State of Innovation

Patents and Innovation Economics

Intellectual Capitalism – My New Book on Economics

Intellectual Capitalism: An Objective Scientific Approach to Economics

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 book-coverwhat 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

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March 2, 2017 Posted by | News | , , , , | 2 Comments

Economics and Evolution: How We Think and Grow Rich

I was visiting the Neanderthal Museum in Mettmann, Germany, when I was confronted by a display of a homo sapien sapiens, or a modern man. The display explained that homo sapien sapiens have a brain that is only 2% of their mass, but consumes 20-25% of all the calories they take in. That makes modern man an incredibly risky evolutionary experiment, one that almost failed.[1] Those calories and that brain do not provide any immediate evolutionary advantage, they do not allow humans to run faster, or give them stronger jaws to tear flesh, or a hard shell to protect them from predators. However, the ability to reason allows humans to create all these things and more.

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

If humans did not invent, then the study of economics would just be the study of human evolution.

Now this might strike you as odd, however if I can convince you it is true or even plausible, you would have to admit that it would have profound consequences. Some of the most important discoveries are those that connect two areas of knowledge that were thought to be separate, such as electricity and magnetism, or geometry and algebra, or physics and chemistry.

Plants and animals adapt to their environment, while humans adapt their environment to them. In evolution when a plant or animal mutates (changes) so that it is better adapted to the environment, then their population increases (as does their range) until they again reach an ‘equilibrium’ between their food supply or resources and the size of their population. This idea was first proposed by Thomas Malthus with respect to man and Charles Darwin was the one that applied it to evolution.

Once the organism has reached this equilibrium, it either has to change again, or some other organism does so. Less successful organisms go extinct or evolve into other more successful life forms. Evolution is a process for producing those life forms that are best adapted at converting energy into life.

Most free market people have rejected Malthus’ ideas in the realm of economics, however it is important to point out that Malthus was correct for all of human history until the Industrial Revolution. Humans do not evolve biologically to become more successful, instead they create things, i.e., they invent.[2] In many ways a man with a spear or bow and arrow is not the same thing from an evolutionary point of view as a man whose only technology is a stone hand axe, who is not the same organism from an evolutionary point of view as a man whose technology includes agriculture. Our inventions allow us to create a great diversity of beings that can survive in dry hot deserts, wet tropical forests, and frigid antic conditions. We can do this despite the fact that homo sapien sapiens are genetically very non-diverse. The point I am making is that:

Inventions are the equivalent of genetic changes from an evolutionary point of view.

Like other organisms when we changed to become more successful at converting energy into life our population grew. For instance, when man invented agriculture, the population of humans increased exponentially as did the territory over which man spread. This is exactly what would happen with a species that had a positive genetic change.

The sad point is that the humans who were part of the initial agricultural revolution were probably somewhat wealthier than previous generations, however that wealth went into increasing the population until the average person was no wealthier than before the agricultural revolution. This is known as the Malthusian Trap and it is where the average person’s (organism) income is just sufficient to keep them from starving to death or what people call a subsistence income.

This is a depressing perspective. How did humans ever escape the Malthusian Trap? Extrapolating from what we have learned, it is clear that humans had to increase their technology (new inventions) faster than their population grew. In other words, we had to do more thinking (inventing) and less procreating. Modern economic research has confirmed this. Robert Solow won the Nobel Prize in Economics for a paper that showed exactly this. He studied the sources of economic growth in the U.S. economy and found that it was not increases in land, labor, or capital, but increases in the level of technology that increased real per capita incomes.

This has the following implications for economics:

  1. The per capita wealth of a technologically stagnant people will be stagnant or declining.
  2. The only way to increase real per capita incomes sustainably is to increase our level of technology.
  3. The only way to increase our level technology in the long run is to create new inventions.

