State of Innovation

Patents and Innovation Economics

Fundamentals of Economic Science: An Objectivist Approach

Ayn Rand stated in, Capitalism: The Unknown Ideal, that

Political economy was, in effect, a science starting in midstream‘


Economics has ignored the unique features of its principle resource – Man.[1] We are going to avoid that problem, by first examining the unique nature of homo sapiens.  But before we look into the unique nature of man, let’s examine what it means to be a science.  It is my premise that economics is objective and therefore can be a hard science[2], based on empirical observation, logic, and reason.  There are some who would say that economics cannot be a hard science because we cannot setup isolated experiments to test hypotheses.  However, the same can be said of geology and astronomy, both of which are considered hard sciences.

All science is based on certain fundamental empirical observations.  One of these fundamental observations is that reality is objective.  This means that reality exists independent of any person’s belief, hope, faith, or desire.  The evidence for this proposition is overwhelming and includes all the incredible advances in physics, chemistry, biology, geology and the applied sciences (engineering).


Fundamental Observation: Reality is Objective[3]

Ayn Rand would state this fundamental observation as:


Reality exists as an objective absolute—facts are facts, independent of man’s feelings, wishes, hopes or fears.[4]


The second fundamental observation of science is that reality is understandable or discoverable using observation, logic, and reason.  In science, we follow logic and reason even if it seems counterintuitive.  For instance, the implications of special and general relativity predict that clocks on GPS (Global Position Satellites) satellites will run at a different rate than clocks on earth.[5] This appears counterintuitive, but empirical evidence shows that this is true and failure to account for this difference will result in meaningful navigational errors.


Fundamental Observation: Reality is understandable or discoverable using observation, logic, and reason


Ayn Rand would state this fundamental observation as:


Reason (the faculty which identifies and integrates the material provided by man’s senses) is man’s only means of perceiving reality, his only source of knowledge, his only guide to action, and his basic means of survival.[6]


If economics is going to be a science, it must be based on these two fundamental observations/assumptions.  Some people may object that science is based on observations.  All logical systems are based on either observations or assumptions.  For instance, Euclidean geometry is based on the assumption that a line goes on forever and two parallel lines never intersect.  Spherical geometry is not based on these assumptions.  It assumes that a line will wrap around on itself.  In science we do not arbitrarily pick the starting point, we use observations.


Definition: Economics is the study of how man transforms things to meet their needs.


Keeping Rand’s admonishment about the state of economics in mind, we now turn our attention the unique nature of man.  Aristotle and Rand define man as a rational animal.  The genus is animal.  The unique nature of animals and all life is that it thrives on negative entropy.[7] The species in the definition of man is that he is rational.  In the context of economics, the important part of being rational is that man invents.  No other animal invents.  In Atlas Shrugged invention plays a major role in the story.  The major character John Galt is an inventor as is Hank Reardon.


Man’s unique reward, however, is that while animals survive by adjusting themselves to their background, man survives by adjusting his background to himself.[8]


The first need of every person is to stay alive.  This means that life is a fight against entropy, the second law of thermodynamics.  Entropy is normally defined as the measure of the disorder of a system.  Entropy was discovered as part of thermodynamics and it explains that a perpetual motion machine is impossible.  Entropy always increases in a closed system.  Luckily for us, the Earth is not a closed system.  For instance, we receive energy from the Sun.  The only way to increase order is by the input of energy.  Life represents increasing order and therefore just to sustain life at its present level requires energy.  Edwin Schrödinger, Nobel Prize winning physicists, proposed this idea in his 1944 book, What is Life.[9]


Fundamental Observation: Life is a fight against entropy


Plants create this energy by photosynthesis.  They convert carbon dioxide into sugars (energy) using light.  They use this energy to create order.  Animals eat plants or other animals and use the energy to create order.  Note that when animals eat plants or other animals, they are increasing the disorder of the plants and animals they eat.  Thus, there are two general mechanisms that increase the entropy of life forms, 1) internal and 2) external.  Internal mechanisms are those that result from the failure to consume enough calories (energy) and aging.  Animals require oxygen, water, and food in that order to survive.[10] Without oxygen, the animal cannot oxidize enough sugar (fat, protein) to survive – overcome entropy.  Without water, the animal’s cells are unable to absorb energy and expel wastes.[11] As a result, the animal does not receive sufficient energy to overcome entropy.  Aging is a process of increasing disorder – entropy.  This disorder is caused at least in part by disorder in genetic information.[12] External mechanisms include being eaten or attacked by other living organisms, diseases, accidents (for animals), and the elements.

