I gave a talk at Atlas Summit on ‘Economics, Evolution, and Rand’s Meta-Ethics’ and one person asked me how my ideas would alter economics. In my talks and in my book Source of Economic Growth, I suggest that economics needs to be rethought from the ground up based on my findings. Here are some of the ways economics needs to be changed in order to make it a science.
1) Fundamental Questions of Economics
No school of economics is even asking the right questions. I have written another post on point (Intellectual Capitalism: Part 1), so I will not repeat all of it here.
Every science is defined by the questions it asks. According to a sampling of websites three of the major questions economics asks are:
1) What goods will be produced?
2) How will the goods be produced?
3) For whom are the goods produced?
All of these questions are inherently collectivist and in a truly capitalist country (i.e., one that protects Natural Rights) all of these questions lead to very boring answers. In addition, none of these questions are scientific questions (Just another example of how economics is not a science).
The single most important question in economics is:
What is the source of real per capita increases in wealth?
This immediately leads to the second most important question in economics today which is: What caused the Industrial Revolution? Both of these questions have empirical and objective answers.
The answer to the first question is inventions and this leads to a number of other important questions, such as how do we measure the rate of technological change?, what things influence the rate of technological change?, why does Singapore appear to have a faster growth rate than Hong Kong despite a lower economic freedom index?, are inventions subject to diminishing returns?, etc.
2) Definition of Economics
Since economics is asking the wrong questions, the definition of economics is incorrect. Here is my suggested definition of economics vs. standard definitions. Note that I have a whole chapter on this subject in my book Source of Economic Growth.
Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
The science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.
Economics is the study of how man obtains those things he needs to live.
3) Cause and Effect in Economics
Classical, Neo-Classical, and Austrian economics emphasize manufacturing and trade, while Keynesian economics emphasizes consumption as the driver of economics and all of them are wrong. The chain of cause and effect in economics is shown in the chart below.
When man applies his reason to the problems of survival he invents. Production, which is really about reproduction or replication, is not the driver in economics as the questions from mainstream economics imply. Trade is also not the driver and in fact the Manufacturing and Trade steps are not absolutely necessary. Keynesian economics focuses on consumption, so it is on the far wrong side of the cause and effect chain.
Because Classical, Neo-Classical, and Austrian economics emphasizes the effects instead of the causes in economics they waste an huge amount of time on supply and demand curves. Every supply and demand curve should come with two caveats: 1) demand does not create supply and 2) this chart assumes a technologically stagnant world. If demand could create supply then Keynesians would be right. What a supply and demand chart shows is how much people would be willing to sell of their present stock at various prices, it does not show that anyone will produce anything.
4) Economics is not a Social Science its Foundations are in Biology and Evolution
Economics is not a social science, it is a real science based on the biological facts of human existence. Specifically that humans have to obtain a certain number of calories (calories here substitute well for all our needs, including oxygen, water, etc.) per day or we die. This gives us a physical definition of profit and loss. Modern economics treats the whole subject as if it was merely a game. Venezuela, North Korea, China, and the USSR prove that it is not.
For more information see Economics, Evolution, and Rand’s Meta-Ethics (Intellectual Capitalism: Fundamentals Part 2)
The fact that profit and loss have real physical definitions means that economics is a real empirical science. Neoclassical economics pretends to be an empirical science but too often they create mathematical models in which none of the variables are measurable. That is not science.
5) Perfect Competition
Perfect competition is an inherently flawed concept that has no place in economics. All conclusions based on perfect competition are wrong, including the whole monopoly power and anti-trust analysis. Perfect competition should be laid to rest and only discussed as a historical example of how absurd economics once was. I have a large section analyzing perfect competition in my book Source of Economic Growth.
Competition is not the source of our wealth. One of the narratives of economics is that competition drives down profit margins and that is how we become wealthy. This is left over from the nonsense of perfect competition. While it is true that we do not want the government to setup rules that provide an advantage for one market participate over another and that these rules hurt the economy, it does not follow that competition creates wealth. The wealthiest countries in the world are those in which a larger percentage of people create unique products and services that have little or no direct competition. The goal is for everyone to be producing unique high value items, not 300 million or even 100 million people all producing me too products.
