FEE or the Foundation for Economic Education has proven to be intellectually bankrupt. For instance, their position against patents and Intellectual property shows that they do not understand property rights or rights generally. They also revere the work of the philosopher David Hume, who argued “cause and effect” does not exist, induction is just correlation, and that a rational ethics is not possible (the so-called is-ought problem). This means that Hume undermined reason, science and ethics. Despite this FEE thinks Hume is a great guy. FEE also promotes Matt Ridley who denigrates human achievement in science and engineering, calling Nobel Laurites in science and inventors frauds, for more click here.
Interestingly Ayn Rand predicted this. The founder of FEE, Leonard Read, sent Rand a prospectus for his plan to create FEE. Rand told Read that his premises were flawed.
The mistake is in the very name of the organization. You call it “The Foundation for Economic Education.” You state that economic education is to be your sole purpose. You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true–therefore your program will not work. You cannot hope to effect a cure by starting with a wrong diagnosis. (The whole letter is reproduced below)
According to FEE reason and capitalism are incompatible, which is why they promote the works of Mises, Hayek, Menger, and Rothbard. You cannot defend capitalism successfully while attacking reason and a rational ethics. These ideas are incompatible with Natural Rights, which is what created the United States and capitalism. FEE is worse than the socialists, because they undermine the very basis of freedom.
Hat tip to Christopher Budden for finding this letter.
To Leonard Read
February 28, 1946
I have read the prospectus of your proposed organization very carefully. No, you have not given our case away. But you have not presented it completely. You have covered only one minor, secondary aspect of it. The partial presentation of a great issue, featuring a secondary aspect, will amount in practice to giving the issue away. Therefore I don’t think that your organization will serve your purpose—if this prospectus represents its program.
The mistake is in the very name of the organization. You call it “The Foundation for Economic Education.” You state that economic education is to be your sole purpose. You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true–therefore your program will not work. You cannot hope to effect a cure by starting with a wrong diagnosis.
The root of the whole modern disaster is philosophical and moral. People are not embracing collectivism because they have accepted bad economics. They are accepting bad economics because they have embraced collectivism. You cannot reverse cause and effect. And you cannot destroy the cause by lighting the effect. That is as futile as trying to eliminate the symptoms of a disease without attacking its germs.
Marxist (collectivist) economics have been blasted, refuted and discredited quite thoroughly. Capitalist (or individualist) economics have never been refuted. Yet people go right on accepting Marxism. If you look into the matter closely, you will see that most people know in a vague, uneasy way, that Marxist economics are screwy. Yet this does not stop them from advocating the same Marxist economics. Why?
The reason is that economics have the same place in relation to the whole of a society’s life as economic problems have in the life of a single individual. A man does not exist merely in order to earn a living; he earns a living in order to exist. His economic activities are the means to an end; the kind of life he wants to lead, the kind of purpose he wants to achieve with the money he earns determines what work he chooses to do and whether he chooses to work at all. A man completely devoid of purpose (whether it be ambition, career, family or anything) stops functioning in the economic sense. That is when he turns into a bum in the gutter. Economic activity per se has never been anybody’s end or motive power. And don’t think that any kind of law of self-preservation would work here—that a man would want to produce merely in order to eat. He won’t. For self-preservation to assert itself, there must be some reason for the self to wish to be preserved. Whatever a man has accepted, consciously or unconsciously, through routine or through choice as the purpose of his life—that will determine his economic activity.
And the same holds true of society and of men’s convictions about the proper economics of society. That which society accepts as its purpose and ideal (or to be exact, that which men think society should accept as its purpose and ideal) determines the kind of economics men will advocate and attempt to practice; since economics are only the means to an end.
When the social goal chosen is by its very nature impossible and unworkable (such as collectivism), it is useless to point out to people that the means they’ve chosen to achieve it are unworkable. Such means go with such a goal; there are no others. You cannot make men abandon the means until you have persuaded them to abandon the goal.
Now the choice of a personal purpose or of a social ideal is a matter of philosophy and moral theory. That is why, if one wishes to cure a dying world, one has to start with moral and philosophical principles. Nothing less will do.
