The Methodology of Positive Economics, that for a discipline to be a science it must be free of moral judgments. However, Friedman appears to making a finer distinction of where ethics fits in science and particularly in economics.
Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with “what is,” not with “what ought to be.”
First, science requires a profound set of ethics that are unique in history. This ethics requires reporting the data accurately, follow the data to its logical conclusion, and never ascribing non-natural causes to the observations.
Second, imagine taking Friedman’s point of view in the science of medicine. Medical doctors are not there to deal with ought to be, just to observe what is. Are doctors biased in their observations, because they bring ethics into their science?
The question of ethics in economics disappears if the correct fundamental questions of economics iare defined and therefore the definition of economics is properly defined. The most fundamental question of economics is: What is the source of real per capita increase in wealth? This leads to the correct definition of economics which is the study of how man obtains the things he needs to live. This puts the focus on human well-being, just like medicine.
Economists who pretend that they are not injecting ethics into economics are really pushing utilitarianism, often summed up as ‘the greatest good for the greatest number’. This always leads to disaster. In the short term the greatest good for the greatest number always weighs in favor of taking the property of those who create and giving it to those who do not, for instance. In fact, many philosophers who push utilitarianism also push socialism. The counter is usually that stealing people’s property is not good in the long run, but this argument rarely wins over most people.
I searched if Friedman ever mentions Natural Rights or Locke and never found anything. This is not surprising as he explicitly rejects ethics, at least in economics, and implicitly accepts utilitarianism.
Friedman is inconsistent with the founding principles of the United States, inconsistent with Objectivism, and not an advocate of Capitalism, which is the economic system that occurs when a country protects people’s Natural Rights.
Friedman, in my opinion, is highly influence by the philosophers of the Scottish Enlightenment, which would not be surprising as Adam Smith is in this group and also Jeremy Bentham, one of the big proponents of utilitarianism.  The Scottish Enlightenment philosophers were also highly skeptical of the efficacy of reason.
Source of Economic Growth
Friedman did not write much about what causes real per capita increases in wealth. I assume he accepted the standard neo-classical idea that increases in capital were the cause of economic growth. This does not fit the empirical evidence. Friedman’s lack of interest in the question is damning. Although, he did focus his attention on what inhibits economic growth.
Friedman spends almost no time discussing inventions or inventors. Inventions are the only way to increase real per capita incomes and define the upper bound on the standard of living in any given period of time. The fact that Friedman ignores them shows incredibly poor judgment.
The Industrial Revolution was the first time in history that real per capita incomes started to grow consistently. Friedman’s only comments about the most important event in the history of economics was that the idea of robber barons was a myth. This is not what I would expect of a scientist, however Friedman was clear that he was not doing science.
Milton Friedman hardly fares any better than the Austrian Economists. Personally, I think his writing is much better than the Austrians and he is more likeable, which seemed to be part of his success in spreading his ideas.
Friedman’s ideas are inconsistent with reason, science, or Natural Rights and therefore not consistent with Capitalism. He is not proposing to do science and undermines reason with his pragmatism. However, unlike the Austrians, Milton Friedman’s supporters are not actively undermining property rights in his name.
 Something the so-called scientists studying Anthropomorphic Global Warming ignore.
The New York Times published one of their standard obscure, rambling articles entitled “We’re in a Low-Growth World. How Did We Get Here?” by Neil Irwin. The author rings his hands over the slow growth of the last 15 years and concludes that we (he) has no idea why we are in this situation, but if it does not change we are in for a gloomy 21st century.
The article is a perfect illustration of the economic professions’ ignorance of what causes economic growth. What is interesting is that most economists do not really consider this an important question of economics. They waste an almost infinite number of bits on price theory with its supply and demand curves, while ignoring the most important question in economics.
The article meanders from the statement that like most things in economics it all boils down to supply and demand, ignoring that supply and demand curves are about equilibrium, not growth. Then it jumps to into a discussion that blames technology as being less effective than in the past and vaguely ties this to a slowdown in the supply side of the equation. Next it jumps to the favorite crutch of Keynesian-socialists, a lack of demand. It provides the standard Keynesian/socialists’ answers of loose money policies and fiscal stimulus that have worked in the past ,according to the article, but just do not seem to be working now, all the while ignoring the fact that neither of these have worked in the past. In the end, the article admits it has no idea why we have slow growth now.
The article illustrates that the economics profession has no idea what causes economic growth. The Keynesians argue that increasing demand creates economic growth (or at least lack of demand causes recessions), while the rest of the economics profession argues that it is increasing levels of capital. So called free market economists know what kills economic growth and their economic freedom surveys provide overwhelming evidence in this case. The US has fallen from 6th in the world to 11th in the world in economic freedom under President Obama (The downward trend started under Bush, showing this is bipartisan effort) according to this article. Correcting this is a great place to start, however this does not explain what causes economic growth.
