State of Innovation

Patents and Innovation Economics

The Greatest Mistake in Economics: We Are Wealthier Because Profit Margins Are Small

Economists often argue that the West is wealthier because profit margins are driven down by competition.  For instance, here is a quote from an article in Forbes by a researcher at the Adam Smith Institute

What this means is that prices to us, the consumers, keep coming down as a result of that competition. And yes, if the prices we have to pay for things decline then we are becoming richer. Our real incomes are rising as a result.[1]

Economists have two scientific sounding theories for this idea, perfect and pure competition or the zero profit tendency.

Pure and Perfect Competition

According to Investopedia under perfect “Companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum.”[2]  Economist hold up perfect completion up as the ideal market situation and any other situation result is “excess profits”.  In fact, perfect competition is the theoretical underpinning of anti-trust law.

There are a number of problems with this theory of perfect competition and I discuss them in depth in my book Source of Economic Growth, so this will just be a brief overview.  First of all we do not create wealth by consuming, we create wealth by producing and we can only produce more efficiently by inventing.  Our standard of living is defined by our technology.  Second the wealthiest countries are those that have producers (companies and workers) whose profit margins have not been squeezed to the bare minimum.  How wealthy are the owners of a company making the bare minimum of profits?  How much can they pay their employees, when their margins are at the bare minimum?

We get wealthier by inventing new technologies that provide large profit margins.  Railroads had (have) much larger profit margins than human mules (Sherpa’s), or canal owners, or wagon drivers.  They still deliver goods for much less cost despite their higher profit margins.  In the future railroads may be obsolete as UAVs take over the job of transporting goods as Amazon is experimenting with.

 

Zero Total Profit Tendency

                Austrian Economics supposedly rejects the perfect competition theory, however they replace it with their own version, the tendency that total profits will be zero when an economy is in equilibrium.[3]  Like perfect competition they assume that competition will drive profits down or toward zero.

 

Conclusion

Competition is not the source of wealth.  In fact in a perfect world economically, we would all produce unique items of extremely high value.  This is not to say that government inhibition of competition is good or makes us wealthier either.  However, every property right (that is enforced) results in less competition and we would not be wealthier without property rights.  Competition is a result of capitalism, it is not the definition of capitalism or what makes us wealthy.  It is this sort of confusion about cause and effect that has so-called free market economists either arguing for anti-trust laws or arguing for anarchy (the absence of property rights).

The source of all real per capita increases in wealth is due to increasing levels of technology, not competition.  The only way we increase our level of technology is by inventing.  Property rights for inventors are the most important property right economically and the fundamental basis of all property rights.

[1] Tim Worstall, Amazon Vs Walmart On Free Shipping – It’s Not Capitalism That Makes Us Rich But Market Competition, https://www.forbes.com/sites/timworstall/2017/05/09/amazon-vs-walmart-on-free-shipping-its-not-capitalism-that-makes-us-rich-but-market-competition/#6dc7b5593c8e accessed June 7, 2017.

[2] Perfect Competition http://www.investopedia.com/terms/p/perfectcompetition.asp#ixzz4jLsXzRQ accessed June 7, 2017.

 

[3]Driving the Market Process: “Alertness” Versus Innovation and “Creative Destruction” https://mises.org/library/driving-market-process-alertness-versus-innovation-and-creative-destruction accessed June 7, 2017

June 8, 2017 Posted by | -Economics, Innovation, Patents, philosophy, Regulation | , , , | 2 Comments

What’s Wrong with Patents Today?

A recent order by the Court of Appeals for the Federal Circuit (CAFC) summarizes everything that is wrong with patent law today (and perhaps the US generally).  The CAFC in an order in Cascades vs. Epson, Sony stated “there is no inconsistency in concluding that patent rights are property and that the source of that right is a public right conferred by federal statute”  A number of things should stand out in this statement, for instance the idea that a right is granted by a federal statute.  This means are rights come from government, not as the Declaration of Independence says that they are inalienable.  If rights come from our government, then they can be taken away by the government, which means they are not “rights” but grants.  This idea goes back to the Devine Right of Kings.  The American Revolution was fought over the idea that there is no such thing as the Devine Right of Kings.  However, in the United States today it is clear that the law does not apply to the government, just like it did not apply to the King, it only applies to private citizens.  For instance, see Hillary Clinton, the IRS, Eric Holder, the NSA, the EPA, and on and on and on.