The moral and social ideal preached by everybody today (and by the conservatives louder than all) is the ideal of collectivism. Men are told that man exists only in order to serve others; that the “common good” is man’s only proper aim in life and his sole justification for existence; that man is his brother’s keeper; that everybody owes everybody a living; that everybody is responsible for everybody’s welfare; and that the poor are the primary concern of society, its holy shrine, the god whom all must serve.
This is the moral premise accepted by most people today, of all classes, all stages of education and all political parties.
How are you going to sell capitalist economics to go with that? How are you going to get them to accept as moral, proper and desirable such conceptions as personal ambition, economic competition, the profit motive and private property?
It can`t be done. Their moral ideal has defined these conceptions as evil and immoral. So modern men are consistent about it. Our “common-gooder conservatives” are not. It’s one or the other.
Here is the dilemma in which the public finds itself when listening to our conservatives: the public is told, in net effect, that collectivism is a noble, desirable ideal, but collectivist economics are impractical.
In order to have a practical economy, that of capitalism, we must resign ourselves to an immoral society, that of individualism. This amounts to saying: you have a choice, you can be moral or you can be practical, but you can`t be both. Given such a choice, men will always choose the moral, because it is preposterous to expect them to choose that which, by the speaker`s own assertion, is evil. Men may be mistaken about what they think is good (and how mistaken they’ve been! And what lying they indulge in to deceive themselves about it!), but they will not accept evil with full, conscious intent and by definition.
Nor will men accept the idea that a moral ideal is impossible, that it cannot be achieved in practice. (And they are right about that, too—it’s a thoroughly *unnatural* proposition.) Therefore it is absolutely useless to tell them that Marxist economics are impractical, so long as you`re also telling them in the same breath that Marxism is noble. They will merely say: “Well, if that’s the ideal, and it cannot be achieved through the economics of capitalism, to hell with the economics of capitalism! If Marxist economics do not work, we’ll find something that works. We must find it. So we’ll go on experimenting. At least Marxism tries in the right direction, while capitalism doesn’t even try to achieve the collectivist ideal. Capitalist economics do not even try to offer us a solution.” How often have you heard this last one?
Now the most futile and ludicrous of all stands to take on this question is the one attempted at present by most of our conservatives. It may be called the “mixed philosophy.” It’s a parallel to the theory of a “mixed economy,” just as untenable, silly and disastrous. It’s the idea that capitalism can be morally justified on a collectivist premise and defended on the grounds of the “common good.” It goes like this: “Dear pinks, our objective, like yours, is the welfare of the poor, more general wealth, and a higher standard of living for everybody—so please let us capitalists function, because the capitalist system will achieve all these objectives for you. It is in fact the only system that can achieve them.”
This last statement is true and has been proved and demonstrated in history, and yet it has not and will not win converts to the capitalist system. Because the above argument is self-contradictory. It is not the purpose of the capitalist system to cater to the welfare of the poor; it is not the purpose of a capitalist enterpriser to spread social benefits; an industrialist does not operate a factory for the purpose of providing jobs for his workers. *A capitalist system could not function on such a premise.*
The economic benefits which the whole society, including the poor, does receive from capitalism come about strictly as secondary consequences, (which is the only way any social result can come about), not as primary goals. The primary goal which makes the system work is the personal, private, individual profit motive. When that motive is declared to be immoral, the whole system becomes immoral, and the motor of the system stops dead.
It’s useless to lie about the capitalist`s real and proper motive. The awful smell of hypocrisy that accompanies such a “mixed philosophy” is so obvious and so strong that it has done more to destroy capitalism than any Marxist theory ever could. It has killed all respect for capitalism. It has, without any further analysis, simply at first glance and first whiff, made capitalism appear thoroughly and totally phony.
The effect is precisely the same as that produced by Willkie, Dewey and all the rest of the “me-too,” “I’ll-get-it-for-you-wholesale” Republicans. Do not underestimate the common sense of the “common man” and do not blame him for ignorance. He could not, perhaps, analyze what was wrong with Willkie or Dewey—but he knew they were phonies. He cannot untangle the philosophical contradiction of defending capitalism through the “common good” —but he knows it’s a phony.
