Intellectual Capitalism: Philosophy
In my book Source of Economic Growth I outlined a school of economics that I called Intellectual Capitalism. This is the first of a series of posts I intend to write to expand upon that outline. Most schools of economics do not explicitly state the philosophical foundations upon which they are based. In this post I will layout the philosophical foundations of Intellectual Capitalism by comparing it to the philosophical foundations of the major schools of economics.
Most mainstream modern economics is based on the ideas of Adam Smith. Smith is part of the Scottish Enlightenment and this is key to understanding the philosophical basis of Smith’s and modern economics philosophical underpinnings. The father of the Scottish Enlightenment was Francis Hutcheson, who believed that we have moral senses (similar to vision, hearing, smell, taste, and touch). This elevates emotions to valid epistemological tools. Adam Smith picked up on Hutcheson’s ideas in his book The Theory of Moral Sentiments.
Smith was also a close friend of David Hume, one of the giants of the Scottish Enlightenment. Hume argued that causation was an illusion and attacked induction as invalid. He also picked up on Hutcheson’s ideas on moral philosophy. Smith never explicitly states that he agrees with Hume, however they admired each other and Smith never rejects Hume’s ideas. The result is that economics is not based on the same philosophy of science as were the hard sciences of physics, chemistry, and biology. Furthermore it means that Smith and modern economics rejects Natural Rights, which are based on reason (the philosophy of the hard sciences).
This rejection of the philosophy of science by economics, at least implicitly, in my opinion is one of the reasons modern economics has been stuck in the equivalent of pre-Newtonian physics.
This is perhaps the second largest school of modern economics and is named for John Maynard Keynes. Keynes was somewhat circumspect about his philosophical underpinnings, however it appears that Kant can be considered his most important philosophical influence. In the paper “The Philosophy of John Maynard Keynes (A Reconsideration)” by Elke Muchlinski he shows that Keynes and Kant shared a common epistemological approach.
His method provides a background for his conception of convention which still encompasses the fragility and precariousness of knowledge. Keynes rejected formal logic as inadequate for his purposes to outline the process of acquiring knowledge.
This should hardly be surprising as Keynes confuses cause with effect, by making consumption the key to the economy. It is clear that Keynes rejects the philosophy of science. Note there is only one correct philosophy of science, so I will no longer qualify that this was the philosophy of the hard sciences. If logic (and evidence) is precarious then the only other potential epistemological tool is emotion. The result is that Keynes also rejects Natural Rights as a valid moral theory.
It is probably incorrect to consider the ideas of Karl Marx a school of economics, as it is really more a school of sociology. Marx greatest intellectual influence was Kant with a close runner up being Hegel. As a result, Marxists reject the philosophy of science, reason, and Natural Rights.
The founder of Austrian Economics is Carl Menger who stated explicitly that the philosopher Franz Brentano was his biggest intellectual influence. Brentano is best known for his influence on psychology and Sigmund Freud. Brentano like the Scottish Enlightenment argues that emotions are valid epistemological tools. This appears to the basis for Menger’s subjective theory of values and prices in economics, which has been picked up by most of modern economics. It is important to note that when Menger and the Austrians talk about subjective values, they do not mean that each individual chooses for himself, they mean the choices are disconnected from reality.
It is clear the foundation of Austrian economics is antithetical to the philosophy of science. Their subjective theory of values is not limited to economic decisions but to all values, which means they also reject Natural Rights.
From Menger there are two slightly variations in modern Austrian Economics: Hayek and Mises
- A Hayek is a direct descendant of the Scottish Enlightenment and he set down his ideas on epistemology in his theory of cultural evolution. This theory explicitly rejects reason (logic and evidence – or the philosophy of science) as the source of knowledge. Instead Hayek substitutes that knowledge is gained and held collectively and not necessarily consciously. For more information see Hayek: Friend or Foe of Reason, Liberty and Capitalism? As a result, Hayek also rejects the idea of Natural Rights.
