Will Thomas and I gave a talk on Austrian Economics at Atlas Summit 2016, where I pointed out that Austrian Business Cycle Theory (ABCT) does not fit the empirical facts. ABCT claims that increasing savings/capital are the cause of economic growth, which is very similar to what classical and neo-classical economics states. I pointed out that in fact it is increasing levels of technology (inventions) that are the cause of economic growth not increases in capital. One of the questioners after the talk stated that inventions (technology) are part of capital.
Many people want to conflate increasing levels of technology with capital, however they are not the same. Capital as used in economics means those durable goods used in production.
In economics, capital goods, real capital, or capital assets are already-produced durable goods or any non-financial asset that is used in production of goods or services.
Adam Smith defines capital as “That part of a man’s stock which he expects to afford him revenue”. https://en.wikipedia.org/wiki/Capital_(economics)
The article goes on to explain how to determine if something as capital.
Classical and neoclassical economics regard capital as one of the factors of production (alongside the other factors: land and labour).
This is what makes it a factor of production:
The good is not used up immediately in the process of production unlike raw materials or intermediate goods. (The significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.)
The good can be produced or increased (in contrast to land and non-renewable resources). https://en.wikipedia.org/wiki/Capital_(economics)
Technological change is not a good, it is the process of inventing. It is true that when these new inventions are reproduced (manufacturing) then when purchased they become capital, but that is several steps removed. If we treat technological change as just part of capital then going out and purchasing capital goods is the same thing as inventing. However, the results are not the same. Purchasing (acquiring) capital without invention results in no real per capita increases in wealth over the long run. As a simple example assume that every farmer in the U.S. has the latest most up to date tractor their land can use. Adding more tractors (capital) does not increase the output of these farms. The same is true for capital in general.
A number of economists have pointed out that increasing levels of capital are not responsible for the tremendous economic growth experienced in the West since the Industrial Revolution. Among these economists are Robert Solow, Paul Romer, and Deirdre McCloskey. They all point to increasing levels of technology as the cause for our increased wealth. Our standard of living is defined by our level of technology.
On the other hand inventing at a faster rate does produce real per capita increases in wealth. Inventions can produce returns that are staggering. For instance, Eli Whitney’s invention of the cotton gin allowed a forty times increase in the output of cotton in the U.S. in one decade.
In science it is important to isolate the factors effecting an experiment. For instance, if you conflate wind resistance and gravity then you end up with the nonsense that heavier objects fall faster than lighter objects. This means you will never be able to create a parachute or an airplane.
In economics if we conflate inventions with capital, we make the mistake that third world countries will become wealthy if we provide them capital. In fact, this is exactly what Development Economics has said for years despite overwhelming evidence to the contrary. Conflating these two concepts will cause us to ignore the role of property rights for invention as being the biggest long term driver of wealth and instead focus on capital gains taxes or increasing the savings rate or increasing comsumption.
Inventions are the cause of real per capita increases in wealth, not capital. Conflating the two is illogical and results in nonsensical economic policies.
Will Thomas and I gave a talk at Atlas Summit 2016 on Austrian Economics. The talk focused on epistemological and ethical positions of Carl Menger, Ludwig Von Mises, and F.A. Hayek. A number of people asked for the slides and related materials. Below I provide links to nine posts on blog that investigate some of the issues discussed in the talk in more detail. Below that are the slides from the talk.