The next thing that should strike you is the phrase “public right.”  What is a public right?  A right is a moral claim to take action and in which no one can morally stop them from taking that action.  Only individuals can take action.  A group all doing the same thing is just a group of individuals in which all of them are taking action.  This nonsense of a public right goes hand in hand with group identity politics, such as women’s rights, Black rights, gay right.

Patents are issued in the name of the inventor(s) not the company employing them, because they recognize that people create inventions not entities.  The inventors legally own the invention (patent) first and then they assign it to the company.  This clearly shows that inventions are owned by the individual(s) not the public.  What is a public right anyway?  Here is how Wikipedia explains a public right.

In America, public rights, as compared to private rights, belong to citizens but are vested in and vindicated by political entities. Public rights cannot be vindicated by private citizens. A right must normally be a private right to be vindicated in court.

A patent does not and never did fit this definition.  A patent is private right and the government is recognizing that right not creating it.  A patent is not like the “right” to a trial by jury, which is not really a right but a procedural guarantee and is still not a public right according to the definition from Wikipedia.

May 13, 2017 Posted by | -Law, News, Patents | , , | Leave a comment

FEE: Ayn Rand Predicts Its Intellectual Bankruptcy

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 econgrowth.smallthe 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

 

Dear Leonard,

 

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.

 

Ayn Rand

January 1, 2017 Posted by | -Economics, -Philosophy, Intellectual Capitalism, Patents, philosophy | , , , , , | Leave a comment

What Your Position on Patents Reveals About You

It is surprising how much your position on patents reveals about your philosophical premises.  We need to first understand five fundamental facts about patents.

 

  1. 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.

 

  1. 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.

 

  1. The Industrial Revolution started in the countries (Great Britain and the US) that had the first functioning patent systems.[1]

Again this fact should apparent to anyone who has looked into this subject.

 

  1. Ayn Rand called patents (and copyrights) the most fundamental of all property rights.aynrandstamp

 

  1. 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.[2]

 

Conclusions

Here are some straight forward conclusions we can draw from these facts.

 

  1. When a person is against patent rights for inventors, they are not an Objectivist, they are a poser.

 

  1. When someone argues that patents inhibit economic growth, they have an almost insurmountable burden of proof to overcome.

 

  1. When someone argues that patents retard the growth of new technologies, their position is not just wrong, it shows the person is irrational.

 

  1. 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.

 

  1. 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.

 

  1. 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[3], and Hayek[4].  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.

 

 

 

[1] 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.

[2] The Writ of Habeas Corpus is not a Right, it is a procedural guarantee.

[3] Burke is sometime considered part of the Scottish Enlightenment and sometimes not.  In this case he should be included.

[4] Intellectually Hayek fits the Scottish Enlightenment to a tee even though he is not normally included in this group.

September 16, 2016 Posted by | -Economics, News, Patents | , , , , | 3 Comments

Austrian Economics: Not Just Wrong

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

 

1) Patents

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

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

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

 

 

6) Conclusion

 

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

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

 

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

[1] http://bakelitecollector.com/bakelite-history

September 12, 2016 Posted by | -Economics, Patents | , , | 1 Comment

NYT How Did We End Up in a Low Growth World?: $#^@!

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 econgrowth.smallwealth 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 frontcoverundermined 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

August 11, 2016 Posted by | -Economics, Innovation, News, Patents | , , , , | 2 Comments

VENUE ACT: An Open Letter

This is a posting of an open letter sent to Congress about the Venue Act, which is another attempt to deny the rights of inventors.

 

Dear Chairman Grassley, Ranking Member Leahy, Chairman Goodlatte, and Ranking Member

Conyers:

 

As legal academics, economists, and political scientists who conduct research in patent law and policy, we write to express our concerns about the recent push for sweeping changes to patent litigation venue rules, such as those proposed in the VENUE Act. 1 These changes would vastly restrict where all patent owners could file suit—contrary to the general rule that a plaintiff in a civil lawsuit against a corporate defendant can select any court with jurisdictional ties to the defendant. 2

mossoffGiven the recent changes in the patent system under the America Invents Act of 2011 and judicial decisions that have effectively weakened patent rights, 3 we believe that Congress should adopt a cautious stance to enacting additional changes that further weaken patent rights, at least until the effects of these recent changes are better understood.