Is there anything more offensive and preposterous than to tell an unemployed worker that the millionaire who is throwing a champagne party on his yacht is doing so only for his, the worker’s benefit, and for the common good of society? Can you really blame the worker if he then goes out and demands that the yacht be confiscated? Is it economic ignorance that makes him do so?
The more propaganda our conservatives spread for capitalist economics while at the same time preaching collectivism morally and philosophically, the more nails they’ll drive into capitalism’s coffin. That is why I do not believe that an economic education alone is of any value. That is also why you will find it difficult to arouse people`s interest in the subject. I believe you are conscious of this difficulty; your prospectus shows anxiety on the scope of “creating a greater desire for economic understanding.” You will not be able to create it.
The great mistake here is in assuming that economics is a science which can be isolated from moral, philosophical and political principles and considered as a subject in itself, without relation to them. *It can’t be done.*
The best example of that is Von Mises’ “Omnipotent Government.” That is precisely what he attempted to do, in a very objective, conscientious, scholarly way. And he failed dismally, even though his economic facts and conclusions were for the most part unimpeachable. He failed to present a convincing case because at the crucial points, where his economics came to touch upon moral issues (as all economics must), he went into thin air, into contradictions, into nonsense. He did prove, all right, collectivist economics don’t work. And he failed to convert a single collectivist.
The organization desperately needed at present is one for EDUCATION IN INDIVIDUALISM, in every aspect of it: philosophical, moral, political, economic—in that order. (That is the actual order in which men’s thinking proceeds on these subjects.) As part of such a program, an education in sound economics would be essential and valuable. Without it, it is a wasted effort.
I suspect that you might have been misled by the fact that you have heard businessmen accept the most preposterous economic fallacies; and you concluded that once the fallacies are exposed, the trouble is cured. Do not be deceived by superficial symptoms; the trouble goes much deeper than that; the trouble is not in the nonsense they accept, *but in what makes them accept it*.
I have written all this at such great length because I consider an organization created by you as potentially of tremendous importance. I consider you the only man in my acquaintance who has the capacity to translate abstract ideas into practical action and to become a great executor of great principles. Therefore I would hate to see you fail in what could be a great undertaking, by attempting it on the wrong premise and in the wrong direction.
I am particularly worried by the fact that you intend to start on such a grand scale (a $3,000,000 budget). If you do not lay the proper foundation first, a three-million-dollar skyscraper will collapse on you more surely and more disastrously than a little bungalow. You will find yourself widely, publicly known and tagged as another ineffectual outfit like the N.A.M. or the Industrial Conference board; your name will become that of “another one of those conservatives,” instead of a new, powerful figure that would attract national attention by representing a real cause, and gain a following through courage, integrity and an unanswerable case, which is what I want you to become. You will find yourself caught in the ruins and forced to go on by the responsibility of so expensive an organization. The end of such a process is—Virgil Jordan.
It would be so much better and so much more practical to start in a smaller way and grow by a natural process rather than a forced one. You do not have at present the men and the educational material to use on a $3,000,000 scale. It would be better to gather your specialists and train them first, rather than release on the nation a flood of unprepared, “mixed philosophy” propagandists.
This letter is my contribution to your cause. If it helps you to analyze the situation, that is the best help I can offer you. If you agree with my analysis, I can continue to help you in this way, in the matter of philosophical direction. I know you have plenty of economists to call on for your work, but no people capable of undertaking the philosophical-moral part of it. Your main problem is to find them. And I will help you long-distance, to the extent that I can.
I shall be most interested in your answer to this.
As to your proposed radio program, I don’t think it’s a good plan. Personally, in spite of my interest in the subject, I’m afraid I would not listen to such a program. I think it would bore me. Five men talking on the same subject from the same general viewpoint would be more monotonous than just one man making a connected speech. The fact that the five men disagree on details would only add confusion, dilute and diffuse the subject and make the whole of the broadcast inconclusive and probably pointless.
If you decide to use Anthem in The Freeman, let me know. I’d like to have you do it, only I’d want to edit the story a little first; it’s old and there are some passages which I think are bad writing and which I’d like to straighten out.