Ludwig Von Mises’ equivalent of Hayek’s cultural evolution is praxeology which is the study of human action. Praxeology starts with an a priori theory of economics. From these fundamental axioms of human action all of economics can be derived without any reference to observation (empirical evidence). This makes praxeology part of philosophical rationalism and a system of math or logic at best. This means that praxeology explicitly rejects the philosophy of science. Because they reject the philosophy of science and adhere to the subjectivity of values and prices, they reject the idea of Natural Rights.
It is interesting that this rejection of empirical evidence allows Austrians to continue to advocate ideas that have been shown by empirical evidence to be incorrect. Among these are Australian Business Cycle Theory (ABCT) and their argument that intellectual property and patents in particular inhibit economic growth.
Despite praxeology’s rejection of empirical evidence, Mises and his follower vehemently reject mathematics in economics and also seem opposed to the use of formal logic in economics. This obvious contradiction escapes them. I will talk more about the role of mathematics in economics below. The Austrians’ criticism of some of the mathematical approaches to economics is correct, but not for the reasons they state.
Note that Murray Rothbard is alone in Austrian economics in advocating for Natural Rights, however he also accepts praxeology and the subjective theory of values and prices. These positions are completely contradictory.
Mathematics in Economics
There is a branch of mathematical economics that grew out of the Cowles Commission that attempts to use the mathematics of linear algebra to model the economy. Paul Romer is part of this group. The idea is that using linear algebra every variable (state) in the economy can be accounted for and therefore the whole economy can be modeled. The Austrians critique this area is based on the limits of reason. However, that is not the problem with this area of economics. These mathematical models cannot take into account new technologies (inventions) and inventions are the most important thing that happens in the economy.
Unfortunately, neoclassical as well as classical economics seems better adapted to the analysis of replication than to that of technological change. The vast economic changes since the Stone Age, or for that matter during recent centuries in the West, were possible only because of technological progress.
As the famous economist Jacob Schmookler points out above, this problem is not limited to mathematical economics.
Is mathematics appropriate in economics at all then? Yes mathematics is appropriate, when it is used correctly. Mathematics cannot just be used to make non-empirical hypothesis seem more scientific, and it is inappropriate to use mathematics to make heuristic models (think ptolemaic epicycles) at least without acknowledging it. Mathematics is only appropriate when it is the reflection of the underlying economic principles and empirical observations, it can never be the driver. This is a problem occurring in modern physics today also.
Econometrics is an attempt to make economics an objective empirical science and therefore when used appropriately is a valid tool of economics.
It should be clear that Intellectual Capitalism is based on the philosophy of science. If you are uncertain what the philosophy of science is, here is an overview that I wrote. This means that Intellectual Capitalism is grounded in human biology, evolution, and to some extent the ideas of entropy. I explain this in much more detail in my book Source of Economic Growth and in the article Inventing at the Intersection of Biology and Economics. As a result, values and prices are objective (not to be confused with intrinsic). They are based on the fact that humans have certain objective needs and natures.
This brings up another point, which is that economics is not just a social science. It applies to a person on a deserted island. Intellectual Capitalism defines economics as the study of how people obtain the things they need to survive. There is no distinction between mere survival and thriving. The idea that because you have enough food for a day, or a week or a year, that economics is not about survival is short sighted. All the evidence shows that one’s standard of living is related to how long one will survive. This is partly because almost no-one has everything they will need to live forever. For instance, think of all the food, medical care, shelter etc., you will need for the rest of your life. This amount of resources exceeds all but less than one percent of the people in the world. Also one’s standard of living determines one’s chances of surviving natural disasters, illness, and other disruptions.
Intellectual Capitalism is the only school of economics that explicitly recognizes that man’s most important asset is his ability to reason (think) and this is true in economics also. This also means that Intellectual Capitalism is explicitly based on Natural Rights and therefore is consistent with the ideas of John Locke, Ayn Rand, and the founding ideals of the United States.
 The Copenhagen interpretation of quantum mechanics also rejected the philosophy of science. A number of people have begun pointing out the problems this has and is causing in modern physics.
2 Comments »
- Business Models
- Featured Videos
- Intellectual Capitalism
- Legal Philosophy
- Press Release
- Regulatory bill of Rights
- sarbanes oxley
- Sarbanes Oxley