Is Carl Menger a Socialist? https://hallingblog.com/2016/06/25/is-carl-menger-a-socialist/
Why Austrian Economics Subjectivity is Wrong and Condemns Economics to Being a Pseudo-Science https://hallingblog.com/2016/06/13/why-austrian-economics-subjectivity-is-wrong-and-condemns-economics-to-being-a-pseudo-science/
Can “Dignity” Explain the Industrial Revolution: A Review of Deirdre McCloskey’s Economic Ideas https://hallingblog.com/2016/05/22/can-dignity-explain-the-industrial-revolution-a-review-of-deirdre-mccloskeys-economic-ideas/
Carl Menger: Austrian Economics vs. Objectivism https://hallingblog.com/2016/03/21/carl-menger-austrian-economics-vs-objectivism/
Carl Menger: Principles of Economics https://hallingblog.com/2015/11/16/carl-menger-principles-of-economics/
Capital in Disequilibrium: The Austrians’ Answer to New Growth Theory https://hallingblog.com/2015/09/09/capital-in-disequilibrium-the-austrians-answer-to-new-growth-theory/
Praxeology: An Intellectual Train Wreck https://hallingblog.com/2015/09/08/praxeology-an-intellectual-train-wreck/
Hayek: Friend or Foe of Reason, Liberty and Capitalism? https://hallingblog.com/2015/03/04/hayek-friend-or-foe-of-reason-liberty-and-capitalism/
The Austrian Business Cycle Debunked https://hallingblog.com/2015/02/15/the-austrian-business-cycle-debunked/
The Irrational Foundations of Austrian Economics https://hallingblog.com/2015/02/12/the-irrational-foundations-of-austrian-economics/
There is a myth by the anti-patent crowd that “overly broad” patents inhibit the development of new technologies. One of the classic examples they like to cite is the Selden Patent (US Pat. No. 549,160), which supposedly inhibited the development of the automobile around the turn of the century. A new paper ‘The “Overly-broad” Selden patent, Henry Ford and Development in the Early US Automobile Industry’ By John Howells and Ron D. Katznelson, shows that in fact the automotive industry prospered and inventiveness accelerated despite the Selden patent.
According to the paper:
First, neither the ALAM-adopted restrictive licensing policy based on the Selden patent, nor the public liability threats to purchasers of unlicensed vehicles (see sections 2.2.3-2.2.4) restricted entry into the automobile industry as shown by Figure 1.
Second, measures of automobile development show it to have been most rapid during the Selden patent term; Raff and Trajtenberg’s analysis of real, quality adjusted prices for the American Automobile Industry show that the fastest rate of price decline for a given automobile quality occurred between 1906 and 1911, within the term of the Selden patent prior to its 1911 adjudication: the rate of quality improvement was greatest in the 1906 – 1911 period and more than half of the quality gain for a given price observed to have occurred by 1980, had been attained in the period 1906 – 1911 (Raff and Trajtenberg 1996, p85, 91).
Third, rather than Ford being slowed down through patent litigation with the ALAM, from the foundation of the Ford Motor Company in 1903, Ford grew sales at an exponential rate faster than that of the total industry during the period of litigation. A serial developer of five major automobile models, which gained tenfold increase in sales every four years, can hardly be considered to have been “stifled.” The Ford Motor Company became the leading manufacturer of automobiles produced in 1906, a position the company retained until 1927; see Figure 2.
The paper provides overwhelming evidence that the Selden patent did not inhibit the automotive industry or the development of new technologies in the automotive industry. This should have been apparent to anyone familiar with the history of the automotive industry. The United States led the world in developing and manufacturing automobiles at the turn of the century and beyond. Selden had a U.S. patent and it was enforced in the U.S., so the facts do not square with the anti-patent narrative.
Another interesting part of the paper is that Ford knew that they would prevail in a lawsuit over the Selden patent. This is the value of well-defined laws and courts who stick to the law.
Selden’s patent was issued by the US Patent Office in 1895 and eventually was assigned to the Association of Licensed Automobile Manufacturers (ALAM) in early 1903. The ALAM publicly asserted that the Selden patent claims should be broadly construed, meaning that the entire automobile industry was within their scope. In October 1903 suit was brought against the Ford Motor Company under the Selden patent and when finally adjudicated on appeal in 1911 the Ford Motor Company was found not to infringe because although the patent was held valid, it was construed narrowly to cover an improvement to the obsolete Brayton engine. This was the embodiment with which Selden had experimented prior to 1879, the year he applied for a patent. Columbia Motor Co. v. CA Duerr and Co. 184 F. 893, 896 (2nd Cir. 1911). The narrow Brayton-based construction saved Selden’s claims, but they were not infringed since all gasoline engines in commercial use were Otto engines by 1911, rendering the patent economically worthless
Another anti-patent lie bites the dust. When a group or a movement consistently lies and promotes lies to support their position over and over again, as the anti-patent crowd has done, they should not be taken seriously by rational people.