Why Intellectual Property Rights? A Lockean Justification, by Professor Adam Mossoff, is probably one of the most important papers written on property rights in over a century. The point of the paper is to show Locke’s labor (physical and especially mental) theory of property rights provides the moral justification for intellectual property (copyrights and patents).
One of the strengths of the Lockean property theory is that it recognizes that IP rights are fundamentally the same as all property rights in all types of assets—from personal goods to water to land to air to inventions to books.
The paper clearly shows that Locke understood that it takes both mental and physical effort to obtain those things man needs to live. Anything that man makes valuable through his efforts, he obtains a property right in.
Locke himself expressly justifies copyright as “property” and approvingly refers to “Inventions and arts” in his summation of his theory that property arises from value-creating, productive labor that supports the “conveniences of life” in § 44 of the Second Treatise. In 1690, the legal concept of patents (property rights in inventions) did not exist yet, and so this is an explicit indication of Locke’s willingness to include what would later become the legal concept of patents within his property theory.
Locke explains that the world exists for “the use of the Industrious and Rational.”
Interestingly Locke distinguishes between copyrights (and patents by extension) and monopolies something that many modern critics of patents are unable to do.
In an essay on the statutory printing monopoly granted to the Stationers Company by Parliament, Locke condemns such monopolies as violating the “property” in creative works that “authors” rightly claim for themselves. In what might be a further surprising claim for many today who think copyright terms are too long, Locke writes in this 1695 essay that authors should have their property rights secured to them for their lifetimes or after first publication plus “50 or 70 years.”
I have argued that the term of a patent should be 35-40 years for the same reason. As I have explained here, no property right is eternally. Dead people do not have property rights.
Another misconception about property rights is that they are the same for every object or value created by man. As Mossoff explains Locke did not make this mistake.
As Locke first explained, property is fundamentally justified and defined by the nature of the value created and secured to its owner … To wit, different types of property rights are defined and secured differently under the law.
This naturally leads to a final observation: Given differences in produced values in the world, such as a water well, domesticated animals, a fecund farm, the desert sand used to make silicon for computer chips, air, broadcast spectrum, corporations, stock, credit, future interests, inventions, business plans, books, paintings, songs, and the myriad others, the specific legal doctrines that protect these values will vary.
It is amazing how many people miss this point, which leads to all sorts of erroneous ideas about what property rights are. This is perhaps the most important point in the whole article.
Property rights are highly misunderstood in today’s world by both lay people and academics. They are even misunderstood by many supporter of capitalism, particularly libertarians and supporters of Austrian Economics, but also by Objectivists and supporters of Ayn Rand.
Libertarians and the economics profession in general have accepted the utilitarian justification for property rights, which is a misnomer and turns property “rights” into arbitrary government grants. In addition, it fails to explain how property rights are acquired, who they belong to and why, among other problems.
Ayn Rand appears to be in basic agreement with Locke. She states:
Any material element or resource which, in order to become of use or value to men, requires the application of human knowledge and effort, should be private property—by the right of those who apply the knowledge and effort.
Capitalism: The Unknown Ideal “The Property Status of the Airwaves,” Capitalism: The Unknown Ideal, 122
Rand also discusses property rights in the chapter Patents and Copyrights in Capitalism: The Unknown Ideal. While she has some keen insights, she never developed a fully articulated theory of property rights.
In my limited research into the history of property rights theory there was excellent research and work starting around Locke and the Enlightenment. Before that property rights were derived from the King (government). In many ways the economics profession, particularly the Austrians have gone backwards to the idea that property “rights” are whatever the government says they are. Scholarship continued on property rights particularly in the United States at least until the first Homestead Act, which showed a clear understanding of property rights. However, that research had died by the time the FCC was created in 1934.
Locke, the Founders, and Ayn Rand understood that property rights are the cornerstone of freedom. Modern libertarians often think property rights can be replaced with contracts. This is confusing cause with effect. Contracts rely on property rights not the other way around. Some Objectivists undermine property rights by rejecting Locke, the Founders, and Rand’s understanding that each individual has a property right in themselves (Self Ownership or Self Sovereignty). This is also based on a misunderstanding of what property rights are and how they are derived.