The first statement has a perfect analogue in evolution, if you replace technology with genetic changes and per capita wealth with increasing population: a species that does not evolve will have a stagnant or declining population. The reason I suggest that that income (population) will fall is because of ‘entropy.’[3]  In my book Source of Economic Growth, I make an analogy between entropy and the classical economics idea of diminishing returns, however that is beyond the scope of this article.

This area of economics is called bioeconomics or thermoeconomics. Most of the economics profession has ignored this area of study, probably because it usually devolves into successive proofs that we are doomed by the Malthusian Trap. Despite this I think there is much to be learned in this area. For instance, Edwin Schrodinger’s failed attempt to tie life to entropy is eye opening. An interesting economist in this area is Gregory Clark, who wrote Farewell to Alms. I do not agree with all his conclusions, but he asks the right questions,[4] which is more important that having the right answers to the wrong questions. Clark’s analysis of the results of economic policies in an economy stuck in the Malthusian Trap is unassailable.

Economies today are hamstrung by absurd regulations and there would be an immense, but one-off benefit in freeing up the economy. Then the question arises—once completely free, how does this economy continue to grow? Statement II follows from I and has an analogy in evolution: The only way for a species to increase its population (in the long run) is for it to evolve (change, mutate). Most economists want to place their emphasis on manufacturing and trade. Manufacturing and trade are about the dissemination of new technologies (or replacement of worn out equipment) they are more similar to increasing the population of a species and spreading out its territory once the species has had a successful mutation.

People can only increase their level of technology by creating new inventions, which means they can only become wealthier by inventing faster than their population increases. Now this is a confusing statement, because population can be counted easily, but what does it mean to say that inventions or technology are increasing and how does that compare to the population. We know that the increases in productivity due to the new technologies must be greater on a percentage level than the increases in the population for per capita incomes to grow. One of the interesting self-correcting outcomes of this proposition is that the more people there are, the more likely someone will come up with a new invention. This means that a declining population or even a stagnant population is not the driver of real per capita increases in wealth. Indeed, declining populations often also lead to a problem in the demographic pyramid—the ratio of the very old and infirm to the productive.

The key question in economics is how do we encourage people to create these positive mutations (inventions)? In the history of the world, the rate at which new inventions were created was roughly proportional to the size of the population and somewhat to population density until the Industrial Revolution. It is also clear that inhibiting peoples’ right to act freely will inhibit the creation of new technologies. It was not until around 1800 that England, and then, the United States, created an explosion in the rate of new inventions on a scale the world had never seen. This resulted in large numbers of people escaping the Malthusian Trap for the first time in history. What these countries had in common is that they created effective property rights for inventors for large numbers of people for the first time in history.

Inventing for humans is analogous to genetic adaptations in other organisms. Originally, human inventions resulted in population increases, just like successful adaptations in other species resulted in population and territory increase for them. A technologically stagnant human civilization is like a genetically static species and in both cases their population (or income) will be flat or declining.[5] The study of economics is about how we create, produce, and distribute these inventions (genetic adaptions). If humans did not invent then the only way for us to become more successful would be genetic adaptation, which would mean that the study of economics would be the same thing as the study of human evolution.

 

Mr. Halling discusses these ideas in more depth in his book, Source of Economic Growth.

 

[1] Other animals have brains with a similar or greater brain to body mass ratio, but humans consume the most energy as a percentage of total calories on maintaining their brains.

[2] The term invention is poorly defined in common usage and in economics and law. An invention is a human creation that has an objective result. A human creation that has a subjective result is art.

[3] The word entropy here is analogous to that used in physics and chemistry, but not exactly the same. In fact, the way entropy is defined in these areas is not perfectly consistent, but that is the subject of another article.

[4] The two most important questions in economics are: 1) What is the cause of increasing real per capita income, and 2) What was the cause of the industrial revolution (the first time people escaped the Malthusian Trap)? I believe I got both of these questions from Professor Clark.

[5] It is hard to find great examples of this in human history but three are the Vikings on Greenland, the Anasazi around Chaco Canyon, and the European dark ages.

