This book is about the science of economics that occurs by asking the question:
What is the Source of Real per Capita Increases in Wealth?
and following the scientific evidence to its logical conclusion. The book is divided into three parts. The first part explains the economic science that results from answering the question above. The second part is a copy of my book the Source of Economic Growth, which answers the questions of what causes real per capita increases in wealth and what caused the Industrial Revolution. The third part is a series of essays on various topics in economics.
This book challenges many of the assumptions of free market economists that argue that economics is a social science. It is first school of economics that is consistent with Objectivism and the founding principles of the United States of America
There has been a lot of interest in the philosophical foundations of Carl Menger. Many Objectivist writers have emphasized Menger’s Aristotelian training, while other have suggested that Menger’s ideas align with Kant and Popper. Most scholars agree that Franz Brentano, who was an Austrian Philosopher, had a big influence on Menger.
Carl Menger was an Aristotelian although not a pure one. He read Aristotle and studied the works of Franz Brentano (1838-1917), a contemporary of Menger at the University of Vienna, who taught Aristotelian philosophy there. Brentano has been considered to be the leading Austrian philosopher of the late nineteenth century.
In order to obtain a better understanding of Menger’s philosophy, it is important to understand Franz Brentano’s philosophical ideas. Brentano’s work focused mainly on the philosophy of psychology. Sigmund Freud was his student and highly influenced by Brentano.
Brentano argued that philosophy should be scientifically rigorous, as rigorous as the natural sciences. However, Marx and many others have said they were doing science.
He emphasized that all our knowledge should be based on direct experience. He did not hold, however, that this experience needs to be made from a third-person point of view, and thus opposes what has become a standard of empirical science nowadays. Brentano rather argued a form of introspectionism: doing psychology from an empirical standpoint means for him to describe what one directly experiences in inner perception, from a first-person point of view.
This passage starts strong with knowledge based on direct experience, but then shifts making the observer part of the experiment and then it redefines empirical to mean “inner perception”. This inner perception is the means to absolute truths according to Brentano.
Brentano argues, “that they (mental phenomena) are only perceived in inner consciousness, while in the case of physical phenomena only external perception is possible” (Psychology, 91). According to Brentano, the former of these two forms of perception provides an unmistakable evidence for what is true.
Brentano says that it (inner perception) is the only kind of perception in a strict sense.
According to Webster’s Dictionary, science is “knowledge about or study of the natural world based on facts learned through experiments and observation.” By observation, Webster’s does not mean inner perception. While Einstein was famous for his “thought experiments”, they were a way of conceptualizing a problem in physics. They were not actual experiments nor did they substitute for actual experiments. Brentano is not doing or proposing to do science, despite his statement.
Brentano is widely regarded as Aristotelian and studied Aristotle extensively. He also was fascinated with the Scholastics and Descartes, but disliked Kant and the German idealists. Brentano and Aristotle appear to agree on Universals, which Peikoff explained as:
Universals, he (Aristotle) holds, are merely aspects of existing entities, isolated in thought by a process of selective attention; they have no existence apart from particulars. Reality is comprised, not of Platonic abstractions, but of concrete, individual entities, each with a definite nature, each obeying the laws inherent in its nature. Aristotle’s universe is the universe of science. The physical world, in his view, is not a shadowy projection controlled by a divine dimension, but an autonomous, self-sufficient realm. It is an orderly, intelligible, natural realm, open to the mind of man.
Brentano’s rejection of Platonic abstractions may have accounted for his distaste for Kant.
Despite the appearance of agreement with Aristotle on metaphysics, Brentano’s position in epistemology significantly differs from Aristotle. Brentano rejects that our senses are how we initially obtain knowledge about the world.
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. However, we can be absolutely sure of our internal perception. When I hear a tone, I cannot be completely sure that there is a tone in the real world, but I am absolutely certain that I do hear. This awareness, of the fact that I hear, is called internal perception.
External perception, sensory perception, can only yield hypotheses about the perceived world, but not truth. Hence he and many of his pupils (in particular Carl Stumpf and Edmund Husserl) thought that the natural sciences could only yield hypotheses and never universal, absolute truths as in pure logic or mathematics.
Franz Brentano maintained that our senses were invalid and could not tell us anything about the world. 
This is the exact opposite of Aristotle.
[H]e (Aristotle) thinks that we can and do have knowledge, so that somehow we begin in sense perception and build up to an understanding of the necessary and invariant features of the world. This is the knowledge featured in genuine science (epistêmê).
Brentano and Aristotle are completely opposite on one of the most fundamental points of epistemology. Because this issue is foundational, it will affect everything else the two men have to say on science and philosophy. I think it is a mistake to argue that Brentano was Aristotelian.
