State of Innovation

Patents and Innovation Economics

George Reisman: Are Objectivist Economists Consistent with Rand?

It is my contention that classical economics is not completely consistent with Ayn Rand’s Objectivist philosophy and even economists who are Objectivists have failed to provide an economic theory that is consistent with her ideas.  For instance, George Reisman is one of the well known economists associated with Objectivism and Professor Emeritus of Economics at Pepperdine University.  In his book Capitalism on page 40 he states:

Patents … derive their market value from the fact that they make it possible for the intellectual creators of new and additional wealth to benefit from their contributions by temporarily limiting the increase in wealth that their intellectual contributions bring about.

Now how does Dr. Reisman square his ideas with Rand on this subject?  Dr. Reisman later states that patents increase the supply of goods, so he appears to be somewhat inconsistent.  But on page 449 he states:

Intangible assets (patents) no more constitute capital than they constitute wealth.

Dr. Reisman does define wealth in Chapter 2 as material goods made by man.  So it is consistent with his definition, but how does he square this with Rand who states in Galt’s speech:

He cannot obtain his food without knowledge of food and of the way to obtain it. He cannot dig a ditch––or build a cyclotron––without a knowledge of his aim and the means to achieve it. To remain alive, he must think.”  Rand 1992, p. 1012.

An example might be useful.  Joe is a builder and knows how to make concrete but is not presently making concrete.  Is he wealthier than Jim who is a builder, in essentially the same position as Joe, but Jim does not know how to make (or get) concrete?  Clearly Joe is wealthier.  I think Reisman’s definition of wealth is flawed.

I also think it is inconsistent with Ayn Rand, who in Capitalism the Unknown Ideal, states:

Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.[1]

Is the value of a building worth more in a country with property rights or one without property rights?  In the property rights country, the owner can collateralize his property, he can obtain income from his property without having to hire thugs to enforce his rights, he can justify investing in improvements in this building.  In both cases there is the same material good, but the value is totally different.  Property rights are wealth, their contribution to wealth is secondary to the underlying asset, i.e., the building or the invention.

My main problem with classical economics or Austrian economics is they have not built a system around the fact that man’s main tool of survival is his mind.  That is the source of his wealth and the only source of real per capita increases in income/wealth.


[1] Rand, Ayn, Capitalism: The Unknown Ideal, Signet, New York, 1967, p. 130.

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October 30, 2013 - Posted by | -Economics, Innovation | , , ,

16 Comments »

  1. I just wanted to say that in the analogy of Jim & Joe, neither man is wealthier than the other. Jim has neither the materials for mixing concrete nor the knowledge of how to procure such materials, while Joe has the knowledge, but does not put that knowledge to use. Knowledge unused is wasted information. Wealth is not based on knowledge alone, but rather how a man uses his knowledge to create value. There is no practical difference between a man who lacks knowledge and a man who doesn’t use his knowledge. Therefore, both men are equally lacking in wealth.

    Comment by Maphesdus | October 30, 2013 | Reply

  2. I disagree. If I am a fisherman and I know how to stitch a wound, I am wealthier than a similarly situated fisherman who does not know how to stitch a wound, even if I am presently not stitching a wound.

    Comment by dbhalling | October 30, 2013 | Reply

  3. Only if you actually make use of your stitching skill when it becomes necessary. A fisherman who knows how to stitch a wound, but refrains from doing so when there’s a wound that needs stitching is no better than a fisherman who doesn’t know how to stitch a wound. Knowledge has no value unless it is actually used and put into practice.

    Comment by Maphesdus | October 30, 2013 | Reply

  4. No the knowledge will allow me to feel more comfortable fishing. It will allow me to fish father afield. It will allow me to hire better people. Knowledge has value and increases wealth. In fact all wealth drives from knowledge – as long as it has the potential of being used.

    Comment by dbhalling | October 30, 2013 | Reply

  5. @Dale, you said: “My main problem with classical economics or Austrian economics is they have not built a system around the fact that man’s main tool of survival is his mind.”

