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Patents and Innovation Economics

Intellectual Capitalism: Fundamentals Part 1

This post is part of series on Intellectual Capitalism.  The first post in the series is Intellectual Capitalism: Philosophy.



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?

Under free market capitalism (the system of economics that occurs when peoples’ natural rights are protected by the government ) the answers are: 1) those goods that produce a profit, 2) by the people who want to make a profit by producing them, and 3) for those people willing to pay for them.  When I say pay for them, I mean by their own productive effort in producing other goods.  Under any other political system the answer is the government and then economics boils down to the psychology of those people in power – in other words it is arbitrary.

These questions and answers are pretty boring and provide no great insight into the world.  We could explore in more depth how the goods will be produced, but this is really a question of engineering and management.  We could ask why those goods produce a profit and eventually we will start studying supply and demand, and pricing.  These are the standard discussions of economics, however I still don’t think the questions being asked are very interesting.

The most important question in all of economics is:

What is the source of real per capita increases in wealth?

The second most important question in economics is:

What is the cause(s) of the Industrial Revolution?

The second question is important, because it is the first time in history that large groups of people escape the Malthusian Trap (living on the edge of starvation) and their incomes start to grow.

The answer to the first question is by increasing one’s level of technology, which can only be accomplished for the world as whole by inventions (human creations with objective results) the answer to the second question is Patents (property rights for inventions).

In my book Source of Economic Growth I provide copious evidence and logic for these answers and I will not repeat those here.  In this article I want to layout some of the fundamental principles of my system of economics, which I call Intellectual Capitalism.  These questions are much more profound than the ones posed by mainstream economics and more relevant to most people.

These questions and answers lead to a system of economics that is consistent with man’s unique nature; his ability to reason.  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.  In economics the chain of cause and effect is:

Invention comes first, then production, and then trade or consumption.

Keynesian economics focuses on consumption, so it is on the far wrong side of the cause and effect chain and as a result, almost everything taught by Keynesian economics is nonsense.  Keynesians will make the argument that you will not produce the hamburger until I order it, so consumers are as important as producers.  As I will explain in more detail below, try that living on a deserted island (Robinson Crusoe economics).  Most of economics focuses on production, which is better than the Keynesians but is an intermediate step and not what causes economic growth.  Generally, this branch of economics focuses on capital as the source of economic growth.  This has been shown over and over to be a mistake.  The paper that is given the most credit for showing capital is not the source of economic growth is Robert Solow’s “Technical Change and the Aggregate Production Function.” As econgrowth.smallI show in my book, Source of Economic Growth, the capital theory of economic growth does not explain the Industrial Revolution.  Some libertarians, such as Matt Ridley, have proposed that trade is the key to economic growth.  This is almost as bad as the Keynesians on the scale of cause and effect.  Other economists focus on monetary issues, such as central bank policies and financial markets.  Money is a way of facilitating trade or a way of transferring capital and is not the source of economic growth.  Now there have been inventions in finance that have contributed to economic growth including: fractional reserve banks, stock and bond markets, and limited liability corporations, among others.


Definition of Economics

With this background we can now define what the study of economics is: it is the study of how man obtains those things necessary to live.  There is no rational distinction between living and thriving from an economic point of view as I explain in detail in my book Source of Economic Growth.  Some people have objected that this definition is too broad.  For instance, they argue that this might include the study of engineering.  However, there is no reason to repeat other subjects and the various branches of engineering are not about the study of how people obtain the things they need, they are about how to apply science to solve various problems of invention, production, or distribution.  However the study of invention is definitely part of the study of economics.  Very little work has been done on the study of the process and principles of inventing.  I have discovered six laws of invention and a short preview of these can be found here.  A more detailed explanation can be found in my book, Source of Economic Growth.

An important point of this definition is that it makes it clear that Robinson Crusoe economics (a solitary man) applies.  The cause and effect of economics is probably most clear in the case of Robinson Crusoe economics, it can also be useful for analyzing many other situations.  For some reason when trade or money is added to economic discussions people think that magic happens.  As a result, when you are analyzing a problem in economics and you get stuck, remove money (or trade) from the equation and most of the  time this will make the situation clear.


Ethics in Economics

Many economists subscribe to the idea that if economics is going to be a science it needs to be value free.  There is no such thing as a value free science.  All sciences are built on an ethics and a philosophy.  At a minimum this includes a commitment to the idea that there are not any supernatural forces as the cause of what we observe, a commitment to the existence of cause and effect, and the ethics to honestly report the data (evidence) and to follow the evidence to its logical conclusion.  Some people may argue that this is not ethics or philosophy because these things are logical, however a short sampling of history shows that this ethics is incredibly unique in the history of humans and even today.

Different sciences may have other philosophical/ethical foundations.  For instance, medicine has the ethical limitation that doctors are not just studying the effect of disease, injuries, poisons, etc. on the human body.  Ethically doctors must use their knowledge to heal and save lives.  In various tyrannical regimes there have been doctors who have studied the effects of poisons or injuries or even the lack of love/affection on babies and these doctors have all been universally condemned.

Bad economic policies can induce more death and suffering than any doctor or group of doctors.  One only need look at the hundreds of millions of deaths that have been caused by economic policies that promote the various forms of socialism.  Economics is the study of how man obtains those things necessary to live.  Just as it would be unethical for a doctor to purposely cause injury to a patient in order to study the effects on the human body, it is unethical for economists to prescribe economic poison for their personal gain, or just because they think if would make an interesting experiment.  Thus the study of economics requires the ethical responsibility of searching for and prescribing policies that promote life.