There is a popular myth that great ideas are a dime a dozen (see here, here, and here). I don’t know what a great idea is. Is a Dick Tracey watch or a nuclear powered rocket a great idea? No, not if you don’t know how to implement them, then it is just a fantasy and unless you have plot with it, it is not even a good fantasy story. However, I do know what a great invention is and they are not a billion dollars a dozen. A great invention takes incalculable intellectual skill, years of training, years of hard work, and significant resources.
Pendulum of Justice, the first Hank Rangar Thriller, discusses this exact point.
“Hey Mike—we’ve heard your ‘good ideas are a dime a dozen’ speech before. The electric light bulb, the cotton gin, the polio vaccine, the microcontroller, hell, the CAT scan, were all a dime a dozen”
It is my opinion that this sort of nonsense is usually spread by people in finance, who are looking to improve their negotiation position or are just too intellectually challenged to really know when an invention is great. It also inflates their self-importance.
The reality is that most people do not create much more than they consume in their lifetimes and this includes many people in finance, even if they personally get rich. It is only by raising our level of technology that we increase our per capita wealth and only inventors increase our level of technology. Great inventors create incalculable wealth and even if they become wealthy, what they receive in payment is a pittance to what they provided.
I think this nonsense of “great ideas are a dime a dozen” is a spin out from the Austrian Economist Joseph Schumpeter who made a nonsensical distinction between innovation and invention, while denigrating inventions and inventors.
According to Wikipedia:
Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice
There is nothing inherently wrong with the distinction above, but the way it is applied blurs together a number of different skills. Blurring skills together shows a misunderstanding of the process of innovating. Broadly speaking, innovation can be broken into two distinct sets of skills: creation and dissemination. By creation I mean creating something new, not production – creating something old.
A subset of creation is invention. An invention is a creation with an objective repeatable result. A creation that is not an invention has a subjective result, such as the effect of a painting on a viewer, or the effect of a book on a reader. Many activities combine both a subjective creation and an invention, such as architecture. However, we can separate out the invention from the other creative elements and this helps our understanding of the process.
Dissemination may include a number of processes, such as education (marketing, sales), manufacturing, finance, and management. This is not to say that marketing cannot be creative, it clearly often is very creative. However, the creative part of marketing can be separated out from the dissemination or execution part of marketing. The same is true of manufacturing, which can definitely include inventing. But an invention related to manufacturing is part of the creation step not part of the dissemination step.
Finance can also have inventions. For instance, the invention of a fractional reserve bank is clearly an invention. It has the objective result of securitizing assets and turning them into loans and currency. A fractional reserve bank will securitize land and turn it into a loan and currency. Despite this, it is important to understand that the first person to develop the fractional reserve bank is inventing and the person operating the fractional reserve bank is disseminating.
All real per capita economic progress is the result of inventing. This is not to say that it is unnecessary to disseminate inventions, but if there were no new inventions there would not be any economic progress. We would be stuck in static world once all the inventions had been completely disseminated. Of course, if we stop all dissemination activities we will quickly starve to death.
It is my opinion that business and economic professors have focused on “innovation” instead of “invention” because they have no idea how to invent or how the process of inventing works. They concentrate on what they know, i.e. business and economic practices. As a result, the focus is on dissemination, under-appreciating the importance of inventing. In addition, it results in misleading business theories, such as:
– Management teams are more important than the quality of the invention.
– Execution is everything; patents and other IP do not matter.
– Get Big Fast.
The truth-test of these theories is directly related to the strength of the patent laws at the time the company is created. When patent laws are weak, these theories are more true and when patent laws are strong, these theories are less true. Unfortunately, when patent laws are weak these theories do not overcome the disincentive to invest in risky new technologies. Management teams do not build revolutionary or disruptive technologies, they just disseminate these technologies. These sorts of teams are like large companies and generally can produce a return with less risk by NOT developing high-risk technologies. They tend to focus on incremental technologies or on stealing someone else’s technology. While this may be good business advice in a period of weak patents, it is bad for our country’s competitiveness and our standard of living.