November 9, 2015 Posted by | -Economics, Innovation, Intellectual Capitalism | , , | Leave a comment

The Science of Economic Growth: Part 1

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

 

Part 1 

Part 2 

Part 3 

Part 4 

Part 5 

Introduction

Since economics is the study of how man meets his needs, the paper will first examine the nature of man.  Man is like other life forms in that he is subject to laws of evolution.  Evolution is the result of entropy.  However, it is not absolute entropy but what is defined herein as biological entropy that controls life forms.  The paper starts with an examination of biological entropy. 

Every species has unique features that allow it to compete in its evolutionary struggle.  Homo Sapiens ’ unique feature is their ability to use their rational mind to alter their environment or invent.  If humans did not invent, then the study of economics would be the study of human evolution.

The defining condition of most life is that it exists in the Malthusian Trap, which is the forcing function of evolution.  An important question is whether humans can escape the Malthusian Trap.  The Malthusian Trap is the result of biological entropy, which implies diminishing returns.  Escaping the Malthusian Trap requires humans to overcome diminishing returns.  Whether humans can invent their way out of diminishing returns is explored.

The paper shows that the answer to this question is that it depends.  If large groups of humans invent quickly enough, then humans can permanently escape the Malthusian Trap.  However, it is clear that in a technological stagnant environment, humans will eventually fall back into the Malthusian Trap.  This leads to more mainstream economic questions, such as whether inventing is endogenous or exogenous?  The paper shows that it is clear that inventing is endogenous.  Another more mainstream economic question that is examined is whether dissemination of new technologies is inhibited by property rights in inventions?  This question logically leads to the question of whether perfect competition or monopolistic competition encourages economic growth?  The paper shows that incentives are not only necessary for the creation of new technologies, but for the dissemination of new technologies and that perfect competition destroys technology creation.

These ideas are then applied to an understanding of the Industrial Revolution, which was the first time that large groups of humans escaped the Malthusian Trap.  It is shown that the Industrial Revolution, which was really a constant invention machine, occurred because of specific incentives for ordinary people to invent.

Finally, given the central role of invention to economics the paper examines whether there are any natural laws that apply to inventions.  Six natural laws of invention are presented.

 

How Does Entropy Apply to Life?

Life requires energy to exist because of entropy.  Otherwise a living organism could just not expend energy and it would live forever.  This setups a struggle between organisms and between species for energy sources, which forms the basis of evolution.  According to Peter A. Corning in “Thermoeconomics:

Beyond The Second Law” the idea that evolution and entropy are related has been long recognized.[1]  This connection has been espoused by Jean Baptiste de Lamarck, Herbert Spencer, Ludwig Boltzmann, Alfred Lotka, and Erwin Schrödinger, in his book What is Life?[2]  However, Corning warns us about confusing energy entropy, information entropy, and physical order.  Keeping this in mind, we need to define entropy in a consistent manner.  As used herein entropy does not mean information entropy or physical order or strictly energy entropy, which I will call absolute entropy.  Entropy means biologic entropy or the ability of an organism or a species to extract useful energy from their surroundings.  While this is related to absolute entropy in that it is about extracting useful energy, what matters in biology is the organism’s ability to extract energy from its environment to sustain its life not the absolute amount of useful energy available.  For instance, a buffalo (Bison) standing on a vein of coal in an open pit mine is surrounded by useful energy or low absolute entropy.  However, the buffalo cannot turn the coal into useful energy for itself and if there is not any grass or sage around, it is an area of high biological entropy for a buffalo.  Let’s explore this idea of biological entropy in more detail.  When a bison dies it has not reached a point of maximum absolute entropy, its carcass may still provide useful energy for vultures, mountain lions, and people.  Despite this, the bison’s biological entropy has reached a maximum, meaning its biological entropy has increased to a level that it no longer is alive.