Property Rights and Patents

This dispenses with the nonsense in economics for a need to define property rights in non-ethical terms.  Defining property rights in utilitarian terms is actually going backwards in history to the time when property “rights” were arbitrary grants by the King (government).  Property rights are an ethical concept and are earned by people when they create something useful for humans (or a single human).  The scope of these property rights is limited by the value the person has created.  The law may standardize some of these rights for practical reasons that are beyond the scope of this post.

Some people get confused about how this applies to employees or people who trade (buy) property.  For instance, I buy a house and the associated land, how does this give me property rights in the house since I did not build it?  The reason I have property rights in the house, is that I created something else of value, for instance let’s say a novel.  I trade my novel which I have property rights in for gold (money, currency) and I trade this for the house.  Part of my property rights include the ability to trade what I create for what someone else created.  So I have obtained property rights in the house because I created value.

In the case of an employee he creates value, but has agreed to trade the property rights he would have in the thing he created, let’s say part of an automobile, for a pay check (gold, money, etc.).  Some people are confused that there is no way the employee could have any property rights in the car he helped build because he did not own any of the parts going into the car.  That would be incorrect.  The employee would have a partial ownership in the car.  It is quite common for many people to have property rights in a single object.  For instance, multiple people may own a farm or thousands of people may own a corporation.  In the case of the employee he does not want (or the company is not willing) to have a situation with multiple owners, he wants to contract for immediately payment and relinquishs his property rights.

Now that we have a proper understanding of property rights we can determine if something is a real property right.  Is a taxi medallion a property right?  The question is whether the owner created value for the “rights” obtained with the medallion?  The government sold the medallion to the taxi company.  However, what did the government do to create the taxi medallion?  It limited other people from starting a taxi service.  That is not creating value and the money the taxi company paid to the city does not create value.  When someone trades a value for a non-value it destroys or at best just transfers the value from a producer to a non-producer.  The most common case of this is a swindler who takes value from the victim and provides nothing in return and this is what a thief also does.

A new invention is creating value and therefore a person obtains a property right in their invention.  Academics, Libertarian, Socialists, and Austrian Economists have filled the ether with numerous nonsensical arguments against patents.  I deal with these in depth in my books The Decline and Fall of the American Entrepreneur and The Source of Economic Growth as well as other posts on my blog and will not repeat them hear.

A property right can never be a monopoly.  Economist attempt to show patents or other property rights are monopolies based on perfect competition.  In fact they base their anti-trust analysis on perfect competition.  (I explain this in more detail in my book The Source of Economic Growth)  However, perfect competition is a recipe for the destruction of wealth and therefore human life.  Perfect competion is a value laden concept whose value is not the man’s life, but the destruction and sacrifice of mens’ lives and their productive efforts.

Intellectual Capitalism specifically rejects the concept of perfect competition as a valid economic concept or ideal and also as being useful to analyze any real life economic situations.  As a result, Intellectual Capitalism rejects the whole anti-trust and rent seeking analysis based on perfect competition, and as a result rejects all anti-trust laws (as formulated in the United States, but not the original Statute of Monopolies) as wealth destroying economic policies.

A monopoly is an abrogation of proper property rights and is created by government decrees that impinge of proper property rights  When the government does this and creates laws that give a single company (person) the right to a market say for salt or telephone services then it creates a monopoly.  When the government’s laws just limit access to a market by impinging on valid property rights then the company or companies (people) who are the beneficiaries are rent seeking.  The proper response when one of these situations is found is to restore people’s valid property rights.  The analysis of monopoies or rent seeking starts with and ends with an analysis of property rights.  As should be apparent Intellectual Capitalism rejects the whole idea of natural monopolies, which are abrogations of peoples’ property rights.


Supply and Demand and Spontaneous Order

Supply and demand is one of the most fendamental concepts/tools in economics.  The price of an item is set where the supply curve and the demand curve overlap.  Note that these curves are conceptual not quantitative.  The whole analysis is based on the idea that markets will drive towards this equalibrium point.  Unfortunately, this whole analysis is based on a technologically stagnant economy.  In addition, it can give the incorrect impression that demand or consumption is just as important in economics as production.

The requirement of supply and demand that the economy be technologically stagnant means that supply and demand only applies in the most unimportant part of the economy.  Supply and demand curves do not tell us how wealth is created or how to create wealth.  Some people see supply and demand plus the pricing information as ordering the economy.  This in fact is Hayek’s spontaneous order argument.  Again this is only true of a technologically stagnant market (and one with essentially free trade).  However, prices plus supply and demand rules do not tell people what to invent.  Now it is true that people, who live in a country with property rights for inventions, tend to invent in the largest markets, however there is no way to create or even postualte a supply and demand curve for such a situation.  Most experts saw no need for a device that transmitted voice.  What the experts (people with the money) wanted was a way to send telegraph signals faster or more of them over the same wire.  So the demand was almost nil for an invention that transmit voice signals before it was invented and for sometime there after.  No price could have been determined for an invention that could send voice signals.  Hayek’s spontaneous order did not direct the economy to invent telephones or any other major inventions.  Hayek’s spontaneous order is interesting, but hardly earth shattering and limited to the most uninteresting, low value areas of the economy.

Supply and demand curves are useful as long as there limitations are properly recognized.  As a result, they are part of Intellectual Capitalism, but only of minor import.



January 18, 2016 Posted by | -Economics, Innovation, Intellectual Capitalism | , | 1 Comment