6) Property Rights/Ethics
There has been a movement to eliminate ethics from economics and this runs through all schools of economics. The justification for this is that science is devoid of ethical considerations. This is not true and the best example of what happens when scientists divorce themselves of ethics is Anthropomorphic Global Warming. All science has an ethics that at least includes the rules of: 1) you must report the data accurately, and 2) you must follow the data to its logical conclusions. Some sciences such as medicine have additional ethical constraints. In medicine it is not ethical for the doctor to give the patient poison or prescribe poison just to see what happens or undertake surgery just to see how the human body reacts. Similarly, economics must not prescribe economic poison. Economics is ethically constrained to policies that promote life.
This attempt by economics to divorce itself from ethics not only means that economics defaults to a utilitarian based ethics, it also means that economists have no idea what property rights are. Property rights cannot be justified on utilitarian grounds. The utilitarian benefits of ‘property rights’ are the effect not the cause. Because of this confusion economists will go around saying that taxing medallions are property rights or FCC licenses or slavery in the South. It also means that when they combine their flawed ideas on ‘property rights’ with the nonsense of perfect competition they start talking about true property rights as giving monopoly power. This leads to all sorts of nonsense including the idea that patents and copyrights are monopolies.
Property rights are based in ethics and cannot be divorced from ethics. Property rights are the recognition that someone created something of value. When economics attempts to redefine property rights, it commits both a scientific error and an ethical error. The scientific error is the result of ignoring definitions and reality. Words have meaning and when economists say property rights are any legally enforceable control over an object it is like a biologist saying a mammal is any warm blooded animal (birds are warm blooded). The definition of a mammal is based in reality and is not arbitrary and the definition of property rights are based in reality. Ignoring reality is not science.
Ethically when economists attempt to redefine property rights they are advocating fraud or theft, by advocating that a creator’s creation be taken from him and given to someone else without the creator’s consent.
It is a sad fact that most economists have no idea what property rights are, however they are in good company. Lawyers, free market advocates, and even Objectivists do not have a firm grounding in what property rights are or how they come about. Historically, the study of property rights peaked around the time of the Homestead Act of 1862 and was dead when Hoover said the airwaves belong to the public.
Adam Mossoff is one of the few academics trying to advance the theoretical foundations of property rights. Studying the nature of property rights is part of economics and is completely neglected by all modern schools of economics.
7) Regulation and Opportunity Costs (An Application)
Regulation is usually analyzed on its effectiveness and based on its opportunity costs. For instance, if we mandate that all cars have airbags, this means that the cost of all cars will increase but the cars will be safer. This means that people will put off buying newer. safer cars and when they do buy a new car they will likely be forced to buy a smaller car that is less safe.
Another example is that if we force houses to meet building codes, builders will have to spend more time complying with these rules and will not be able to make certain tradeoffs. The supposed advantage is safety, but the opportunity costs is that housing is more expensive which means consumers have to drive cars that are not as safe or eat food of lower quality or have fewer children or spend less on education.
This analysis is flawed, because the largest opportunity cost of regulation is the lost inventions. The main justification for regulations is safety. However, because regulations such building codes and the FDA lock us into a technological stagnant (or retarded) market, in the long run we are less safe and these regulated product cost more. In the case of the FDA I am sure that what minor benefits we obtain in safety are wiped out within a year or two by the lost technological advances. However there have been no empirical studies on point to my knowledge. In fact, studies looking at this issue would be excellent research project in economics.
8) Immigration (An Application)
Does immigration lower wages or not? Economists argue both side of this argument and point to differing empirical evidence to support their positions. The reason for this confusion is that economists do not understand that inventions are the source of real per capita increases in wealth. I will show how my system of economics resolves this debate and why there appears to be conflicting empirical data.
We will start with the simplest case first. If we have a country where the overwhelming majority of people are living in the Malthusian Trap (i.e., the edge of starvation, subsistence living) then if more people move into that country people’s wages will not go down, but people will starve to death. With this information let’s examine the two extreme cases: a technologically stagnant country and a technologically dynamic country. In a technologically stagnant country the total GDP is flat to declining slowly. If immigrants increase the population of this country they will not and cannot increase its GDP, so real per capita incomes will decrease and therefore wages will decline. This is similar to the country in the Malthusian Trap.
When a country is technologically dynamic then its real per capita GDP is increasing. Immigrants in this case can contribute to the country’s increasing level of technology and therefore the wealth of the country. In that case each new person that is open to using their mind is an asset and only makes the country wealthier. A pretty good measure of how technologically dynamic a country is its economic freedom index.
