There are a lot of misconceptions about money and banking. Often people either think these are the root of all our problems or the solution to all our problems. Both seem to believe that once money enters the equation in economics magic happens. This paper will focus on how money and banking work in a free market and then examine the distortions caused by government manipulation of money and banking.
If you examine an economics book on money it will tell you money is a medium of transaction, a store of value, and a unit of account. Some economist say that money being a medium of exchange is the real function (definition) and the other two functions follow from money’s primary purpose. I agree and therefore in this paper the definition of money is a medium of exchange.
All sorts of things have served as money including sea shells, tobacco leaves, grain, large immovable stones, tea leaves, cigarettes, silver, gold, paper, and computer bits (entries). Why money is a useful invention is usually explained by way of an example. Suppose that you raise cows for a living and you wanted to buy a loaf of bread. If you tried to trade your cow to the butcher, you would want several hundred loaves of bread in return. Most of the bread would spoil before you can eat it, so you only want two loaves of bread now. On top of this, the baker wants chickens not a cow. Under a bartering system these transaction will not occur, however with the addition of money you can sell your cow to the butcher and he will give you money. You can then use the money to buy two loaves of bread, which the baker can use the money to buy chickens.
It is likely that money originally grew out of an IOU (I Owe yoU) system. For instance, in the example above it is possible that once the rancher and the baker agree that the cow is worth 300 loaves of bread, then the baker would give the rancher two loaves of bread and an IOU for 298 loaves of bread. The rancher intends to present the IOU to the baker every week for his two loaves of bread. At which time the baker will give him two loaves of bread and an amended (new) IOU.
Unfortunately, the rancher gets sick and needs a doctor. The doctor agrees to accept the baker’s IOU in payment for his services. Now the baker’s IOU has acted as medium of exchange, which means it is money.
Money is just a generally accept IOU. In other words many people will accept it as a general IOU that they can “redeem” from most people. In the example above the doctor would have to worry that the baker might not make good on his IOU. Now some people will argue that only paper fiat money is a generalized IOU. However, even gold is functioning as a generalized IOU. It is commodity money and as a result may have value in the market separate from its use as an IOU, but the person accepting it as money does not need it as a commodity. He is planning on trading it with other people for goods and services. On a deserted island (with no hope of rescue) you could have a ton of gold, but it would useless and you would not be better off with it than without it. This also shows that wealth is not the same thing as having money.
One of the advantages of this point of view on money as an IOU is that it makes it clear that money is not wealth, even gold. The Spanish Kings and Queens found out this point when they brought back tons, literally, of gold and silver but still ended up going bankrupt. The gold was not wealth and they spent their gold on things that did not create wealth. Wealth is the things and knowledge that solve the objective problems of life (inventions). I added the knowledge part because if you give an aboriginal person living in the Brazilian rain forest a super-computer, or an MRI machine, or even a bulldozer they are not wealthier because they do not know how to use these things (inventions) or even trade them. Wealth is also about the objective problems of life, the most fundamental ones being air, water, and food. These are still problems for many people in the third world. Even in wealthy first world countries people have real objective problems, such as health problems, safety, etc. It might not be as obvious why cruise control or smart phones solve objective problems, however if you think about it both do.
The idea that money is not wealth is important because it immediately makes the fallacy of Mercantilism apparent, which Adam Smith spent 100s of pages on. In addition, it makes it clear that we cannot become wealthier by manipulating the money supply. The only way to become wealthier on a per capita basis is to create new things that are more efficient at solving the objective problems of life or solve new objective problems of life, in other words create new inventions.
People often argue about the differences between money, currency, real money, commodity money, debt money, paper money, and fiat money. Currency is generally defined as something that is specifically designed to function as money, such as coins. Commodity money is when the money is a commodity such as silver, gold, grain, or is backed by a commodity. Now real money can mean several different things, however I am talking about people who argue that only gold (silver) is real money. By this they seem to mean that gold is a commodity money and all other currencies are to be measured against gold. All commodity moneys have the advantage that they are more difficult for the government to devalue, however bitcoin also has this feature. The other point is that gold has a long tradition as a widely recognized money. This is true but does nothing to enlighten what money is or what its function is.
Fiat money is money that is not backed by a commodity. Usually it is paper money although more and more it is just electronic entries in a computer and often it is legal tender, which will discuss in more detail shortly. Paper money is self-explanatory. Debt money can have several meanings, but usually means the money “created” when a person (entity) takes out a loan. Many people argue that debt money is evil or somehow costs us interest just to have money. Since all money is essentially an IOU, all money is created by a debt, i.e., a claim to future goods and services.
Banking and money have been closely linked at least since the Agricultural Revolution about 11,000 year ago. The Agricultural Revolution was a series of inventions that provided man with access to a huge increase in the number of calories per acre. As a result, the human population expanded enormously and the territory of humans also expanded. These excess calories were converted into population increases until the number of calories collected/created by the human population were roughly equivalent to the number necessary to support that population.
The grains that were the major source of these extra calories had to be stored, because the grains ripened all at once. While the grain was stored, it needed to be protected from water and vermin. If the grain ran out before the next harvest, people starved to death. Efficient, effective storage of grains reduced the chances of running out grain before the next harvest. A centralized grain storage (grain silos) was more effective than individual storage of grains. When a farmer deposited their grain they received a receipt (clay tablet) for the grain. Eventually people started to use these receipts to pay for other goods (services). For instance, if you wanted to buy a chicken instead of going to the grain silo and taking out enough grain to pay for the chicken, you just handed over some of these clay tablets to the owner of the chicken. In other words these receipts became money.
In ancient Mesopotamia, as long ago as 5000 B.C.E., clay tablets were used to represent beer or grain. These clay tablets functioned as money. Gold also started functioning as money about the same time, but was probably only used for large or long distance payments and therefore was not used by average people. These clay tablets were “created out of thin air” in the vernacular of today. After a harvest there would be a lot of these clay tablets around and we would say the money supply increased. As people withdrew grain, the grain bank would redeem these receipts. We do not know if the “bank” destroyed these clay tablets, which would have been the logical thing to do or if they stored them for the next harvest. Either way the money supply would shrink until the next harvest. In fact the number of clay tablets (in circulation) would have shrunk to almost to zero just before the next harvest. We know this is the case because of evolution. Population expands until it takes up the available food supply, which is known as the Malthusian Trap. This means the grain would be almost gone by the time the next harvest rolled around.
If you eliminate money (clay tablets) this does not change the economic situation. Until the Industrial Revolution people lived on the edge of starvation and it was common for families to have to ration their food and even pick who would get food and who would not. Because the healthy adults were the only way any of them would survive through the next year, the old, the young, and the sick were the first one’s whose food was cut off. This is a grim reminder that economics is not just a game, but has real world consequences.
If we replaced the clay tablets with coins (e.g., silver, gold), then the money supply would not go up and down. However, the price of food (and other goods) would go up and down. After a harvest the price of food would be cheap and just before the harvest food would be very expensive. The monetary system would not change the underlying economic situation one bit.
This is what we have learned about money in a free market:
1) Money is a medium of exchange
2) Money is a generalized IOU
3) The money supply can vary in a free market without fractional reserve banking.
4) Many things can function as money and only the market should “decide” what is money.
5) Money is not magic and does not allow magic in economics.
Now we are going to introduce some government (non-free market) distortions to money. Going back to our clay tablets, someone probably realized that it did not make sense to destroy the clay tablets when people withdrew grain, since they would have to make new clay tablets after the harvest. The “bank” probably started storing them and this of course led to the temptation of stealing the clay tablets. Also the government probably decreed that taxes had to be paid in these clay tablets, which was the first step to making them legal tender.