With this background this paper will examine Menger’s epistemological positions. Menger lays out his epistemology in a book entitled Investigations into the Method of Social Sciences. Lawrence H. White in the introduction to the book, explains.
Fortunately, Menger draws and even emphasizes a suitable distinction between the “realist-empirical orientation of theoretical research” and the “exact” orientation (p. 59). The search for so-called, ”exact laws” alone is more appropriately considered the task of purely theoretical research in economics. We can make sense of “exact laws” as theoretical propositions which (necessarily) take an “if-then” form: if conditions A and B hold, then condition C must also obtain. Menger rightly insists (pp. 70, 215) that realist-empirical generalizations (e.g., A and B are usually accompanied by C) can by their nature never attain the strictness that necessarily characterizes logical implications. The two sorts of “laws” are on different epistemological planes. So without too much dissent from Menger’s thought we may divide economic theory from economic history where he divided strict theory from what he considered an empirical sort of theory. What is empirical is really historical, and this accounts for its different status from what is deductive.
Lawrence H. White goes on to explain:
But this is not because, like some economists, he (Menger) sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science. 
Menger is arguing that science involves a theoretical side that is impervious to empirical data. This sounds a lot like Brentano’s idea of “inner perception”, which “provides an unmistakable evidence for what is true.” Menger says there is a second side of economics (science) which is empirical and never provides “exact” true theories in economics or science generally. This is very similar to the explanation of Brentano’s ideas on empirical evidence: “External perception, sensory perception, can only yield hypotheses about the perceived world, but not truth.”
Brentano’s and Menger’s ideas match up fairly well. Neither of their positions fit Aristotle’s epistemological ideas. Both of them have misappropriated the word science. In science reality is always the final judge. There is nothing that man knows that did not start with our perceptions and nothing in science that is “exactly true”, i.e., independent of empirical observation.
While Bentano and Menger appear to be opposed to Kant, their epistemological positions are a lot closer to Kant than Aristotle. Menger’s theoretical-empirical split fits Kant’s noumenal and phenomenal realm when translated to epistemology, which results in the analytic-synthetic distinction. “Analytic propositions are true by virtue of their meaning, while synthetic propositions are true by how their meaning relates to the world.”
Menger and Brentano’s empirical side is a precursor to Karl Popper’s mistaken ideas on science. Popper appeared to accept David Hume’s skepticism of induction and his response is the same as Menger’s and Brentano’s, which is that empirical evidence never gives us the truth, just closer approximations. This is not the philosophy of science and is based in-part on an incorrect understanding of what knowledge is. Knowledge does not mean being omniscient or having “perfect knowledge”. It is impossible to gain knowledge by just thinking about things (Without reference to the reality).
Menger’s ideas are inconsistent with Objectivism. They undermine science and economics.
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
 http://plato.stanford.edu/entries/brentano/#method, Stanford Encyclopedia of Philosophy, Franz Brentano (First published Wed Dec 4, 2002; substantive revision Tue Aug 26, 2014)
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
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, Introduction, 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, Introduction, p. xiii, Lawrence H. White.
 Wikipedia, Analytic–Synthetic Distinction, Accessed October 21, 2016, https://en.wikipedia.org/wiki/Analytic%E2%80%93synthetic_distinction.
Austrian Economics is always claiming a strong connection to the Philosophy of Aristotle. The Austrians main connection to Aristotle is the idea of apriorism. In philosophy apriorism is defined as the philosophical doctrine that there may be genuine knowledge independent of experience. This apriorism shows up particularly in Menger and Mises. In Mises case it is clearly related to his ideas on praxeology. In Menger’s case this comes from his epistemology in which he states there is an exact theoretical side of science and an inexact empirical side of science. The question is whether the Austrians’ claim to following Aristotle’s ideas or being neo-Aristotelian has any validity.
One of the most defining points of Aristotle’s philosophy was his disagreement with Plato’s “Theory of Forms.” Plato argued that we cannot trust our senses and the world they perceive is at best a vague, shadowy version of the real world. For more see Plato’s Allegory of the Cave. According to Plato if you see a red ball there is a perfect version of red and a perfect version of a ball in the “real world” and we are seeing some sort of distorted versions of these. Plato’s real world is often represented as being up in the sky, sort of a heaven. Since we cannot trust our senses, Plato’s answer is that we must just think about what has to be true and that will lead us to the truth. This is known as rationalism.
Aristotle rejected Plato’s ideas and said we could trust our senses. In order to verify (and integrate) that our conclusions from our senses are valid Aristotle created rules of thought or logic. It is important to remember that to Aristotle these conclusions were always based on (tested against) the real world evidence. In other words, logic was useful in reasoning about the world, but the ultimate proof was reality. This makes him diametrically opposed to Plato’s rationalism.
