State of Innovation

Patents and Innovation Economics

Austrian Economics: Not Just Wrong

Numerous Objectivists and well-meaning advocates of freedom are surprised when I show them that Austrian Economics is not a pro-reason, pro-freedom, intellectual movement.  When I show them what the Austrians are saying, they make all sorts of excuses for the Austrians, including that the Austrians do not mean what they are saying, that these errors do not affect the excellent economic work the Austrians have done, and that these problems are limited to a small minority group of Austrians.  It is time that we take a good look at what Austrian Economics says and examine whether we want to lend our good name to this movement.  Below I discuss some of the common talking points.


1) Patents

The Austrians have been at the center of the anti-patent movement.  They argue that patents hurt the economy and slow down technological progress.  The wealthiest countries in the world have the strongest patent systems; almost all new technologies are developed by the countries with the strongest patent systems, the Industrial Revolution started in countries with the first and strongest patent systems and those countries with the strongest patents systems correlate well with their economic freedom index.  If a socialist ignored this amount of overwhelming macroeconomic evidence, we would vilify them.

humeHowever it is worse than just ignoring the evidence  Matt Ridley, author of the Rational Optimist and darling of the Austrians, is an example of how the Austrians are willing to lie to win their points on patents.  Ridley makes the claim that technological progress does not require patents and then cites a number of technologies that were never patented.  The book (Rational Optimist) states that a number of inventions were never patented, p. 264, such as automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers.  Five minutes of competent research shows that all these technologies are subject to numerous patents.  The case of Bakelite shows that Ridley is not just incompetent, but a liar.  A simple internet search shows that chemist Leo Hendrik Baekeland (1863-1944) invented and first patented the synthetic resin that we know as Bakelite in 1907.[1]  I have made this point publicly and I have heard no apologies or retractions from Ridley or the Austrians.  The Austrians do not even appear bothered by this blatant lie, they continue to repeat the essence of the lie whenever they get a chance.

If Al Gore did this we would ridicule him.  But when it comes to the Austrians, we stand aside and make excuses for them.  It is worse than that, because the Austrians are part of a machine to manufacture lies about patents faster than they can be refuted.  See Adam Mossoff’s paper on point  Note, that this is exactly the technique AGW environmental Nazis use.

Liars should not be trusted at all and it turns out the Matt Ridley has doubled down on his lies.  In an article in the Wall Street Journal he states:

                “Simultaneous discovery and invention mean that both patents and Nobel Prizes are fundamentally unfair things. And indeed, it is rare for a Nobel Prize not to leave in its wake a train of bitterly disappointed individuals with very good cause to be bitterly disappointed.”

What Ridley is saying is that Nobel Prize winners and inventors are frauds.  He states that “technological evolution has a momentum of its own.”  Ridley is saying that scientists and inventors do not create anything, society does.  Ridley is not just a liar- he is EVIL.  Where did Ridley get these ideas?  They are straight from F.A. Hayek’s “Cultural Evolution.”  Ridley is not alone or anomalous among the Austrians.  Reason Magazine, the Cato Institute, Foundation fo Economic Education, and the Wall Street Journal have all joined in to propagate the Austrian lies to promote their anti-patent agenda.

Diedre McCloskey is another Austrian Economist that denigrates the work of inventors, engineers and scientists, suggesting that technological progress is on auto-pilot.  These attacks are exactly the same anti-achievement, anti-reason attacks you get from the left.  They sound like James Taggart from Atlas Shrugged:

’He didn’t invent smelting and chemistry and air compression.  He couldn’t have invented HIS metal but for thousands and thousands of other people. HIS Metal! Why does he think it’s his? Why does he think it’s his invention?  Everybody uses the work of everybody else.  Nobody ever invents anything.’ (Jim Taggart) She (Cheryl) said, puzzled, ‘But the iron ore and all those other things were there all the time.  Why didn’t anybody else make that Metal, but Mr. Rearden did?’”

This Austrian position is a repackaging of Hayek’s Cultural Evolution.  This vicious attack on human greatness is not a minor flaw or error.


2) The Austrians use reason and evidence to support their positions?

Mises: The Austrians are clear that praxeology and their economic theories are not based on empirical evidence.

                “[Praxeology’s] cognition is purely formal and general without reference to the material content and particular features of the actual case. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori.”  Mises, Human Action, p. 32

“All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given.” Mises, Human Action, p. 66

“Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.”  Murray N. Rothbard

You can find Austrians (Mises) saying this all over and supporting it.  If the Austrians (Mises branch) are using evidence to reach their conclusions, then they have to admit praxeology is wrong.  If praxeology is right, then you have to admit that they are not using empirical evidence.  There is no middle ground here.


