State of Innovation

Patents and Innovation Economics

Is Carl Menger a Socialist?

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:

Menger

(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.

June 25, 2016 Posted by | -Economics | 1 Comment

Patents = Wealth

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.

wealth.v.patents

 

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.

GDP.US.Uk.Brazil

 

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

June 24, 2016 Posted by | -Economics, Innovation | , | Leave a comment

Why Austrian Economics Subjectivity is Wrong and Condemns Economics to Being a Pseudo-Science

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.[1]

econgrowth.smallAccording 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.[2]

wealth.v.longevity

 

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.[3]  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[4]  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.[5]  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.

[1] 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.

[2] Of course it is entirely possible that Von Mises (see footnote 1) believe trying to stay alive is an arbitrary choice.

[3] 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.

[4] 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.

[5] Murray Rothbard tried to span this contradiction.  A likely result was the non-sense of anarcho-capitalism.

June 13, 2016 Posted by | -Economics | , , , | 3 Comments

Can “Dignity” Explain the Industrial Revolution: A Review of Deirdre McCloskey’s Economic Ideas

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.

McCloskeyThis 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.[1]  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.[2]

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.[3]

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)[4]

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.[5]

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.

 

 

 

[1] “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

[2] http://themendenhall.com/2016/04/24/notes-deirdre-mccloskey-mercatus/

 

[3] http://www.economia.unam.mx/cladhe/docs/McCloskey-Keynotespeak.pdf

 

[4] http://www.artdiamond.com/DiamondPDFs/McCloskeyBourgeiosDignityReviewH.pdf

[5] http://www.artdiamond.com/DiamondPDFs/McCloskeyBourgeiosDignityReviewH.pdf

May 22, 2016 Posted by | -Economics, -History, Innovation | , , , | 3 Comments

Adam Mossoff on the VENUE ACT

Law professor Adam Mossoff examines the latest patent deform bill, the Venue Act, in his editorial in the Washington Times entitled Weighing the Patent System.  This ACT makes it more difficult for patent owners to select the venue of their choice.  The legislation would not change the venue rules for any other class of plaintiffs or defendants, which shows the Act is arbitrary and makes patent owners second class citizens.

Aside from these concerns, the more fundamental problem is that the VENUE Act reflects ongoing bias against patent owners in the policy debates.

This bill is being pushed by a coalition of large companies.  These companies do not think they should ever have to pay to use other peoples’ intellectual property.  In other words they want to be legal thieves and they are willing to destroy the U.S. economy for their short term economic advantage.

It is widely recognized that the PTAB is incredibly biased against patents in both its procedural and substantive rules.

These new rules and procedures for challenging patents were pushed by the same coalition that is pushing the Venue Act.

mossoff

March 25, 2016 Posted by | -Law, Patents | , | Leave a comment

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 | , , , | Leave a 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

Economics, Evolution, and Rand’s Meta-Ethics (Intellectual Capitalism: Fundamentals Part 2)

This post is serving a dual purpose of being my outline for my talk at Atlas Summit 2016 and to explain my ideas on Intellectual Capitalism.

 

The most important question in economics is: What is the source of real per capita increases in wealth?  In my talk at Atlas Summit 2015, I examined how many prominent economists throughout history have answered this question.  I finished this survey with the latest research in this area which is known as “New Growth Economics.”  I explained where I thought these economists had gone off track and where they were inconsistent with Ayn Rand’s ideas.  I concluded with an outline of a science of economics that I think is consistent with Objectivism, natural rights, and the founding principles of the United States.

econgrowth.smallIn this talk I am going to investigate this question from a bioeconomics point of view.  Bioeconomics or thermoeconomics (aka biophysical economics) attempts to tie economics to biology and thermodynamics.  In other words its goal is to provide a physical as opposed to a sociological basis for economics.  This area of study has been around since the 1920s and has never been accepted as part of mainstream economics for good reason.  In most cases the research in this area has been an endless way of restating or proving the ideas of Thomas Malthus, a favorite of the environmentalist movement.  The famous physicists Edwin Schrodinger, of the Schrodinger wave equation in quantum mechanics, waded into this area and developed some interesting ideas about life and entropy.  However, it turned out that a number of his ideas were based on an unsound position about entropy or the second law of thermodynamics.