In general, living organisms use energy to overcome entropy first and then to increase their size.  However, some animals also create simple shelters or seek shelter to ward off the entropy increasing effects of the elements and predators.  Rain, sun, hail, snow, heat, and cold all contribute to the increase in entropy of living organisms (disorder).  A living organism dies when its entropy increases above a certain level.  Life has two main methods of overcoming the effects of the second law of thermodynamics: 1) food (energy) consumption and 2) shelter creation (inhabitation).

A species of life becomes extinct when the species as a whole reaches a certain level of entropy either because it cannot consume enough energy or because external mechanisms increase its entropy to the extinction level.  A species reaches the Malthusian Trap when increases in population of the species results in the total required energy (food) to support the population is greater than supply of food.  Or stated in the laws of physics, the total available energy is less than the energy required to overcome the total entropy of the species’ population.  Most life forms exist in the Malthusian Trap, including humans until the Industrial Revolution.  Evolution is life’s way of determining which species is best at overcoming entropy.

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 entropy.  For instance, humans have invented agriculture to increase their supply of food (energy) and therefore order.  Humans also harnessed the physical strength of animals, created internal combustion machines, electric lights, electricity, washing machines, tractors, computers, the internet, email, lasers, fiber optics, etc.  All of these are inventions.  Humans alter their environment by creating inventions.  This is different from every other animal.  This should not be surprising, since the distinguishing characteristic of homo sapiens is their ability to reason.  Man is a rational animal according to Aristotle’s classical definition.[13] Being rational is the distinguishing characteristic of humans.  Man uses his reason to alter his environment (invent) and increase order for himself.  Invention is the unique way in which man is able to create order – this is the fundamental observation of economics.


Fundamental Observation of Economics: Man’s unique ability to increase order (wealth) is his ability to invent.


Ayn Rand’s way of explaining this is:


Nothing can raise a country’s productivity except technology[14]


Inventing first results in the increased success of the species.  Homo sapiens populated most of the world in less than 500,000 years because of this unique ability.  As long as the rate of technological progress is slower than the growth in population, man is stuck in the Malthusian Trap.  Sometime around 1800 in Europe and the United States, the rate of invention exceeded the rate of growth in population and man escaped the Malthusian Trap at least in the West.[15] When man escapes, he is no longer subject to biological evolution.  As far as we know, homo sapiens are the only species to ever escape the Malthusian Trap.

Trade enhances man’s ability to invent.  By trading the products of each others’ inventions both trading partners can specialize and end up wealthier.  David Ricardo explained how both parties are better off because of trade using the example of England trading cloth for Portuguese wine:


England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time.  England would therefore find it in her interest to import wine, and to purchase it by the exportation of cloth.  To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time.  It would therefore be advantageous for her to export wine in exchange for cloth.  This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced with less labour than in England.[16]


Using the example above, if England produces twice as much cloth as it needs, it has invested 200 man hours.  If Portugal produces twice as much wine as it needs it has invested 160 man hours.  Now if England and Portugal trade their excess cloth for the excess wine, England has invested 200 man hours for all its cloth and wine, while Portugal has invested 160 man hours for all its cloth and wine.[17] If England had produced both all its cloth and all its wine locally, then it would have invested 220 man hours for the same goods.  This means that England requires 10% more man hours if it does not trade.  If Portugal had produced both all its cloth and all its wine locally, then it would have invested 170 man hours for the same goods.  This means that Portugal requires 6.25% more man hours if it does not trade.

Trade is a rational activity and humans are the only animals to engage in trade of non-like items and trade between non-related individuals.[18] Classical economics has focused on trade and the related supply and demand curves instead of the role of invention in economics.  This might have occurred because the beginning of classical economics was in reaction to the Mercantile system and its limitations on trade.  Adam Smith’s book, The Wealth of Nations, is often seen as a refutation of the Mercantile system.  Matt Ridley, in his book, The Rational Optimist, has suggested that trade is the key to creating wealth.  This emphasis on trade has been misplaced.  Invention proceeds trade.  If everyone produces the same thing, then there is no reason to trade.  It is only because someone has invented a new product that trade becomes a rational choice.  For instance, one group of people may have invented a process for skinning animals and using them as clothing.  They may have traded this with people who had access to flint and invented a system for making simple axes.  Invention has to proceed production, which has to proceed trade logically.  Of course, without trade the value of invention is severely diminished.

In summary, life is a fight against entropy.  Economics is the study of how man transforms things to meet their needs.  The unique way in which humans meet their needs is to invent.  Only by inventing can humans increase their level of wealth.


[1] Rand, Ayn, Capitalism: The Unknown Ideal, Kindle Edition, location 126-128, 2011.