There is a famous painting entitled The School of Athens by Raphael in which Plato is pointing to the sky and Aristotle has his hand out pointing to the world before us that illustrates the differences between Aristotle and Plato. Aristotle’s epistemology is based in this world, where Plato thinks that the real world is somewhere else.
How did Austrians ever get the idea that apriorism is consistent with Aristotle? A search of Aristotle on the Internet Encyclopedia of Philosophy of Philosophy and the Stanford Encyclopedia of Philosophy does not show any mentions of apriorism or apriori. An informal search of academic papers and books finds only a couple of mentions of Aristotle and apriorism, except by Austrians (Austrian/Objectivists). Both argue that apriorism is inconsistent with Aristotle’s philosophy. One book says that Aristotle the empiricist exposes the vanity of armchair natural scientists and it is clear that Aristotle lies on the side of empiricism not apriorism.
This idea that apriorism is consistent with Aristotle appears to come from Aristotle’s concept of axioms. Aristotle had one axiom, the principle of non-contradiction according the Stanford Encyclopedia of Philosophy. The explanation (justification) of this axiom sounds similar to the Austrians apriorism.
“Before embarking on this study of substance, however, Aristotle goes on in Book Γ to argue that first philosophy, the most general of the sciences, must also address the most fundamental principles—the common axioms—that are used in all reasoning. Thus, first philosophy must also concern itself with the principle of non-contradiction (PNC): the principle that “the same attribute cannot at the same time belong and not belong to the same subject and in the same respect” (1005b19). This, Aristotle says, is the most certain of all principles, and it is not just a hypothesis. It cannot, however, be proved, since it is employed, implicitly, in all proofs, no matter what the subject matter. It is a first principle, and hence is not derived from anything more basic.
What, then, can the science of first philosophy say about the PNC? It cannot offer a proof of the PNC, since the PNC is presupposed by any proof one might offer—any purported proof of the PNC would therefore be circular.”
This axiom was expanded to three axioms, the law of identity, the law of the non-contradiction, and the law of the excluded middle. It seems to me that the other two laws follow from the law of identity.
This sounds similar to how Austrians justify their apriorism, however the Austrians extend the idea to state:
(a) that the fundamental axioms and premises of economics are absolutely true;
(b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true;
(c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and
(d) that the deduced theorems could not be tested even if it were desirable.
While this was written by Murray Rothbard it is the logical conclusion of Menger’s “theoretical science.” These ideas are diametrically opposed to those of Aristotle. Austrian Economics is not Aristotelian, not science and not consistent with Objectivism.
I have pointed to an economic theory that is consistent with Aristotle, science, and Objectivism. Part of my insight came from “New Growth Economics”, whose central point is that wealth is created by the human mind. This should be exciting to Objectivists, because that sounds very much like Ayn Rand. It also points to an objective basis for economics. Every human needs to acquire and consume a minimum number of calories or they die. This provides an objective standard that is very similar to Rand’s standard for her ethics. It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.
Inventions are the result of applying man’s reasoning power to the objective problems of life. The way we become wealthier is by increasing our level of technology. I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.
All species are biologically designed to spend most of their existence on the edge of starvation. The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.
 Walter E. Wehrle, The Myth of Aristotle’s Development and the Betrayal of Metaphysics
 Aristotle’s Metaphysics http://plato.stanford.edu/entries/aristotle-metaphysics/#FundPrinAxio
 Murray N. Rothbard,” In Defense of “Extreme Apriorism”, https://bastiat.mises.org/sites/default/files/Defense%20of%20Extreme%20Apriorism,%20In_6.pdf, accessed November 25, 2016.
It is surprising how much your position on patents reveals about your philosophical premises. We need to first understand five fundamental facts about patents.
- The wealthiest countries in the world have the strongest patent systems.
This fact should be readily apparent to anyone who has looked into this subject. There have been a number of studies on point and the correlation is at least as strong as the economic freedom index.
- Almost all new technologies are developed by the countries with the strongest patent systems.
This fact should be readily apparent to anyone who has looked into this subject. This obvious fact has been verified by studies.
- The Industrial Revolution started in the countries (Great Britain and the US) that had the first functioning patent systems.
Again this fact should apparent to anyone who has looked into this subject.
- Ayn Rand called patents (and copyrights) the most fundamental of all property rights.
- Patents are enshrined in the US Constitution, Article 1, Section 8, Clause 8.
Patents and copyrights are the only rights mentioned in the original Constitution. Note the Bill of Rights was not part of the original Constitution.