Technological progress (i.e., inventing), in the long run, is the only competitive business advantage. The best management team in the world selling buggy whips at the turn of the century could not overcome the technological advance of the automobile and stay a buggy whip company. The best management team in the world selling vacuum tubes in the 1940s, could not overcome the advance of transistors and semiconductors and stay a vacuum tube company. This country is littered with companies that had great management teams that were overwhelmed by changes in technology. For instance, Digital Computers had a great management team, but they could not overcome the advance of the personal computer. Digital Computers, Inc. failed to invent fast enough to overcome the onslaught of small inexpensive computers. US steel was not able to overcome the onslaught of mini-mills, aluminum, and plastics. This was not because they did not have a good management team, it was because the management team under- prioritized invention and over-prioritized execution or dissemination skills. Ford & GM have not become walking zombies because they did not have strong management teams, but because they have not invented. As a result, they have antiquated production systems and weak technology in their products. 86% of the companies in the Fortune 500 in 1959 are no longer there. Some of these companies disappeared because of bad management, but most companies disappeared because they did not keep up with changing technology. In other words, they did not invent.
Inventions(i.e., advances in technology) are the ONLY WAY to increase real per capita incomes and the only long term business advantage.
Schumpeter – another Austrian School of Economics Failure.
According to this article Menger in “Carl Menger’s Lectures to Crown Prince Rudolf of Austria (trans. Monika Streissler and David F. Good; Aldershot, 1994)” argues for:
(1) public works constructed by the state such as roads, railways and canals.
(2) government established agricultural and vocational training institutions (Menger 1994: 123).
(3) government subsidies to certain sectors
(4) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture
(5) government intervention to stop child labour (Menger 1994: 129).
Carl Menger is often touted as the savior of Austrian Economics, but assuming all the above is true he is hardly a principled capitalist. In fact he sounds like a standard conservative who is against government intrusion in the economy until he is for it.
How Strong Patents Make Wealthy Nations is an excellent paper that provides overwhelming evidence that patents create economic wealth. The paper has two excellent charts. The first chart shows the strength of a number of countries patent systems versus their wealth.
The second chart compares the per capita GDP of the U.S., Great Britain, and Brazil from 1700 until 1913. The U.S. and UK had patent systems, while Brazil did not and Brazil and the U.S. became independent about the same time. The result is that Brazil’s per capita GDP hardly changes while the U.S. and UK experience an over five-fold increase in per capita incomes from 1800 to 1913.
This paper has important implications on economists Paul Romer’s work. Paul Romer is one of the leading new growth economists and is often mentioned as likely future recipient of the Nobel Prize in economics. Romer and Robert Solow have shown that increasing levels of technology are the only way we increase real per capita wealth. Romer contends that property rights for inventions (mainly patents) are always a bad trade-off. He argues that strong patent systems encourage the creation of new technologies, but they inhibit the dissemination of new technologies. His reason for this position is based in his belief in the theory of “pure and perfect competition.” Alternatively, weak or non-existent patent systems result in good distribution of new technologies but they are poor at creating new technologies. It is clear that this paper provides significant empirical evidence that Romer’s idea that property rights are always a bad trade is incorrect.
I have one minor criticism with this paper. The authors argue that the patent system in the U.S. helped manufacturing. Manufacturing is not what causes increases in our per capita income and inventions sometimes hurt manufacturing. For instance, digital printing and the Internet have completely destroyed the manufacturing side of the publishing industry and 3D manufacturing has potential to do the same thing to manufacturing in other industries. The question is not whether patents help manufacturing, it is whether it makes us wealthier.
How Strong Patents Make Wealthy Nations by Devlin Hartline & Kevin Madigan
I was having a discussion with Objectivist colleague about the Austrian Economic idea of subjective value. In economics the subjective theory of values (STV) was developed in response to the classical economic ‘labor theory of value’. The labor theory of value states that the value of an item is equal to the sum total of the labor that went into making it. Thus the value of your computer is equal to the total amount of labor used to produce it, including all its components.