On an individual organism level I define maximum biological entropy as the point at which the organism dies.  Many things can cause the entropy of an individual organism to reach it maximum and organisms use a variety of mechanisms to overcome biological entropy.  Plants create useful energy by photosynthesis.  They convert carbon dioxide into sugars (energy) using light.  They use this energy to reduce their biological entropy.  Animals eat plants or other animals and use the energy to reduce their biological entropy.  Note that when animals eat plants or other animals, they are increasing the biological entropy of the plants and animals they eat.  Thus, there are two general mechanisms that increase the biological entropy of life forms: internal and external.  Internal mechanisms are those that result from the failure to consume enough calories (energy) and aging.  Animals require oxygen, water, and food, in that order, to survive.[3]  Without oxygen, the animal cannot oxidize enough sugar (fat, protein) to survive – overcome biological entropy.  Without water, the animal’s cells are unable to absorb energy and expel wastes.[4]  Aging is a process of increasing biological entropy.  This is caused at least in part by disorder in genetic information.[5]  This genetic disorder results in the organism not being able to create enough useful energy to survive or increasing the amount of energy necessary to survive.  External mechanisms include being eaten or attacked by other living organisms, diseases, accidents (for animals), and the elements.

In general, living organisms use energy to overcome biological entropy first and then to increase their size.  However, some animals also create simple shelters or seek shelter to ward off the biological entropy increasing effects of the elements and predators.  Rain, sun, hail, snow, heat, and cold all contribute to the increase in biological entropy of living organisms.  Life has two main methods of overcoming the effects of the biological entropy: 1) food (energy) consumption and 2) shelter creation (inhabitation).

A species of life becomes extinct when the species as a whole reaches a certain level of biological entropy either because it cannot consume enough energy or because external mechanisms increase its biological entropy to reach the extinction level.  The biological entropy level at which a species becomes extinct is the maximum biological entropy for the species.  A species reaches the Malthusian Trap when increases in population of the species results in the total required energy (food) to support the population being greater than the supply of food.  Most life forms exist in the Malthusian Trap, most of the time, including humans until the Industrial Revolution.

 

Evolution

It is widely known that Malthus’s Essay on the Principles of Population influenced Charles Darwin and shaped his ideas on evolution.  Darwin himself recorded in his 1876 autobiography the following:

In October 1838, that is, fifteen months after I had begun my systematic enquiry, I happened to read for amusement ‘Malthus on Population’, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The results of this would be the formation of a new species. Here, then I had at last got a theory by which to work.[6]

Evolution is then a way of selecting species or variations on species that have low biological entropy and causing those species with high biological entropy to go extinct.  The limited amount of food (energy) for each species ensures that evolution is a dynamic ongoing process.  The variations are the result of sexual recombination of the parent’s genes and mutations in the organism’s genes.  The unique feature of humans is that they alter their environment to fit their needs, they do not just rely on genetic variations that allow them to better adapt to their environment.  The way humans do this is by inventing, which will discuss more in the next section.

 


[1] Corning, Peter A., Thermoeconomics:

Beyond The Second Law, Journal of Bioeconomics, Journal of Bioeconomics, Vol. 4, No. 1. (1 January 2002), pp. 57-88, p. 58.

[2] Ibid

[3] There are few exotic life forms that do not need oxygen, but all require energy to overcome entropy.

[4] BNET, Physiological Effects of Dehydration: Cure Pain and Prevent Cancer, http://findarticles.com/p/articles/mi_m0ISW/is_2001_August/ai_78177228/, 10/6/10.

[5] Hayflick, Leonard, Entropy Explains Aging, Genetic Determinism Explains Longevity, and Undefined Terminology Explains Misunderstanding Both, PLoS Genetics, http://www.plosgenetics.org/article/info:doi/10.1371/journal.pgen.0030220, 10/7/10.

