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F. A. Hayek: Austrian Economics vs. Objectivism

I am giving a talk with Will Thomas at Atlas Summit 2016 on Austrian Economics.  I have been assigned to discuss the Austrian economists Carl econgrowth.smallMenger and F A. Hayek.  I will have about eight minutes for each Menger and Hayek.  This post presents the basic ideas I will present on Hayek.

F. A. Hayek won the noble prize in economics. He is probably best known for his book The Road to Serfdom, which was written during world war two. In academic circles Hayek is best known for his work on how prices in a market economy provide information and result in a spontaneous order.  This work is closely related to Adam Smith’s ideas about the “invisible hand.”  Ayn Rand and Hayek never met, but Rand was highly critical of Hayek.[1]

Hayek considered one of his great achievements his work on “cultural evolution”, which lays out his epistemology.  One commentator summarizes Hayek’s cultural evolution this way

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

The History of Hayek’s Theory of Cultural Evolution, Erik Angner

Dept. of History and Philosophy of Science

Hayek’s objection to central planning is not based on individualism, but on the fact that central planning substitutes the knowledge and decisions of a few people for that of the group.  This disrupts the process of cultural evolution according to Hayek.

This group basis of evolution is based on Hayek’s belief that reason is limited at best.

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

The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek: A Critical Comparison, Linda C. Raeder is Associate Editor of HUMANITAS and a Research Associate at the National Humanities Institute

David Kelley summarizes Hayek’s position on Capitalism best.

This case for market freedom is essentially negative. Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system. But the inescapable ignorance of would-be planners excludes that possibility: ―If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.‖10

 

http://www.reasonpapers.com/pdf/33/rp_33_1.pdf

Symposium: Rand and Hayek on Cognition and Trade

Rand versus Hayek on Abstraction

David Kelley The Atlas Society

Hayek also accepts the Austrian economics position of subjective values and as a result rejects a rational or scientific ethics.  “No universally valid system of ethics can ever be known to us,‖3 which is obviously not consistent with her view.”[2]

It is clear that Hayek is inconsistent with Ayn Rand’s metaphysics, epistemology, and ethics.  Hayek’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.

 

[1] https://www.youtube.com/watch?v=GXJX9StfE1g

[2] http://www.reasonpapers.com/pdf/33/rp_33_1.pdf, Symposium: Rand and Hayek on Cognition and Trade, Rand versus Hayek on Abstraction, David Kelley The Atlas Society

March 21, 2016 Posted by | -Economics, philosophy | , , , | 1 Comment

Carl Menger: Austrian Economics vs. Objectivism

I am giving a talk with Will Thomas at Atlas Summit 2016 on Austrian Economics.  I have been assigned to discuss the Austrian economists Carl Menger and F A. Hayek.  I will have about eight minutes for each Menger and Hayek.  This post presents the basic ideas I will present on Carl Menger.

Carl Menger is commonly considered the founder of Austrian economics.  Menger wrote his first book Principles of Economics in 1871.  It is very difficult to nail down Menger’s position on a number of issues.  For instance, he is known for developing the subjective theory of value in Austrian economics, which was in response to the labor theory of value of classical economics.  The labor theory of value is that value of an item is equal to the value of all the labor that went into making the item.  This is an intrinsic theory of value and rejected by almost all economists today.  However, many people including some Objectivists argue that Menger really was advocating an objective theory of value instead of a subjective theory of value.

For instance, consider these two quotes by Menger from Principles of Economics:

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  (objective?)

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  (subjective?)

MengerModern Austrians and most economists today have accepted the subjective theory of values.  The logical result of accepting the subjective theory of values is that no rational theory of ethics is possible, which is exactly what Mises, Hayek, modern Austrians and modern economists, such as Milton Friedman, have concluded.  This means that Natural Rights and Rand’s ethics are inconsistent with the subjective theory of values.  This has important implications particularly for property rights, but in fact makes all of law subjective.

Despite the contradictory statements by Menger I think it is fair to say that he was advocating a subjective theory of values.  Menger was most influenced by philosopher Franz Brentano who also was highly influential of Freud.  Franz Brentano maintained that our senses were invalid and could not tell us anything about the world.[1]  In addition, the Austrians who follow and praised Menger have adopted the subjective theory of value.