The Austrians, particularly Carl Menger, explained that this was clearly incorrect. In response he said the value of a thing is determined by each person’s own mind. Most economists today adhere to some sort of subjectivist theory of value.
Ayn Rand, in Capitalism for the Unknown Ideal, discussed the differences between intrinsic, subjective, and objective theories of value. In my opinion it was her way of making it clear that she disagreed with her friend Ludwig Von Mises.
The subjectivist theory holds that the good bears no relation to the facts of reality.
The intrinsic theory holds that the good resides in some sort of reality, independent of man’s consciousness.
The objective theory holds that the good is … an evaluation of the facts of reality … according to a rational standard of value.
(Ayn Rand Lexicon “What Is Capitalism?” Capitalism: The Unknown Ideal, 21)
The Subjective Theory of Value (STV) in economics results in economics being a subjective social ‘science’, instead of an objective, true science. It is important that we define what Austrians’ mean by the STV. They mean that people’s economic choices are not connected to reality. People have subjective values that they attempt to fulfill and we cannot say whether a person’s economic choice is correct or rational.
According to the STV we could not say that if Robinson Crusoe’s choice to trade his canteen of water for a gold doubloon to the only other survivor of a shipwreck, when there is no potable water on the island and no foreseeable chance of rescue before Crusoe dies of dehydration and no foreseeable chance of rain before Crusoe dies of dehydration, is irrational. We cannot even make this decision if we know that Crusoe’s goal is to stay alive and he has no connection to the other survivor.
If we take the STV seriously, then I can be rich if I just subjectively believe that my slum house in a decaying part of Detroit is worth $200 million. Value is all subjective, so as long as I firmly hold to this belief then I will suddenly be wealthy. Pointing out to me that the market value of my house is only $15,000 is founding your opinion “upon an arbitrary judgment of value.”
Unfortunately, the Austrian STV turns economics into a popularity game. As a result the only reason John Galt’s motor has any economic value is that other people value it. This is obvious nonsense. Galt’s motor has economic value even if no one else subjectively values it. The motor produces almost unlimited electrical power for almost zero marginal cost. Thus it has economic value to Galt, even if no one else is smart enough to see its value or take advantage of its value.
You will often hear Austrian economists describe why someone became wealthy in terms of a popularity contest. They rarely discuss the value that the wealthy person created, instead they talk about how the wealthy person made so many people happy. If wealth creation is just the result of an arbitrary popularity contest, then there is no logical reason that we should not redistribute wealth.
The macroeconomic evidence does not support the idea that people make arbitrary economic decisions. The wealthier people are the longer they live on average. If peoples’ decisions were truly subjective (disconnected from reality) then we would expect that there would be no correlation between wealth and longevity at least for those people living above the subsistence level. But in fact, there is a strong correlation. There is also a strong correlation between wealth and a number of factors related to the quality of life. This shows that people are not spending their money arbitrarily (subjective valuation), but spending it on things that enhance their longevity and their life.
Some people suggest that once people are above the subsistence level of living then economic decisions become subjective. The evidence does not support this point of view either. People who are wealthier tend to drive safer cars, have better built houses that can withstand natural disasters better, have better access to high quality health care and so on. Very few people are wealthy enough to afford the highest quality goods and services for the rest of their lives. Clearly, the wealthier people are the more they can afford to indulge some of their whimsies, however if they make enough irrational economic decisions they will not only go bankrupt, they will die – see Venezuela.
Wealthier people are also happier. There are some old studies that attempted to show that additional wealth/income above a subsistence level did not increase people’s happiness (The Easterlin Paradox). However, more recent studies have shown that increasing levels of wealth do correlate with increasing levels of happiness. The original studies were clearly biased and trying to make a political point.
Several of the ideas of Austrian economics are actually inconsistent with the STV For instance, how Austrians explain marginal utility implicitly shows that they understand peoples’ economic decisions (values) are not arbitrary. The most common way Austrians explain marginal utility is to explain that if they have one unit of water per day they will use if for drinking. If they suddenly have two units of water per day they will use the second unit for watering their garden, which they value lower than drinking. If they then find they have three units of water per day, then they will use the third unit for washing.