[2] Hard sciences include physics, chemistry, and biology, as opposed to “soft science”, such as psychology, sociology, and political science.

[3] Even the bizarre results of quantum mechanics are repeatable and independent of the observer’s hopes, desires, faith, opinion.

[4] The Ayn Rand Institute, Introducing Objectivism,, 2/0/11.

[5] Real-World Relativity: The GPS Navigation System,, October 3, 2010.

[6] The Ayn Rand Institute, Introducing Objectivism,, 2/0/11.

[7] Wikipedia, What is Life?,ödinger), Edwin Schrödinger, 10/6/10

[8] Rand, Ayn, For the New Intellectual, p. 15.

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

[11] BNET, Physiological Effects of Dehydration: Cure Pain and Prevent Cancer,, 10/6/10.

[12] Hayflick, Leonard, Entropy Explains Aging, Genetic Determinism Explains Longevity, and Undefined Terminology Explains Misunderstanding Both, PLoS Genetics,, 10/7/10.

[13] The Philosophy of Aristotle, Adventures in Philosophy, 10/7/10.

[14] “The Moratorium on Brains” The Ayn Rand Letter, I, 3, 5.

[15] This should more accurately be stated that the rate of growth in productivity due to the introduction of new technologies exceeded the rate of growth in population.

[16] Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Harper Collins, New York, 2010, p. 75.

[17] This example ignores the cost of transport the wine and cloth, but it illustrates the general concept.

[18] Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Harper Collins, New York, 2010, p. 56.



February 22, 2011 - Posted by | -Economics, Innovation | , , , , ,


  1. DB,

    I must confess that I am not as deeply indoctrinated (cough, cough) I mean educated in Ayn Rand objectivism as you appear to be.

    However, it seems to me that the above Rand rant is peppered with one absolutist proposition after another where each of them can be demonstrated to be in error.

    But before going there, I want to step back and dig into one of the deeper aspects of “science” and mathematics.

    Roger Penrose spends quite a bit of energy on this topic in the opening chapters of his tome, “The Road to Reality”.

    Both in mathematics and in science, we humans make a subtle assumption, which if shown to be wrong, puts a major kink into what we consider to be the unassailable and most fundamental axioms of science and mathematics.

    That assumption is as follows: When we make an absolutist declaration regarding math or science, we assume that the declaration is universally true at all scale of dimensions, meaning from the largest scales of time and space (billions of years and many light years) to the infinitesimally smallest scale of dimension (fempto seconds or less and Angstroms and less) and the declaration is universally true in all parts of the Universe.

    More specifically, if I were to declare that it is universally true that c^2= a^2 + b^2, I am making an assumption that space has no kinks in it and that space is homogeneously planar and continuous in the Euclidean sense.

    WE already know that this assumption falls apart in the dimensional realms where quantum mechanics takes hold (the realm of the very small) and this perhaps is the first hint we as humans had that there was something flawed, fragile and breakable in the very foundations of what refer to as “science” (as well as math).

    Roger Penrose includes in his tome some sketches related to this issue. Here is a link to one of them:

    p.s. No doubt you are aware that some libertarians hold Ayn Rands views on patents and invention to be wrong despite the fact that she is goddess of their libertarian belief system

    Comment by step back | February 23, 2011 | Reply

    • Step back,

      Absolutely, all logically systems are built on assumptions or observations. Our belief that the world was Euclidean was shown by Edison to be incorrect. However, with a science we acknowledge these limitations. For instance Euclidean geometry is perfectly correct in non-relativistic and non-quantum mechanical spaces.

      This post is part of a new book. I have been told to find a target audience. Rand fans seem to be the best target. If you can sell (guaranteed) my next book in large quantities without targeting it to fans of Ayn Rand, I could write it without any references to Ayn Rand.

      Comment by dbhalling | February 23, 2011 | Reply

  2. Looks like your spam filter ate my comment (or maybe it was deleted by site owner?)

    Comment by step back | February 23, 2011 | Reply

    • Step back,
      I would never delete one of your comments, please try again.

      Comment by dbhalling | February 23, 2011 | Reply

      • It was a real long one and I didn’t save a copy. Maybe it’s caught in your spam folder for some reason –i.e. needs site owner moderation?

        (Thank you for the vote of confidence about not deleting my comments.)

        Comment by step back | February 23, 2011

  3. DB,

    As I mentioned, a significant number of Rand fans are anti-patent. They consider patents as doing violence to their “natural” property rights when they invent at a later date after the supposed, 1st to invent person files a patent app with the evil non-libertarian government (you know, the one that stifles true innovation and needs to be moved out of the way of the forces of the free market).