Despite this I think there is some useful information to be gleaned from this work and the goal of providing a physical basis for economics.  Most of the economics profession disagrees, however there was a lady from Russia who thought that ethics was based in reality, specifically the biological reality of man and what is necessary to sustain his life, despite the scorn of most philosophers.  Rand showed that ethics was not arbitrary whim, but derived from the nature of man.

I am going to do something unusual, I am going to state some of the most important claims of this talk upfront.

  1. If man did not invent, then the study of economics would be the same as the study of human evolution.
  2. Inventions are the equivalent of genetic changes from an evolutionary point of view.
  3. Rand’s metaethics and biological evolution are aligned.

I bet that you think that some of these claims are bit far out.  However, I think you will have to admit that if I can show that these are true then they have profound consequences.

Rand’s analysis of ethics starts with the understanding that man is a living organism and he has some things in common with all living organisms and some things that differ.

“An organism’s life depends on two factors: the material or fuel which it needs from the outside, from its physical background, and the action of its own body, the action of using that fuel properly. What standard determines what is proper in this context? The standard is the organism’s life, or: that which is required for the organism’s survival.”

The Virtue of Selfishness, “The Objectivist Ethics.”

 

“If an organism fails in the basic functions required by its nature … [it] dies.”

The Virtue of Selfishness, “The Objectivist Ethics.”

Rand’s ability to build an ethics on biological reality is a profound accomplishment and a big reason why Objectivism became so important to me.  Ethics is about what we should do.  It’s a code of action.  Economics as I define it is about how we accomplish this: that is how we survive.  As Rand points out for most organisms their code of actions is hardwired in their genetics.  “How” to accomplish these goals is also hardwired.

“A plant has no choice of action: the goals it pursues are automatic … determined by its nature.”

The Virtue of Selfishness, “The Objectivist Ethics.”

This is what I mean by metaethics, it is the ethics of non-volitional beings.

Rand’s metaethics is aligned with the fundamentals of biological evolution.  Evolution is built on two or three very simple observations: 1) a selection mechanism, commonly called natural selection, and 2) a change mechanism, which includes sexual reproduction and asexual genetic changes.  Rand’s point that if an organism fails it dies which is another way of stating that there is a selection mechanism.  The idea of a selection mechanism is an inevitable result of the nature of life and its fundamental alternative, death.  The “goal” of life is not competition (selection of the fittest) despite the natural selection component of evolution.  By “goal” I mean the natural direction the process will take.  In the case of life and evolution, the goal is to maximize the amount of energy converted into life.

What determines if an organism or a species survives is its automatic code or DNA that determines both what it should do and how it should do it.[1]  For instance a plant values water and it grows roots into the soil to obtain water.  Both the value and how to achieve the value are “hardwired” by its DNA.  This shows that Rand’s metaethics hints at the idea of a genetic code that is changeable biologically.

The unique nature of man is that he is a rational animal according to Rand and Aristotle.[2]  This means that man does not have an automatic code of values or automatic knowledge, in other words he does not have an instinct.  This provides the advantage of being able to obtain new knowledge and react to different situations in unique ways but it also means that we have to define our own code of values and acquire knowledge.

Biology provides support for Rand and Aristotle.  Human (homo sapiens sapiens) brains use 25% of the bodies total caloric intake, despite the fact that they are only 2% of the total weight.  This is significantly more than other animals.  Mammals’ brains only use 2%-10% of their total caloric intake.[3] Those calories and that brain do not provide any immediate evolutionary advantage, they do not allow humans to run faster, or give them stronger jaws to tear flesh, or a hard shell to protect them from predators. However, the ability to reason allows humans to create all these things and more.

It turns out for all those dieters out there that it does not matter whether we think hard with our brains or just leave them in idle. This means the brain has very high fixed costs, but very low marginal costs. It seems like something that a venture capitalist might invest in.

All organisms have a certain minimum number of calories they need to obtain to stay alive.  This resting rate of burning calories we can consider to be entropy.  Entropy was originally a concept from thermodynamics. One dictionary definition of entropy is that it is a measure of thermal energy per unit temperature that is not available for useful work.  Here we are just using entropy to denote that every living being consumes energy that is not available for the organism to do useful work.  We could just say that life requires energy without probably any loss of meaning. Failure to overcome this entropy results in the death of that organism.  Life requires a profit meaning we have to produce more than the amount of energy than we consume.  A loss is when we spend more energy than we have obtained.  This provides us a biological definition of profit and loss and shows that consistent losses result in biological death, just like consistent financial losses result in the financial death of an organization.