We are going to skip forward to Roman times. The Roman’s used silver coins as their currency. The main unit of money was the denarius, which was between the size of a modern nickel and dime and equivalent to a day’s worth of wages for a skilled laborer. As late as 68 C.E. the silver in a denarius was almost 100%, but then it started to decline. People balked at using this debased money, however the government declared the new, lower silver coins legal tender. By 265 C.E. the silver content in coins was down to 0.5%. Not surprising the Roman Empire suffered huge inflation. The Roman’s minted so many coins that even today you can buy several Roman coins of standard quality for twenty dollars or so. For clarity later on I am going to call this “simple inflation”.
An important point here is that legal tender laws are always the first step towards inflation. The only reason for a government to pass a legal tender law is so that they can “print” money. In other words, the government is undertaking an endeavor that would get any private citizen throw in jail. With the end of the Roman Empire legal tender laws and banking died out during the Dark Ages. Coins were mainly used by the rich during this period.
By the 1700s legal tender laws were being seen again in Europe. France experimented with legal tender laws, allowing The Mississippi Company in the 1710s to have control over its legal tender with disastrous results. Supposedly, the French swore off paper money and modern banking for years after this. Some historians have even argued that this backwardness in France’s finance system was part of why they were beaten by the English. This is a fascinating story, but beyond the scope of this article.
The British followed suit in 1833 making banknotes issued by the Bank of England (a private bank at the time) legal tender. The United States had no legal tender laws (after the Constitution) until 1862 during the American Civil War. The North printed $450,000,000 under this law to help finance the war. Eventually this law was declared unconstitutional in Hepburn v. Griswold, 75 U.S. 603 (1870). The Court reasoned that the Constitution allowed the federal government to coin money, but not the power to make paper legal tender. The government argued that since it had the power to carry out war and the issuance of the legal tender was necessary for carrying on the war, then legal tender laws fell under the “necessary and proper’ clause of the Constitution. The Court rejected this argument and also pointed to the fact that the Constitution prohibited the states from interfering with contracts. The Constitution did not specifically, prohibit the federal government from interfering with private contracts, but it would be against the spirit of the Constitution to allow the federal government to do so. In one of the stranger twists in history, Salmon P. Chase helped push the legal tender legislation through as Lincoln’s Secretary of Treasury, then he was appointed Chief Justice of the Supreme Court and lead a 5-3 decision to declare the law unconstitutional. Unfortunately, this case was quickly overruled by the Knox v. Lee, 79 U.S. 457 (1871) Supreme Court decision.
Multiple competing bank notes were the norm at that time. According to the Cato Institute, “the government did not entirely monopolize issuance of notes until 1935, but the laws that made the monopoly possible date from the Civil War.” Today the legal tender law in the US is 35 USC § 5103 which states:
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.
Legal Tender laws are necessary for government counterfeiting to be successful. Without legal tender laws, people would quit accepting the money printed by the government. The key point is that legal tenders are necessary to create inflation. Any further investigation of money will require that we first examine how banks work.
The first banks in Europe after the Dark Ages were goldsmiths. Because goldsmiths were working with valuable materials they needed vaults. Wealthy patrons would often give some of their gold or other valuables to the goldsmith to secure in their vault. The goldsmith would give the patron a receipt for their gold. Overtime, just like the clay tablets for grain, people started to trade the receipts instead of taking out gold and paying with the gold.
Some of the customers also started asking for loans. The goldsmiths wanted to reduce their risk if the customer defaulted on the loan, so they asked for collateral. Originally, they probably asked for jewelry or other things made of silver and gold, since they knew they could liquidate (sell) these items fairly easily. The goldsmiths could have given the customer gold out of their gold reserve (capital) and they probably did initially. Most likely many customers then gave the gold back to the goldsmith and took receipts for the gold. If the goldsmith’s receipts were trusted enough, they could skip this step and just give the customer receipts. If the customer failed to pay the loan back, the jewelry (collateral) became the property of the goldsmith.
Or the goldsmiths could have given the borrower gold on deposit from other customers, which is the way most people think of banking working. In that case then the gold the goldsmith had on hand (deposit) was less than the amount of the receipts outstanding for the gold, which is fractional reserve banking (assuming the goldsmith had no gold capital or the loan(s) were greater than the goldsmith’s gold capital). Fractional reserve banking is defined as:
a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal.
Most customers probably deposited the borrowed gold with the goldsmith and took receipts. Again the goldsmiths probably began to skip the step of giving the borrower actual gold (silver) and just gave them receipts for the gold. At this point it might appear that the goldsmith is “creating money out of thin air”, however the receipts in this case are backed by the collateral, jewelry in this example. Actually, all the outstanding receipts are now backed by the gold on hand and the collateral the goldsmith has for loans.
At this point the goldsmith risks all the holders of these receipts asking for their gold and the goldsmith does not have enough gold to fulfill all these demands. However, the goldsmith does have enough capital to fulfill the demands, because the collateral, jewelry and gold on deposit in this example. It is likely that initially most of these loans were “callable”, meaning that the goldsmith could demand the borrower pay them back in full (gold or receipts) at any time. If the borrower paid up, then the goldsmith had no problem paying off the receipts. If the borrower did not pay up, then goldsmith became the owner of the collateral (jewelry) and could sell it to fully back the receipts.
Eventually the goldsmiths realized it was not only jewelry (gold and silver items) that had value and could act as collateral. For instance, arable farmland was one of the most valuable assets that people could own for most of history since the Agricultural Revolution. The goldsmith could not put the farmland in his vault, however he could have a legal claim to the land. That claim stated that if the borrower did not pay back the loan, then the goldsmith owned the farmland. Of course it takes longer to liquidate farmland than jewelry and farmland might be more subject to market fluctuations. As a result, the amount the goldsmith would lend against the farmland was lower than for gold and silver items.
At first goldsmiths probably made loans against farmland that someone owned outright. Eventually, they figured out that they could make loans on farmland that was being purchased, as long as there was a big enough down payment (the equivalent of loaning less than the value of collateral). What the goldsmith is doing is securitizing assets other than gold. When the goldsmiths created receipts for gold and silver deposits they were securitizing gold (and silver). “Securitize is a pooled group of financial assets that together create a new security” or banknote in this case. This means that goldsmiths receipts (banknotes) are backed by not only gold deposits but the other assets that they hold as collateral.
This is exactly what a company does when it sells bonds (stock). The bond is backed by the assets (collateral) of the company. The bonds are usually very liquid and can be sold or traded in exchange for goods and services, i.e., the bonds are money.
These goldsmiths became fractional reserve banks once they started securitizing assets other than gold. Fractional reserve banking is an important invention and is created (exists) in a free market. A fractional reserve bank is doing something analogous to what engineers have done with the telephone system. The backbone that connects two people together on a phone line does not have the capacity to allow everyone to make a call at the same time. The engineers know that only a certain fraction of people will normally be on their phones at the same time. By designing a system to handle this level of usage plus a margin, the cost of the telephone system is reduced. Of course occasionally, like in the time of an emergency, everyone wants to use their phone at the same time and then you receive a message like ‘all circuits are busy, please try your call again later.’ Another example is the time sharing of resources is done by computers. Before the 1980s this was done by having a number of computer terminals all connected to one large computer that time shared its resource among these terminals. This is still done within your computer when it runs multiple programs. The processing power of the microcontroller is time shared among these programs.