Here are some straight forward conclusions we can draw from these facts.
- When a person is against patent rights for inventors, they are not an Objectivist, they are a poser.
- When someone argues that patents inhibit economic growth, they have an almost insurmountable burden of proof to overcome.
- When someone argues that patents retard the growth of new technologies, their position is not just wrong, it shows the person is irrational.
- When a person is against patents they are not pro-Constitution (a supporter of the Constitution), they are a poser.
Many libertarians and Austrians want to act like they support the US Constitution, but attack the property rights of inventors (patents). You cannot have it both ways.
Here are some other conclusions that we can draw that are not quite as straight forward.
- People who attack patents have rejected Natural Rights.
Patents are built on Natural Rights (as is the founding of the US). Under Natural Rights theory anyone who creates something has a property right in their creation. Note that the libertarians and Austrians (economics) who argue against patents have all rejected Natural Rights and adopted Utilitarianism as their political ethics. The socialists who argue against patents have adopted Altruism as their political ethics.
- People who attack patents believe reason is limited.
The Libertarians that attack patents are all enthralled with the philosophers of the Scottish Enlightenment, like Hume, Mill, Burke, and Hayek. David Hume was an extreme skeptic that said humans could not even show we existed. Hume argued that cause and effect did not exist. He also argued induction and therefore science were nonsense. He attacked Natural Rights and argued that a rational ethics was impossible. (Hume supporters will argue he was just skeptical of these things, but the ferocity with which he attacks them shows that this was not just an interesting academic exercise on the part of Hume). All of these philosophers undermine reason. Many like Kant say they are for reason, but reason is limited. That is a contradiction, but beyond this post. Of course it is clear that the socialists also have rejected reason.
 The first patent system was Venice in the 1400s and Venice was one of the wealthiest and most technologically advanced cities in the world at the time.
 The Writ of Habeas Corpus is not a Right, it is a procedural guarantee.
 Burke is sometime considered part of the Scottish Enlightenment and sometimes not. In this case he should be included.
 Intellectually Hayek fits the Scottish Enlightenment to a tee even though he is not normally included in this group.
Numerous Objectivists and well-meaning advocates of freedom are surprised when I show them that Austrian Economics is not a pro-reason, pro-freedom, intellectual movement. When I show them what the Austrians are saying, they make all sorts of excuses for the Austrians, including that the Austrians do not mean what they are saying, that these errors do not affect the excellent economic work the Austrians have done, and that these problems are limited to a small minority group of Austrians. It is time that we take a good look at what Austrian Economics says and examine whether we want to lend our good name to this movement. Below I discuss some of the common talking points.
The Austrians have been at the center of the anti-patent movement. They argue that patents hurt the economy and slow down technological progress. The wealthiest countries in the world have the strongest patent systems; almost all new technologies are developed by the countries with the strongest patent systems, the Industrial Revolution started in countries with the first and strongest patent systems and those countries with the strongest patents systems correlate well with their economic freedom index. If a socialist ignored this amount of overwhelming macroeconomic evidence, we would vilify them.
However it is worse than just ignoring the evidence Matt Ridley, author of the Rational Optimist and darling of the Austrians, is an example of how the Austrians are willing to lie to win their points on patents. Ridley makes the claim that technological progress does not require patents and then cites a number of technologies that were never patented. The book (Rational Optimist) states that a number of inventions were never patented, p. 264, such as automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers. Five minutes of competent research shows that all these technologies are subject to numerous patents. The case of Bakelite shows that Ridley is not just incompetent, but a liar. A simple internet search shows that chemist Leo Hendrik Baekeland (1863-1944) invented and first patented the synthetic resin that we know as Bakelite in 1907. I have made this point publicly and I have heard no apologies or retractions from Ridley or the Austrians. The Austrians do not even appear bothered by this blatant lie, they continue to repeat the essence of the lie whenever they get a chance.
If Al Gore did this we would ridicule him. But when it comes to the Austrians, we stand aside and make excuses for them. It is worse than that, because the Austrians are part of a machine to manufacture lies about patents faster than they can be refuted. See Adam Mossoff’s paper on point http://www.ipwatchdog.com/2015/11/19/repetition-of-make-them-true/id=63302/. Note, that this is exactly the technique AGW environmental Nazis use.