    I don’t want to be putting words into their mouths. You might be wanting to check in with the folk at this site:

    Comment by step back | February 23, 2011 | Reply

  4. Step back,

    Yes that is interesting. Ayn Rand was very clear that intellectual property is the most fundamental form of property. See I show in my book that their ideas are more consistent with the ideas of Marx, who only recognized physical labor as providing value. If you take their ideas seriously then there is no reason for professors, doctors, attorneys, engineers, accountants, marketers – information is free and it costs nothing to create or distribute it. Incidentally, they also confuse patent ownership with ownership of the information. Only trade secret law gives a person exclusive rights to an idea. Patents are designed to spread the information associated with inventions, it is only when someone intends or does make a physical embodiment that the tort kicks in.

    Also see professor Adam Mossoff’s work at George Mason. He is an intellectual property, patent law professor. He also participates in Objectivist conferences.

    In the blogosphere, see Not PC a pro patent pro Rand site from New Zealand and The Vincenton Post pro patent pro Rand site from Phillipines.

    Comment by dbhalling | February 24, 2011 | Reply

  5. Good (bravo) for you that you are going to write another book.

    However, “economics” is not a science, not even a “dismal” one.

    I think you will draw a lot of criticism if you try to take that path.

    Economics is a religion of sorts; one that believes in an invisible deity known to its followers as “The Invisible Hand”.

    Economics is a political ideology of sorts; one that tries to assert itself as being “fair” with regard to who in society is “deserving” of receiving a share in society’s surplus wealth and who is not.

    Economics is a mind control tool of sorts; one that convinces the lower classes to vote against their own economic interests time and again.

    But don’t put words in my mouth. If you ask me whether I have ideas for a better system; I don’t.

    Comment by step back | February 24, 2011 | Reply

    • Step back,
      I completely disagree. Economics is the study of how humans overcome entropy (provide for their sustenance). If a person does not obtain adequate energy (oxygen, water, food, shelter, medical care, etc) they die. This is a hard fact. If a group of people do not have adequate energy for everyone in the group, some or all the people starve. You may complain that this is physiology or evolution, but they are the basis of economic science. If humans did not invent, then the study of economics would collapse to the study of physiology and evolution. Thus economics is based on several “hard sciences” entropy, physiology and evolution.

      If you want to argue that the present state of economics hardly amounts to a science, you would get my vote. Until the economics profession fires any economist who suggests that stealing (welfare – especially corporate welfare) or destroying things (war, natural disasters) increases wealth or jobs, it can only be seen as being pre-science.

      By the way you misrepresent the “invisible hand.” It is simple a shorthand way of describing how people use trade to provide for their sustenance. Because of trade, we do not all have to be self sufficient and by pursuing our own vocations we provide goods and services that everyone (many people) needs.

      Comment by dbhalling | February 24, 2011 | Reply

  6. DB,

    You will get no argument from me that the Laws of Nature (i.e. conservation of energy, conservation of mass, thermodynamics, etc.) cannot be violated.

    On the other hand, you will be hard pressed to find an “economist” who has studied the hard sciences and understands why hard physical limits will be hit sort of like a Humpty Dumpty Egg crashing into a brick wall, if we keep going in the BAU (business as usual) ways that we as a global civilization have been going so far, with our economic feet pressing the pedal to the medal and pushing for it to go even faster and faster. The cliff looms just ahead.

    (And BTW, that does not give me any joy; just sadness and anguish that hardly anybody sees it coming or is willing to say out loud that it is coming. A new version of Farmville (addictive computer game) will not save us from the perils that face us in the nonvirtual reality world. Modern economic theory is just another Farmville game.)

    Comment by step back | February 24, 2011 | Reply

    • In general, I agree with you. However, John Von Neumann made some contributions to economics. Particularly he was one of the first to use infinite dimensional sets of Hilbert Space (most commonly used for quantum mechanics) in economic to attempt to create a general price model of the economy. Paul Romer, who is one of the leading lights in economic growth theory (often mentioned a likely Nobel Prize winner in the future), has an undergraduate degree in physics.

      I do not believe all this higher level math applied to economics has actually helped it become a solid science. Actually, I think it has diverted their attention from creating a solid basis for economics.

      Romer understands the importance of invention (he calls it recipes) but he is indifferent on patents. He believes that there needs to be incentives for creating recipes, but once they are created it takes no resources (it is frictionless) to have ideas spread. (If this were true their would be no reason for engineers, lawyers, doctors, professors, marketers, sales people, etc and why does anyone pay for someone to teach them calculus – there are no IP rights in calculus) He argues that ideas are non-rivalrous and this is why we need no incentives for inventions once they are created. The non-rivalrous argument is rabbit hole. The real value of inventions is that they are not subject to entropy.