Banks know that only a small number of people will want gold at the same time. Most of the time people will be happy with banknotes or just accounting entries. However, if people lose confidence in the bank, then they will all want to withdraw gold (cash) at the same time. This is called a ‘run on the bank’ and is the same thing as everyone trying to make a telephone call at the same time. Note that this is a cash flow issue and can happen even to a bank that is profitable. Usually, banks that were clearly profitable could borrow gold from other banks to weather the run.
When a fractional reserve bank (hereinafter bank) initiates a loan against an asset, let’s say a farm, the bank creates a security (banknotes or an entry in a ledger) equal to the amount of the loan. In this process it “creates money” equal to the loan. At one time this might have been done by printing a bunch of banknotes, but now it is an electronic entry in the banks accounting system. An article entitled “Money Creation in the Modern Economy” published by the Bank of England explains “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” This article also points out that “money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.” According to the article, “Money in the Modern Economy: an Introduction”, there are three main sources of money in modern economies, currency, bank deposits (loans by commercial banks) and central bank reserves. This article also points out that most money in the economy is created by banks initiating loans. 
Some people call this debt money and argue it is bad for the economy. They imply that this system of money creation requires we pay interest to have money. First, it is important to point out that this sort of money creation happens in a free market. Second, the only one paying interest is the person who took out the loan. In a free market there would also be other forms of money, such as gold, silver, bitcoin etc.
When loans are paid back money is destroyed, just like the case of the clay tablets being destroyed (taken out of circulation) when people turned them in for their grain. The bank no longer has access to the collateral (e.g., farmland, jewelry, etc.). As a result, the banknotes (electronic entries) are destroyed. Note that money is also destroyed if the borrower defaults on the loan.
In a free market (for this discussion most importantly means no legal tender laws and no central bank) banks’ ability to ‘create money’ is limited by the value of the assets used as collateral. The bank is not creating money, it is securitizing assets and the banks’ ability to create money is then limited to the assets that can be securitized.
If the banks create too many loans that cannot be paid back, then they will tighten their lending standards. This will result in fewer loans and less money being created. When the economy is growing banks will fund more loans and create more money. However, the amount of money in the economy will be proportional to the assets that can be collateralized in the economy.
As a result, in a free market fractional reserve banks do cause variations in the money supply, but do not cause inflation or deflation. Note that the United States had fractional reserve banks from before the revolution and the United States did not have any periods of inflation. The banks were constrained in how much money they could create. Now prices did vary widely sometimes, particularly in times of war. However it is necessary to separate out the fluctuation in prices due to changes in supply and demand from those due to changes in the quantity of money. During a war (crop failure) there is an increase in the demand for goods and services, particularly food. Men are off fighting instead of planting their fields and the war itself often destroys the crops on large tracks of land. This increase in the price of food will mean that farmland that is not threatened by the war will be more valuable. As a result, it is likely banks will be willing to lend more money against these farms. This will result in some increase in the money supply. However, when the war ends the prices of the farm goods will fall and so will the value of the farmland, which will reduce the number of loans outstanding, reducing the amount of money in the economy. Averaged out over time money grows at the same rate as the economy and prices are roughly stable.
This is what we have learned about banking in a free market:
1) Fractional reserve banking exist in and our an invention of a free market.
2) Fractional reserve banks do create and destroy money, however the amount of money created is proportional to the assets in an economy.
3) Fractional reserve banks do not cause inflation.
(I wanted to include a discussion of central banks, however this article is already too long. So I will post on central banks and their effects in another article)
 Peter Dockrill, This 5,000-year-old artefact shows ancient workers were paid in beer, http://www.sciencealert.com/this-5-000-year-old-clay-tablet-shows-ancient-mesopotamians-were-paid-for-work-in-beer; and
Rachelle Samson, History of money: From clay tablets to legal tenders
History of money: From clay tablets to legal tenders, http://www.versiondaily.com/the-history-of-money-from-clay-tablets-to-legal-tenders/.
 Jeff Desjardins, Currency and the Collapse of the Roman Empire, http://money.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/, accessed 11 November 2016.
 coins https://www.amazon.com/Lot-10-Uncleaned-Ancient-Bronze/dp/B001BMWATA?SubscriptionId=AKIAIKBZ7IH7LXTW3ARA&&linkCode=xm2&camp=2025&creative=165953&creativeASIN=B001BMWATA&tag=wwwbookcompar-20&ascsubtag=5820b98a48308f0454a513ac
 A. Andreades, History of the Bank of England 1640 to 1903, http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/andreades/HistoryBankEngland.pdf,
 Schuel, Kurt, Cato Journal, Vol. 20, No. 3 (Winter 2001) p 454.
 Counterfeiting in an economic sense is any currency that is not backed by productive or creative effort that someone willing exchanged their creative effort for. Gold is clearly not counterfeit money, since it requires productive effort to mine gold. Buy paper money presents a problem. It takes productive effort to make and print paper, but no one would trade twenty dollars of their effort for someone who printed a twenty dollar bill. Economic counterfeiting is really a fraud where someone believes the other person has provided value that they did not provide and purposely withheld this fact from the other party.
 Fractional Reserve Banking Definition | Investopedia http://www.investopedia.com/terms/f/fractionalreservebanking.asp#ixzz4QUDQvzpR, accessed November 19, 2016.
 The collateral is usually worth more than the loan to deal with market fluctuations. This is why people used to say that a bank would only loan you money if you were already rich.
 Securitize Definition | Investopedia http://www.investopedia.com/terms/s/securitize.asp#ixzz4QVLtJy4H, accessed on November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money creation in the modern Economy, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf, accessed November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money creation in the modern Economy, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf, accessed November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money in the modern economy: an introduction, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf, accessed November 19, 2016.
 Michael McLeay, Amar Radia and Ryland Thomas, Money in the modern economy: an introduction, http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf, accessed November 19, 2016.
 Debt-Based Money vs. Sovereign Money, http://positivemoney.org/our-proposals/debt-based-money-vs-sovereign-money-infographic/, accessed November 19, 2016.
 Credit cards and personal loans may seem to violate this, but a person’s willingness to work is an asset.
 JOSH ZUMBRUN, A Brief History of U.S. Inflation Since 1775, http://blogs.wsj.com/economics/2015/12/14/a-brief-history-of-u-s-inflation-since-1775/, accessed 12/3/2016.
FEE or the Foundation for Economic Education has proven to be intellectually bankrupt. For instance, their position against patents and Intellectual property shows that they do not understand property rights or rights generally. They also revere the work of the philosopher David Hume, who argued “cause and effect” does not exist, induction is just correlation, and that a rational ethics is not possible (the so-called is-ought problem). This means that Hume undermined reason, science and ethics. Despite this FEE thinks Hume is a great guy. FEE also promotes Matt Ridley who denigrates human achievement in science and engineering, calling Nobel Laurites in science and inventors frauds, for more click here.
Interestingly Ayn Rand predicted this. The founder of FEE, Leonard Read, sent Rand a prospectus for his plan to create FEE. Rand told Read that his premises were flawed.
The mistake is in the very name of the organization. You call it “The Foundation for Economic Education.” You state that economic education is to be your sole purpose. You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true–therefore your program will not work. You cannot hope to effect a cure by starting with a wrong diagnosis. (The whole letter is reproduced below)
According to FEE reason and capitalism are incompatible, which is why they promote the works of Mises, Hayek, Menger, and Rothbard. You cannot defend capitalism successfully while attacking reason and a rational ethics. These ideas are incompatible with Natural Rights, which is what created the United States and capitalism. FEE is worse than the socialists, because they undermine the very basis of freedom.