Liars should not be trusted at all and it turns out the Matt Ridley has doubled down on his lies. In an article in the Wall Street Journal he states:
“Simultaneous discovery and invention mean that both patents and Nobel Prizes are fundamentally unfair things. And indeed, it is rare for a Nobel Prize not to leave in its wake a train of bitterly disappointed individuals with very good cause to be bitterly disappointed.” http://www.wsj.com/articles/the-myth-of-basic-science-1445613954
What Ridley is saying is that Nobel Prize winners and inventors are frauds. He states that “technological evolution has a momentum of its own.” Ridley is saying that scientists and inventors do not create anything, society does. Ridley is not just a liar- he is EVIL. Where did Ridley get these ideas? They are straight from F.A. Hayek’s “Cultural Evolution.” Ridley is not alone or anomalous among the Austrians. Reason Magazine, the Cato Institute, Foundation fo Economic Education, and the Wall Street Journal have all joined in to propagate the Austrian lies to promote their anti-patent agenda.
Diedre McCloskey is another Austrian Economist that denigrates the work of inventors, engineers and scientists, suggesting that technological progress is on auto-pilot. These attacks are exactly the same anti-achievement, anti-reason attacks you get from the left. They sound like James Taggart from Atlas Shrugged:
’He didn’t invent smelting and chemistry and air compression. He couldn’t have invented HIS metal but for thousands and thousands of other people. HIS Metal! Why does he think it’s his? Why does he think it’s his invention? Everybody uses the work of everybody else. Nobody ever invents anything.’ (Jim Taggart) She (Cheryl) said, puzzled, ‘But the iron ore and all those other things were there all the time. Why didn’t anybody else make that Metal, but Mr. Rearden did?’”
This Austrian position is a repackaging of Hayek’s Cultural Evolution. This vicious attack on human greatness is not a minor flaw or error.
2) The Austrians use reason and evidence to support their positions?
Mises: The Austrians are clear that praxeology and their economic theories are not based on empirical evidence.
“[Praxeology’s] cognition is purely formal and general without reference to the material content and particular features of the actual case. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori.” Mises, Human Action, p. 32
“All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given.” Mises, Human Action, p. 66
“Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.” Murray N. Rothbard https://mises.org/library/praxeology-methodology-austrian-economics.
You can find Austrians (Mises) saying this all over and supporting it. If the Austrians (Mises branch) are using evidence to reach their conclusions, then they have to admit praxeology is wrong. If praxeology is right, then you have to admit that they are not using empirical evidence. There is no middle ground here.
Hayek: These Austrians are clear that reason is impotent.
“According to this theory, rules, norms and practices evolve in a process of natural selection operating at the level of the group. Thus, groups that happen to have more efficient rules and practices tend to grow, multiply, and ultimately displace other groups. The theory, of which Hayek himself was proud, is on all accounts central to his economic, social, and political project.” (Emphasis Added) http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf
“Burke and Hayek, then, shared a common enemy as well as a common understanding: Enlightenment rationalism. Perhaps the most characteristic attribute of Enlightenment thought was its cavalier dismissal of ‘irrational’ tradition as mere superstition and prejudice.” (Emphasis added) http://www.nhinet.org/raeder.htm
According to Hayek, reason was not the driving force behind cultural evolution, but rather co-evolved in the course of this process. (Emphasis Added) http://www.bath.ac.uk/economics/staff/horst-feldmann/feldmann-2005-hayek-theory-of-cultural-evolution.pdf
“Hayek tells us that that rationality (he does not explicitly distinguish between either “”reason”” and “”rationality”” or “”reasonable”” and “”rational””) is “”no more than some degree of coherence and consistency in a person’s actions, some lasting influence of knowledge or insight which, once acquired, will affect his action at a later date and in different circumstances.”” Hayek also maintains that behavior guided by habit, custom, and tradition is rational in the sense that such behavior is not contrary to intelligent action.” https://home.isi.org/hayek-role-reason-human-affairs#sthash.1zV4WFR9.dpuf
“Hayek’s argument is primarily directed against certain epistemological views that he associates with the philosophy of Rene Descartes and the Enlightenment, views he labels “”constructivist rationalism.”” For Hayek, the constructivist mentality is characterized by 1) belief in a socially autonomous human reason capable of designing civilization and culture; 2) a radical rejection of tradition and conventional behavior; 3) a tendency toward animistic or anthropomorphic thinking; and 4) the demand for rational justification of values.” https://home.isi.org/hayek-role-reason-human-affairs#sthash.1zV4WFR9.dpuf
“This tradition is characterized, moreover, by an evolutionary perspective that conceives social institutions and practices—law, morals, money, the market mechanism, habits, language—not as products of conscious construction or enlightened invention but of a suprarational trial-and-error process of cultural evolution.” https://home.isi.org/hayek-role-reason-human-affairs#sthash.1zV4WFR9.dpuf
“However, Hayek seemingly came to doubt there could be any such thing as properly constructed rule of law.” http://plato.stanford.edu/entries/friedrich-hayek/#LawEcoNic
“In his philosophy, Hayek relegates reason to a minor role. He argues for a modest perspective of people’s reasoning capabilities. He contends that reason is passive and that it is a social product.” http://www.rationalargumentator.com/index/blog/2015/08/rand-hayek-comparison/
Hayek’s writings on cultural evolution are long winded and therefore do not make for clear quotes. This is not surprising when people are arguing against reason they are often long winded, such as Kant. When the Supreme Court writes a long opinion you can be sure that they are not using reason and attempting to bury the irrationalism of their argument in lots of words.