Our level of technology is what defines (i.e., provides the upper bound on) our level of wealth. As a result, the only way to increase real per capita wealth over the long term is to invent (i.e., increase our level of technology). The book the Source of Economic Growth provides overwhelming evidence for this. Since 2000, when the slow-down started according to the New York Times, we have undermined our inventors, by undermining their property rights in their inventions. The US has also undermined the three foundations on which technology startups are built: 1) Intellectual Capital, 2) Financial Capital, and 3) Human Capital. The US has undermined the intellectual capital pillar by weakening the patent system, which leftists and libertarians continue today (see the Venue Act). The financial capital side has been undermined by Sarbanes Oxley and other financial regulation. The human capital leg has been undermined by accounting changes to stock options. I discuss how these little known changes in US law and regulations resulted in economic stagnation starting in 2000, while the US had real economic growth in the 1990’s, in my book The Decline and Fall of the American Entrepreneur.
If the US is serious about increasing its long range economic growth it needs to:
Protect the rights of inventors by significantly strengthening our patent system’
Repeal all financial regulation;
Repeal regulatory rules that lock-in specific technologies, such as the FDA, the EPA, and building codes.
These changes would increase the US’s economic freedom score. We do not have to accept the low growth new normal, however nature to be commanded must first be obeyed.
We’re in a Low-Growth World. How Did We Get Here?” by Neil Irwin
This is a posting of an open letter sent to Congress about the Venue Act, which is another attempt to deny the rights of inventors.
Dear Chairman Grassley, Ranking Member Leahy, Chairman Goodlatte, and Ranking Member
As legal academics, economists, and political scientists who conduct research in patent law and policy, we write to express our concerns about the recent push for sweeping changes to patent litigation venue rules, such as those proposed in the VENUE Act. 1 These changes would vastly restrict where all patent owners could file suit—contrary to the general rule that a plaintiff in a civil lawsuit against a corporate defendant can select any court with jurisdictional ties to the defendant. 2
Given the recent changes in the patent system under the America Invents Act of 2011 and judicial decisions that have effectively weakened patent rights, 3 we believe that Congress should adopt a cautious stance to enacting additional changes that further weaken patent rights, at least until the effects of these recent changes are better understood.
Proponents of amending the venue rules have an initially plausible-sounding concern: the Eastern District of Texas handles a large percentage of patent infringement lawsuits and one judge within that district handles a disproportionate share of those cases. The reality is that the major proponents of changing the venue rules are primarily large high-tech companies and retailers with an online presence sued in the Eastern District of Texas that would rather litigate in a small number of more defendant-friendly jurisdictions. Indeed, the arguments in favor of this unprecedented move to restrict venue do not stand up to scrutiny. Specifically:
- Proponents for the VENUE Act argue that “[t]he staggering concentration of patent cases in just a few federal district courts is bad for the patent system.” 4 As an initial matter, data indicates that filings of patent lawsuits in the Eastern District of Texas have dropped substantially this year—suggesting a cautious approach until trends have stabilized. 5
- Contrary to claims by its proponents, legislative proposals like the VENUE Act would not spread lawsuits throughout the country. In fact, these same proponents have found that restricting venue in a manner similar to the VENUE Act would likely result in concentrating more than 50% of patent lawsuits in just two districts: the District of Delaware (where most publicly traded corporations are incorporated) and the Northern District of California (where many patent defendants are headquartered). 6 Instead of widely distributing patent cases across numerous districts in order to promote procedural “fairness,” the VENUE Act would primarily channel cases into only two districts, which happen to be districts where it is considered much more difficult to enforce patent rights.7
- Proponents for the VENUE Act have argued that the Eastern District of Texas is reversed more often by the Federal Circuit than other jurisdictions, claiming that in 2015 the Federal Circuit affirmed only 39% of the Eastern District of Texas’s decisions but affirmed over 70% of decisions from the Northern District of California and District of Delaware. 8 These figures are misleading: they represent only one year of data, mix trials and summary judgment orders, and fail to take into account differences in technology types and appeals rates in each district. In fact, a more complete study over a longer time period by Price Waterhouse Coopers found that the Eastern District of Texas affirmance rate is only slightly below the national average for all districts.9
- The Federal Circuit recently confirmed in In re TC Heartland (Fed. Cir. Apr. 29, 2016) that 28 U.S.C. § 1400(b) provides that a corporate defendant in a patent case—like corporate defendants in nearly all other types of cases—may be sued in any district in which personal jurisdiction lies. Constitutional due process requires a “substantial connection” between the defendant and forum. 10 Thus, contrary to its title and the claims of its proponents, the VENUE Act does not re-establish a “uniform” litigation system for patent rights by requiring substantial ties to the forum. Instead, the Act thwarts the well-established rule that plaintiffs can bring suit in any jurisdiction in which a corporate defendant has committed substantial violations of the law.11
- The VENUE Act would raise costs for many patent owners by requiring them to litigate the same patent against multiple defendants in multiple jurisdictions, increasing patent litigation overall. In recent years, the America Invents Act’s prohibition on joinder of multiple defendants in a single lawsuit for violating the same patent has directly resulted in increased lawsuits and increased costs for patent owners.12 Moreover, the VENUE Act would also result in potentially conflicting decisions in these multiple lawsuits, increasing uncertainty and administration costs in the patent system.