Let’s hope that Adam Mossoff will continue his excellent work in this important area.
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
This is a review of Carl Menger’s book Principles of Economics published in 1871. I will be judging this book on three criteria: 1) Is it adhering to the philosophy of science? 2) Does it address the question of what is the cause of real per capita increases in wealth? and 3) Does it address the question of what was the cause of the industrial revolution? These last two questions are the most important in all of economics and it is impossible to write something that is profound if it does not address a profound question. I will also be analyzing Menger’s “subjective” theory of value and prices.
Philosophy of Science
Menger addresses this issue in the Preface. He discusses the remarkable advances of the hard sciences and the high regard in which they are held. He also laments that economics is held in very low regard.
This method of research, attaining universal acceptance in the natural sciences, led to very great results, and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge, and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science. (P.47)
Menger however never states why it would be improper to use the philosophy of natural sciences. He implies that he is using the “empirical method” however he never explains what he means by that. The rest of the book has almost no empirical evidence in support of Menger’s positions. Menger’s lack of clarity on this point is consistent with much of the rest of the book. This means that it is often possible to argue that Menger held two contrary positions and find support for both in this book. This in and of itself is support that Menger did not follow the philosophy of science, however it is a useful rhetorical tool. In addition, his major protégé, Ludwig Von Mises, explicitly rejects the philosophy of science, in favor of philosophical rationalism.
Menger’s major intellectual influence was Franz Brentano, an Austrian philosopher best known for his works related to psychology. Brentano wrote a book entitled Perception is Misception, in which he claims that perception is erroneous. “In fact he maintained that external, sensory perception could not tell us anything about the de facto existence of the perceived world, which could simply be illusion.” Since Menger considered Brentano a friend and intellectual influence and Menger did not refute this position, it is reasonable to assume that Menger was sympathetic to Brentano’s anti-perception idea. This anti-perception point of view is very reminiscent of Plato. Plato’s ideas are not consistent with science.
The overwhelming evidence is that Menger did not follow the philosophy of science. This means that none of the major Austrian economists, Menger, Von Mises, or Hayek based economics on the philosophy science. Austrian economics is not a science.
Source of Economic Growth
This section, The Causes of Progress in Human Welfare p. 71, is the part of Menger’s book I consider most important. It also appears to be the payoff for pages of description of first, second, third, etc. order goods. Even Menger admits that his definition of these is a bit vague, however first order goods appear to be consumables or consumer goods. Menger argues that economic growth is the result of creating more second or high order goods. This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists. Not only has this already been said by other economists, but it is wrong. He also has one throw-away line about human knowledge.
“Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.”
He never builds on this, he does not explore how human knowledge is created, how it results in increases in economic wealth, or what knowledge is important to economic growth. His followers, such as Mises also do not build on this, they all focus on increases in savings and capital as the cause of growth in the economy.
In a technologically stagnant economy adding more capital at best can lead to some sort of optimum output, but can never exceed this level. (I describe and provide evidence for this in much more detail in my book Source of Economic Growth). As a simple example, imagine Robinson Crusoe fishing with a spear. The spear is a second order good or higher under Menger’s approach. Now if Crusoe creates more spears will he have more fish? No, since he can only use one spear at a time. At best having more spears will allow him to replace his spear more quickly if he breaks or loses a spear. Another example is that if every farmer that can use a tractor has one, then giving them more tractors will not increase the production of first order goods. This has been shown empirically and Robert Solow’s paper (Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320) is just one of many that prove this.
Menger fails to answer the question of what causes real per capita increases in wealth.
Menger never mentions the industrial revolution in this book. The Industrial Revolution is the first time that people escape subsistence living (the Malthusian Trap) in large numbers. It is the most significant event in the economic history of the world and Menger shows no interest in it. By the time Menger wrote Principle of Economics the Industrial Revolution was at least seventy years old and had exploded in the United States. This shows a profound disinterest in the empirical side of economics. It would be like an astronomer ignoring and eschewing the telescope or biologist who refuses to do or even explore the results of dissections.