Hat tip to Christopher Budden for finding this letter.
To Leonard Read
February 28, 1946
I have read the prospectus of your proposed organization very carefully. No, you have not given our case away. But you have not presented it completely. You have covered only one minor, secondary aspect of it. The partial presentation of a great issue, featuring a secondary aspect, will amount in practice to giving the issue away. Therefore I don’t think that your organization will serve your purpose—if this prospectus represents its program.
The mistake is in the very name of the organization. You call it “The Foundation for Economic Education.” You state that economic education is to be your sole purpose. You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true–therefore your program will not work. You cannot hope to effect a cure by starting with a wrong diagnosis.
The root of the whole modern disaster is philosophical and moral. People are not embracing collectivism because they have accepted bad economics. They are accepting bad economics because they have embraced collectivism. You cannot reverse cause and effect. And you cannot destroy the cause by lighting the effect. That is as futile as trying to eliminate the symptoms of a disease without attacking its germs.
Marxist (collectivist) economics have been blasted, refuted and discredited quite thoroughly. Capitalist (or individualist) economics have never been refuted. Yet people go right on accepting Marxism. If you look into the matter closely, you will see that most people know in a vague, uneasy way, that Marxist economics are screwy. Yet this does not stop them from advocating the same Marxist economics. Why?
The reason is that economics have the same place in relation to the whole of a society’s life as economic problems have in the life of a single individual. A man does not exist merely in order to earn a living; he earns a living in order to exist. His economic activities are the means to an end; the kind of life he wants to lead, the kind of purpose he wants to achieve with the money he earns determines what work he chooses to do and whether he chooses to work at all. A man completely devoid of purpose (whether it be ambition, career, family or anything) stops functioning in the economic sense. That is when he turns into a bum in the gutter. Economic activity per se has never been anybody’s end or motive power. And don’t think that any kind of law of self-preservation would work here—that a man would want to produce merely in order to eat. He won’t. For self-preservation to assert itself, there must be some reason for the self to wish to be preserved. Whatever a man has accepted, consciously or unconsciously, through routine or through choice as the purpose of his life—that will determine his economic activity.
And the same holds true of society and of men’s convictions about the proper economics of society. That which society accepts as its purpose and ideal (or to be exact, that which men think society should accept as its purpose and ideal) determines the kind of economics men will advocate and attempt to practice; since economics are only the means to an end.
When the social goal chosen is by its very nature impossible and unworkable (such as collectivism), it is useless to point out to people that the means they’ve chosen to achieve it are unworkable. Such means go with such a goal; there are no others. You cannot make men abandon the means until you have persuaded them to abandon the goal.
Now the choice of a personal purpose or of a social ideal is a matter of philosophy and moral theory. That is why, if one wishes to cure a dying world, one has to start with moral and philosophical principles. Nothing less will do.
The moral and social ideal preached by everybody today (and by the conservatives louder than all) is the ideal of collectivism. Men are told that man exists only in order to serve others; that the “common good” is man’s only proper aim in life and his sole justification for existence; that man is his brother’s keeper; that everybody owes everybody a living; that everybody is responsible for everybody’s welfare; and that the poor are the primary concern of society, its holy shrine, the god whom all must serve.
This is the moral premise accepted by most people today, of all classes, all stages of education and all political parties.
How are you going to sell capitalist economics to go with that? How are you going to get them to accept as moral, proper and desirable such conceptions as personal ambition, economic competition, the profit motive and private property?
It can`t be done. Their moral ideal has defined these conceptions as evil and immoral. So modern men are consistent about it. Our “common-gooder conservatives” are not. It’s one or the other.
Here is the dilemma in which the public finds itself when listening to our conservatives: the public is told, in net effect, that collectivism is a noble, desirable ideal, but collectivist economics are impractical.
In order to have a practical economy, that of capitalism, we must resign ourselves to an immoral society, that of individualism. This amounts to saying: you have a choice, you can be moral or you can be practical, but you can`t be both. Given such a choice, men will always choose the moral, because it is preposterous to expect them to choose that which, by the speaker`s own assertion, is evil. Men may be mistaken about what they think is good (and how mistaken they’ve been! And what lying they indulge in to deceive themselves about it!), but they will not accept evil with full, conscious intent and by definition.
Nor will men accept the idea that a moral ideal is impossible, that it cannot be achieved in practice. (And they are right about that, too—it’s a thoroughly *unnatural* proposition.) Therefore it is absolutely useless to tell them that Marxist economics are impractical, so long as you`re also telling them in the same breath that Marxism is noble. They will merely say: “Well, if that’s the ideal, and it cannot be achieved through the economics of capitalism, to hell with the economics of capitalism! If Marxist economics do not work, we’ll find something that works. We must find it. So we’ll go on experimenting. At least Marxism tries in the right direction, while capitalism doesn’t even try to achieve the collectivist ideal. Capitalist economics do not even try to offer us a solution.” How often have you heard this last one?
Now the most futile and ludicrous of all stands to take on this question is the one attempted at present by most of our conservatives. It may be called the “mixed philosophy.” It’s a parallel to the theory of a “mixed economy,” just as untenable, silly and disastrous. It’s the idea that capitalism can be morally justified on a collectivist premise and defended on the grounds of the “common good.” It goes like this: “Dear pinks, our objective, like yours, is the welfare of the poor, more general wealth, and a higher standard of living for everybody—so please let us capitalists function, because the capitalist system will achieve all these objectives for you. It is in fact the only system that can achieve them.”
This last statement is true and has been proved and demonstrated in history, and yet it has not and will not win converts to the capitalist system. Because the above argument is self-contradictory. It is not the purpose of the capitalist system to cater to the welfare of the poor; it is not the purpose of a capitalist enterpriser to spread social benefits; an industrialist does not operate a factory for the purpose of providing jobs for his workers. *A capitalist system could not function on such a premise.*
The economic benefits which the whole society, including the poor, does receive from capitalism come about strictly as secondary consequences, (which is the only way any social result can come about), not as primary goals. The primary goal which makes the system work is the personal, private, individual profit motive. When that motive is declared to be immoral, the whole system becomes immoral, and the motor of the system stops dead.
It’s useless to lie about the capitalist`s real and proper motive. The awful smell of hypocrisy that accompanies such a “mixed philosophy” is so obvious and so strong that it has done more to destroy capitalism than any Marxist theory ever could. It has killed all respect for capitalism. It has, without any further analysis, simply at first glance and first whiff, made capitalism appear thoroughly and totally phony.
The effect is precisely the same as that produced by Willkie, Dewey and all the rest of the “me-too,” “I’ll-get-it-for-you-wholesale” Republicans. Do not underestimate the common sense of the “common man” and do not blame him for ignorance. He could not, perhaps, analyze what was wrong with Willkie or Dewey—but he knew they were phonies. He cannot untangle the philosophical contradiction of defending capitalism through the “common good” —but he knows it’s a phony.
Is there anything more offensive and preposterous than to tell an unemployed worker that the millionaire who is throwing a champagne party on his yacht is doing so only for his, the worker’s benefit, and for the common good of society? Can you really blame the worker if he then goes out and demands that the yacht be confiscated? Is it economic ignorance that makes him do so?