- The VENUE Act encourages the manipulation of well-settled venue rules across all areas of law by the self-serving efforts of large corporate defendants who seek to insulate themselves from the consequences of violating the law. By enacting the VENUE Act, Congress would send a strong signal to corporate defendants that they can tilt the substantive playing field by simply shifting cases to defendant-friendly jurisdictions.
Innovators and their investors have long been vital to a flourishing innovation economy in the United States. Startups, venture capitalists, individual inventors, universities, and established companies often rely heavily on patents to recoup their extensive investments in both R&D and commercialization. We urge you to exercise caution before enacting further sweeping changes to our patent system that would primarily benefit large infringers to the detriment of these innovators and, ultimately, our innovation economy.
Christopher A. Cotropia University of Richmond School of Law
Gregory Dolin University of Baltimore School of Law
Richard A. Epstein New York University School of Law
Chris Frerking University of New Hampshire School of Law
Shubha Ghosh Syracuse University College of Law
Richard Gruner John Marshall Law School
Stephen Haber Stanford University Department of Political Science
Hugh Hansen Fordham University School of Law
Chris Holman UMKC School of Law
Gus Hurwitz Nebraska College of Law
Zorina Khan Bowdoin College Department of Economics
Megan M. La Belle Columbus School of Law The Catholic University of America
Kristina M. Lybecker Colorado College Department of Economics & Business
Damon C. Matteo Fulcrum Strategy Tsinghua University, Graduate School of Economics
Adam Mossoff Antonin Scalia Law School George Mason University
Xuan-Thao Nguyen Robert H. McKinney School of Law Indiana University-Purdue University
Sean O’Connor University of Washington School of Law
Seth C. Oranburg Duquesne University School of Law
David Orozco Florida State University The College of Business
Kristen Osenga University of Richmond School of Law
Jillian Popadak Duke University The Fuqua School of Business
Mark Schultz Southern Illinois University School of Law
Ted Sichelman University of San Diego School of Law
David O. Taylor SMU Dedman School of Law
David J. Teece University of California at Berkeley Haas School of Business
Shine Tu West Virginia University College of Law
Saurabh Vishnubhakat Texas A&M University School of Law
- Polk Wagner University of Pennsylvania Law School
1 Venue Equity and Non-Uniformity Elimination Act, S.2733, 114th Cong. (2016), https://www.congress.gov/114/bills/s2733/BILLS-114s2733is.pdf.
2 See 28 U.S.C. § 1391(c)(2). See generally Ferens v. John Deere Co., 494 U.S. 516, 527 (1990) (“a plaintiff . . . has the option of shopping for a forum with the most favorable law”).
3 These include, among others: (1) administrative procedures for invalidating patents created by the America Invents Act, which have had extremely high invalidation rates, leading one former federal appellate judge to refer to these procedures as “death squads,” and (2) several decisions by the Supreme Court and the Federal Circuit that have drastically curtailed patent rights for many innovators. See Adam Mossoff, Weighing the Patent System: It Is Time to Confront the Bias against Patent Owners in Patent ‘Reform’ Legislation, WASHINGTON TIMES (March 24, 2016), http://www.washingtontimes.com/news/2016/mar/24/adam-mossoff-weighing-the-patent-system/.
4 Colleen Chien & Michael Risch, A Patent Reform We Can All Agree On, WASH. POST (June 3, 2016), https://www.washingtonpost.com/news/in-theory/wp/2015/11/20/why-do-patent-lawyers-like-to-file-in-texas/.
5 See Michael C. Smith, “Hot But No Longer Boiling“ – EDTX Patent Case Filings Down almost Half; New Case Allocation and Procedures (No More Letter Briefing for SJ motions), EDTexweblog.com (July 21, 2016), http://mcsmith.blogs.com/eastern_district_of_texas/2016/07/edtx-patent-case-filing-trends-new-case-allocation-andprocedures.html.
6 Colleen Chien & Michael Risch, What Would Happen to Patent Cases if They Couldn’t all be Filed in Texas?, PATENTLY-O (March 11, 2016), http://patentlyo.com/patent/2016/03/happen-patent-couldnt.html. This study also finds that 11% of cases would continue to be filed in the Eastern District of Texas, concentrating nearly two-thirds of all cases in three districts. See id. The authors of this study are presently expanding their investigation to an enlarged data set, which will also capture additional aspects of the VENUE Act. Neither the data nor their results are available yet. However, we have no reason to believe that the expanded data or analysis will produce results other than what has already been shown: a high concentration of patent cases in a small number of districts.