Menger does not compare the economies of different countries or the economy of a country at different times, despite the profound differences in the economies of countries around the world. This is not how a scientist thinks or works. Instead Menger examines propositions in his own head, like the monks of the middle ages arguing over how many angels can dance on a pin head. Menger’s style is completely consistent with Mises praxeology – philosophical rationalism.
The cause of real per capita increases in wealth is increasing levels of technology (new inventions) and the cause of the Industrial Revolution is legally enforceable property rights for inventions (patents) as William Rosen, shows in his excellent book The Most Powerful Idea in the World and I show in my book Source of Economic Growth.
Menger does not discuss inventions, technology, knowledge, patents or their importance in economics. Menger fails to add anything useful to the two most important questions in all of economics.
Menger is generally credited with the idea of subjective value in economics. This is described as a reaction to the labor theory of value described in classical economics, which is an intrinsic theory of value. Despite this many people have argued that Menger was not advocating a subjective theory of value. Note that when modern Austrians use the term subjective value they mean that values are disconnected from reality – they are peoples’ arbitrary decisions. The interesting thing is that in his Principles of Economics you can find support for both positions. For instance, if you want to argue that Menger was advocating an objective theory of valuation you can provide the following quotes:
Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115
Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs. p 116
Menger also makes this distinction between real and imaginary goods. He appears to be making a point about objective values, however he never does anything with these concepts once he introduces them.
Note that Menger never defines what he means by needs. Are needs anything someone wants? Menger never says. Then he talks about the satisfaction of needs. Is this a personally, subjective decision? Menger never says.
On the other hand if you want to say Menger was advocating the modern value subjectivism of Austrians, then you can find these quotes.
It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. P. 121
The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146
Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals. P.146
Another factor favoring the subjective theory of values is that Menger is clear that ethics and morality are outside the study of economics.
But it seems to me that the question of the legal or moral character of these facts is beyond the sphere of our science. P. 173
Here he is talking about the morality of charging interest, however it is clear that this statement is a more general statement about economics. This suggests that Menger’s ethics, like most Austrians, is some version of Utilitarianism, which means he rejects Locke’s and Rand’s Natural Rights. Another quote that supports this point of view is Menger’s ideas of property.
The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves. P.76
Property, therefore, like human economy, is not an arbitrary invention but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods. P. 97
The first quote is really Menger’s definition of property. Note that this over 200 years after Locke. It is a clear rejection of Locke and Natural Rights.
The second quote is a forerunner of the inane idea that property “rights” are socially useful tools for allocating scarce resources adhered to by Austrians.
Menger’s position on subjective value is confused. Note that this is not the work of scientist, which shows once again that Menger’s ideas are not based on the philosophy of science. Despite this Menger’s rejection Natural Rights, rejection of ethics in economics, and the direction his students took suggests that on balance Menger was an advocate of the radical subjective theory of value.
I undertook this task because a number of people I have respect for argued that Menger was not the same as Hayek or Von Mises. In addition, a number of well-known Objectivists have tried to reconcile Austrian Economics with Objectivism. I have analyzed in depth the irrational roots of the two main branches of Austrian Economics: 1) Hayek and 2) Von Mises. I have shown that the positions of Austrians on a number of positions are absolutely flawed including their position on property “rights”, the Austrian Business Cycle, their position on fractional reserve banking, and their position on intellectual property. Carl Menger has not proven to be the savior of this fall from grace. This is not to say that other schools of economics are better or that there is nothing useful in Austrian economics. For instance, Menger’s marginal utility is a useful concept, but hardly profound.
I found Principle of Economics boring, repetitive, and written in the pseudo-scientific style of many pop management books or psychological self-help books. This is consistent with other books I have read by Austrians. The best writer among the major Austrians is Hayek.
I did not force myself to read every word of Principle of Economics because it is boring, repetitive, and non-scientific. I will not apologize for not reading all of a book that is clearly not based on science. I also will not waste my time reading anymore books by Austrians. I know more about the underlying tenants of Austrian economics than many of its proponents, just as I know more about the underlying tenants of christianity than many of its proponents.