The more propaganda our conservatives spread for capitalist economics while at the same time preaching collectivism morally and philosophically, the more nails they’ll drive into capitalism’s coffin. That is why I do not believe that an economic education alone is of any value. That is also why you will find it difficult to arouse people`s interest in the subject. I believe you are conscious of this difficulty; your prospectus shows anxiety on the scope of “creating a greater desire for economic understanding.” You will not be able to create it.
The great mistake here is in assuming that economics is a science which can be isolated from moral, philosophical and political principles and considered as a subject in itself, without relation to them. *It can’t be done.*
The best example of that is Von Mises’ “Omnipotent Government.” That is precisely what he attempted to do, in a very objective, conscientious, scholarly way. And he failed dismally, even though his economic facts and conclusions were for the most part unimpeachable. He failed to present a convincing case because at the crucial points, where his economics came to touch upon moral issues (as all economics must), he went into thin air, into contradictions, into nonsense. He did prove, all right, collectivist economics don’t work. And he failed to convert a single collectivist.
The organization desperately needed at present is one for EDUCATION IN INDIVIDUALISM, in every aspect of it: philosophical, moral, political, economic—in that order. (That is the actual order in which men’s thinking proceeds on these subjects.) As part of such a program, an education in sound economics would be essential and valuable. Without it, it is a wasted effort.
I suspect that you might have been misled by the fact that you have heard businessmen accept the most preposterous economic fallacies; and you concluded that once the fallacies are exposed, the trouble is cured. Do not be deceived by superficial symptoms; the trouble goes much deeper than that; the trouble is not in the nonsense they accept, *but in what makes them accept it*.
I have written all this at such great length because I consider an organization created by you as potentially of tremendous importance. I consider you the only man in my acquaintance who has the capacity to translate abstract ideas into practical action and to become a great executor of great principles. Therefore I would hate to see you fail in what could be a great undertaking, by attempting it on the wrong premise and in the wrong direction.
I am particularly worried by the fact that you intend to start on such a grand scale (a $3,000,000 budget). If you do not lay the proper foundation first, a three-million-dollar skyscraper will collapse on you more surely and more disastrously than a little bungalow. You will find yourself widely, publicly known and tagged as another ineffectual outfit like the N.A.M. or the Industrial Conference board; your name will become that of “another one of those conservatives,” instead of a new, powerful figure that would attract national attention by representing a real cause, and gain a following through courage, integrity and an unanswerable case, which is what I want you to become. You will find yourself caught in the ruins and forced to go on by the responsibility of so expensive an organization. The end of such a process is—Virgil Jordan.
It would be so much better and so much more practical to start in a smaller way and grow by a natural process rather than a forced one. You do not have at present the men and the educational material to use on a $3,000,000 scale. It would be better to gather your specialists and train them first, rather than release on the nation a flood of unprepared, “mixed philosophy” propagandists.
This letter is my contribution to your cause. If it helps you to analyze the situation, that is the best help I can offer you. If you agree with my analysis, I can continue to help you in this way, in the matter of philosophical direction. I know you have plenty of economists to call on for your work, but no people capable of undertaking the philosophical-moral part of it. Your main problem is to find them. And I will help you long-distance, to the extent that I can.
I shall be most interested in your answer to this.
As to your proposed radio program, I don’t think it’s a good plan. Personally, in spite of my interest in the subject, I’m afraid I would not listen to such a program. I think it would bore me. Five men talking on the same subject from the same general viewpoint would be more monotonous than just one man making a connected speech. The fact that the five men disagree on details would only add confusion, dilute and diffuse the subject and make the whole of the broadcast inconclusive and probably pointless.
If you decide to use Anthem in The Freeman, let me know. I’d like to have you do it, only I’d want to edit the story a little first; it’s old and there are some passages which I think are bad writing and which I’d like to straighten out.
There has been a lot of interest in the philosophical foundations of Carl Menger. Many Objectivist writers have emphasized Menger’s Aristotelian training, while other have suggested that Menger’s ideas align with Kant and Popper. Most scholars agree that Franz Brentano, who was an Austrian Philosopher, had a big influence on Menger.
Carl Menger was an Aristotelian although not a pure one. He read Aristotle and studied the works of Franz Brentano (1838-1917), a contemporary of Menger at the University of Vienna, who taught Aristotelian philosophy there. Brentano has been considered to be the leading Austrian philosopher of the late nineteenth century.
In order to obtain a better understanding of Menger’s philosophy, it is important to understand Franz Brentano’s philosophical ideas. Brentano’s work focused mainly on the philosophy of psychology. Sigmund Freud was his student and highly influenced by Brentano.
Brentano argued that philosophy should be scientifically rigorous, as rigorous as the natural sciences. However, Marx and many others have said they were doing science.
He emphasized that all our knowledge should be based on direct experience. He did not hold, however, that this experience needs to be made from a third-person point of view, and thus opposes what has become a standard of empirical science nowadays. Brentano rather argued a form of introspectionism: doing psychology from an empirical standpoint means for him to describe what one directly experiences in inner perception, from a first-person point of view.
This passage starts strong with knowledge based on direct experience, but then shifts making the observer part of the experiment and then it redefines empirical to mean “inner perception”. This inner perception is the means to absolute truths according to Brentano.
Brentano argues, “that they (mental phenomena) are only perceived in inner consciousness, while in the case of physical phenomena only external perception is possible” (Psychology, 91). According to Brentano, the former of these two forms of perception provides an unmistakable evidence for what is true.
Brentano says that it (inner perception) is the only kind of perception in a strict sense.
According to Webster’s Dictionary, science is “knowledge about or study of the natural world based on facts learned through experiments and observation.” By observation, Webster’s does not mean inner perception. While Einstein was famous for his “thought experiments”, they were a way of conceptualizing a problem in physics. They were not actual experiments nor did they substitute for actual experiments. Brentano is not doing or proposing to do science, despite his statement.
Brentano is widely regarded as Aristotelian and studied Aristotle extensively. He also was fascinated with the Scholastics and Descartes, but disliked Kant and the German idealists. Brentano and Aristotle appear to agree on Universals, which Peikoff explained as:
Universals, he (Aristotle) holds, are merely aspects of existing entities, isolated in thought by a process of selective attention; they have no existence apart from particulars. Reality is comprised, not of Platonic abstractions, but of concrete, individual entities, each with a definite nature, each obeying the laws inherent in its nature. Aristotle’s universe is the universe of science. The physical world, in his view, is not a shadowy projection controlled by a divine dimension, but an autonomous, self-sufficient realm. It is an orderly, intelligible, natural realm, open to the mind of man.
Brentano’s rejection of Platonic abstractions may have accounted for his distaste for Kant.
Despite the appearance of agreement with Aristotle on metaphysics, Brentano’s position in epistemology significantly differs from Aristotle. Brentano rejects that our senses are how we initially obtain knowledge about the world.
In fact he maintained that external, sensory perception could not tell us anything about the de facto existence of the perceived world, which could simply be illusion. However, we can be absolutely sure of our internal perception. When I hear a tone, I cannot be completely sure that there is a tone in the real world, but I am absolutely certain that I do hear. This awareness, of the fact that I hear, is called internal perception.
External perception, sensory perception, can only yield hypotheses about the perceived world, but not truth. Hence he and many of his pupils (in particular Carl Stumpf and Edmund Husserl) thought that the natural sciences could only yield hypotheses and never universal, absolute truths as in pure logic or mathematics.
Franz Brentano maintained that our senses were invalid and could not tell us anything about the world. 
This is the exact opposite of Aristotle.