7 See PricewaterhouseCoopers LLP, 2015 Patent Litigation Study (May 2015) (“PWC Study”), http://www.pwc.com/us/en/forensic-services/publications/assets/2015-pwc-patent-litigation-study.pdf.
8 Ryan Davis, EDTX Judges’ Love of Patent Trials Fuels High Reversal Rate, LAW360 (Mar. 8, 2016), http://www.law360.com/articles/767955/edtx-judges-love-of-patent-trials-fuels-high-reversal-rate.
9 See PWC Study, supra note 7 (finding an average affirmance rate of 48% for all districts, compared to an affirmance rate of 42% for the Eastern District of Texas)
10 See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985).
11 See generally Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947) (“[T]he plaintiff’s choice of forum should rarely be disturbed.”).
12 See Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Unpacking Patent Assertion Entities (PAEs), 99 MINNESOTA LAW REVIEW 649 (2014), http://www.minnesotalawreview.org/wpcontent/uploads/2015/02/REVISEDSchwartzetal_MLR.pdf.
I gave a talk at Atlas Summit on ‘Economics, Evolution, and Rand’s Meta-Ethics’ and one person asked me how my ideas would alter economics. In my talks and in my book Source of Economic Growth, I suggest that economics needs to be rethought from the ground up based on my findings. Here are some of the ways economics needs to be changed in order to make it a science.
1) Fundamental Questions of Economics
No school of economics is even asking the right questions. I have written another post on point (Intellectual Capitalism: Part 1), so I will not repeat all of it here.
Every science is defined by the questions it asks. According to a sampling of websites three of the major questions economics asks are:
1) What goods will be produced?
2) How will the goods be produced?
3) For whom are the goods produced?
All of these questions are inherently collectivist and in a truly capitalist country (i.e., one that protects Natural Rights) all of these questions lead to very boring answers. In addition, none of these questions are scientific questions (Just another example of how economics is not a science).
The single most important question in economics is:
What is the source of real per capita increases in wealth?
This immediately leads to the second most important question in economics today which is: What caused the Industrial Revolution? Both of these questions have empirical and objective answers.
The answer to the first question is inventions and this leads to a number of other important questions, such as how do we measure the rate of technological change?, what things influence the rate of technological change?, why does Singapore appear to have a faster growth rate than Hong Kong despite a lower economic freedom index?, are inventions subject to diminishing returns?, etc.
2) Definition of Economics
Since economics is asking the wrong questions, the definition of economics is incorrect. Here is my suggested definition of economics vs. standard definitions. Note that I have a whole chapter on this subject in my book Source of Economic Growth.
Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
The science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.
Economics is the study of how man obtains those things he needs to live.
3) Cause and Effect in Economics
Classical, Neo-Classical, and Austrian economics emphasize manufacturing and trade, while Keynesian economics emphasizes consumption as the driver of economics and all of them are wrong. The chain of cause and effect in economics is shown in the chart below.
When man applies his reason to the problems of survival he invents. Production, which is really about reproduction or replication, is not the driver in economics as the questions from mainstream economics imply. Trade is also not the driver and in fact the Manufacturing and Trade steps are not absolutely necessary. Keynesian economics focuses on consumption, so it is on the far wrong side of the cause and effect chain.
Because Classical, Neo-Classical, and Austrian economics emphasizes the effects instead of the causes in economics they waste an huge amount of time on supply and demand curves. Every supply and demand curve should come with two caveats: 1) demand does not create supply and 2) this chart assumes a technologically stagnant world. If demand could create supply then Keynesians would be right. What a supply and demand chart shows is how much people would be willing to sell of their present stock at various prices, it does not show that anyone will produce anything.
4) Economics is not a Social Science its Foundations are in Biology and Evolution
Economics is not a social science, it is a real science based on the biological facts of human existence. Specifically that humans have to obtain a certain number of calories (calories here substitute well for all our needs, including oxygen, water, etc.) per day or we die. This gives us a physical definition of profit and loss. Modern economics treats the whole subject as if it was merely a game. Venezuela, North Korea, China, and the USSR prove that it is not.
For more information see Economics, Evolution, and Rand’s Meta-Ethics (Intellectual Capitalism: Fundamentals Part 2)
The fact that profit and loss have real physical definitions means that economics is a real empirical science. Neoclassical economics pretends to be an empirical science but too often they create mathematical models in which none of the variables are measurable. That is not science.
5) Perfect Competition
Perfect competition is an inherently flawed concept that has no place in economics. All conclusions based on perfect competition are wrong, including the whole monopoly power and anti-trust analysis. Perfect competition should be laid to rest and only discussed as a historical example of how absurd economics once was. I have a large section analyzing perfect competition in my book Source of Economic Growth.