Proponents of amending the venue rules have an initially plausible-sounding concern: the Eastern District of Texas handles a large percentage of patent infringement lawsuits and one judge within that district handles a disproportionate share of those cases. The reality is that the major proponents of changing the venue rules are primarily large high-tech companies and retailers with an online presence sued in the Eastern District of Texas that would rather litigate in a small number of more defendant-friendly jurisdictions.  Indeed, the arguments in favor of this unprecedented move to restrict venue do not stand up to scrutiny. Specifically:

 

  • Proponents for the VENUE Act argue that “[t]he staggering concentration of patent cases in just a few federal district courts is bad for the patent system.” 4 As an initial matter, data indicates that filings of patent lawsuits in the Eastern District of Texas have dropped substantially this year—suggesting a cautious approach until trends have stabilized. 5

 

  • Contrary to claims by its proponents, legislative proposals like the VENUE Act would not spread lawsuits throughout the country. In fact, these same proponents have found that restricting venue in a manner similar to the VENUE Act would likely result in concentrating more than 50% of patent lawsuits in just two districts: the District of Delaware (where most publicly traded corporations are incorporated) and the Northern District of California (where many patent defendants are headquartered). 6 Instead of widely distributing patent cases across numerous districts in order to promote procedural “fairness,” the VENUE Act would primarily channel cases into only two districts, which happen to be districts where it is considered much more difficult to enforce patent rights.7

 

  • Proponents for the VENUE Act have argued that the Eastern District of Texas is reversed more often by the Federal Circuit than other jurisdictions, claiming that in 2015 the Federal Circuit affirmed only 39% of the Eastern District of Texas’s decisions but affirmed over 70% of decisions from the Northern District of California and District of Delaware. 8 These figures are misleading: they represent only one year of data, mix trials and summary judgment orders, and fail to take into account differences in technology types and appeals rates in each district. In fact, a more complete study over a longer time period by Price Waterhouse Coopers found that the Eastern District of Texas affirmance rate is only slightly below the national average for all districts.9

 

  • The Federal Circuit recently confirmed in In re TC Heartland (Fed. Cir. Apr. 29, 2016) that 28 U.S.C. § 1400(b) provides that a corporate defendant in a patent case—like corporate defendants in nearly all other types of cases—may be sued in any district in which personal jurisdiction lies. Constitutional due process requires a “substantial connection” between the defendant and forum. 10 Thus, contrary to its title and the claims of its proponents, the VENUE Act does not re-establish a “uniform” litigation system for patent rights by requiring substantial ties to the forum. Instead, the Act thwarts the well-established rule that plaintiffs can bring suit in any jurisdiction in which a corporate defendant has committed substantial violations of the law.11

 

  • The VENUE Act would raise costs for many patent owners by requiring them to litigate the same patent against multiple defendants in multiple jurisdictions, increasing patent litigation overall. In recent years, the America Invents Act’s prohibition on joinder of multiple defendants in a single lawsuit for violating the same patent has directly resulted in increased lawsuits and increased costs for patent owners.12 Moreover, the VENUE Act would also result in potentially conflicting decisions in these multiple lawsuits, increasing uncertainty and administration costs in the patent system.

 

  • The VENUE Act encourages the manipulation of well-settled venue rules across all areas of law by the self-serving efforts of large corporate defendants who seek to insulate themselves from the consequences of violating the law. By enacting the VENUE Act, Congress would send a strong signal to corporate defendants that they can tilt the substantive playing field by simply shifting cases to defendant-friendly jurisdictions.

 

Innovators and their investors have long been vital to a flourishing innovation economy in the United States. Startups, venture capitalists, individual inventors, universities, and established companies often rely heavily on patents to recoup their extensive investments in both R&D and commercialization. We urge you to exercise caution before enacting further sweeping changes to our patent system that would primarily benefit large infringers to the detriment of these innovators and, ultimately, our innovation economy.

 

Sincerely,

 

Christopher A. Cotropia                                University of Richmond School of Law

Gregory Dolin                                    University of Baltimore School of Law

Richard A. Epstein                            New York University School of Law

Chris Frerking                                    University of New Hampshire School of Law

Shubha Ghosh                                  Syracuse University College of Law

Richard Gruner                                                 John Marshall Law School

Stephen Haber                                                 Stanford University Department of Political Science

Hugh Hansen                                     Fordham University School of Law

Chris Holman                                     UMKC School of Law

Gus Hurwitz                                       Nebraska College of Law

Zorina Khan                                     Bowdoin College Department of Economics

Megan M. La Belle                           Columbus School of Law The Catholic University of America

Kristina M. Lybecker                       Colorado College Department of Economics & Business

Damon C. Matteo                            Fulcrum Strategy Tsinghua University, Graduate School of Economics

and Business

Adam Mossoff                                  Antonin Scalia Law School George Mason University