[H]e (Aristotle) thinks that we can and do have knowledge, so that somehow we begin in sense perception and build up to an understanding of the necessary and invariant features of the world. This is the knowledge featured in genuine science (epistêmê).
Brentano and Aristotle are completely opposite on one of the most fundamental points of epistemology. Because this issue is foundational, it will affect everything else the two men have to say on science and philosophy. I think it is a mistake to argue that Brentano was Aristotelian.
With this background this paper will examine Menger’s epistemological positions. Menger lays out his epistemology in a book entitled Investigations into the Method of Social Sciences. Lawrence H. White in the introduction to the book, explains.
Fortunately, Menger draws and even emphasizes a suitable distinction between the “realist-empirical orientation of theoretical research” and the “exact” orientation (p. 59). The search for so-called, ”exact laws” alone is more appropriately considered the task of purely theoretical research in economics. We can make sense of “exact laws” as theoretical propositions which (necessarily) take an “if-then” form: if conditions A and B hold, then condition C must also obtain. Menger rightly insists (pp. 70, 215) that realist-empirical generalizations (e.g., A and B are usually accompanied by C) can by their nature never attain the strictness that necessarily characterizes logical implications. The two sorts of “laws” are on different epistemological planes. So without too much dissent from Menger’s thought we may divide economic theory from economic history where he divided strict theory from what he considered an empirical sort of theory. What is empirical is really historical, and this accounts for its different status from what is deductive.
Lawrence H. White goes on to explain:
But this is not because, like some economists, he (Menger) sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science. 
Menger is arguing that science involves a theoretical side that is impervious to empirical data. This sounds a lot like Brentano’s idea of “inner perception”, which “provides an unmistakable evidence for what is true.” Menger says there is a second side of economics (science) which is empirical and never provides “exact” true theories in economics or science generally. This is very similar to the explanation of Brentano’s ideas on empirical evidence: “External perception, sensory perception, can only yield hypotheses about the perceived world, but not truth.”
Brentano’s and Menger’s ideas match up fairly well. Neither of their positions fit Aristotle’s epistemological ideas. Both of them have misappropriated the word science. In science reality is always the final judge. There is nothing that man knows that did not start with our perceptions and nothing in science that is “exactly true”, i.e., independent of empirical observation.
While Bentano and Menger appear to be opposed to Kant, their epistemological positions are a lot closer to Kant than Aristotle. Menger’s theoretical-empirical split fits Kant’s noumenal and phenomenal realm when translated to epistemology, which results in the analytic-synthetic distinction. “Analytic propositions are true by virtue of their meaning, while synthetic propositions are true by how their meaning relates to the world.”
Menger and Brentano’s empirical side is a precursor to Karl Popper’s mistaken ideas on science. Popper appeared to accept David Hume’s skepticism of induction and his response is the same as Menger’s and Brentano’s, which is that empirical evidence never gives us the truth, just closer approximations. This is not the philosophy of science and is based in-part on an incorrect understanding of what knowledge is. Knowledge does not mean being omniscient or having “perfect knowledge”. It is impossible to gain knowledge by just thinking about things (Without reference to the reality).
Menger’s ideas are inconsistent with Objectivism. They undermine science and economics.
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf , INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS
https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf , INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xi.
https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf , INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xiii, Lawrence H. White.
 Wikipedia, Analytic–Synthetic Distinction, Accessed October 21, 2016, https://en.wikipedia.org/wiki/Analytic%E2%80%93synthetic_distinction.
Austrian Economics is always claiming a strong connection to the Philosophy of Aristotle. The Austrians main connection to Aristotle is the idea of apriorism. In philosophy apriorism is defined as the philosophical doctrine that there may be genuine knowledge independent of experience. This apriorism shows up particularly in Menger and Mises. In Mises case it is clearly related to his ideas on praxeology. In Menger’s case this comes from his epistemology in which he states there is an exact theoretical side of science and an inexact empirical side of science. The question is whether the Austrians’ claim to following Aristotle’s ideas or being neo-Aristotelian has any validity.
One of the most defining points of Aristotle’s philosophy was his disagreement with Plato’s “Theory of Forms.” Plato argued that we cannot trust our senses and the world they perceive is at best a vague, shadowy version of the real world. For more see Plato’s Allegory of the Cave. According to Plato if you see a red ball there is a perfect version of red and a perfect version of a ball in the “real world” and we are seeing some sort of distorted versions of these. Plato’s real world is often represented as being up in the sky, sort of a heaven. Since we cannot trust our senses, Plato’s answer is that we must just think about what has to be true and that will lead us to the truth. This is known as rationalism.
Aristotle rejected Plato’s ideas and said we could trust our senses. In order to verify (and integrate) that our conclusions from our senses are valid Aristotle created rules of thought or logic. It is important to remember that to Aristotle these conclusions were always based on (tested against) the real world evidence. In other words, logic was useful in reasoning about the world, but the ultimate proof was reality. This makes him diametrically opposed to Plato’s rationalism.
There is a famous painting entitled The School of Athens by Raphael in which Plato is pointing to the sky and Aristotle has his hand out pointing to the world before us that illustrates the differences between Aristotle and Plato. Aristotle’s epistemology is based in this world, where Plato thinks that the real world is somewhere else.
How did Austrians ever get the idea that apriorism is consistent with Aristotle? A search of Aristotle on the Internet Encyclopedia of Philosophy of Philosophy and the Stanford Encyclopedia of Philosophy does not show any mentions of apriorism or apriori. An informal search of academic papers and books finds only a couple of mentions of Aristotle and apriorism, except by Austrians (Austrian/Objectivists). Both argue that apriorism is inconsistent with Aristotle’s philosophy. One book says that Aristotle the empiricist exposes the vanity of armchair natural scientists and it is clear that Aristotle lies on the side of empiricism not apriorism.
This idea that apriorism is consistent with Aristotle appears to come from Aristotle’s concept of axioms. Aristotle had one axiom, the principle of non-contradiction according the Stanford Encyclopedia of Philosophy. The explanation (justification) of this axiom sounds similar to the Austrians apriorism.
“Before embarking on this study of substance, however, Aristotle goes on in Book Γ to argue that first philosophy, the most general of the sciences, must also address the most fundamental principles—the common axioms—that are used in all reasoning. Thus, first philosophy must also concern itself with the principle of non-contradiction (PNC): the principle that “the same attribute cannot at the same time belong and not belong to the same subject and in the same respect” (1005b19). This, Aristotle says, is the most certain of all principles, and it is not just a hypothesis. It cannot, however, be proved, since it is employed, implicitly, in all proofs, no matter what the subject matter. It is a first principle, and hence is not derived from anything more basic.
What, then, can the science of first philosophy say about the PNC? It cannot offer a proof of the PNC, since the PNC is presupposed by any proof one might offer—any purported proof of the PNC would therefore be circular.”
This axiom was expanded to three axioms, the law of identity, the law of the non-contradiction, and the law of the excluded middle. It seems to me that the other two laws follow from the law of identity.
This sounds similar to how Austrians justify their apriorism, however the Austrians extend the idea to state:
(a) that the fundamental axioms and premises of economics are absolutely true;
(b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true;
(c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and
(d) that the deduced theorems could not be tested even if it were desirable.
While this was written by Murray Rothbard it is the logical conclusion of Menger’s “theoretical science.” These ideas are diametrically opposed to those of Aristotle. Austrian Economics is not Aristotelian, not science and not consistent with Objectivism.