    Certainly true about Classical Economics, sadly. But you really should read Carl Menger, the founder of Austrian Economics, writing in his revolutionary ‘Principles of Economics’ on the four conditions that must exist in order for a thing to acquire “goods-character”:
    1. A human need.
    2. Such properties as render the thing capable of being brought into causal connection with the satisfaction of this need.
    3. Human knowledge of this causal connection.
    4. Command of the thing sufficient to direct it to the satisfaction of the need.

    This is the very start of Austrian value theory. As George Reisman points out, “his principle [is] that the starting point both of goods-character and of the value of goods is within us—within human beings—and radiates outward from us to external things…”

    Comment by Peter Cresswell | October 31, 2013 | Reply

  6. Hi Peter,

    Thanks for the input, I will check out Menger.

    Comment by dbhalling | October 31, 2013 | Reply

  7. Peter,

    Menger only mentions economic growth once. What causes economic growth I believe is the single most important question in economics, and the answer is not just capitalism (economic freedom) or getting supply and demand right. Menger seems to hint that it has something to do with technology (higher order goods) but hardly makes this explicit. On related note he mentions technology three times, patents once, and his definition of property on page 74 is ambiguous.

    In Capitalism the Unknown Ideal, Rand complains that economists ignore the fundamental nature of man, and the start in mid-stream. I don’t see the Manger solves that problem.

    Comment by dbhalling | October 31, 2013 | Reply

  8. To add two cents or more, the question on whether objectivists are loyal to Rand’s vision seems not to be wrong question. The fact is the disciples are rarely copies of the master, more builders on their mentors foundations. The natural tendency is to interpret and change, and that they will. The real question is to the extent they have are they becoming no longer true to her vision. My guess that is question with many answers including in the arena of patents.

    The discussion with Peter seems to center on the meaning of wealth and value and status of patents themselves.

    Wealth itself, properly understood, is a matter of desire. Things have worth not because of the labor involved (Classical and Marxian concept) nor due to Utility (Menger) but due to desire. A gold nugget picked up along a trail has value. A value not attached to the labor needed to pick it up or the utility it offers but the fact others will desire it. Any definition of wealth that does not indicate the influence of human emotion and specifically the emotion of desire is misleading.

    As far as Patents, I too differ from Dr. Reisman on patents as capital. Patents are part of the assets a company can bring to bear and have value as a sellable commodity. This makes them by definition as much capital as physical assets like a crane or human capital like an engineer.

    On the subject of knowledge making a man wealthier, it is only true if it is marketable. To use a different analogy than the one you employed. A man who buries his gold in his backyard and lives in a shack is still considered wealthier than his neighbor who lives in a similar home but has no gold. The fact that he has a marketable asset at his disposal adds to him wealthier. This is no different then a doctor who digs ditches is inherently wealthier than the illiterate getting paid the same next to him. The caveat to this is if a man has a less marketable skill or knowledge than what he is using. In this case the additional knowledge/skill set does not make him so much wealthier as more stable (he has something to fall back on). Of course a safety net skill can have value if it allows one to take on things that one would normally not have the guts to do.

    Comment by Luke | November 3, 2013 | Reply

  9. The question is not that they followed Rand – she admits that she was not defining a system of economics, but whether they have been able to create an economic theory consistent with her and their stated goals.

    I disagree with the Austrian subjective view of wealth. Wealth are those things necessary to sustain one’s life. Thus in most societies having a lot of gold makes one wealthy because they can trade if for the things they need. But if you are on a deserted island and have a lot of gold it is worthless. (Not enough time to do this complete justice)

    I disagree about knowledge only making someone wealthier if it is marketable. Again if I am on a deserted island and I am a surgeon, I am wealthier than a person in the exact same position who is not a surgeon.

    Part of the problem I believe, as did Rand, is that many people define economics as the study of trading. Well this ignores production, which has to come before trade. Economics is the study of how man creates and acquires the things necessary to sustain his life. When looked at this way it immediately becomes apparent that if man was not a rational animal, economics would collapse into the study of the evolution of humans. Thus man’s mind is the only reason there is a subject called economics. Another related thing that drives me crazy about economists is they think they can study their subject without defining what property is. ((Not enough time to do this complete justice)

    Comment by dbhalling | November 4, 2013 | Reply

  10. The question on whether they are still witing Rand’s general vision or stepping into some sort of hybrid or even something totally new is legitmate. To me the more important question is are they onto something or just going off on a tangent. I think we both agree they seem to be doing more of the second.