Why do Austrians always select drinking for water as having the highest priority? Clearly they inherently understand that people have to drink to stay alive (an objective – reality based decision) and that drinking water is more important than washing if the person wants to live.
Another example is the Austrian Business Cycle (ABCT). ABCT argues that we grow wealthier when we invest in (purchase) “higher order goods”, which is just a fancy way of saying increasing our capital. Thus they are arguing that purchasing capital goods has a higher value (economic and moral) than purchasing consumer goods. Some Austrians recognize the contradiction and try to dance around it by saying that economics can tell you what the result of certain policy actions will be, however economics cannot tell you which choice you should make. This is like a doctor telling you that a poison will kill you, but the physician cannot tell you that you should not ingest it.
Economic and moral values are not separate and cannot be isolated. Both are based on the objective nature of man. Austrians by choosing a STV for economics are logically compelled to the conclusion that ethics is subjective. The STV also condemns economics to the category of a social ‘science.’ Only by rejecting the STV and replacing it with an objective theory of value can economics be an objective science.
 If human action always aims at a purpose, which by definition it does, then human action must be rational, that is, consistent with reason or guided by one’s will and intellect. It can never be termed irrational.
In making this point, Mises in Human Action (p. 19) writes “Human action is necessarily always rational. The term ‘rational action’ is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man.”
Seemingly irrational action is rational, that is, has an aim. To appraise it as irrational, the appraiser merely imposes some other external source of value. Mises writes (p. 104): “However one twists things, one will never succeed in formulating the notion of ‘irrational’ action whose ‘irrationality’ is not founded upon an arbitrary judgment of value.”
https://mises.org/library/what-do-austrians-mean-rational, What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.
 Of course it is entirely possible that Von Mises (see footnote 1) believe trying to stay alive is an arbitrary choice.
 http://www.forbes.com/sites/susanadams/2013/05/10/money-does-buy-happiness-says-new-study/#29669cf440b5 (accessed 6/10/16) and http://www.nber.org/papers/w14282.pdf?new_window=1 (Accessed 6/10/16) Betsey Stevenson Justin Wolfers, ECONOMIC GROWTH AND SUBJECTIVE WELL-BEING: REASSESSING THE EASTERLIN PARADOX, NBER WORKING PAPER SERIES.
 Austrians tend to have a very fluid definition what they mean by the STV. They shift the definition based on the discussion they are involved in and use the one they believe will make their argument most effectively.
 Murray Rothbard tried to span this contradiction. A likely result was the non-sense of anarcho-capitalism.
Dr. McCloskey is a Distinguished Professor of Economics, History, English, and Communication at the University of Illinois at Chicago. Her ideas on what caused the Industrial Revolution and economic growth are being widely touted. She has written a number of books (Bourgeois Equality, Bourgeois Dignity, and The Bourgeois Virtues) explaining her position in detail.
McCloskey’s work focuses on the causes of the Industrial Revolution. She does an excellent job of debunking the idea that capital accumulation or exploitation is the cause of the Industrial Revolution. She has a keen grasp of economic history. Unfortunately, the ability to criticize other ideas is not the same thing as putting forth a coherent theory.
This article is based on a talk that McCloskey gave at George Mason, an interview that she gave after this talk, and a review of her book Bourgeois Dignity: Why Economics Can’t Explain the Modern World by Arthur M. Diamond, Jr. a professor of economics from University of Nebraska at Omaha.
One of the most enduring myths of economics is that increases in capital are responsible for our increasing standard of living. McCloskey shows that for almost all of human history the average person lived at a subsistence level (edge of starvation aka “the Malthusian Trap”). She cites two exceptions, the Agricultural Revolution that occurred about 10-11 thousand years ago in the Fertile Crescent and the Industrial Revolution. The increase in real per capita incomes that happened after the beginning of the Agricultural Revolution did not last. According to McCloskey the reason it did not last was because human population expanded to absorb the excess calories that were initially created by the Agricultural Revolution.