Hayek: These Austrians are clear that reason is impotent.

                “According to this theory, rules, norms and practices evolve in a process of natural selection operating at the level of the group. Thus, groups that happen to have more efficient rules and practices tend to grow, multiply, and ultimately displace other groups. The theory, of which Hayek himself was proud, is on all accounts central to his economic, social, and political project.” (Emphasis Added)

“Burke and Hayek, then, shared a common enemy as well as a common understanding: Enlightenment rationalism. Perhaps the most characteristic attribute of Enlightenment thought was its cavalier dismissal of ‘irrational’ tradition as mere superstition and prejudice.” (Emphasis added)

According to Hayek, reason was not the driving force behind cultural evolution, but rather co-evolved in the course of this process.  (Emphasis Added)

“Hayek tells us that that rationality (he does not explicitly distinguish between either “”reason”” and “”rationality”” or “”reasonable”” and “”rational””) is “”no more than some degree of coherence and consistency in a person’s actions, some lasting influence of knowledge or insight which, once acquired, will affect his action at a later date and in different circumstances.”” Hayek also maintains that behavior guided by habit, custom, and tradition is rational in the sense that such behavior is not contrary to intelligent action.”

“Hayek’s argument is primarily directed against certain epistemological views that he associates with the philosophy of Rene Descartes and the Enlightenment, views he labels “”constructivist rationalism.”” For Hayek, the constructivist mentality is characterized by 1) belief in a socially autonomous human reason capable of designing civilization and culture; 2) a radical rejection of tradition and conventional behavior; 3) a tendency toward animistic or anthropomorphic thinking; and 4) the demand for rational justification of values.”

“This tradition is characterized, moreover, by an evolutionary perspective that conceives social institutions and practices—law, morals, money, the market mechanism, habits, language—not as products of conscious construction or enlightened invention but of a suprarational trial-and-error process of cultural evolution.”

“However, Hayek seemingly came to doubt there could be any such thing as properly constructed rule of law.”

“In his philosophy, Hayek relegates reason to a minor role. He argues for a modest perspective of people’s reasoning capabilities. He contends that reason is passive and that it is a social product.”

Hayek’s writings on cultural evolution are long winded and therefore do not make for clear quotes.  This is not surprising when people are arguing against reason they are often long winded, such as Kant. When the Supreme Court writes a long opinion you can be sure that they are not using reason and attempting to bury the irrationalism of their argument in lots of words.

It is clear from the quotes above and related papers (most by Hayek supporters) that Hayek thinks that reason cannot be used (is impotent) to understand any social institutions.  At best Hayek is saying that reason is useful in the limited sphere of hard sciences.  If so this is just a variation on Kant.

If the Austrians (Hayek) are using reason as the Austrian apologists argue, then they have to abandon the whole idea of cultural evolution.  If CE is right, then the Austrians are rejecting reason.  Hayek was clear that Cultural Evolution (CE) underlies all his ideas in economics.  If CE is wrong then Hayek’s whole case for freedom falls as does his ideas on spontaneous order.  His ideas on spontaneous order require Natural Rights, which Hayek rejects.

We have to take people’s ideas seriously.  The Austrian fans are always making excuses for why Hayek, Mises, Menger, etc. don’t mean what they are saying.  When we are reviewing socialist ideas, such as Keynes, we hold Keynes not only responsible for what he said, but the logical conclusions of what he said.

It is a logical contradiction to use words to be against reason and therefore most people are polite or generous and assume that the Austrians do not mean what they are saying.  This is fine in casual conversation, but when people are writing about their ideas you have to take them at their word.

Mises and Hayek are both rejecting reason from different points of view.  This is not surprising because the intellectual tradition of Austrians is David Hume.  Hume is perhaps the worst anti-reason philosopher in the last 300 years.  Hume and Adam Smith were great friends.  Hayek is a straightforward extension of the Hume- Smith line of irrationalism.  Menger and Mises follow a slightly different path of Hume to Franz Brentano, who elevates emotions to the level of epistemological absolutes.  Hume and Smith did the same thing.

Apologists for the Austrians always suggest that I am making huge leaps without evidence.  If I said that Keynes is the product of the Kant-Marx line no one would suggest that I am making outrageous leaps.  Intellectuals are responsible for not only exactly what they say, but also the logical conclusions of what they say.  Just because Austrians spout that they were for free markets does not mean that we can hold them to a different standard than the socialists.


3) Are the Austrians Really for Free Markets?