Another question that arises is whether Menger’s epistemology was reason or consistent with science and Objectivism.  Again you can find contradictory interpretations, even among Objectivist.  However, in his book Principles of Economics he is clear that the techniques of the physical sciences at the time were not the ones he was applying in his study of economics.  Menger described his epistemology in more detail in his book Investigations into the Method of Social Sciences, where he suggests that all science has a theoretical, non-empirical side and an empirical side.[2]  The theoretical side creates universal truths that cannot be subject to empirical proof or disproof.  That is not science.  It appears to me that Mises’ praxeology follows Menger’s theoretical side, which is philosophical rationalism.  While Hayek follows the empirical side of Menger, which rejects the efficacy of reason.

Menger’s Principles of Economics provides almost no empirical evidence for his positions.  In addition, he shows no interest in the most interesting economic phenomena in history, the Industrial Revolution.  This is inconsistent with a scientific approach to economics.

Menger shows only a passing interest in what causes economic growth, particularly per capita increases in wealth.  He argues that economic growth is the result of creating more second or high order goods.  His explanation appears to be the basis of the Austrian Business Cycle Theory.  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.

In conclusion, Menger seems to commonly make contradictory statements, which makes him difficult to pin down, however it appears clear to me that Menger is not consistent with Objectvism on metaphysic, epistemology, or ethics.  Menger’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.

[1] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

[2] p. xi https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS

 

March 21, 2016 Posted by | -Economics, philosophy | , , | 5 Comments

Dale Halling and William R Thomas – Austrian Economics and Objectivism Panel: Atlas Summit 2016

I am proud to announce that Will Thomas and I will be giving a talk on Objectivism and Austrian Economics.  This year’s Atlas Summit will be held in Las Vegas July 11-13 just proceeding FreedomFest at the same location.  Here is the description of our talk:

Prominent Objectivists have argued that Austrian Economics is compatible with Objectivism. Ludwig von Mises was Ayn Rand’s favorite economic thinker, and Objectivist economist George Reisman was trained by Mises. Despite this, Rand was very critical of a number of Austrians including F.A. Hayek and Murray Rothbard.  David Kelley has written that “Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system.” What are the philosophical foundations of Austrian Economics? Is Austrian Economics good economics? Dale Halling and William R Thomas will explore these questions in this panel session.

Presently our talk is scheduled for Wednesday, July 13 from 12:00–1:00 PM, however this is subject to change.  I have been told that I can invite anyone to my talk and they can hear my talk for free, although they will not be able to see the other fine talks at Atlas Summit.

AtlasSocietyNote that right now there is a $100 discount for early registration and this also gives you access to FreedomFest.

I hope to see many of you there.

 

 

February 8, 2016 Posted by | -Economics, philosophy | , , , , | Leave a comment

Aristotle and Rand vs Hume: Causation and Induction

Ayn Rand and many scholars blame Kant for killing the Enlightenment.  Kant is the founder of what I call the Germany anti-Enlightenment movement.  It seems to me that David Hume may be as responsible for killing the Enlightenment or more so than Kant partly because his arguments are more understandable.  Hume is part of what I call the Scottish anti-Enlightenment.  Francis Hutcheson is usually considered the father of the Scottish anti-Enlightenment, but Hume is its most powerful advocate.

Hume provides three arguments that attack the core of the Enlightenment:

1) His skepticism of causation

2) His skepticism of induction

3) His “is-ought” attack on ethics.

Rand concentrated her attention on the third problem.  She explained, “The fact that a living entity is, determines what it ought to do.”

The first two arguments are actually interrelated for Hume.  He was grappling with the problem that for deductive syllogisms to be true the premise statements must be true, but how do we arrive at the premise concepts?  The classical example is:

 

All men are mortal.

Socrates is a man.

Therefore, Socrates is mortal.