Competition is not the source of our wealth. One of the narratives of economics is that competition drives down profit margins and that is how we become wealthy. This is left over from the nonsense of perfect competition. While it is true that we do not want the government to setup rules that provide an advantage for one market participate over another and that these rules hurt the economy, it does not follow that competition creates wealth. The wealthiest countries in the world are those in which a larger percentage of people create unique products and services that have little or no direct competition. The goal is for everyone to be producing unique high value items, not 300 million or even 100 million people all producing me too products.
6) Property Rights/Ethics
There has been a movement to eliminate ethics from economics and this runs through all schools of economics. The justification for this is that science is devoid of ethical considerations. This is not true and the best example of what happens when scientists divorce themselves of ethics is Anthropomorphic Global Warming. All science has an ethics that at least includes the rules of: 1) you must report the data accurately, and 2) you must follow the data to its logical conclusions. Some sciences such as medicine have additional ethical constraints. In medicine it is not ethical for the doctor to give the patient poison or prescribe poison just to see what happens or undertake surgery just to see how the human body reacts. Similarly, economics must not prescribe economic poison. Economics is ethically constrained to policies that promote life.
This attempt by economics to divorce itself from ethics not only means that economics defaults to a utilitarian based ethics, it also means that economists have no idea what property rights are. Property rights cannot be justified on utilitarian grounds. The utilitarian benefits of ‘property rights’ are the effect not the cause. Because of this confusion economists will go around saying that taxing medallions are property rights or FCC licenses or slavery in the South. It also means that when they combine their flawed ideas on ‘property rights’ with the nonsense of perfect competition they start talking about true property rights as giving monopoly power. This leads to all sorts of nonsense including the idea that patents and copyrights are monopolies.
Property rights are based in ethics and cannot be divorced from ethics. Property rights are the recognition that someone created something of value. When economics attempts to redefine property rights, it commits both a scientific error and an ethical error. The scientific error is the result of ignoring definitions and reality. Words have meaning and when economists say property rights are any legally enforceable control over an object it is like a biologist saying a mammal is any warm blooded animal (birds are warm blooded). The definition of a mammal is based in reality and is not arbitrary and the definition of property rights are based in reality. Ignoring reality is not science.
Ethically when economists attempt to redefine property rights they are advocating fraud or theft, by advocating that a creator’s creation be taken from him and given to someone else without the creator’s consent.
It is a sad fact that most economists have no idea what property rights are, however they are in good company. Lawyers, free market advocates, and even Objectivists do not have a firm grounding in what property rights are or how they come about. Historically, the study of property rights peaked around the time of the Homestead Act of 1862 and was dead when Hoover said the airwaves belong to the public.
Adam Mossoff is one of the few academics trying to advance the theoretical foundations of property rights. Studying the nature of property rights is part of economics and is completely neglected by all modern schools of economics.
7) Regulation and Opportunity Costs (An Application)
Regulation is usually analyzed on its effectiveness and based on its opportunity costs. For instance, if we mandate that all cars have airbags, this means that the cost of all cars will increase but the cars will be safer. This means that people will put off buying newer. safer cars and when they do buy a new car they will likely be forced to buy a smaller car that is less safe.
Another example is that if we force houses to meet building codes, builders will have to spend more time complying with these rules and will not be able to make certain tradeoffs. The supposed advantage is safety, but the opportunity costs is that housing is more expensive which means consumers have to drive cars that are not as safe or eat food of lower quality or have fewer children or spend less on education.
This analysis is flawed, because the largest opportunity cost of regulation is the lost inventions. The main justification for regulations is safety. However, because regulations such building codes and the FDA lock us into a technological stagnant (or retarded) market, in the long run we are less safe and these regulated product cost more. In the case of the FDA I am sure that what minor benefits we obtain in safety are wiped out within a year or two by the lost technological advances. However there have been no empirical studies on point to my knowledge. In fact, studies looking at this issue would be excellent research project in economics.
8) Immigration (An Application)
Does immigration lower wages or not? Economists argue both side of this argument and point to differing empirical evidence to support their positions. The reason for this confusion is that economists do not understand that inventions are the source of real per capita increases in wealth. I will show how my system of economics resolves this debate and why there appears to be conflicting empirical data.
We will start with the simplest case first. If we have a country where the overwhelming majority of people are living in the Malthusian Trap (i.e., the edge of starvation, subsistence living) then if more people move into that country people’s wages will not go down, but people will starve to death. With this information let’s examine the two extreme cases: a technologically stagnant country and a technologically dynamic country. In a technologically stagnant country the total GDP is flat to declining slowly. If immigrants increase the population of this country they will not and cannot increase its GDP, so real per capita incomes will decrease and therefore wages will decline. This is similar to the country in the Malthusian Trap.
When a country is technologically dynamic then its real per capita GDP is increasing. Immigrants in this case can contribute to the country’s increasing level of technology and therefore the wealth of the country. In that case each new person that is open to using their mind is an asset and only makes the country wealthier. A pretty good measure of how technologically dynamic a country is its economic freedom index.