[6] The Autobiography of Charles Darwin, location 680-686, by Charles Darwin (Mar 17, 2006) – Kindle eBook

 

December 20, 2011 Posted by | -Economics, Innovation | , , , , , | 13 Comments

Evolution, Economics, and Patent Law

The study of economics would be the same thing as the study of evolution of humans if humans did not invent.  Without invention there is no reason for trade.  Why would we trade my berries for your berries if they are essentially the same berries?  If we both eat the same dead animals, what would the purpose of trade be?  Without trade, production is limited to the immediate needs of the person.  Perhaps you might store up some nuts, but everything else will spoil.  Note that shelter is an invention, unless it only involves taking over a cave or a hole in a tree.  The unique feature of man is that he is a rational animal and in the economic realm this means that he invents.  No other animal invents.  Only humans change their environment to meet their needs.

The driving function of evolution is the Malthusian Trap.  In the Malthusian Trap, food (things need to survive) is limited and population growth in any species is always greater than the growth of the food supply, except humans very recently.  This puts species into competition for food and selects for the species that are most successful in a given area.  The only reason that humans (some) were able to escape the Malthusian Trap was that they invented faster than their population grew.  Meaning the rate at which technology changed provided greater productivity growth than the expansion in the population.  Why after 20,000 to 100,000 years of human existence did people in England, the United States, and the West suddenly escape the Malthusian Trap?  Clearly, the rate of invention accelerated in these places so that productivity outstripped population growth.  But why there and why then?  There is extensive evidence that the introduction of property rights (individual – there is no such thing as group property rights) always provides a strong incentive to maximize return on an asset.  England and then the U.S. at the beginning of the Industrial Revolution were the first large groups of people to introduce property rights in inventions.  This provided the necessary impetus to invent new technologies and diffuse them widely.  Clearly, patents cannot provide this incredible benefit outside of a system of individual rights and property rights.  However, it was the linchpin that launched large groups of humans outside of the Malthusian Trap and the constraints of biological evolution.

For more information see:

The Source of Economic Growth

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention

Jobs and Patents

Are Patents Relevant

 

October 14, 2011 Posted by | -Economics, Patents | , , , , , | Leave a comment

Fundamentals of Economic Science: An Objectivist Approach

Ayn Rand stated in, Capitalism: The Unknown Ideal, that

Political economy was, in effect, a science starting in midstream‘

 

Economics has ignored the unique features of its principle resource – Man.[1] We are going to avoid that problem, by first examining the unique nature of homo sapiens.  But before we look into the unique nature of man, let’s examine what it means to be a science.  It is my premise that economics is objective and therefore can be a hard science[2], based on empirical observation, logic, and reason.  There are some who would say that economics cannot be a hard science because we cannot setup isolated experiments to test hypotheses.  However, the same can be said of geology and astronomy, both of which are considered hard sciences.

All science is based on certain fundamental empirical observations.  One of these fundamental observations is that reality is objective.  This means that reality exists independent of any person’s belief, hope, faith, or desire.  The evidence for this proposition is overwhelming and includes all the incredible advances in physics, chemistry, biology, geology and the applied sciences (engineering).

 

Fundamental Observation: Reality is Objective[3]

Ayn Rand would state this fundamental observation as:

 

Reality exists as an objective absolute—facts are facts, independent of man’s feelings, wishes, hopes or fears.[4]

 

The second fundamental observation of science is that reality is understandable or discoverable using observation, logic, and reason.  In science, we follow logic and reason even if it seems counterintuitive.  For instance, the implications of special and general relativity predict that clocks on GPS (Global Position Satellites) satellites will run at a different rate than clocks on earth.[5] This appears counterintuitive, but empirical evidence shows that this is true and failure to account for this difference will result in meaningful navigational errors.

 

Fundamental Observation: Reality is understandable or discoverable using observation, logic, and reason

 

Ayn Rand would state this fundamental observation as:

 

Reason (the faculty which identifies and integrates the material provided by man’s senses) is man’s only means of perceiving reality, his only source of knowledge, his only guide to action, and his basic means of survival.[6]

 

If economics is going to be a science, it must be based on these two fundamental observations/assumptions.  Some people may object that science is based on observations.  All logical systems are based on either observations or assumptions.  For instance, Euclidean geometry is based on the assumption that a line goes on forever and two parallel lines never intersect.  Spherical geometry is not based on these assumptions.  It assumes that a line will wrap around on itself.  In science we do not arbitrarily pick the starting point, we use observations.