No countries on Earth today are fully optimized to increase their level of technology and only a few are absolutely technologically stagnant. Some of the more technologically dynamic countries
include Singapore and Honk Kong. As Peter Thiel has pointed out the rate that the U.S. creates new technologies outside the information technology area has slowed significantly. Countries that are close to being technologically stagnant include Venezuela and North Korea and many African countries
Since economists do not control for how technologically dynamic the economy (or part of the economy) was that they used in their studies of whether immigrants increase or decrease wages, it is not surprising they got differing results even if they did everything else right in their studies.
My proposed school of economics, Intellectual Capitalism, is profoundly different than Neo-Classical, Austrian, Keynesian or any other school of economics.
For more on Intellectual Capitalism see:
My Book Source of Economic Growth
 Note this assumes that this country is technologically stagnant, which is likely if most people are living in the Malthusian Trap. s
Will Thomas and I gave a talk on Austrian Economics at Atlas Summit 2016, where I pointed out that Austrian Business Cycle Theory (ABCT) does not fit the empirical facts. ABCT claims that increasing savings/capital are the cause of economic growth, which is very similar to what classical and neo-classical economics states. I pointed out that in fact it is increasing levels of technology (inventions) that are the cause of economic growth not increases in capital. One of the questioners after the talk stated that inventions (technology) are part of capital.
Many people want to conflate increasing levels of technology with capital, however they are not the same. Capital as used in economics means those durable goods used in production.
In economics, capital goods, real capital, or capital assets are already-produced durable goods or any non-financial asset that is used in production of goods or services.
Adam Smith defines capital as “That part of a man’s stock which he expects to afford him revenue”. https://en.wikipedia.org/wiki/Capital_(economics)
The article goes on to explain how to determine if something as capital.
Classical and neoclassical economics regard capital as one of the factors of production (alongside the other factors: land and labour).
This is what makes it a factor of production:
The good is not used up immediately in the process of production unlike raw materials or intermediate goods. (The significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.)
The good can be produced or increased (in contrast to land and non-renewable resources). https://en.wikipedia.org/wiki/Capital_(economics)
Technological change is not a good, it is the process of inventing. It is true that when these new inventions are reproduced (manufacturing) then when purchased they become capital, but that is several steps removed. If we treat technological change as just part of capital then going out and purchasing capital goods is the same thing as inventing. However, the results are not the same. Purchasing (acquiring) capital without invention results in no real per capita increases in wealth over the long run. As a simple example assume that every farmer in the U.S. has the latest most up to date tractor their land can use. Adding more tractors (capital) does not increase the output of these farms. The same is true for capital in general.
A number of economists have pointed out that increasing levels of capital are not responsible for the tremendous economic growth experienced in the West since the Industrial Revolution. Among these economists are Robert Solow, Paul Romer, and Deirdre McCloskey. They all point to increasing levels of technology as the cause for our increased wealth. Our standard of living is defined by our level of technology.
On the other hand inventing at a faster rate does produce real per capita increases in wealth. Inventions can produce returns that are staggering. For instance, Eli Whitney’s invention of the cotton gin allowed a forty times increase in the output of cotton in the U.S. in one decade.
In science it is important to isolate the factors effecting an experiment. For instance, if you conflate wind resistance and gravity then you end up with the nonsense that heavier objects fall faster than lighter objects. This means you will never be able to create a parachute or an airplane.
In economics if we conflate inventions with capital, we make the mistake that third world countries will become wealthy if we provide them capital. In fact, this is exactly what Development Economics has said for years despite overwhelming evidence to the contrary. Conflating these two concepts will cause us to ignore the role of property rights for invention as being the biggest long term driver of wealth and instead focus on capital gains taxes or increasing the savings rate or increasing comsumption.
Inventions are the cause of real per capita increases in wealth, not capital. Conflating the two is illogical and results in nonsensical economic policies.
D of the DK Halling authors of the Hank Rangar series has been selected to give talk on Economics, Evolution, and Rand’s Meta-Ethics. This year’s Atlas Summit will be held in Las Vegas July 11-13 just proceeding FreedomFest at the same location. Here is the description of my talk:
A scientific, Objectivist school of economics would start with the very nature of man as does Rand’s ethics. From an evolutionary and economic point of view the unique feature of man is that while all other organisms adapted to their environment, man adapts his environment to his needs. This shows that inventions are the evolutionary equivalent of positive genetic changes. It also shows that the key resource in economics is man’s mind. The relationship between Rand’s meta-ethics, evolution, and economics will be examined.