      Comment by dbhalling | February 24, 2011 | Reply

      • but once they [the recipes] are created it takes no resources (it is frictionless) to have ideas spread

        Obviously he has never played a game of telephone (you know, where a message is passed through whispers from one end of a line of people to the other end). 😉

        Comment by step back | February 24, 2011

  7. “Definition: Economics is the study of how man transforms things to meet their needs.”

    At 7 Billion strong, we have over-fished the oceans, denuded the forests, polluted the air (and water), driven many other species into extinction, etc. And yes, technology has greatly helped us to achieve those results.

    However, it stretches credibility to insist that economists spend their time analyzing these important aspects of how mankind transforms things to meet its “needs”.

    No. Economists spend most of their time and energy pulling fancy mathematical equations out of their Fannie Mae’s where the equations are totally disconnected from physical reality.

    Take “money” for example.

    (Well sure, thank you, everybody wants to take money. 😉 )

    What is money?
    Where does it come from?

    The first question is too complex to answer in one sitting.

    However, as to the second question, we know there was no money in the age of the dinosaurs.

    Now there are trillions and quadrillions of units of the “thing”. It all appeared out of thin air. We made it up. It is a fabrication divorced from physical reality.

    And yet, that is the one thing that economists do spend most of their time studying (and worshiping).

    So the more proper definition of economics is that it is a methodology used by men to not account for things they do not want to be held accountable for (i.e. destroying the planet) and to count things (money) that are divorced from physical reality.

    With that said, you and I do not disagree that mankind needs to reinvent itself in order to remain viable on this finite and easily destroyed planet.

    Comment by step back | February 25, 2011 | Reply

    • Step back,

      We actually have more forests in the US than when the first European settlers came here. We also have more bears, deer, mountain lions, etc. Although we have overfished Cod and there is no sign of their population coming back. Note that occurred in an area where there was no property rights – tragedy of the commons. As we increase our level of technology we reduce pollution. The main reason the air is less polluted today than in1970s in large cities is increases in technology not regulations. Pollution is waste and in a free market technology entrepreneurs find ways to make money from waste. For instance, I am part of a company that is researching how to recover the resins and metals from used circuit boards without using VOCs. The peppered moth shows that companies reduce pollution from coal soot because the soot was a byproduct of incomplete combustion. See the book the Rational Optimist by Matt Ridley for more examples.

      If your point is to return us to some sort of Rousseau-like noble savage state, this is a complete fantasy. If you want to understand just how brutal life was before the Industrial Revolution, see the book State of Fear by Michael Crichton.

      Comment by dbhalling | February 25, 2011 | Reply

  8. Step back,

    I agree that economists focus too much attention on money. This focus on money causes a number of logical gaps. Money is just a way of storing valuing. Originally money was just one of the commodities or goods that had value and could be stored and traded later. Paper (digital) money is not wealth and creating money does not create goods and services no matter how much Bernake, Pelosi, and Geithner say otherwise. For a good book on the history of money see Niall Ferguson Ascent of Money.

    Comment by dbhalling | February 25, 2011 | Reply

  9. Money is just …


    It is not.

    Deep in your heart you know it is not just that.

    Money is many a different and complex things: power, security, envy, dreams, nightmares, …., and on and on.

    But I left the most important thing out of the list. What?

    Comment by step back | February 26, 2011 | Reply

    • power and control. That is why governments pass legal tender laws. That is why the Supreme Court (Originally) Hepburn v. Griswold ruled that legal tender laws were unconstitutional.

      Comment by dbhalling | February 27, 2011 | Reply

      • I was thinking more so that money represents “promises”, often promises that cannot be kept despite the declaration by a bunch of black robed dudes that it is “legal tender”.

        Think about the trillions of units of money (a.k.a. dollars) that the USA Federal government prints. The implied promise is that this stuff can be exchanged for commodities, like a livable amount of food and gasoline, and that the exchange value is retained for a reasonable amount of time.

        But what happens if when you get to the gasoline station, there is no gas? For any amount of legal tender? What happens when you get to the supermarket and there is no food? For any amount of legal tender? Suddenly the implied promises of the money go up in a puff of smoke and hot air; the same hot air from whence the money came in the first place.

        Comment by step back | February 27, 2011

  10. Step back,

    Interesting points. Normally that is described as money being a “store of value. But I agree with you point about promises. Because of this I think of money as a generalized IOU.

    Comment by dbhalling | February 27, 2011 | Reply

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