The Industrial Revolution was the first time in history that average peoples’ incomes began to grow consistently. In the U.S. we have incomes that are 100 times greater than that of people before the Industrial Revolution and across the World as a whole our incomes are 30 times larger than people living at a subsistence level. McCloskey stresses that capital increases cannot explain this increase in our wealth. At best it could explain a factor of 2 or 3.
She also argues that “property rights” cannot explain the Industrial Revolution.
Though property rights are important, she noted, Genghis Khan enforced property rights rigidly, and as a result people fled to his domain for its political protections; nonetheless, little in the way of an industrial revolution resulted. China likewise had a good property rights system for centuries without innovation, indicating that it is clearly not a sufficient condition by itself.
Property rights, she said, are “commonplace” without progress, though they are important if progress is to be had.
McCloskey also argues that scientific progress is not the cause of this increase in wealth.
[T]he Scientific Revolution did not suffice. Non‐ Europeans like the Chinese outstripped the West in science until quite late. Britain did not lead in science—yet clearly did in technology. Indeed, applied technology depended on science only a little even in 1900.
So what did cause this explosion in wealth associated with the Industrial Revolution according to McCloskey? Innovation. She does not define exactly what she means by innovation. It clearly includes invention, however like Schumpeter she sees inventors as just a small part of the overall puzzle. According to a reviewer, McCloskey thinks invention is on autopilot.
She expresses the view that since roughly 1900 the process of invention has become “routine” which would also be consistent with a view that patents are not necessary. (footnote 9 on p. 454)
She also dismisses the patent system as the cause of this increase in wealth and innovation. However, professor Arthur M. Diamond, Jr. suggests her argument in unconvincing.
I also have one substantive concern. McCloskey rejects a little too quickly and a little too strongly one important possible cause: patents.
The answer for McCloskey is liberty and dignity. In various places she says this is key for inventors, or innovators (Schumpter), or Bourgeois virtues. It is hard to see how this leads to any specific policies or even how you can measure the dignity portion of her answer. While her critique of standard economics is brilliant and she is focused on the right questions, her answers are confused and contradictory.
For instance, in some places she emphasizes invention not social attitudes and in other places she says inventions just occur and inventors are unimportant. She never explains why the Industrial Revolution starts in Great Britain and the U.S. but not in France for instance. She does point out that it is not scientific advancement, because France was at least if not more sceintifically advanced than Great Britain at the beginning of the Industrial Revolution.
McCloskey hints that she is sympathetic to the Austrian School of Economics. For instance, in the talk at George Mason she says “economics is what goes on between our ears.” She emphasizes her agreement with the Austrian’s radical subjectivism when she says “its subjective value all the way down” and “we can’t be sure that people experience red the same as us.”
Despite this she seems to align with Joseph Schumpeter more than she does with Mises or Hayek. Her critique of the capital theory of wealth creation is totally inconsistent with Mises and Hayek. Her interest in economic history is totally inconsistent with Mises and she never once mentions, banks, fractional reserve banks, or central banks. Her emphasis on dignity seems to resonate with Hayek’s idea of ‘cultural evolution’ and her distinction between inventors and innovators is pure Schumpeter.
In the final analysis McCloskey’s critique of the standard explanations for the Industrial Revolution is excellent and the fact that she is asking the right questions in economics is also laudable. However, her answers are contradictory and confused. Instead of following the evidence, she tries to cram her preconceived ideas about economics onto the evidence, including the irrational radical subjectivism of the Austrian School of Economics.
 “Transportation improvements cannot have caused anything close to the factor of 16 in British economic growth. By Harberger’s (and Fogel’s) Law, an industry that is 10% of national product, improving by 50 percent on the 50% of non‐natural routes, results in a mere one‐time increase of product of 2.5% (= .1 x .5 x .5), when the thing to be explained is an increase of 1500%. Nor is transport rescued by “dynamic” effects, which are undermined by (1.) the small size of the static gain to start them off and (2.) the instable economic models necessary to make them nonlinear dynamic.” http://www.economia.unam.mx/cladhe/docs/McCloskey-Keynotespeak.pdf
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