Objectivism and Austrian economics are incompatible. I think many Objectivists are fooled into supporting Austrian economics because they talk about free markets. Austrian economics is not the product of reason, the Enlightenment, and the philosophy of science. It is best described as a branch of the Scottish “Enlightenment”, which really was a counter enlightenment movement. If Objectivism wants to make progress in economic science it needs to wall itself off from Austrian economics.
 https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.
Opponents of patents often like to refer to them as a monopoly, which is a thoroughly discredited idea (see here, here, here, here, and here). Another argument they often raise is that “real” property rights do not expire, they go on in perpetuity. Since patents and trademarks expire after a certain period of time, they cannot be true property rights.
To answer this question, it is necessary that examine the nature of property rights more carefully. You obtain property rights in something because you made it productive or created it. Of course you can also trade your rights in something you created for currency and then contract to buy something else, thus obtaining property rights in the item. Your rights in say land are limited by the activity you undertook to obtain those rights. For instance, if you farmed the land and say put a house on it, then you have a right to continue those activities and ones reasonably related to them. However, this does not mean that your property rights extend to the center of the earth or up infinitely into space. It also does not mean you can put a huge pigsty on the edge your land next to your neighbor’s house. Note this was/is true under common law, no need for regulatory law or home owners’ associations.
Property rights are part of the system of natural rights, which are based on the foundation of self-ownership or self-sovereignty.
Is man a sovereign individual who owns his person, his mind, his life and its products – or is he the property of the tribe …
Capitalism: The Unknown Ideal, What is Capitalism, p 10.
Locke also based natural rights on self-ownership or self-sovereignty. These ideas are not axioms but derived from observation and logic. You obtain property rights in something because you created it or made it productive. Since you own yourself, you own those things you create, however the limits of your property rights are determined by what you created (made productive) and some practical legal implications.
When it comes to land, most people obtain property rights in the land because they farmed it or made it useful for habitation or both. These property rights do not go on forever as commonly conceived. Dead people cannot own something, only living people can have property rights. When a person dies their property rights expire including their property rights in land. The heirs do not acquire the property rights in the land (assuming they were not an active part of making the land productive), they just receive the first right to acquire the property rights in the land, by making it productive. If they are unable to make the land productive or they are otherwise not a productive people they will quickly have to sell the land to someone who can make it productive.
You might argue that the law does not precisely follow the philosophical basis of the law and that would be correct. However, the law has to consider factors that the pure philosopher does not, for instance, efficiency, evidentiary issues, and certainty of title. If the ownership of land and other property were not passed to the heirs in the form of first right to acquire, then every time someone died there would be a free for all to acquire the land, etc. This would lead to fights, both legal and physical. This would defeat the legal goals of efficiency, evidentiary clarity, and title clarity. However that is not to suggest that the system we have “inherited” for the disposition of estates is perfect or the best.
In the case of patents/copyrights the most philosophically correct position for the length of a patent/copyright (from this point forward I will just discuss patents) would be the inventor’s life. However, this would cause all sorts of practical patents. The patent for a first inventor could issue and one day later the inventor could die, while another inventor could live for another seventy years. This would be unjust. More importantly it would make it very difficult to verify if a patent was still active. Last it would make it very risky to invest in company built around an invention that was patented. Imagine that you are asked to invest in company whose main asset is an invention that could be worth hundreds of millions of dollars, however if the inventor dies tomorrow the company would lose its most important asset. These practical realities of the law mean that patents should have a certain set period of time. The patent cannot go on in perpetuity because the inventor’s heirs cannot make the asset productive as in the case of land, so they cannot reacquire the patent rights. The US has tried out a number of different term lengths for patents. Presently, it is 20 years from the date of filing and that makes it essentially uniform with the rest of the world. My suggestion would be to make the term of a patent closer to half a person’s life, since most people do not invent things as a child and there is absolutely no macroeconomic evidence that stronger patents have ever inhibited the economy.
 Rand in other places states that Rights are based on the right to life. She necessarily had to mean the right your own life, to be consistent with inalienable rights. It is clear that she was not opposed to the idea of self-ownership and did not see this inconsistent with the idea of natural rights. It is also easier to understand natural rights from a self-ownership point of view than a right to (your own) life.
