There seems to be a lot of confusion on the issues of whether Rand’s ethics is (or is consistent with) a natural right ethics and the idea of self-ownership. These issues seem to bring up a lot of hidden assumptions and emotions.
Natural Rights: Any logical analysis of whether Objectivist ethics can be classified as a natural rights ethical system has to start with some definitions. The word “rights” here means that this term is only concerned with the ethical interaction between people. Usually, this is even further limited to the ethical basis of governments or political systems. Objectivist ethics covers more than just natural rights.
Natural means that the ethical system is based on nature or reality. Logically, a “rights” system is either natural or unnatural there are no other choices. That is basic logic and is called the law of the excluded middle. (If you comment that there is some third choice, expect a harsh reply explaining that you do not understand basic logic. If you double down on this irrationality, expect an even harsher reply).
The question then boils down to whether Objectivist ethics is based in nature (reality) or whether it has a non-natural basis and the only non-natural basis would have to be a supra-natural or completely arbitrary basis.
It is clear to anyone who has studied Rand’s ethics that it is based in nature, specifically the nature of man. I have written on this extensively, see here. It is clear that Rand’s ethics is in the broad category of Natural Rights.
If you want to argue that Rand’s formulation of rights is different than the Founding Fathers or Locke’s or other natural rights philosophies, that is fine, but that is not the question. Do not comment that Harry Binswanger or Leonard Peikoff or someone else disagrees. Objectivism is about reason, not about ordained leaders. Arguing from authority, without providing a rational argument, is dishonorable to Objectism, Rand, and turns Objectivism into a religion.
Self-Ownership: Once again we start with a definition. Self-ownership is defined as having ethical and legal control over one’s body and mind. If you disagree with this definition then you need to provide you own and you need to explain why you are not using the standard definition, which has been around for hundreds of years.
Based on the definition above it is clear that Rand’s ethical system is consistent with self-ownership. If you argue it is not, then you do know what a definition is or alternatively what Rand said on the subject (expect harsh replies if you argue this irrational position).
Now you might argue that “self-ownership” is not axiomatic (or a fundamental observation) of Rand’s ethics and you would be correct. Technically, it is not an axiom in Locke’s formulation of natural rights either.
FEE or the Foundation for Economic Education has proven to be intellectually bankrupt. For instance, their position against patents and Intellectual property shows that they do not understand property rights or rights generally. They also revere the work of the philosopher David Hume, who argued “cause and effect” does not exist, induction is just correlation, and that a rational ethics is not possible (the so-called is-ought problem). This means that Hume undermined reason, science and ethics. Despite this FEE thinks Hume is a great guy. FEE also promotes Matt Ridley who denigrates human achievement in science and engineering, calling Nobel Laurites in science and inventors frauds, for more click here.
Interestingly Ayn Rand predicted this. The founder of FEE, Leonard Read, sent Rand a prospectus for his plan to create FEE. Rand told Read that his premises were flawed.
The mistake is in the very name of the organization. You call it “The Foundation for Economic Education.” You state that economic education is to be your sole purpose. You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true–therefore your program will not work. You cannot hope to effect a cure by starting with a wrong diagnosis. (The whole letter is reproduced below)
According to FEE reason and capitalism are incompatible, which is why they promote the works of Mises, Hayek, Menger, and Rothbard. You cannot defend capitalism successfully while attacking reason and a rational ethics. These ideas are incompatible with Natural Rights, which is what created the United States and capitalism. FEE is worse than the socialists, because they undermine the very basis of freedom.
Hat tip to Christopher Budden for finding this letter.
To Leonard Read
February 28, 1946
I have read the prospectus of your proposed organization very carefully. No, you have not given our case away. But you have not presented it completely. You have covered only one minor, secondary aspect of it. The partial presentation of a great issue, featuring a secondary aspect, will amount in practice to giving the issue away. Therefore I don’t think that your organization will serve your purpose—if this prospectus represents its program.
The mistake is in the very name of the organization. You call it “The Foundation for Economic Education.” You state that economic education is to be your sole purpose. You imply that the cause of the world’s troubles lies solely in people’s ignorance of economics and that the way to cure the world is to teach it the proper economic knowledge. This is not true–therefore your program will not work. You cannot hope to effect a cure by starting with a wrong diagnosis.
The root of the whole modern disaster is philosophical and moral. People are not embracing collectivism because they have accepted bad economics. They are accepting bad economics because they have embraced collectivism. You cannot reverse cause and effect. And you cannot destroy the cause by lighting the effect. That is as futile as trying to eliminate the symptoms of a disease without attacking its germs.
Marxist (collectivist) economics have been blasted, refuted and discredited quite thoroughly. Capitalist (or individualist) economics have never been refuted. Yet people go right on accepting Marxism. If you look into the matter closely, you will see that most people know in a vague, uneasy way, that Marxist economics are screwy. Yet this does not stop them from advocating the same Marxist economics. Why?