I have pointed to an economic theory that is consistent with Aristotle, science, and Objectivism. Part of my insight came from “New Growth Economics”, whose central point is that wealth is created by the human mind. This should be exciting to Objectivists, because that sounds very much like Ayn Rand. It also points to an objective basis for economics. Every human needs to acquire and consume a minimum number of calories or they die. This provides an objective standard that is very similar to Rand’s standard for her ethics. It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.
Inventions are the result of applying man’s reasoning power to the objective problems of life. The way we become wealthier is by increasing our level of technology. I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.
All species are biologically designed to spend most of their existence on the edge of starvation. The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.
 Walter E. Wehrle, The Myth of Aristotle’s Development and the Betrayal of Metaphysics
 Aristotle’s Metaphysics http://plato.stanford.edu/entries/aristotle-metaphysics/#FundPrinAxio
 Murray N. Rothbard,” In Defense of “Extreme Apriorism”, https://bastiat.mises.org/sites/default/files/Defense%20of%20Extreme%20Apriorism,%20In_6.pdf, accessed November 25, 2016.
It is surprising how much your position on patents reveals about your philosophical premises. We need to first understand five fundamental facts about patents.
- The wealthiest countries in the world have the strongest patent systems.
This fact should be readily apparent to anyone who has looked into this subject. There have been a number of studies on point and the correlation is at least as strong as the economic freedom index.
- Almost all new technologies are developed by the countries with the strongest patent systems.
This fact should be readily apparent to anyone who has looked into this subject. This obvious fact has been verified by studies.
- The Industrial Revolution started in the countries (Great Britain and the US) that had the first functioning patent systems.
Again this fact should apparent to anyone who has looked into this subject.
- Ayn Rand called patents (and copyrights) the most fundamental of all property rights.
- Patents are enshrined in the US Constitution, Article 1, Section 8, Clause 8.
Patents and copyrights are the only rights mentioned in the original Constitution. Note the Bill of Rights was not part of the original Constitution.
Here are some straight forward conclusions we can draw from these facts.
- When a person is against patent rights for inventors, they are not an Objectivist, they are a poser.
- When someone argues that patents inhibit economic growth, they have an almost insurmountable burden of proof to overcome.
- When someone argues that patents retard the growth of new technologies, their position is not just wrong, it shows the person is irrational.
- When a person is against patents they are not pro-Constitution (a supporter of the Constitution), they are a poser.
Many libertarians and Austrians want to act like they support the US Constitution, but attack the property rights of inventors (patents). You cannot have it both ways.
Here are some other conclusions that we can draw that are not quite as straight forward.
- People who attack patents have rejected Natural Rights.
Patents are built on Natural Rights (as is the founding of the US). Under Natural Rights theory anyone who creates something has a property right in their creation. Note that the libertarians and Austrians (economics) who argue against patents have all rejected Natural Rights and adopted Utilitarianism as their political ethics. The socialists who argue against patents have adopted Altruism as their political ethics.
- People who attack patents believe reason is limited.
The Libertarians that attack patents are all enthralled with the philosophers of the Scottish Enlightenment, like Hume, Mill, Burke, and Hayek. David Hume was an extreme skeptic that said humans could not even show we existed. Hume argued that cause and effect did not exist. He also argued induction and therefore science were nonsense. He attacked Natural Rights and argued that a rational ethics was impossible. (Hume supporters will argue he was just skeptical of these things, but the ferocity with which he attacks them shows that this was not just an interesting academic exercise on the part of Hume). All of these philosophers undermine reason. Many like Kant say they are for reason, but reason is limited. That is a contradiction, but beyond this post. Of course it is clear that the socialists also have rejected reason.
 The first patent system was Venice in the 1400s and Venice was one of the wealthiest and most technologically advanced cities in the world at the time.
 The Writ of Habeas Corpus is not a Right, it is a procedural guarantee.
 Burke is sometime considered part of the Scottish Enlightenment and sometimes not. In this case he should be included.
 Intellectually Hayek fits the Scottish Enlightenment to a tee even though he is not normally included in this group.
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.
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.
However 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. 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 http://www.ipwatchdog.com/2015/11/19/repetition-of-make-them-true/id=63302/. 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.” http://www.wsj.com/articles/the-myth-of-basic-science-1445613954
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 https://mises.org/library/praxeology-methodology-austrian-economics.
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) http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf
“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) http://www.nhinet.org/raeder.htm
According to Hayek, reason was not the driving force behind cultural evolution, but rather co-evolved in the course of this process. (Emphasis Added) http://www.bath.ac.uk/economics/staff/horst-feldmann/feldmann-2005-hayek-theory-of-cultural-evolution.pdf
“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.” https://home.isi.org/hayek-role-reason-human-affairs#sthash.1zV4WFR9.dpuf
“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.” https://home.isi.org/hayek-role-reason-human-affairs#sthash.1zV4WFR9.dpuf
“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.” https://home.isi.org/hayek-role-reason-human-affairs#sthash.1zV4WFR9.dpuf
“However, Hayek seemingly came to doubt there could be any such thing as properly constructed rule of law.” http://plato.stanford.edu/entries/friedrich-hayek/#LawEcoNic
“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.” http://www.rationalargumentator.com/index/blog/2015/08/rand-hayek-comparison/
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 http://socialdemocracy21stcentury.blogspot.mx/2012/08/rescuing-menger-from-austrians.html.
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 http://www.libertarianism.org/columns/why-did-hayek-support-basic-income.
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 http://socialdemocracy21stcentury.blogspot.mx/2010/10/was-mises-socialist-why-mises-refutes.html.
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 https://hallingblog.com/2012/11/13/understanding-the-coming-financial-collapse-central-banking-fraction-reserve-banking-and-legal-tender-laws/. 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.
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.
I have been criticized for pointing out that Austrian Economics, particularly Menger, Mises, and Hayek, is not consistent with reason, science, or Natural Rights and therefore not consistent with Capitalism. In this article I am going to apply the same standards to Milton Friedman, who is also often cited as a great advocate of freedom and capitalism.
Milton Friedman won the Nobel Prize in economics and is not part of the Austrian School of Economics. He is often classified as a monetarist or part of the Chicago School of Economics, I think the latter is more accurate. Ayn Rand was no fan of Friedman. She criticized his belief that economics must be morally neutral. In this video, Rand states that Friedman is not an advocate for Capitalism and an enemy of Objectivism.
Milton Friedman laid out his ideas on epistemology in the essay “The Methodology of Positive Economics” (1953). Some experts claim that the essay was a big influence on the Chicago School of Economics. In this article he essentially argues for a pragmatic approach to epistemology, which boils down to if a model (theory) is predictive it is correct.
Friedman’s methodology, which appears to justify the eclectic and pragmatic view that economists should use any model that appears to “work” regardless of how absurd or unreasonable its assumptions might appear, has been deployed in service of a rigid theoretical orthodoxy.
Friedman argues that economic models are generally judged by the reasonableness of the underlying assumptions/propositions, however he thinks this is incorrect.
In so far as a theory can be said to have “assumptions” at all, and in so far as their “realism” can be judged independently of the validity of predictions, the relation between the significance of a theory and the “realism” of its “assumptions” is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).
It is easy to show Friedman’s pragmatism is mistaken. Copernican Heliocentrism with its epicycles of the planets was highly predictive, but it was not science. In science/engineering this is known as a heuristic model. Heuristic models are often created by curve fitting the observed data. They predict how a system will work within very narrow circumstance, but do not explain the underlying physics (causes). As a result, heuristic models cannot be extended or built upon, when people attempt to do so they lead to false conclusions.