 

Definition: Economics is the study of how man transforms things to meet their needs.

 

Keeping Rand’s admonishment about the state of economics in mind, we now turn our attention the unique nature of man.  Aristotle and Rand define man as a rational animal.  The genus is animal.  The unique nature of animals and all life is that it thrives on negative entropy.[7] The species in the definition of man is that he is rational.  In the context of economics, the important part of being rational is that man invents.  No other animal invents.  In Atlas Shrugged invention plays a major role in the story.  The major character John Galt is an inventor as is Hank Reardon.

 

Man’s unique reward, however, is that while animals survive by adjusting themselves to their background, man survives by adjusting his background to himself.[8]

 

The first need of every person is to stay alive.  This means that life is a fight against entropy, the second law of thermodynamics.  Entropy is normally defined as the measure of the disorder of a system.  Entropy was discovered as part of thermodynamics and it explains that a perpetual motion machine is impossible.  Entropy always increases in a closed system.  Luckily for us, the Earth is not a closed system.  For instance, we receive energy from the Sun.  The only way to increase order is by the input of energy.  Life represents increasing order and therefore just to sustain life at its present level requires energy.  Edwin Schrödinger, Nobel Prize winning physicists, proposed this idea in his 1944 book, What is Life.[9]

 

Fundamental Observation: Life is a fight against entropy

 

Plants create this energy by photosynthesis.  They convert carbon dioxide into sugars (energy) using light.  They use this energy to create order.  Animals eat plants or other animals and use the energy to create order.  Note that when animals eat plants or other animals, they are increasing the disorder of the plants and animals they eat.  Thus, there are two general mechanisms that increase the entropy of life forms, 1) internal and 2) external.  Internal mechanisms are those that result from the failure to consume enough calories (energy) and aging.  Animals require oxygen, water, and food in that order to survive.[10] Without oxygen, the animal cannot oxidize enough sugar (fat, protein) to survive – overcome entropy.  Without water, the animal’s cells are unable to absorb energy and expel wastes.[11] As a result, the animal does not receive sufficient energy to overcome entropy.  Aging is a process of increasing disorder – entropy.  This disorder is caused at least in part by disorder in genetic information.[12] External mechanisms include being eaten or attacked by other living organisms, diseases, accidents (for animals), and the elements.

In general, living organisms use energy to overcome entropy first and then to increase their size.  However, some animals also create simple shelters or seek shelter to ward off the entropy increasing effects of the elements and predators.  Rain, sun, hail, snow, heat, and cold all contribute to the increase in entropy of living organisms (disorder).  A living organism dies when its entropy increases above a certain level.  Life has two main methods of overcoming the effects of the second law of thermodynamics: 1) food (energy) consumption and 2) shelter creation (inhabitation).

A species of life becomes extinct when the species as a whole reaches a certain level of entropy either because it cannot consume enough energy or because external mechanisms increase its entropy to the extinction level.  A species reaches the Malthusian Trap when increases in population of the species results in the total required energy (food) to support the population is greater than supply of food.  Or stated in the laws of physics, the total available energy is less than the energy required to overcome the total entropy of the species’ population.  Most life forms exist in the Malthusian Trap, including humans until the Industrial Revolution.  Evolution is life’s way of determining which species is best at overcoming entropy.