It is clear from the quotes above and related papers (most by Hayek supporters) that Hayek thinks that reason cannot be used (is impotent) to understand any social institutions. At best Hayek is saying that reason is useful in the limited sphere of hard sciences. If so this is just a variation on Kant.
If the Austrians (Hayek) are using reason as the Austrian apologists argue, then they have to abandon the whole idea of cultural evolution. If CE is right, then the Austrians are rejecting reason. Hayek was clear that Cultural Evolution (CE) underlies all his ideas in economics. If CE is wrong then Hayek’s whole case for freedom falls as does his ideas on spontaneous order. His ideas on spontaneous order require Natural Rights, which Hayek rejects.
We have to take people’s ideas seriously. The Austrian fans are always making excuses for why Hayek, Mises, Menger, etc. don’t mean what they are saying. When we are reviewing socialist ideas, such as Keynes, we hold Keynes not only responsible for what he said, but the logical conclusions of what he said.
It is a logical contradiction to use words to be against reason and therefore most people are polite or generous and assume that the Austrians do not mean what they are saying. This is fine in casual conversation, but when people are writing about their ideas you have to take them at their word.
Mises and Hayek are both rejecting reason from different points of view. This is not surprising because the intellectual tradition of Austrians is David Hume. Hume is perhaps the worst anti-reason philosopher in the last 300 years. Hume and Adam Smith were great friends. Hayek is a straightforward extension of the Hume- Smith line of irrationalism. Menger and Mises follow a slightly different path of Hume to Franz Brentano, who elevates emotions to the level of epistemological absolutes. Hume and Smith did the same thing.
Apologists for the Austrians always suggest that I am making huge leaps without evidence. If I said that Keynes is the product of the Kant-Marx line no one would suggest that I am making outrageous leaps. Intellectuals are responsible for not only exactly what they say, but also the logical conclusions of what they say. Just because Austrians spout that they were for free markets does not mean that we can hold them to a different standard than the socialists.
3) Are the Austrians Really for Free Markets?
Menger pushed the following ideas: (1) public works constructed by the state such as roads, railways and canals. (2) government established agricultural and vocational training institutions (Menger 1994: 123). (3) government subsidies to certain sectors. (4) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture. (5) government intervention to stop child labour (Menger 1994: 129), according to this article http://socialdemocracy21stcentury.blogspot.mx/2012/08/rescuing-menger-from-austrians.html.
Hayek was willing to make all sorts of compromises with the idea of free markets, because he was committed to Cultural Evolution, not reason and not Natural Rights. For instance, he was for the government providing everyone with a “Basic Income” according to this article http://www.libertarianism.org/columns/why-did-hayek-support-basic-income.
In this quote Hayek argues for mandatory insurance. “Once it becomes the recognized duty of the public to provide for the extreme needs of old age, unemployment, sickness, etc., irrespective of whether the individuals could and ought to have made provision themselves, and particularly once health is assured to such an extent that it is apt to reduce individuals efforts, it seems an obvious corollary to compel them to ensure or otherwise provide against those common hazards of life.” The Constitution of Liberty (1960)
Mises supports fire regulations according to this article http://socialdemocracy21stcentury.blogspot.mx/2010/10/was-mises-socialist-why-mises-refutes.html.
The claim of Austrians that their founders are for a pure free market is absolute nonsense.
4) What Are the Supposed Great Achievements of the Austrians?
I am constantly told that the Austrian Economists made great contributions to economics, whatever their other faults. Other than Menger’s Marginal Utility, Hayek’s flawed ideas on Spontaneous Order, and perhaps Mises’ insight that War does not create prosperity, I am unaware of any other great economic contributions by the Austrians to economics. I have asked numerous Austrians to name the great economic contributions of the Austrians and they are never able to actually name any.
What the Austrians were good at was criticizing socialism and Marxism. The ability to criticize is not the same thing as the ability to put forward good economic theories.