Friedman’s epistemology boils down to pragmatic “pure empiricism”, which means he accepts the evidence of his senses, but denies logic and concepts. Friedman disconnects assumptions/propositions from the results of the model, which is an attack on logic. An analogy would be that it might make no sense that doing a rain dance causes it to rain, but our empirical evidence says that it is predictive of whether it rains in the next couple of days so it is a good theory. As a result, we are supposed to ignore that there is no causal relationship between the rain and the rain dance.
Friedman’s epistemology is anti-reason. In one case Friedman argued that we need freedom because of this epistemological uncertainty. “I have no right to coerce someone else, because I cannot be sure that I am right and he is wrong.” This is common position of libertarians and Austrians – lack of knowledge requires freedom. This position not only undercuts all of science, it removes reason as the foundation of ethics, political philosophy, and law. It is also unadulterated nonsense.
Friedman is not proposing to do science, he is proposing to collect data that never leads to knowledge. Science is based both on reality and reason/logic. Friedman wants to ignore the reason/logic side of science. While Friedman has different reasons for not proposing to do science, he is otherwise consistent with the Menger, Mises, and Hayek in rejecting science in economics. Ultimately, Friedman’s ideas on science are just a rehash of Karl Popper’s misguided concept of science.
Friedman is consistent with the Austrians in suggesting that economics must be value free – that is devoid of ethics. Friedman argues in his paper The Methodology of Positive Economics, that for a discipline to be a science it must be free of moral judgments. However, Friedman appears to making a finer distinction of where ethics fits in science and particularly in economics.
Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with “what is,” not with “what ought to be.”
First, science requires a profound set of ethics that are unique in history. This ethics requires reporting the data accurately, follow the data to its logical conclusion, and never ascribing non-natural causes to the observations.
Second, imagine taking Friedman’s point of view in the science of medicine. Medical doctors are not there to deal with ought to be, just to observe what is. Are doctors biased in their observations, because they bring ethics into their science?
The question of ethics in economics disappears if the correct fundamental questions of economics iare defined and therefore the definition of economics is properly defined. The most fundamental question of economics is: What is the source of real per capita increase in wealth? This leads to the correct definition of economics which is the study of how man obtains the things he needs to live. This puts the focus on human well-being, just like medicine.
Economists who pretend that they are not injecting ethics into economics are really pushing utilitarianism, often summed up as ‘the greatest good for the greatest number’. This always leads to disaster. In the short term the greatest good for the greatest number always weighs in favor of taking the property of those who create and giving it to those who do not, for instance. In fact, many philosophers who push utilitarianism also push socialism. The counter is usually that stealing people’s property is not good in the long run, but this argument rarely wins over most people.
I searched if Friedman ever mentions Natural Rights or Locke and never found anything. This is not surprising as he explicitly rejects ethics, at least in economics, and implicitly accepts utilitarianism.
Friedman is inconsistent with the founding principles of the United States, inconsistent with Objectivism, and not an advocate of Capitalism, which is the economic system that occurs when a country protects people’s Natural Rights.
Friedman, in my opinion, is highly influence by the philosophers of the Scottish Enlightenment, which would not be surprising as Adam Smith is in this group and also Jeremy Bentham, one of the big proponents of utilitarianism.  The Scottish Enlightenment philosophers were also highly skeptical of the efficacy of reason.
Source of Economic Growth
Friedman did not write much about what causes real per capita increases in wealth. I assume he accepted the standard neo-classical idea that increases in capital were the cause of economic growth. This does not fit the empirical evidence. Friedman’s lack of interest in the question is damning. Although, he did focus his attention on what inhibits economic growth.
Friedman spends almost no time discussing inventions or inventors. Inventions are the only way to increase real per capita incomes and define the upper bound on the standard of living in any given period of time. The fact that Friedman ignores them shows incredibly poor judgment.
The Industrial Revolution was the first time in history that real per capita incomes started to grow consistently. Friedman’s only comments about the most important event in the history of economics was that the idea of robber barons was a myth. This is not what I would expect of a scientist, however Friedman was clear that he was not doing science.
Milton Friedman hardly fares any better than the Austrian Economists. Personally, I think his writing is much better than the Austrians and he is more likeable, which seemed to be part of his success in spreading his ideas.
Friedman’s ideas are inconsistent with reason, science, or Natural Rights and therefore not consistent with Capitalism. He is not proposing to do science and undermines reason with his pragmatism. However, unlike the Austrians, Milton Friedman’s supporters are not actively undermining property rights in his name.
 Something the so-called scientists studying Anthropomorphic Global Warming ignore.
The New York Times published one of their standard obscure, rambling articles entitled “We’re in a Low-Growth World. How Did We Get Here?” by Neil Irwin. The author rings his hands over the slow growth of the last 15 years and concludes that we (he) has no idea why we are in this situation, but if it does not change we are in for a gloomy 21st century.
The article is a perfect illustration of the economic professions’ ignorance of what causes economic growth. What is interesting is that most economists do not really consider this an important question of economics. They waste an almost infinite number of bits on price theory with its supply and demand curves, while ignoring the most important question in economics.
The article meanders from the statement that like most things in economics it all boils down to supply and demand, ignoring that supply and demand curves are about equilibrium, not growth. Then it jumps to into a discussion that blames technology as being less effective than in the past and vaguely ties this to a slowdown in the supply side of the equation. Next it jumps to the favorite crutch of Keynesian-socialists, a lack of demand. It provides the standard Keynesian/socialists’ answers of loose money policies and fiscal stimulus that have worked in the past ,according to the article, but just do not seem to be working now, all the while ignoring the fact that neither of these have worked in the past. In the end, the article admits it has no idea why we have slow growth now.
The article illustrates that the economics profession has no idea what causes economic growth. The Keynesians argue that increasing demand creates economic growth (or at least lack of demand causes recessions), while the rest of the economics profession argues that it is increasing levels of capital. So called free market economists know what kills economic growth and their economic freedom surveys provide overwhelming evidence in this case. The US has fallen from 6th in the world to 11th in the world in economic freedom under President Obama (The downward trend started under Bush, showing this is bipartisan effort) according to this article. Correcting this is a great place to start, however this does not explain what causes economic growth.
Our level of technology is what defines (i.e., provides the upper bound on) our level of wealth. As a result, the only way to increase real per capita wealth over the long term is to invent (i.e., increase our level of technology). The book the Source of Economic Growth provides overwhelming evidence for this. Since 2000, when the slow-down started according to the New York Times, we have undermined our inventors, by undermining their property rights in their inventions. The US has also undermined the three foundations on which technology startups are built: 1) Intellectual Capital, 2) Financial Capital, and 3) Human Capital. The US has undermined the intellectual capital pillar by weakening the patent system, which leftists and libertarians continue today (see the Venue Act). The financial capital side has been undermined by Sarbanes Oxley and other financial regulation. The human capital leg has been undermined by accounting changes to stock options. I discuss how these little known changes in US law and regulations resulted in economic stagnation starting in 2000, while the US had real economic growth in the 1990’s, in my book The Decline and Fall of the American Entrepreneur.
If the US is serious about increasing its long range economic growth it needs to:
Protect the rights of inventors by significantly strengthening our patent system’
Repeal all financial regulation;
Repeal regulatory rules that lock-in specific technologies, such as the FDA, the EPA, and building codes.
These changes would increase the US’s economic freedom score. We do not have to accept the low growth new normal, however nature to be commanded must first be obeyed.
We’re in a Low-Growth World. How Did We Get Here?” by Neil Irwin
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