No countries on Earth today are fully optimized to increase their level of technology and only a few are absolutely technologically stagnant. Some of the more technologically dynamic countries
include Singapore and Honk Kong. As Peter Thiel has pointed out the rate that the U.S. creates new technologies outside the information technology area has slowed significantly. Countries that are close to being technologically stagnant include Venezuela and North Korea and many African countries
Since economists do not control for how technologically dynamic the economy (or part of the economy) was that they used in their studies of whether immigrants increase or decrease wages, it is not surprising they got differing results even if they did everything else right in their studies.
My proposed school of economics, Intellectual Capitalism, is profoundly different than Neo-Classical, Austrian, Keynesian or any other school of economics.
For more on Intellectual Capitalism see:
My Book Source of Economic Growth
 Note this assumes that this country is technologically stagnant, which is likely if most people are living in the Malthusian Trap. s
Will Thomas and I gave a talk on Austrian Economics at Atlas Summit 2016, where I pointed out that Austrian Business Cycle Theory (ABCT) does not fit the empirical facts. ABCT claims that increasing savings/capital are the cause of economic growth, which is very similar to what classical and neo-classical economics states. I pointed out that in fact it is increasing levels of technology (inventions) that are the cause of economic growth not increases in capital. One of the questioners after the talk stated that inventions (technology) are part of capital.
Many people want to conflate increasing levels of technology with capital, however they are not the same. Capital as used in economics means those durable goods used in production.
In economics, capital goods, real capital, or capital assets are already-produced durable goods or any non-financial asset that is used in production of goods or services.
Adam Smith defines capital as “That part of a man’s stock which he expects to afford him revenue”. https://en.wikipedia.org/wiki/Capital_(economics)
The article goes on to explain how to determine if something as capital.
Classical and neoclassical economics regard capital as one of the factors of production (alongside the other factors: land and labour).
This is what makes it a factor of production:
The good is not used up immediately in the process of production unlike raw materials or intermediate goods. (The significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.)
The good can be produced or increased (in contrast to land and non-renewable resources). https://en.wikipedia.org/wiki/Capital_(economics)
Technological change is not a good, it is the process of inventing. It is true that when these new inventions are reproduced (manufacturing) then when purchased they become capital, but that is several steps removed. If we treat technological change as just part of capital then going out and purchasing capital goods is the same thing as inventing. However, the results are not the same. Purchasing (acquiring) capital without invention results in no real per capita increases in wealth over the long run. As a simple example assume that every farmer in the U.S. has the latest most up to date tractor their land can use. Adding more tractors (capital) does not increase the output of these farms. The same is true for capital in general.
A number of economists have pointed out that increasing levels of capital are not responsible for the tremendous economic growth experienced in the West since the Industrial Revolution. Among these economists are Robert Solow, Paul Romer, and Deirdre McCloskey. They all point to increasing levels of technology as the cause for our increased wealth. Our standard of living is defined by our level of technology.
On the other hand inventing at a faster rate does produce real per capita increases in wealth. Inventions can produce returns that are staggering. For instance, Eli Whitney’s invention of the cotton gin allowed a forty times increase in the output of cotton in the U.S. in one decade.
In science it is important to isolate the factors effecting an experiment. For instance, if you conflate wind resistance and gravity then you end up with the nonsense that heavier objects fall faster than lighter objects. This means you will never be able to create a parachute or an airplane.
In economics if we conflate inventions with capital, we make the mistake that third world countries will become wealthy if we provide them capital. In fact, this is exactly what Development Economics has said for years despite overwhelming evidence to the contrary. Conflating these two concepts will cause us to ignore the role of property rights for invention as being the biggest long term driver of wealth and instead focus on capital gains taxes or increasing the savings rate or increasing comsumption.
Inventions are the cause of real per capita increases in wealth, not capital. Conflating the two is illogical and results in nonsensical economic policies.
Will Thomas and I gave a talk at Atlas Summit 2016 on Austrian Economics. The talk focused on epistemological and ethical positions of Carl Menger, Ludwig Von Mises, and F.A. Hayek. A number of people asked for the slides and related materials. Below I provide links to nine posts on blog that investigate some of the issues discussed in the talk in more detail. Below that are the slides from the talk.