On a species level (except humans), life attempts to overcome entropy by adaptations that make it more successful at acquiring useful energy.  The more successful the species is at acquiring useful energy, the greater its population (and territory) will become, which will increase its chances of having offspring and useful adaptations.  However, it will mean that the individuals in the species will also eventually begin to compete with each other for the resources that provide the energy to overcome the entropy.  Because of population increases and using up the available energy, the species will be back at the point at which the calories it acquires are just on the edge of starvation, otherwise known as the Malthusian trap.  Then, another adaptation of that species or another species will result in excess free energy, an increase in the population of that adapted species, and the process will repeat.

Humans have a low genetic diversity especially for a species with our population and geographic territory.[4]  This would appear to be inconsistent with biological evolution, however it is important to remember that humans adapt the environment to their needs, while other organism adapt to the environment.  The way humans adapt the environment is by creating things to solve problems and these are called inventions.  An invention is a unique combination of elements that solves an objective problem.  Thus the invention of how to make (preserve) fire solves the objective problems of cooking and providing warmth.  Humans do not wait for genetic changes they create inventions that allow them to change the environment.  This means that inventions function like genetic changes for humans.  Our inventions allow us to create a great diversity of beings that can survive in dry hot deserts, wet tropical forests, and frigid arctic conditions.  A human with a club and fur skin is a different species (organism) from a non-biological evolution point of view than a man with a high power rifle and wearing synthetic fibers who raises cows, chickens, and grows wheat.

When humans created a new invention our population increased and many times our territory also increased.  The two biggest historical examples are the Agricultural Revolution and the Industrial Revolution.  After the Agricultural Revolution the population and geographical territory of humans expanded rapidly.  The Agricultural Revolution was really a group of inventions.  Unfortunately, the Agricultural Revolution did not result in humans escaping the Malthusian Trap (living on the edge of starvation).  This was because the surplus energy provided by agriculture was taken up by the increase in human population, which is the same thing that happens to organisms with successful genetic mutations.

How did we escape the Malthusian Trap then?  We had to create inventions at a rate that gave us a profit that exceeded the rate at which human population expanded.  This happened during the Industrial Revolution for the first time in history.  Since the beginning of the Industrial Revolution the percentage of people escaping the Malthusian Trap has continued to increase despite an explosion in our population.  Something happened at the beginning of the Industrial Revolution that had never occurred in human history: we started inventing at an unprecedented rate.  The question is why that occurred?  Before the Industrial Revolution, around 1800, inventions occurred roughly at a rate that was proportional to our population, however this is not what happened in the Industrial Revolution.  The explosion of inventions was fairly isolated to a small population in a relatively small geographic area, specifically the people of Great Britain and the United States.  The reason this occurred is that this was the first time in human history that large groups of people had access to property rights in their inventions (i.e., patents).

An interesting question is whether other organisms could evolve biologically fast enough to escape the Malthusian Trap?  The answer is no, because organisms modify themselves (adapt to the environment) and to escape Malthusian Trap it is necessary to modify the environment.  An organism that was highly effective at modifying itself would just become so successful that it would destroy its inputs (consume all its resources).

Would it be possible, as some environmentalists suggest, that once we escaped the Malthusian Trap we could just stop inventing and stay at our present level of wealth?  No, because of entropy or diminishing returns.  The classical economists argued that diminishing returns were due to the lower quality of inputs overtime.  For instance, once it was found that coal was useful the initial coal could be picked up off the ground and used relatively near where it was found.  Over time people had to start mining the coal and transporting it over longer distances.  As they dug into the ground water would collect in their mines and that had to be removed.  The easy to mine coal was used up first.  This problem is related to the randomness conception of “entropy.”[5]  The coal is not uniformly spread throughout the world.

The result is that our output (wealth) will decline over time if we do not continue to invent.  The second law of thermodynamics says that we cannot create a perpetual motion machine.  When environmentalists offer the solution of sustainability they are attempting to build a perpetual motion machine.