The reason is that economics have the same place in relation to the whole of a society’s life as economic problems have in the life of a single individual. A man does not exist merely in order to earn a living; he earns a living in order to exist. His economic activities are the means to an end; the kind of life he wants to lead, the kind of purpose he wants to achieve with the money he earns determines what work he chooses to do and whether he chooses to work at all. A man completely devoid of purpose (whether it be ambition, career, family or anything) stops functioning in the economic sense. That is when he turns into a bum in the gutter. Economic activity per se has never been anybody’s end or motive power. And don’t think that any kind of law of self-preservation would work here—that a man would want to produce merely in order to eat. He won’t. For self-preservation to assert itself, there must be some reason for the self to wish to be preserved. Whatever a man has accepted, consciously or unconsciously, through routine or through choice as the purpose of his life—that will determine his economic activity.
And the same holds true of society and of men’s convictions about the proper economics of society. That which society accepts as its purpose and ideal (or to be exact, that which men think society should accept as its purpose and ideal) determines the kind of economics men will advocate and attempt to practice; since economics are only the means to an end.
When the social goal chosen is by its very nature impossible and unworkable (such as collectivism), it is useless to point out to people that the means they’ve chosen to achieve it are unworkable. Such means go with such a goal; there are no others. You cannot make men abandon the means until you have persuaded them to abandon the goal.
Now the choice of a personal purpose or of a social ideal is a matter of philosophy and moral theory. That is why, if one wishes to cure a dying world, one has to start with moral and philosophical principles. Nothing less will do.
The moral and social ideal preached by everybody today (and by the conservatives louder than all) is the ideal of collectivism. Men are told that man exists only in order to serve others; that the “common good” is man’s only proper aim in life and his sole justification for existence; that man is his brother’s keeper; that everybody owes everybody a living; that everybody is responsible for everybody’s welfare; and that the poor are the primary concern of society, its holy shrine, the god whom all must serve.
This is the moral premise accepted by most people today, of all classes, all stages of education and all political parties.
How are you going to sell capitalist economics to go with that? How are you going to get them to accept as moral, proper and desirable such conceptions as personal ambition, economic competition, the profit motive and private property?
It can`t be done. Their moral ideal has defined these conceptions as evil and immoral. So modern men are consistent about it. Our “common-gooder conservatives” are not. It’s one or the other.
Here is the dilemma in which the public finds itself when listening to our conservatives: the public is told, in net effect, that collectivism is a noble, desirable ideal, but collectivist economics are impractical.
In order to have a practical economy, that of capitalism, we must resign ourselves to an immoral society, that of individualism. This amounts to saying: you have a choice, you can be moral or you can be practical, but you can`t be both. Given such a choice, men will always choose the moral, because it is preposterous to expect them to choose that which, by the speaker`s own assertion, is evil. Men may be mistaken about what they think is good (and how mistaken they’ve been! And what lying they indulge in to deceive themselves about it!), but they will not accept evil with full, conscious intent and by definition.
Nor will men accept the idea that a moral ideal is impossible, that it cannot be achieved in practice. (And they are right about that, too—it’s a thoroughly *unnatural* proposition.) Therefore it is absolutely useless to tell them that Marxist economics are impractical, so long as you`re also telling them in the same breath that Marxism is noble. They will merely say: “Well, if that’s the ideal, and it cannot be achieved through the economics of capitalism, to hell with the economics of capitalism! If Marxist economics do not work, we’ll find something that works. We must find it. So we’ll go on experimenting. At least Marxism tries in the right direction, while capitalism doesn’t even try to achieve the collectivist ideal. Capitalist economics do not even try to offer us a solution.” How often have you heard this last one?
Now the most futile and ludicrous of all stands to take on this question is the one attempted at present by most of our conservatives. It may be called the “mixed philosophy.” It’s a parallel to the theory of a “mixed economy,” just as untenable, silly and disastrous. It’s the idea that capitalism can be morally justified on a collectivist premise and defended on the grounds of the “common good.” It goes like this: “Dear pinks, our objective, like yours, is the welfare of the poor, more general wealth, and a higher standard of living for everybody—so please let us capitalists function, because the capitalist system will achieve all these objectives for you. It is in fact the only system that can achieve them.”
This last statement is true and has been proved and demonstrated in history, and yet it has not and will not win converts to the capitalist system. Because the above argument is self-contradictory. It is not the purpose of the capitalist system to cater to the welfare of the poor; it is not the purpose of a capitalist enterpriser to spread social benefits; an industrialist does not operate a factory for the purpose of providing jobs for his workers. *A capitalist system could not function on such a premise.*
The economic benefits which the whole society, including the poor, does receive from capitalism come about strictly as secondary consequences, (which is the only way any social result can come about), not as primary goals. The primary goal which makes the system work is the personal, private, individual profit motive. When that motive is declared to be immoral, the whole system becomes immoral, and the motor of the system stops dead.