 

For Hume this syllogism raises the issue of how do we know that all men are mortal?  We have not met all men and all men who have lived have not died and how do we know that the future will be like the past?  Hume realized that all abstract statements, indeed all concepts must be start with humeindividual perceptions or instances, unless god or someone gives us a tablet with all the abstractions.  But how do we go from particular instances to an abstraction?  For example, all the people I know are mortal, to “all men are mortal”?  This is a question of induction and Hume realized for induction to be true, we must assume that cause and effect exists and is knowable.  However Hume did not see any justification for our confidence that cause and effect exists or is knowable.  Hume saw cause and effect as a physiological pattern recognition that at best has a probabilistic certainty.  Thus to Hume his skepticism about induction and causal relationships are intimately interconnected.

Hume ignores the law of identity in his arguments, which is at least in part how I think Rand and Aristotle would respond to Hume.  A thing is what it is and therefore it has certain properties.  If a thing changes then we know that something caused it to change.  Otherwise it would violate the law of identity.  Perhaps Hume’s response would be to attack the law of identity, however this would be an extraordinary claim and therefore require extraordinary evidence.[1]

Hume illustrates his ideas on the lack of causality with billiard balls.  This is how Wikipedia explains it:

For example, when one thinks of “a billiard ball moving in a straight line toward another”, one can conceive that the first ball bounces back with the second ball remaining at rest, the first ball stops and the second ball moves, or the first ball jumps over the second, etc. There is no reason to conclude any of these possibilities over the others.

This example shows that Hume is ignoring the law of identity.[2]  For instance, the first ball cannot jump over the second ball without violating the law of identity.[3]  Billiard balls do not jump for no reason.  The same is true of the first ball bouncing back and the second ball staying in place.  A billiard ball when struck moves.

A famous example to illustrate Hume’s attack on induction is the black swan scenario.  In this scenario you observe one hundred swans and they are all white.  Thus you infer (induction) that all swans are white.  The next day you see a black swan.  This is essentially what Hume thinks scientists are doing.  Hume is making this argument about 50 years after Isaac Newton’s Principia.  I think this shows that Hume had an agenda to attack the Enlightenment.  Newton’s laws of mechanics and gravity had overwhelming shown the power of science and reason and therefore induction, but Hume chose to reject them.  Hume did not even come close to meeting his burden of proof in this argument.

The swan example shows another flaw in Hume’s argument.  Hume has made an inference based on an accidental cause.  I consider this and intellectual dishonest argument.  Eggs are white, clouds are white, paper is white, some flowers are white, and so are some other birds.  Drawing the conclusion that all swans are white is to focus on an accidental cause of relations, Aristotle would point out.  Most humans are within a certain height range, but that would be no reason to define humans as being above 4.5 feet or below 6.5 feet.  Hume in this example ignores what is an important or causal feature of swans for a trivial feature.  This is worthy of a side show magician not serious philosophy or science.  His excuse would be that there is no causation.

 

Perfect knowledge.

This is another error that people who argue along the lines of Hume make.  An example of this argument was used to attack Newton’s ideas on gravity.  People argued that Newton had failed to explain why masses have gravity or how gravity works at a distance and therefore they rejected all of Newton’s ideas on gravity.  The criticism is fair, but the conclusion is not.  In fact, Newton acknowledged this was a problem, but that did not mean that he had not contributed enormously to the understanding of gravity.

 

The perfect knowledge argument is that if you do not know everything with perfect precision, then you do not anything.  The only way to you can meet this definition of knowledge is to be omniscient, which is metaphysically impossible.  Thus they setup a false argument by setting a standard for knowledge that can never be met.

Rand’s response would be that perfect knowledge proponents are using the wrong definition of knowledge.

“Knowledge” is . . . a mental grasp of a fact(s) of reality, reached either by perceptual observation or by a process of reason based on perceptual observation.[4]

A related attack on knowledge is to ignore its context and then show it does not work outside of that context.

Knowledge is contextual . . . By “context” we mean the sum of cognitive elements conditioning the acquisition, validity or application of any item of human knowledge.[5]

In the case of Newton his mechanics are correct within the context in which the knowledge was developed.  There are areas (context) where Newtonian mechanics is not correct.  All this proves is that Newton was not omniscient, not that “he got it all wrong.”