Sustainability is not Sustainable

They are trying to create a system in which the quality of the inputs never decreases.  The environmentalists are correct that we create waste (low value outputs) and we will not be able to forever use the same processes without running into problems.  However the solution is not to stop inventing and freeze our technology, but to continue to create new technologies at a rapid rate.  This has the following implications for economics:

  1. The per capita wealth of a technologically stagnant people will be stagnant or declining.

      2  The only way to increase real per capita incomes sustainably is to increase our level of technology.

  1. The only way to increase our level technology in the long run is to create new inventions.

The first statement has a perfect analogue in evolution, if you replace technology with genetic changes and per capita wealth with increasing population: a species that does not evolve will have a stagnant or declining population.  The best human example of this that I know of is the Dark Ages.  The level of European technology declined.  For instance, the process of creating concrete was lost.  The Romans had a mechanical reaper for corn, which was lost until Cyrus McCormick invented a new (commercially practical) reaper in 1837, and numerous construction techniques, such as those used to build the Pantheon were also lost.  As a result Europe’s population decreased and so did its population density.  Another, example is Easter Island around 1600, where the islanders cut down all the trees and lost the top soil to farm and without the tall trees they were no longer able to fish.  Because the Easter Island Polynesians were technologically stagnant their inputs declined until they could not longer support their population.  It is estimated that their population fell from a peak of 15,000 to 10,000 down around 2,000.  Farmland is another example where the output declines overtime without new technologies.

This leads to the question of whether inventions are subject to diminishing returns.  I discuss this is great detail in my book Source of Economic Growth.  Here I will just cover some of the most basic points.  An invention is a unique combination of elements (things, components) that provide an objective result.  Every invention can be a component (element) of another invention.  As a result, every invention opens up a number of potential inventions.  The number of potential inventions expands combinatorially as new inventions are created.

However, this is just potential inventions.  Studies have shown that narrow areas of technology often appear to be subject to diminishing returns over time.  Meaning the next invention is more expensive or provides less performance gain or both.  For instance, vacuum tubes were limited in their switching speed and how small they could be made.  The cost and performance of military jets is another example.  There was a chart created by an undersecretary of the Army, Norman Augustine, showing that in the not too distant future a single jet fighter would cost the entire GDP of the U.S.  The physical speed of vehicles also seems to have peaked.

Generally, these technology bottlenecks have been solved by cross over technologies.  For instance, vacuum tubes were replaced with discrete transistors, which were replaced by integrated circuits.  Ray Kurzweil, futurist and prolific inventor, has shown that despite the limitations of individual areas of technology, computing power has been growing at a relatively uniform rate since Babbage created the mechanical computer around 1822.

The cost performance limitations of jet fighters have been overcome by electronics and UAVs.  Electronics have allowed old airframes to be upgraded significantly in performance, without the cost of building better or even new airframes.

There is no macro evidence that inventions are subject to diminishing returns.

 

Conclusion

I have approached the question of “What is the source of real per capita increases in wealth?” from both a New Growth and Bioeconomics point of view and they both provide the same answer, inventions.  This is consistent with Rand who points out that man’s mind is the ultimate source of all human wealth.  Inventions are just the application of man’s mind to the problems of life.

Inventions are the evolutionary equivalent of genetic changes.  Manufacturing (reproduction) and distribution are the evolutionary equivalent of reproduction and territory expansion of new biological organisms.

Profit and loss have a real physical meaning.  They are not just an arbitrary way of keeping score in a parlor game as both the left and to some extend the economics profession treats them.  Those people who advocate making profits illegal are advocating death, literally.

Sustainability is not Sustainable because of entropy.  However, if peoples’ natural rights are protected and their rights to their inventions are secured, then technology can grow much faster than entropy.

This research shows that Rand’s criticisms of economics were spot on and the whole of economics needs to be rethought in light of these insights.

 

 

 

 

[1] As Rand explains it “by an automatic knowledge and an automatic code of values.” The Virtue of Selfishness, “The Objectivist Ethics.”

[2] Rational means the ability to reason.  Reason is volitional and people can choose to not exercise their ability to reason.

[3] Suzana Herculano-Houze,  Scaling of Brain Metabolism with a Fixed Energy Budget per Neuron: Implications for Neuronal Activity, Plasticity and Evolution. http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0017514, accessed February 20, 2016.  Also see http://www.human-memory.net/brain.html access 2/20/16.

[4] Greater genetic diversity found among the great apes than among humans, Department of Experimental and Health Sciences, https://www.upf.edu/cexs/news/genetica.html, accessed 2/21/16.

[5] My investigation of this issue has shown me that out present conception of entropy and the second law of thermodynamics has some inconsistencies.  The easiest problem to understand with entropy (2nd law) is that it only applies to an isolated system.  However an isolated system is one that in which there is no gravity.  Such a system does not exists.

February 29, 2016 Posted by | bioeconomics, Intellectual Capitalism | , , | 6 Comments

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