Xuan-Thao Nguyen                         Robert H. McKinney School of Law Indiana University-Purdue University

Indianapolis

Sean O’Connor                                                 University of Washington School of Law

Seth C. Oranburg                             Duquesne University School of Law

David Orozco                                     Florida State University The College of Business

Kristen Osenga                                                 University of Richmond School of Law

Jillian Popadak                                   Duke University The Fuqua School of Business

Mark Schultz                                      Southern Illinois University School of Law

Ted Sichelman                                   University of San Diego School of Law

David O. Taylor                                  SMU Dedman School of Law

David J. Teece                                   University of California at Berkeley Haas School of Business

Shine Tu                                               West Virginia University College of Law

Saurabh Vishnubhakat                  Texas A&M University School of Law

  1. Polk Wagner University of Pennsylvania Law School

 

 

 

______

 

1 Venue Equity and Non-Uniformity Elimination Act, S.2733, 114th Cong. (2016), https://www.congress.gov/114/bills/s2733/BILLS-114s2733is.pdf.

2 See 28 U.S.C. § 1391(c)(2). See generally Ferens v. John Deere Co., 494 U.S. 516, 527 (1990) (“a plaintiff . . . has the option of shopping for a forum with the most favorable law”).

3 These include, among others: (1) administrative procedures for invalidating patents created by the America Invents Act, which have had extremely high invalidation rates, leading one former federal appellate judge to refer to these procedures as “death squads,” and (2) several decisions by the Supreme Court and the Federal Circuit that have drastically curtailed patent rights for many innovators. See Adam Mossoff, Weighing the Patent System: It Is Time to Confront the Bias against Patent Owners in Patent ‘Reform’ Legislation, WASHINGTON TIMES (March 24, 2016), http://www.washingtontimes.com/news/2016/mar/24/adam-mossoff-weighing-the-patent-system/.

4 Colleen Chien & Michael Risch, A Patent Reform We Can All Agree On, WASH. POST (June 3, 2016), https://www.washingtonpost.com/news/in-theory/wp/2015/11/20/why-do-patent-lawyers-like-to-file-in-texas/.

5 See Michael C. Smith, “Hot But No Longer Boiling“ – EDTX Patent Case Filings Down almost Half; New Case Allocation and Procedures (No More Letter Briefing for SJ motions), EDTexweblog.com (July 21, 2016), http://mcsmith.blogs.com/eastern_district_of_texas/2016/07/edtx-patent-case-filing-trends-new-case-allocation-andprocedures.html.

6 Colleen Chien & Michael Risch, What Would Happen to Patent Cases if They Couldn’t all be Filed in Texas?, PATENTLY-O (March 11, 2016), http://patentlyo.com/patent/2016/03/happen-patent-couldnt.html. This study also finds that 11% of cases would continue to be filed in the Eastern District of Texas, concentrating nearly two-thirds of all cases in three districts. See id. The authors of this study are presently expanding their investigation to an enlarged data set, which will also capture additional aspects of the VENUE Act. Neither the data nor their results are available yet. However, we have no reason to believe that the expanded data or analysis will produce results other than what has already been shown: a high concentration of patent cases in a small number of districts.

7 See PricewaterhouseCoopers LLP, 2015 Patent Litigation Study (May 2015) (“PWC Study”), http://www.pwc.com/us/en/forensic-services/publications/assets/2015-pwc-patent-litigation-study.pdf.

8 Ryan Davis, EDTX Judges’ Love of Patent Trials Fuels High Reversal Rate, LAW360 (Mar. 8, 2016), http://www.law360.com/articles/767955/edtx-judges-love-of-patent-trials-fuels-high-reversal-rate.

9 See PWC Study, supra note 7 (finding an average affirmance rate of 48% for all districts, compared to an affirmance rate of 42% for the Eastern District of Texas)

10 See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985).

11 See generally Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947) (“[T]he plaintiff’s choice of forum should rarely be disturbed.”).

12 See Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Unpacking Patent Assertion Entities (PAEs), 99 MINNESOTA LAW REVIEW 649 (2014), http://www.minnesotalawreview.org/wpcontent/uploads/2015/02/REVISEDSchwartzetal_MLR.pdf.

August 1, 2016 Posted by | -Law, News, Patents | | Leave a comment

Conflating Inventions (Technological Progress) with Capital in Economics

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 AtlasSocietywhen 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.

 

July 22, 2016 Posted by | Innovation, News, Patents | , , , , , | 2 Comments