 

Probabilistic knowledge

One of the proposed solutions to Hume and suggested by Hume himself is that knowledge is probabilistic.[6]  Karl Popper is probably the best known advocate of this idea.  This idea as applied to the black swan case above would be that the more swans we see the more certain we are that all swans are white, however we never know for sure.  Thus we never know anything and scientific theories are never true, they have just not been proven incorrect yet.

This idea has become quite popular in the scientific community.  However, probabilistic knowledge ignores the law of identity.  Probability is built on the law of identity.[7]  Probability theory was developed to understand the odds in games of chance.  For instance, what is the probability that a die when rolled will land on a six.  If we rolled a die and the position of the numbers could change without cause {that is the die could violate the law of identity) then probability theory would not work.  In order to determine the probability of the die being six when rolled we determine all the possible outcomes (law of identity) and then we determined how many of these are a six.  Probability also does not defy causation, it assumes that we do not know the initial conditions and the initial conditions are random.  If we know the initial conditions then we can use Newtonian mechanics to determine exactly which number will appear on the die when we roll it.

Now some people will counter that is not true since we don’t know if a fly will land on the die or an asteroid will land on us just as the die is thrown.  This is context dropping of knowledge and this was discussed above.

The probabilistic hypothesis of knowledge shows a lack of understanding of the law of identity.

 

Conclusion: Why Does This Matter?

David Hume is still highly influential today.  For instance, his “is-ought” argument underpins the moral and cultural relativism arguments of today.  His attack on causality shows up in Karl Popper’s ideas that knowledge is probabilistic and we can never know anything.  This leads to today’s modern cynicism.  It also is the basis of the environmentalists so called “precautionary principle.”  Hume’s attack on causation allows Keynesians to maintain that consumption is more important than production, modern economics to maintain that production is more important than invention. or that capital causes inventions ,or Obama’s “you didn’t build that”

Confusing cause and effect is the source of numerous errors that lead to real problems in the real world.  For instance, are increasing levels of CO2 in the atmosphere the cause of increasing temperatures on Earth or is it the result of increasing temperatures.

What is amazing to me is that Hume wrote these ideas after Locke, Bacon, Newton, Galileo, Robert Boyle, etc.  In my opinion, Hume and his non-continental followers have not been given the scrutiny they deserve.

Hume deserves equal billing with Kant for the ignominy of killing the Enlightenment and the resulting human suffering.

 

[1] Thomas Paine

[2] To some extent Hume’s “is-ought” argument also ignores the law of identity.

[3] This is true not withstanding the nonsense of the Copenhagen interpretation of quantum mechanics.

[4] Ayn Rand Lexicon, Introduction to Objectivist Epistemology “Concepts of Consciousness,” Introduction to Objectivist Epistemology, 35

[5] Ayn Rand Lexicon, Leonard Peikoff, The Philosophy of Objectivism lecture series, Lecture 5

[6] This is an easy trap to fall into and one that the author has made.

[7] This is true notwithstanding the nonsense of the Copenhagen interpretation of quantum mechanics.

February 6, 2016 Posted by | philosophy | , , , , | Leave a comment

Adam Mossoff on Property Rights: A Must Read for Capitalists and Patent Attorneys

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,[10] 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.

mossoffIn 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.

December 18, 2015 Posted by | -Philosophy, Patents, philosophy | , , , | Leave a comment

Is Capitalism a game of the Survival of the Fittest?

It is quite common to be in a discussion about economics and proposing a capitalist solution when someone pipes-in “that’s just survival of the fittest.” What they are talking about is “Social Darwinism” and the image they mean to conjure up is that capitalism is like a bunch of gladiators fighting it out to the death until there is just one winner. Unfortunately, this tends to trip many of us because we often say that capitalism is about competition and that competition is what makes America great. In fact some economists (e.g. University of Chicago– see Pure and Perfection Competition: By What Standard?) have gone so far as to say the very definition of capitalism is ‘perfect competition.’ George Reisman has shown that perfect competition is really collectivism in the article Platonic Competition. The idea of unrestrained competition also is used by Libertarians and others to attack the property rights of inventor (patents).

econgrowth.smallSocial Darwinism refers to a group of ideas that relate to sociology, economics, and eugenics that are supposedly extensions of Charles Darwin’s ideas on evolution. Herbert Spencer is considered the father of Social Darwinism and he was the one, not Darwin, who coined the term ‘survival of the fittest.’ Spencer defended capitalism based on Social Darwinism. However, plenty of socialists including the National Socialist Party in Germany also used the ideas of Social Darwinism to support their version of eugenics.