It’s useless to lie about the capitalist`s real and proper motive. The awful smell of hypocrisy that accompanies such a “mixed philosophy” is so obvious and so strong that it has done more to destroy capitalism than any Marxist theory ever could. It has killed all respect for capitalism. It has, without any further analysis, simply at first glance and first whiff, made capitalism appear thoroughly and totally phony.
The effect is precisely the same as that produced by Willkie, Dewey and all the rest of the “me-too,” “I’ll-get-it-for-you-wholesale” Republicans. Do not underestimate the common sense of the “common man” and do not blame him for ignorance. He could not, perhaps, analyze what was wrong with Willkie or Dewey—but he knew they were phonies. He cannot untangle the philosophical contradiction of defending capitalism through the “common good” —but he knows it’s a phony.
Is there anything more offensive and preposterous than to tell an unemployed worker that the millionaire who is throwing a champagne party on his yacht is doing so only for his, the worker’s benefit, and for the common good of society? Can you really blame the worker if he then goes out and demands that the yacht be confiscated? Is it economic ignorance that makes him do so?
The more propaganda our conservatives spread for capitalist economics while at the same time preaching collectivism morally and philosophically, the more nails they’ll drive into capitalism’s coffin. That is why I do not believe that an economic education alone is of any value. That is also why you will find it difficult to arouse people`s interest in the subject. I believe you are conscious of this difficulty; your prospectus shows anxiety on the scope of “creating a greater desire for economic understanding.” You will not be able to create it.
The great mistake here is in assuming that economics is a science which can be isolated from moral, philosophical and political principles and considered as a subject in itself, without relation to them. *It can’t be done.*
The best example of that is Von Mises’ “Omnipotent Government.” That is precisely what he attempted to do, in a very objective, conscientious, scholarly way. And he failed dismally, even though his economic facts and conclusions were for the most part unimpeachable. He failed to present a convincing case because at the crucial points, where his economics came to touch upon moral issues (as all economics must), he went into thin air, into contradictions, into nonsense. He did prove, all right, collectivist economics don’t work. And he failed to convert a single collectivist.
The organization desperately needed at present is one for EDUCATION IN INDIVIDUALISM, in every aspect of it: philosophical, moral, political, economic—in that order. (That is the actual order in which men’s thinking proceeds on these subjects.) As part of such a program, an education in sound economics would be essential and valuable. Without it, it is a wasted effort.
I suspect that you might have been misled by the fact that you have heard businessmen accept the most preposterous economic fallacies; and you concluded that once the fallacies are exposed, the trouble is cured. Do not be deceived by superficial symptoms; the trouble goes much deeper than that; the trouble is not in the nonsense they accept, *but in what makes them accept it*.
I have written all this at such great length because I consider an organization created by you as potentially of tremendous importance. I consider you the only man in my acquaintance who has the capacity to translate abstract ideas into practical action and to become a great executor of great principles. Therefore I would hate to see you fail in what could be a great undertaking, by attempting it on the wrong premise and in the wrong direction.
I am particularly worried by the fact that you intend to start on such a grand scale (a $3,000,000 budget). If you do not lay the proper foundation first, a three-million-dollar skyscraper will collapse on you more surely and more disastrously than a little bungalow. You will find yourself widely, publicly known and tagged as another ineffectual outfit like the N.A.M. or the Industrial Conference board; your name will become that of “another one of those conservatives,” instead of a new, powerful figure that would attract national attention by representing a real cause, and gain a following through courage, integrity and an unanswerable case, which is what I want you to become. You will find yourself caught in the ruins and forced to go on by the responsibility of so expensive an organization. The end of such a process is—Virgil Jordan.
It would be so much better and so much more practical to start in a smaller way and grow by a natural process rather than a forced one. You do not have at present the men and the educational material to use on a $3,000,000 scale. It would be better to gather your specialists and train them first, rather than release on the nation a flood of unprepared, “mixed philosophy” propagandists.
This letter is my contribution to your cause. If it helps you to analyze the situation, that is the best help I can offer you. If you agree with my analysis, I can continue to help you in this way, in the matter of philosophical direction. I know you have plenty of economists to call on for your work, but no people capable of undertaking the philosophical-moral part of it. Your main problem is to find them. And I will help you long-distance, to the extent that I can.
I shall be most interested in your answer to this.
As to your proposed radio program, I don’t think it’s a good plan. Personally, in spite of my interest in the subject, I’m afraid I would not listen to such a program. I think it would bore me. Five men talking on the same subject from the same general viewpoint would be more monotonous than just one man making a connected speech. The fact that the five men disagree on details would only add confusion, dilute and diffuse the subject and make the whole of the broadcast inconclusive and probably pointless.
If you decide to use Anthem in The Freeman, let me know. I’d like to have you do it, only I’d want to edit the story a little first; it’s old and there are some passages which I think are bad writing and which I’d like to straighten out.
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.
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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