 It is beyond the scope of this paper to explain the derivation of natural rights by Locke and Rand.
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.
The Economist has printed another of their fantasy articles on patents entitled “A question of utility.” Gene Quinn has written a great article showing the numerous inaccuracies in The Economist’s article entitled “What ‘The Economist’ Doesn’t Get about Patents.” The Economist article argues that patents were irrelevant to the industrial revolution. Mr. Quinn shows the fallacy of this statement, but I want to amplify on what he said. The industrial revolution started in England and the United States, which were the two countries with functioning patent systems. The industrial revolution was not about industry but about a continuous invention revolution as the book “The Most Powerful Idea in the World” illustrates. Modern ‘New Growth Economics’ has shown that the only way to increase real per capita incomes, is to increase our level of technology and that means creating new inventions.
My new book Source of Economic Growth tackles these important questions specifically it answers these two questions: 1) What is the source of real per captia increases in wealth? And 2) What was the cause of the industrial revolution? I provide overwhelming evidence that new inventions are the only way to increase real per capita incomes and property rights for inventions, i.e., patents, are the only way to provide a high enough level of inventing to escape the Malthusian Trap and enter the Industrial Revolution.
The Austrians, such as those on the Von Mises website, like to tout that they are pro-freedom, capitalists, and arch enemies of the socialists and Keynesians. Strangely enough this means that they have aligned themselves with socialists in opposing property rights for inventors and attacking Locke’s ideas on property. Even more fundamentally the Austrians seem to share intellectual roots with the socialist or more broadly the post-modernist movement, which is a reactionary movement opposing the enlightenment, reason, and science. I have written on Fredrick Hayek’s anti-reason, anti-natural rights, moral relativist positions in Hayek vs. Rand: Patents and Capitalism.
However, Hayek was not the only Austrian with post-modernists roots. Von Mises was clear that values and prices are subjective. By this the Austrians do not mean that they are personal or that each person puts a different value on things, they mean unconnected in anyway with reality. Von Mises also said that economics is a value-free science. This may sound high-minded, but science is not value free. Science starts with an objective reality, demands logic and evidence, and morally requires that scientist report data accurately. These positions of Von Mises place him firmly in agreement with the post-modernists (socialists, Keynesians). Some people think I am misinterpreting the Austrian position so here is a video of a talk from the Mises University that demonstrates that the Mises people are serious about the subjective theory of value. They are not saying it depends on your circumstances, they are saying there is no connection to reality between prices or values in economics. The meat of the video starts at 7:35 in which the speaker states “value is just a state of mind.” At 7:57 he is clear that value has no extensive property, which means it is not related to the real world. 8:16 the speaker states that all we have is a state of mind – that value exists only in the mind of the individual. 9:23 value is a state of mind. 9:54 there is no relation between the external world (reality) and the judgments of our minds – this is as clear as it will get that the Austrians are ignoring reality and believe economics is separate from reality. 11:14 The speaker describes profit as subjective.
Of course this position cannot logically be held to be true so you will find contradicting statements in the talk. Just like people who deny reality, meaning they deny A is A, the position cannot be held without contradiction. But since they deny reality matters in economics, they free themselves from the science of non-contradictory thinking – logic. This makes the Austrians consistent with the post-modernist (socialist) movement. I cannot say that every Austrian economist makes this mistake, but it is the accepted position of the modern Austrian school of economics and it got its start with Von Mises.
The speaker is trying to destroy the intrinsic theory of value. Classical economists followed the labor theory of value which is an intrinsic theory of value. According to this theory the value of an item is the sum total of the labor that went into the item. The Austrians are correct that the classical economists’ position was incorrect, but their solution is no better. They want to say value is determined without reference to the real world – that is it is all in the mind of the valuer, while the classical economists said value could be determined without reference to the valuer. Both are nonsense. Objective valuation has to take the position of the valuer and the item being valued into account. Ayn Rand has a great explanation of this topic in Capitalism the Unknown Ideal starting on page 13 I believe.
Capitalism is based in reality, reason, and the ethics of natural rights. Austrians are not capitalists.
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