Is Social Darwinism, especially as portrayed by the image of gladiators slugging it out, good biology or good economics? If evolution were a process in which the ‘goal’ was to destroy other species and then destroy all competitors within the species, life would have burned out long ago. The ‘goal’ of life and evolution is to convert as much energy into life as possible. By ‘goal’ here I mean the logical end result of the natural process of evolution, not that there is a conscious objective of individuals. Evolution is an optimizing system that selects those life forms that are best at converting energy in life in a variety of different environments. This results in a variety of different life forms. Even within a relatively uniform environment, the way to optimize the total amount of life is to have a variety of organisms that can exploit different sources of energy.

In economics the goal is not to have 500 firms creating model Ts, it is to have 500 firms all creating unique high value items (If everyone produced the same thing, what would be the point of trade?).  Human life, and then wealth, as we escape the Malthusian Trap, increases as we create more inventions that allow us to live in different climates for instance, or exploit new resources, just as different species maximize the amount of life. I do not want to make the same thing as my neighbor. I want him to make something that is of incredibly high value to me and I want to make something that is of incredibly high value to him.  We want competition to flourish because we don’t want to allow someone to become lazy (rent seeking), and freeride on the efforts of others. But competition is not what makes us wealthy.  We also need property rights to ensure that people do not free ride on the work of inventors.

I think the 100 meter dash is a good example of what competition (pure competition or competition for the same product) can accomplish. In 1891 the world record was 10.8 seconds. Today it is 9.57 or about a 13% gain. This kind of gain would not support the quadrupling of human population over the same period of time.

The goal of an economy is to increase the total wealth. A person’s wealth is not increased by destroying other people’s productive capacity. In fact, the wealthiest countries are those in which people are engaged in a wide variety of high-value activities and the poorest countries are those in which people are competing in a small number of industries. The way these high-value positions are created is by inventions that create whole new industries and can only exist in a legal environment in which inventor’s rights to their creations are protected by property rights (patents).

Interestingly, AvidGamerRants has shown that a number of games that appear to be setup with a ‘winner take all’ goal can often be ‘won’ most successfully, by rational cooperation rather than by eliminating other players  Game theory seems to support this  as this article, New take on game theory offers clues on why we cooperate, explains. For instance, in both Minecraft and Monopoly your chances of being successful increase, if instead of trying to kill off your fellow players, you collaborate with other players.

Social Darwinism as encapsulated in the statement ‘survival of the fittest’ is bad biology and bad economics; it’s even a poor gaming strategy in competitive games.

December 8, 2015 Posted by | -Economics, Patents, philosophy | , , , | Leave a comment

Carl Menger: Principles of Economics

This is a review of Carl Menger’s book Principles of Economics published in 1871[1].  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 Mengerquestion 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.[2]  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.”[3]  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.

 

Industrial Revolution

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.

 

Subjective Value

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.

 

Conclusion

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.

 

[1] https://mises.org/sites/default/files/Principles%20of%20Economics_5.pdf,

[2] https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.

[3] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

November 16, 2015 Posted by | -Economics, -Philosophy, Innovation, Patents, philosophy | , , | 1 Comment

Capital in Disequilibrium: The Austrians’ Answer to New Growth Theory

This book, Capital in Disequilibrium: The Role of Capital in a Changing World by Peter Lewen, is supposed to be Austrian Economics’ answer to “new growth theory”, which recognizes that new human knowledge is the most important component to economic growth.  As opposed to the “old” ideas on growth which claimed economic growth was the result of increases in land, labor, or capital.  Old school growth theories focus primarily on increases in capital.  Perhaps the two biggest figures in new growth theory are Robert Solow and Paul Romer.  Robert Solow won the Nobel Prize in economics for his econometric study showing that technological change was the key driver in the US economy.  Sadly he then said technological change was not part of the study of economics, it was like background radiation and beyond our control.  Paul Romer takes over from Solow by making technological change part of the study and policy recommendation of economics.