Here are a number of errors that Austrians make in economics. They claim that fractional reserve banking creates money out of thin air. This position is absurd and makes Austrians look like flat Earthers. Here is an article on point https://hallingblog.com/2012/11/13/understanding-the-coming-financial-collapse-central-banking-fraction-reserve-banking-and-legal-tender-laws/. The Austrian Business Cycle Theory does not fit the empirical facts and even some Austrians have admitted so in academic papers. Of course this does not matter because empirical evidence is irrelevant (Mises) or we cannot use reason to analyze our own world (Hayek). The Austrians obsession with the Fed (Central Banks) as the cause of all recessions results in them ignoring other important facts in the economy and creates a mystical obsession with Central Banks. The Austrians position on Property Rights is not only wrong, it undermines capitalism and the law.
5) Ayn Rand on the Austrians.
Rothbard: Rothbard is the father of the anarcho-capitalism movement. Rand described it as “a naive floating abstraction”.
Hayek: Ayn Rand in her marginalia launched a nasty attack on Friedrich von Hayek calling him, among other things, a “God damn fool” and a “vicious bastard.” (Mayhew, ed., Ayn Rand’s Marginalia, pp. 149 and 151.)
Mises: Rand called him the greatest living economist. However, Branden appeared to speak for himself and Ayn Rand says:
“We must take the gravest exception, for example, to the general doctrine of praxeology; to the assertion that all value-judgments are outside the province of reason, that a scientific ethics is impossible; to the disavowal of the concept of inalienable rights; and to many of the psychological view expressed.” (Branden 1963b, 34) The Journal of Ayn Rand Sutidies Vol. 6 No. 2.
According to Branden, Rand’s comments in the margin of Human Action were highly critical of Mises works. Branden, The Passion of Ayn Rand.
What Rand admired about Mises were his criticisms of socialism and Marxism.
Rand’s overall evaluation of the Austrians is damning. Rand was initially attracted to some of the Austrians. This only proves she was human. Thus, it is not surprising that many Objectivists are initially attracted to the Austrians, as was I. .
What is interesting is that most Austrians understand that Objectivism is incompatible with Austrian Economics, but many Objectivists have not figured this out.
Austrian Economics is not just wrong, it is actively working against Freedom, Capitalism, Science, and Reason. The case against Austrian Economics is overwhelming.
- -Austrian Economics rejects and denigrates the intellectual achievements of inventors, engineers, and scientist.
- -Austrian Economics rejects and actively undermines reason and science. (The modern Austrians are happy to lie to promote their positions.)
- -Austrians are not defenders of the United States Constitution.
- -Austrians undermine property rights, the law, and Natural Rights.
- -Austrian Economics actively undermines the idea of a rational Ethics.
- -The great Austrian Economists were not defenders of free markets and capitalism. They were quite willing to allow government interference in the market, if it fit their goals.
- -Austrian Economics pushes a number of economics theories that are laughably wrong.
If we hold the Austrians to the same standards we do for the socialists, we see that they are essentially the same.
I have been criticized for pointing out that Austrian Economics, particularly Menger, Mises, and Hayek, is not consistent with reason, science, or Natural Rights and therefore not consistent with Capitalism. In this article I am going to apply the same standards to Milton Friedman, who is also often cited as a great advocate of freedom and capitalism.
Milton Friedman won the Nobel Prize in economics and is not part of the Austrian School of Economics. He is often classified as a monetarist or part of the Chicago School of Economics, I think the latter is more accurate. Ayn Rand was no fan of Friedman. She criticized his belief that economics must be morally neutral. In this video, Rand states that Friedman is not an advocate for Capitalism and an enemy of Objectivism.
Milton Friedman laid out his ideas on epistemology in the essay “The Methodology of Positive Economics” (1953). Some experts claim that the essay was a big influence on the Chicago School of Economics. In this article he essentially argues for a pragmatic approach to epistemology, which boils down to if a model (theory) is predictive it is correct.
Friedman’s methodology, which appears to justify the eclectic and pragmatic view that economists should use any model that appears to “work” regardless of how absurd or unreasonable its assumptions might appear, has been deployed in service of a rigid theoretical orthodoxy.
Friedman argues that economic models are generally judged by the reasonableness of the underlying assumptions/propositions, however he thinks this is incorrect.
In so far as a theory can be said to have “assumptions” at all, and in so far as their “realism” can be judged independently of the validity of predictions, the relation between the significance of a theory and the “realism” of its “assumptions” is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).
It is easy to show Friedman’s pragmatism is mistaken. Copernican Heliocentrism with its epicycles of the planets was highly predictive, but it was not science. In science/engineering this is known as a heuristic model. Heuristic models are often created by curve fitting the observed data. They predict how a system will work within very narrow circumstance, but do not explain the underlying physics (causes). As a result, heuristic models cannot be extended or built upon, when people attempt to do so they lead to false conclusions.