Menger pushed the following ideas: (1) public works constructed by the state such as roads, railways and canals. (2) government established agricultural and vocational training institutions (Menger 1994: 123). (3) government subsidies to certain sectors. (4) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture. (5) government intervention to stop child labour (Menger 1994: 129), according to this article

Hayek was willing to make all sorts of compromises with the idea of free markets, because he was committed to Cultural Evolution, not reason and not Natural Rights.  For instance, he was for the government providing everyone with a “Basic Income” according to this article

In this quote Hayek argues for mandatory insurance.  “Once it becomes the recognized duty of the public to provide for the extreme needs of old age, unemployment, sickness, etc., irrespective of whether the individuals could and ought to have made provision themselves, and particularly once health is assured to such an extent that it is apt to reduce individuals efforts, it seems an obvious corollary to compel them to ensure or otherwise provide against those common hazards of life.”  The Constitution of Liberty (1960)

Mises supports fire regulations according to this article

The claim of Austrians that their founders are for a pure free market is absolute nonsense.


4) What Are the Supposed Great Achievements of the Austrians?

I am constantly told that the Austrian Economists made great contributions to economics, whatever their other faults.  Other than Menger’s Marginal Utility, Hayek’s flawed ideas on Spontaneous Order, and perhaps Mises’ insight that War does not create prosperity, I am unaware of any other great economic contributions by the Austrians to economics.  I have asked numerous Austrians to name the great economic contributions of the Austrians and they are never able to actually name any.

What the Austrians were good at was criticizing socialism and Marxism.  The ability to criticize is not the same thing as the ability to put forward good economic theories.

Here are a number of errors that Austrians make in economics.  They claim that fractional reserve banking creates money out of thin air.  This position is absurd and makes Austrians look like flat Earthers.  Here is an article on point  The Austrian Business Cycle Theory does not fit the empirical facts and even some Austrians have admitted so in academic papers.  Of course this does not matter because empirical evidence is irrelevant (Mises) or we cannot use reason to analyze our own world (Hayek).  The Austrians obsession with the Fed (Central Banks) as the cause of all recessions results in them ignoring other important facts in the economy and creates a mystical obsession with Central Banks.  The Austrians position on Property Rights is not only wrong, it undermines capitalism and the law.


5) Ayn Rand on the Austrians.

Rothbard: Rothbard is the father of the anarcho-capitalism movement.  Rand described it as “a naive floating abstraction”.

Hayek: Ayn Rand in her marginalia launched a nasty attack on Friedrich von Hayek calling him, among other things, a “God damn fool” and a “vicious bastard.” (Mayhew, ed., Ayn Rand’s Marginalia, pp. 149 and 151.)

 Mises:  Rand called him the greatest living economist.  However, Branden appeared to speak for himself and Ayn Rand says:

“We must take the gravest exception, for example, to the general doctrine of praxeology; to the assertion that all value-judgments are outside the province of reason, that a scientific ethics is impossible; to the disavowal of the concept of inalienable rights; and to many of the psychological view expressed.”  (Branden 1963b, 34) The Journal of Ayn Rand Sutidies Vol. 6 No. 2.

According to Branden, Rand’s comments in the margin of Human Action were highly critical of Mises works.  Branden, The Passion of Ayn Rand.

What Rand admired about Mises were his criticisms of socialism and Marxism.

Rand’s overall evaluation of the Austrians is damning.  Rand was initially attracted to some of the Austrians.  This only proves she was human.  Thus, it is not surprising that many Objectivists are initially attracted to the Austrians, as was I.   .

What is interesting is that most Austrians understand that Objectivism is incompatible with Austrian Economics, but many Objectivists have not figured this out.



6) Conclusion


Austrian Economics is not just wrong, it is actively working against Freedom, Capitalism, Science, and Reason.  The case against Austrian Economics is overwhelming.

  • -Austrian Economics rejects and denigrates the intellectual achievements of inventors, engineers, and scientist.
  • -Austrian Economics rejects and actively undermines reason and science.  (The modern Austrians are happy to lie to promote their positions.)
  • -Austrians are not defenders of the United States Constitution.
  • -Austrians undermine property rights, the law, and Natural Rights.
  • -Austrian Economics actively undermines the idea of a rational Ethics.
  • -The great Austrian Economists were not defenders of free markets and capitalism.  They were quite willing to allow government interference in the market, if it fit their goals.
  • -Austrian Economics pushes a number of economics theories that are laughably wrong.


If we hold the Austrians to the same standards we do for the socialists, we see that they are essentially the same.



September 12, 2016 - Posted by | -Economics, Patents | , ,

1 Comment »

  1. Extremely opinionated. Filled with questionable statements that are not backed up with facts. He seems/claims to see conflicts where I see none. The conclusions and statements in bold type look incorrect and unsupported to me.

    Comment by Don Armstrong | September 13, 2016 | Reply

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