Is Carl Menger a Socialist? https://hallingblog.com/2016/06/25/is-carl-menger-a-socialist/
Why Austrian Economics Subjectivity is Wrong and Condemns Economics to Being a Pseudo-Science https://hallingblog.com/2016/06/13/why-austrian-economics-subjectivity-is-wrong-and-condemns-economics-to-being-a-pseudo-science/
Can “Dignity” Explain the Industrial Revolution: A Review of Deirdre McCloskey’s Economic Ideas https://hallingblog.com/2016/05/22/can-dignity-explain-the-industrial-revolution-a-review-of-deirdre-mccloskeys-economic-ideas/
Carl Menger: Austrian Economics vs. Objectivism https://hallingblog.com/2016/03/21/carl-menger-austrian-economics-vs-objectivism/
Carl Menger: Principles of Economics https://hallingblog.com/2015/11/16/carl-menger-principles-of-economics/
Capital in Disequilibrium: The Austrians’ Answer to New Growth Theory https://hallingblog.com/2015/09/09/capital-in-disequilibrium-the-austrians-answer-to-new-growth-theory/
Praxeology: An Intellectual Train Wreck https://hallingblog.com/2015/09/08/praxeology-an-intellectual-train-wreck/
Hayek: Friend or Foe of Reason, Liberty and Capitalism? https://hallingblog.com/2015/03/04/hayek-friend-or-foe-of-reason-liberty-and-capitalism/
The Austrian Business Cycle Debunked https://hallingblog.com/2015/02/15/the-austrian-business-cycle-debunked/
The Irrational Foundations of Austrian Economics https://hallingblog.com/2015/02/12/the-irrational-foundations-of-austrian-economics/
There is a myth by the anti-patent crowd that “overly broad” patents inhibit the development of new technologies. One of the classic examples they like to cite is the Selden Patent (US Pat. No. 549,160), which supposedly inhibited the development of the automobile around the turn of the century. A new paper ‘The “Overly-broad” Selden patent, Henry Ford and Development in the Early US Automobile Industry’ By John Howells and Ron D. Katznelson, shows that in fact the automotive industry prospered and inventiveness accelerated despite the Selden patent.
According to the paper:
First, neither the ALAM-adopted restrictive licensing policy based on the Selden patent, nor the public liability threats to purchasers of unlicensed vehicles (see sections 2.2.3-2.2.4) restricted entry into the automobile industry as shown by Figure 1.
Second, measures of automobile development show it to have been most rapid during the Selden patent term; Raff and Trajtenberg’s analysis of real, quality adjusted prices for the American Automobile Industry show that the fastest rate of price decline for a given automobile quality occurred between 1906 and 1911, within the term of the Selden patent prior to its 1911 adjudication: the rate of quality improvement was greatest in the 1906 – 1911 period and more than half of the quality gain for a given price observed to have occurred by 1980, had been attained in the period 1906 – 1911 (Raff and Trajtenberg 1996, p85, 91).
Third, rather than Ford being slowed down through patent litigation with the ALAM, from the foundation of the Ford Motor Company in 1903, Ford grew sales at an exponential rate faster than that of the total industry during the period of litigation. A serial developer of five major automobile models, which gained tenfold increase in sales every four years, can hardly be considered to have been “stifled.” The Ford Motor Company became the leading manufacturer of automobiles produced in 1906, a position the company retained until 1927; see Figure 2.
The paper provides overwhelming evidence that the Selden patent did not inhibit the automotive industry or the development of new technologies in the automotive industry. This should have been apparent to anyone familiar with the history of the automotive industry. The United States led the world in developing and manufacturing automobiles at the turn of the century and beyond. Selden had a U.S. patent and it was enforced in the U.S., so the facts do not square with the anti-patent narrative.
Another interesting part of the paper is that Ford knew that they would prevail in a lawsuit over the Selden patent. This is the value of well-defined laws and courts who stick to the law.
Selden’s patent was issued by the US Patent Office in 1895 and eventually was assigned to the Association of Licensed Automobile Manufacturers (ALAM) in early 1903. The ALAM publicly asserted that the Selden patent claims should be broadly construed, meaning that the entire automobile industry was within their scope. In October 1903 suit was brought against the Ford Motor Company under the Selden patent and when finally adjudicated on appeal in 1911 the Ford Motor Company was found not to infringe because although the patent was held valid, it was construed narrowly to cover an improvement to the obsolete Brayton engine. This was the embodiment with which Selden had experimented prior to 1879, the year he applied for a patent. Columbia Motor Co. v. CA Duerr and Co. 184 F. 893, 896 (2nd Cir. 1911). The narrow Brayton-based construction saved Selden’s claims, but they were not infringed since all gasoline engines in commercial use were Otto engines by 1911, rendering the patent economically worthless
Another anti-patent lie bites the dust. When a group or a movement consistently lies and promotes lies to support their position over and over again, as the anti-patent crowd has done, they should not be taken seriously by rational people.
There is a popular myth that great ideas are a dime a dozen (see here, here, and here). I don’t know what a great idea is. Is a Dick Tracey watch or a nuclear powered rocket a great idea? No, not if you don’t know how to implement them, then it is just a fantasy and unless you have plot with it, it is not even a good fantasy story. However, I do know what a great invention is and they are not a billion dollars a dozen. A great invention takes incalculable intellectual skill, years of training, years of hard work, and significant resources.