Friedman’s epistemology boils down to pragmatic “pure empiricism”, which means he accepts the evidence of his senses, but denies logic and concepts. Friedman disconnects assumptions/propositions from the results of the model, which is an attack on logic. An analogy would be that it might make no sense that doing a rain dance causes it to rain, but our empirical evidence says that it is predictive of whether it rains in the next couple of days so it is a good theory. As a result, we are supposed to ignore that there is no causal relationship between the rain and the rain dance.
Friedman’s epistemology is anti-reason. In one case Friedman argued that we need freedom because of this epistemological uncertainty. “I have no right to coerce someone else, because I cannot be sure that I am right and he is wrong.” This is common position of libertarians and Austrians – lack of knowledge requires freedom. This position not only undercuts all of science, it removes reason as the foundation of ethics, political philosophy, and law. It is also unadulterated nonsense.
Friedman is not proposing to do science, he is proposing to collect data that never leads to knowledge. Science is based both on reality and reason/logic. Friedman wants to ignore the reason/logic side of science. While Friedman has different reasons for not proposing to do science, he is otherwise consistent with the Menger, Mises, and Hayek in rejecting science in economics. Ultimately, Friedman’s ideas on science are just a rehash of Karl Popper’s misguided concept of science.
Friedman is consistent with the Austrians in suggesting that economics must be value free – that is devoid of ethics. Friedman argues in his paper The Methodology of Positive Economics, that for a discipline to be a science it must be free of moral judgments. However, Friedman appears to making a finer distinction of where ethics fits in science and particularly in economics.
Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with “what is,” not with “what ought to be.”
First, science requires a profound set of ethics that are unique in history. This ethics requires reporting the data accurately, follow the data to its logical conclusion, and never ascribing non-natural causes to the observations.
Second, imagine taking Friedman’s point of view in the science of medicine. Medical doctors are not there to deal with ought to be, just to observe what is. Are doctors biased in their observations, because they bring ethics into their science?
The question of ethics in economics disappears if the correct fundamental questions of economics iare defined and therefore the definition of economics is properly defined. The most fundamental question of economics is: What is the source of real per capita increase in wealth? This leads to the correct definition of economics which is the study of how man obtains the things he needs to live. This puts the focus on human well-being, just like medicine.
Economists who pretend that they are not injecting ethics into economics are really pushing utilitarianism, often summed up as ‘the greatest good for the greatest number’. This always leads to disaster. In the short term the greatest good for the greatest number always weighs in favor of taking the property of those who create and giving it to those who do not, for instance. In fact, many philosophers who push utilitarianism also push socialism. The counter is usually that stealing people’s property is not good in the long run, but this argument rarely wins over most people.
I searched if Friedman ever mentions Natural Rights or Locke and never found anything. This is not surprising as he explicitly rejects ethics, at least in economics, and implicitly accepts utilitarianism.
Friedman is inconsistent with the founding principles of the United States, inconsistent with Objectivism, and not an advocate of Capitalism, which is the economic system that occurs when a country protects people’s Natural Rights.
Friedman, in my opinion, is highly influence by the philosophers of the Scottish Enlightenment, which would not be surprising as Adam Smith is in this group and also Jeremy Bentham, one of the big proponents of utilitarianism.  The Scottish Enlightenment philosophers were also highly skeptical of the efficacy of reason.
Source of Economic Growth
Friedman did not write much about what causes real per capita increases in wealth. I assume he accepted the standard neo-classical idea that increases in capital were the cause of economic growth. This does not fit the empirical evidence. Friedman’s lack of interest in the question is damning. Although, he did focus his attention on what inhibits economic growth.
Friedman spends almost no time discussing inventions or inventors. Inventions are the only way to increase real per capita incomes and define the upper bound on the standard of living in any given period of time. The fact that Friedman ignores them shows incredibly poor judgment.
The Industrial Revolution was the first time in history that real per capita incomes started to grow consistently. Friedman’s only comments about the most important event in the history of economics was that the idea of robber barons was a myth. This is not what I would expect of a scientist, however Friedman was clear that he was not doing science.
Milton Friedman hardly fares any better than the Austrian Economists. Personally, I think his writing is much better than the Austrians and he is more likeable, which seemed to be part of his success in spreading his ideas.
Friedman’s ideas are inconsistent with reason, science, or Natural Rights and therefore not consistent with Capitalism. He is not proposing to do science and undermines reason with his pragmatism. However, unlike the Austrians, Milton Friedman’s supporters are not actively undermining property rights in his name.
 Something the so-called scientists studying Anthropomorphic Global Warming ignore.
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/
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.
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