Presently my talk is scheduled for Tuesday, July 12 from 4:00–5:00 PM, however this is subject to change. I have been told that I can invite anyone to my talk and they can hear my talk for free, although they will not be able to see the other fine talks at Atlas Summit.
Note that right now there is a $100 discount for early registration and this also gives you access to FreedomFest.
I hope to see many of you there.
The libertarian crowd has been at the forefront of the anti-patent crusade. It is important to understand that libertarians are not consistent with classical liberals, such as the founding fathers and Locke. I have been looking for a way to illustrate this. Then I ran across a Wall Street Journal article by Matt Ridley, a darling of the libertarian crowd, which illustrated the differences perfectly. The article ostensibly was about government funding of science. I am sympathetic to the thrust of the article, however, in the second paragraph he states:
“Suppose Thomas Edison had died of an electric shock before thinking up the light bulb. Would history have been radically different? Of course not. No fewer than 23 people deserve the credit for inventing some version of the incandescent bulb before Edison, according to a history of the invention written by Robert Friedel, Paul Israel and Bernard Finn.”
This struck me as a very odd paragraph in an article on government funding of science. Edison was not funded by the government. Mr. Ridley and the people he cites may have never worked in fundamental research or with inventors. This may result in a misunderstanding of the differences between various inventions that lay people group together, which is the case with the paper cited in the article.
Ridley’s sole argument about Edison rests on the idea that other people were working on the problem. Thousands of people have tried to solve Fermat’s last theorem since 1637. Does that mean Andrew Wiles proof in 1994 was inevitable? Alternatively, only Edwin Armstrong worked on and invented FM (frequency modulation). Does that mean FM was not inevitable?
The article does stop there however, it goes on to denigrate the work of almost every great inventor and scientist since the Enlightenment, concluding with the statement:
“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.”
Ridley is not just attacking government funding of science, he is contending that discoveries and inventions are equally likely, given a range of researchers. If you take the statement above literally, it means that everyone working in technology and science are robots.
However, Ridley provides no evidence for his position and ignores the large variations in the rate of science advancement and inventions in both time and geography. This is not surprising, as Mr. Ridley did the same thing in his book The Rational Optimist, where he claims that most inventions were never patented, however a simple fact check showed that every invention he mentions is the subject of numerous patents.
The excellent book, The Most Powerful Idea in the World by William Rosen, shows that the Industrial Revolution, which was really an explosion in new inventions, was the result of property rights for inventions, i.e., patents, as does my book Source of Economic Growth.
One of the differences between classical liberals and libertarians is that classical liberalism celebrates great people, particularly those who used reason in the areas of science and technology. The Enlightenment was about celebrating the power of reason and rejecting faith and determinism. Thomas Jefferson said the two of the greatest people in the history of the world were Isaac Newton and John Locke.
Perhaps Ridley’s position is not shared by most libertarians. Yet, a recent panel discussion on Reason TV, part of the libertarian magazine Reason, shows Ridley’s position is widely shared. One panelist compared patents to slavery and taxi medallions. Another panelist made Ridley’s point that most inventions were never patented. But, if you eliminated everything in your house that was subject to a patent or made by a process that was once patented, your house would not exist. Most people will quickly understand that all the electronics would be gone, but so would the refrigerator, the electrical power, and even the glass in your windows was subject to patents extending back to Venice.
It would be easy to brand such an anti-intellectual property as arising from jealousy or self-aggrandizement, however, I think that would be a mistake. These libertarians are pushing a version of F. A. Hayek’s cultural evolution. Hayek’s ideas on cultural evolution are based on the impotence of reason. Hayek argues, that the demand for rational, conscious (“political”) control of the concrete particulars of social life is based upon a misunderstanding of the process of cultural evolution and on a hubristic and dangerous overestimation of the capacity of the conscious reasoning intellect.”
Ridley is just applying Hayek’s ideas on cultural evolution to science and technology. He is not the only one; the libertarian/Austrian economist Peter Lewin from University of Texas at Dallas, sadly my alma mater, makes a similar point. He emphasizes that most technical knowledge is tacit knowledge which is something we know but cannot prove or of which we are not conscious. In other places Lewin discusses “social knowledge” which appears to be tacit knowledge we hold collectively. Both Lewin and Hayek are fans of David Hume, who said causation does not exist (or cannot be proved) and induction is invalid or could not be proven valid. For many libertarians the anti-induction, anti-reason David Hume, is a hero.