Pendulum of Justice, the first Hank Rangar Thriller, discusses this exact point.
“Hey Mike—we’ve heard your ‘good ideas are a dime a dozen’ speech before. The electric light bulb, the cotton gin, the polio vaccine, the microcontroller, hell, the CAT scan, were all a dime a dozen”
It is my opinion that this sort of nonsense is usually spread by people in finance, who are looking to improve their negotiation position or are just too intellectually challenged to really know when an invention is great. It also inflates their self-importance.
The reality is that most people do not create much more than they consume in their lifetimes and this includes many people in finance, even if they personally get rich. It is only by raising our level of technology that we increase our per capita wealth and only inventors increase our level of technology. Great inventors create incalculable wealth and even if they become wealthy, what they receive in payment is a pittance to what they provided.
I think this nonsense of “great ideas are a dime a dozen” is a spin out from the Austrian Economist Joseph Schumpeter who made a nonsensical distinction between innovation and invention, while denigrating inventions and inventors.
According to Wikipedia:
Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice
There is nothing inherently wrong with the distinction above, but the way it is applied blurs together a number of different skills. Blurring skills together shows a misunderstanding of the process of innovating. Broadly speaking, innovation can be broken into two distinct sets of skills: creation and dissemination. By creation I mean creating something new, not production – creating something old.
A subset of creation is invention. An invention is a creation with an objective repeatable result. A creation that is not an invention has a subjective result, such as the effect of a painting on a viewer, or the effect of a book on a reader. Many activities combine both a subjective creation and an invention, such as architecture. However, we can separate out the invention from the other creative elements and this helps our understanding of the process.
Dissemination may include a number of processes, such as education (marketing, sales), manufacturing, finance, and management. This is not to say that marketing cannot be creative, it clearly often is very creative. However, the creative part of marketing can be separated out from the dissemination or execution part of marketing. The same is true of manufacturing, which can definitely include inventing. But an invention related to manufacturing is part of the creation step not part of the dissemination step.
Finance can also have inventions. For instance, the invention of a fractional reserve bank is clearly an invention. It has the objective result of securitizing assets and turning them into loans and currency. A fractional reserve bank will securitize land and turn it into a loan and currency. Despite this, it is important to understand that the first person to develop the fractional reserve bank is inventing and the person operating the fractional reserve bank is disseminating.
All real per capita economic progress is the result of inventing. This is not to say that it is unnecessary to disseminate inventions, but if there were no new inventions there would not be any economic progress. We would be stuck in static world once all the inventions had been completely disseminated. Of course, if we stop all dissemination activities we will quickly starve to death.
It is my opinion that business and economic professors have focused on “innovation” instead of “invention” because they have no idea how to invent or how the process of inventing works. They concentrate on what they know, i.e. business and economic practices. As a result, the focus is on dissemination, under-appreciating the importance of inventing. In addition, it results in misleading business theories, such as:
– Management teams are more important than the quality of the invention.
– Execution is everything; patents and other IP do not matter.
– Get Big Fast.
The truth-test of these theories is directly related to the strength of the patent laws at the time the company is created. When patent laws are weak, these theories are more true and when patent laws are strong, these theories are less true. Unfortunately, when patent laws are weak these theories do not overcome the disincentive to invest in risky new technologies. Management teams do not build revolutionary or disruptive technologies, they just disseminate these technologies. These sorts of teams are like large companies and generally can produce a return with less risk by NOT developing high-risk technologies. They tend to focus on incremental technologies or on stealing someone else’s technology. While this may be good business advice in a period of weak patents, it is bad for our country’s competitiveness and our standard of living.
Technological progress (i.e., inventing), in the long run, is the only competitive business advantage. The best management team in the world selling buggy whips at the turn of the century could not overcome the technological advance of the automobile and stay a buggy whip company. The best management team in the world selling vacuum tubes in the 1940s, could not overcome the advance of transistors and semiconductors and stay a vacuum tube company. This country is littered with companies that had great management teams that were overwhelmed by changes in technology. For instance, Digital Computers had a great management team, but they could not overcome the advance of the personal computer. Digital Computers, Inc. failed to invent fast enough to overcome the onslaught of small inexpensive computers. US steel was not able to overcome the onslaught of mini-mills, aluminum, and plastics. This was not because they did not have a good management team, it was because the management team under- prioritized invention and over-prioritized execution or dissemination skills. Ford & GM have not become walking zombies because they did not have strong management teams, but because they have not invented. As a result, they have antiquated production systems and weak technology in their products. 86% of the companies in the Fortune 500 in 1959 are no longer there. Some of these companies disappeared because of bad management, but most companies disappeared because they did not keep up with changing technology. In other words, they did not invent.
Inventions(i.e., advances in technology) are the ONLY WAY to increase real per capita incomes and the only long term business advantage.
Schumpeter – another Austrian School of Economics Failure.
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