humeThis book suffers from many of the same problems other economists who have explored new growth theory have had.  They attempt to graft the findings of new growth theory onto their preconceived ideas about economics.  For example, Robert Solow is a Keynesian so he has attempted to just tweak Keynesian ideas to fit this new information, instead of understanding that this new information required a whole new look at and approach to economics.  Paul Romer is what I would call a “mathematical Keynesian” and is also trying to fit a square peg into a round hole.

This book attempts to take the finding s of new growth theory and meld them into Austrian Business Cycle Theory (ABCT).[1]  ABCT claims that economic growth is the result of increases in capital/savings.  There is no evidence that increases in savings or capital in anyway result in economic growth and plenty of evidence to the contrary.[2]  Pasting some of the ideas of new growth theory onto ABCT neither solves the problems with ABCT nor adds anything to new growth theory.

The author’s ideas on scientific and technical knowledge come from Karl Popper, who has argued that knowledge is impossible.  This is not surprising as it is consistent with Hayek’s ideas of cultural evolution, which argues that reason is limited and it is conceit to suggest that anyone can use reason to determine a correct societal structure.  Both Hayek and the author are fans of David Hume (See Lewin’s youtube “Peter Lewin on Austrian Capital Theory – Part 1”).  David Hume you will remember said causality was an illusion and brought us the “is ought” problem in ethics.  In other words, Hume attacked the very basis of reason, logic, and ethics.  Hume is part of the Scottish Enlightenment, which elevated emotions above reason.  The Scottish Enlightenment underpins all of Austrian Economics.  The other philosophical tradition behind the Austrians is philosopher Franz Brentano who raised the psychology of the person to a primary.

It is not surprising then that the author concludes “The superior performance of capitalist economies cannot be logically ‘proved.’”  Under the author’s ‘implications for policy’ section we get this,

“It involves not only, or primarily, the addition of existing capital equipment but rather the introduction of progressively more technically advance equipment, the production of which is made possible by an institutional environment in which the discovery of such technical advances is encouraged.”

Interestingly enough the author never explains what encourages technological advances and he never even mentions property rights for inventions, i.e., patents.  Even Solow and Romer realize that they cannot ignore patents, however contrived their arguments are for dismissing them.

One of the reasons the author ignores patents is that he emphasizes what he calls “tacit knowledge.”  Tacit knowledge is something we know but cannot prove or of which we are not conscious.  This is perfectly consistent with the Austrian ideas that reason is limited or ineffectual.  As a result, he talks a lot about innovation and never mentions inventors.  He talks about organizations, but never individuals.  He talks a lot about production and ignores invention.  Austrians like to scream they are capitalist or free market, but they are certainly not pro-individualistic.  This is not surprising as this would require a commitment to the power of the individual mind to understand the world.  The author further reveals his collectivist ideas when emphasizes that the knowledge that is important to the economy is “social knowledge.”  The Austrians are collectivists.  They believe central planning interrupts the functioning of the process of gaining “social knowledge.”

This book does not contribute anything to new growth theory.  The only reason to read this book is to better understand the underlying principles of Austrian Economics, which are not pro-reason, pro-individual, or pro-capitalism (The economic system that occurs when the government protects individual rights.)

[1] A Graphical Introduction to the Austrian Business Cycle Theory, Gaurav Mehra, https://mises.ca/posts/articles/a-graphical-introduction-to-the-austrian-business-cycle-theory/, accessed 9/8/15

[2] [This] technique has been applied to virtually every economy in the world and a common finding is that observed levels of economic growth cannot be explained simply by changes in the stock of capital in the economy or population and labor force growth rates. Hence, technological progress plays a key role in the economic growth of nations, or the lack of it.  http://en.wikipedia.org/wiki/Growth_accounting.

 

September 9, 2015 Posted by | -Economics, Innovation, philosophy | , , , , , , , | 3 Comments