Classical liberals know that causation exists, that Induction as a methodology, is not only valid, but the source of all knowledge. The most important value to a classical liberal is Reason. They understand that there is no such thing as social knowledge or knowledge of which we are not conscious. Classical liberals understand each person’s mind functions independently and therefore they celebrate great inventors and scientists. They know that without these great people, it is entirely possible that we would still be living in the Dark Ages. One only need look at North Korea, Cuba, or the Middle East to understand that technological progress is not inevitable and is not the result of some determinist spontaneous order.
What is interesting if you look closely at the arguments of Ridley, Hayek, and Lewin is that they are collectivist at an epistemological or cultural level. Their argument against a centralized government appears to be that it distorts this collectivist acquisition of knowledge.
Classical liberals and libertarians both appear to support free markets or capitalism. Beyond this they diverge, especially for the modern beltway libertarians. Classical liberals base their support of capitalism in reason and natural rights, which are discovered by reason. Libertarians base their arguments for free markets based on collective acquisition of knowledge that is disrupted by government interference.
Libertarians often align themselves with Ayn Rand, and claim her as one of their own, however, their ideas are incompatible with Rand’s. Rand herself was highly critical of the creed of Libertarianism, calling them “hippies of the Right.” If Matt Ridley had written Atlas Shrugged, the economy would have hummed along based on spontaneous order and John Galt would not be a genius inventor.
 http://www.firstprinciplesjournal.com/articles.aspx?article=1513&theme=home&page=3, Hayek on the Role of Reason in Human Affairs, Linda C. Raeder, Palm Beach Atlantic University
Marshall Phelps wrote an excellent response in Forbes to an anti-patent editorial by The Economist. The article is entitled Do Patents Really Promote Innovation? A Response To The Economist. He provides overwhelming evidence that patents are the driver of new technologies. I and others have shown that the reason the industrial revolution occurred when and where it did was because of the introduction of the first practical patent systems, i.e., property rights for inventions. The article also points out that the most inventive countries are those with the strongest patent systems and these countries also have the greatest technology dispersion. The article also points out that the patent system encourages the dissemination of information about technologies, which has been shown empirically and logically. It is time the anti-patent crowd admit that their position is a matter of faith, not logic an evidence.
I have one beef with the article when it says you cannot prove that patents lead to more inventions and you cannot prove a free market (with patents) leads to economic growth. Both of these have been shown empirically and the causal connection is clear. Property rights ensure that the creator benefits from their creation. People have to work to live and when the product of their work is stolen from them, they cannot be as productive. For more see my book Source of Economic Growth and my talk at Atlas Summit 2015.
Dale B. Halling’s new book Source of Economic Growth is now available. This book examines the two most important questions in economics: 1) What is the source of real per capita economic growth, and 2) What caused the industrial revolution? The industrial revolution is important, because it is the first time any large group of people escape subsistence living (Malthusian Trap) and their incomes start to grow. By examining these questions, the book devises a science of economics that is consistent with natural rights, the founding of the United States, and is tied to the biological reality of life.
Mr. Halling gave a related talk at Atlas Summit 2015 entitled The Source of Economic Growth. No school of economic thought is consistent with Objectivism, which is why Ayn Rand, in the very first sentences of “Capitalism: The Unknown Ideal”, said “This book is not a treatise on economics. It is a collection of essays on the moral aspects of capitalism.” Patent attorney and novelist Dale Halling proposes a science of economics that is consistent with Rand’s philosophy. The path to that understanding of economics results from examining the source of real per capita increases in wealth, which puts man’s mind at the center of economics. No other school of economics puts emphasis on man’s mind, which is one reason why Rand had a tenuous relationship with even free market economists.
I have been invited to a debate at Freedom Fest 2015. The topic of the debate is “Competition in Business: Good or Bad?” I will be taking the competition is for loser side of the debate.
This documentary explains how the United States is destroying its Patent System that has been the engine on which America’s technological and economic leadership has been built. The movie can be seen in a number of cities on December 15.
Invention is as old as human existence, and no country has promoted and thrived on invention more than the United States thanks to its patent system. But is American invention at risk?
Framed around the story of two first-time inventors, Inventing to Nowhere explores the stakes in policy fights over the American innovation economy, with interviews of legendary inventor Dean Kamen, historians, members of Congress and other key players in the effort to keep the country innovating.
For more than 200 years, the U.S. patent system has helped protect and grow ideas. This reverence for intellectual property rights has been a driving force in making the United States an economic superpower. But as the patent-law debate becomes more influenced by special interests, the future of inventors and entrepreneurs is in jeopardy.
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