    As far as Austrians, I prefer Mises to Menger but niether totally seems to grasp the truth. To me wealth can’t be purely utlitarian (or based on the sustaining of life). A diamond ring is not edible but it can add esteem and give pleasure to the owner. Just as psychologist seperate needs into base and higher level, wealth could be as a mental exercise divided into base and upper level types. Those things that sustain life would fall into the catagory of base wealth, diamond rings and a fancy car would be upper level wealth. (or base and upper level desires).

    Trading, while part of economics, is a result. A result of people trading those things they value (desire) less for those things they value more. This is where I believe Mises gets it right, to study economics you must also study human nature. Man and his interactions are far more complex than the search to satisfy base needs. It also goes beyond what is rational at times, as what is sane in one man’s eyes can seem quite the opposite to another (playing basketball with saggy pants on for example).

    Of course you are quite right in expressing concern about the definition of property. One can only trade what one has, and what one has is his propetty. No matter how you define economics and wealth the queston of property is a base issue. Without property rights trade, wealth and a host of other economic concepts cease to have meaning. To that end, if one does not own one’s own thoughts what can he own? For certain, if a person share’s their thoughts freely they become communal in nature and no further claim can be made on them (except for credit for thier origin in some cases).. But those thoughts one holds back as assets for sale are a another matter all together.

    Finally It seems to me the desrt island scenario goes beyond wealth in an economic sense. A surgeon probably will survive better than a illiterate ditch digger and therefore has an advantage (although the same might not be said for a philospher or mechanic). His knowledge (and experince) gives him inner wealth, a wealth of the soul if you will, but economically it has no value. Personal enrichment and sentimental attachment can be defined as a form of wealth, just not in economic terms. .

    Comment by Luke | November 4, 2013 | Reply

  11. Wealth is those things that can be used to sustain your life. This includes knowledge. You might say I don’t need a new car to sustain my life. But a new car reduces the chance I will be hurt in accident, increases the likelihood that I will make it to my appointments, all these add to sustaining my life. This is why wealth is one of the best indicators of longevity. Knowledge is the ultimate source of all production and therefor all wealth. You might say entertainment does nothing to sustain one’s life, but those people who have access to more entertainment tend to live longer. Not every purchase is necessarily a rational choice to increase those things that sustain one’s life, and you can get wealthy selling to fools, but that does not change the nature of wealth.

    Comment by dbhalling | November 4, 2013 | Reply

  12. This might be one of those things we have to agree to disagree. A large amount of the assets that compose a person’s wealth have no connection to sustaining life. Things like the art on the wall, coin collections,jewery, etc.. Their value lies wholly within the fact they are valued (desired) by others besides themselves. Those things not valued by others (desired) have no economic value. This is the same for all those who live in societies who have progressed beyond the level of the hunter gatherer.

    Comment by Luke | November 4, 2013 | Reply

  13. Sorry Dale and Luke, I simply cannot agree with your characterisations of Reisman, Menger or even Mises–or of Austrian economists in general.

    I don’t have time to write more now, but I do intend to.

    Comment by Peter Cresswell | November 5, 2013 | Reply

  14. Hi Luke and Peter,

    Sorry you got caught in the spam filter.

    Comment by dbhalling | November 13, 2013 | Reply

  15. Peter, I look forward to your input.

    Comment by dbhalling | November 13, 2013 | Reply

  16. Luke, if there is absolutely no connection between the thing and the ability to sustain one’s life then it is not wealth. But art can act as a store of value. Those people who enjoy art and have more access to art live longer than those who do not.

    “Those things not valued by others have no economic value.” The first oil found in Pennsylvania had no value to others. Waste grease from fast food restaurants had not value to others originally. The key to all economic wealth is man’s man and its ability to fashion things for his survival, which includes enjoyment. This also means that if I am on a deserted island and have a fishing pole or fishing net then this is not wealth. That does not make sense.

    Comment by dbhalling | November 13, 2013 | Reply


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