Homo sapiens also consume food and create shelter to overcome the effects of entropy.  Unlike other living organisms, homo sapiens organize their environment to minimize the effects of entropy.  For instance, humans have invented agriculture to increase their supply of food (energy) and therefore order.  Humans also harnessed the physical strength of animals, created internal combustion machines, electric lights, electricity, washing machines, tractors, computers, the internet, email, lasers, fiber optics, etc.  All of these are inventions.  Humans alter their environment by creating inventions.  This is different from every other animal.  This should not be surprising, since the distinguishing characteristic of homo sapiens is their ability to reason.  Man is a rational animal according to Aristotle’s classical definition.[13] Being rational is the distinguishing characteristic of humans.  Man uses his reason to alter his environment (invent) and increase order for himself.  Invention is the unique way in which man is able to create order – this is the fundamental observation of economics.

 

Fundamental Observation of Economics: Man’s unique ability to increase order (wealth) is his ability to invent.

 

Ayn Rand’s way of explaining this is:

 

Nothing can raise a country’s productivity except technology[14]

 

Inventing first results in the increased success of the species.  Homo sapiens populated most of the world in less than 500,000 years because of this unique ability.  As long as the rate of technological progress is slower than the growth in population, man is stuck in the Malthusian Trap.  Sometime around 1800 in Europe and the United States, the rate of invention exceeded the rate of growth in population and man escaped the Malthusian Trap at least in the West.[15] When man escapes, he is no longer subject to biological evolution.  As far as we know, homo sapiens are the only species to ever escape the Malthusian Trap.

Trade enhances man’s ability to invent.  By trading the products of each others’ inventions both trading partners can specialize and end up wealthier.  David Ricardo explained how both parties are better off because of trade using the example of England trading cloth for Portuguese wine:

 

England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time.  England would therefore find it in her interest to import wine, and to purchase it by the exportation of cloth.  To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time.  It would therefore be advantageous for her to export wine in exchange for cloth.  This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced with less labour than in England.[16]

 

Using the example above, if England produces twice as much cloth as it needs, it has invested 200 man hours.  If Portugal produces twice as much wine as it needs it has invested 160 man hours.  Now if England and Portugal trade their excess cloth for the excess wine, England has invested 200 man hours for all its cloth and wine, while Portugal has invested 160 man hours for all its cloth and wine.[17] If England had produced both all its cloth and all its wine locally, then it would have invested 220 man hours for the same goods.  This means that England requires 10% more man hours if it does not trade.  If Portugal had produced both all its cloth and all its wine locally, then it would have invested 170 man hours for the same goods.  This means that Portugal requires 6.25% more man hours if it does not trade.

Trade is a rational activity and humans are the only animals to engage in trade of non-like items and trade between non-related individuals.[18] Classical economics has focused on trade and the related supply and demand curves instead of the role of invention in economics.  This might have occurred because the beginning of classical economics was in reaction to the Mercantile system and its limitations on trade.  Adam Smith’s book, The Wealth of Nations, is often seen as a refutation of the Mercantile system.  Matt Ridley, in his book, The Rational Optimist, has suggested that trade is the key to creating wealth.  This emphasis on trade has been misplaced.  Invention proceeds trade.  If everyone produces the same thing, then there is no reason to trade.  It is only because someone has invented a new product that trade becomes a rational choice.  For instance, one group of people may have invented a process for skinning animals and using them as clothing.  They may have traded this with people who had access to flint and invented a system for making simple axes.  Invention has to proceed production, which has to proceed trade logically.  Of course, without trade the value of invention is severely diminished.

In summary, life is a fight against entropy.  Economics is the study of how man transforms things to meet their needs.  The unique way in which humans meet their needs is to invent.  Only by inventing can humans increase their level of wealth.

 


[1] Rand, Ayn, Capitalism: The Unknown Ideal, Kindle Edition, location 126-128, 2011.

[2] Hard sciences include physics, chemistry, and biology, as opposed to “soft science”, such as psychology, sociology, and political science.

[3] Even the bizarre results of quantum mechanics are repeatable and independent of the observer’s hopes, desires, faith, opinion.

[4] The Ayn Rand Institute, Introducing Objectivism, http://www.aynrand.org/site/PageServer?pagename=objectivism_intro, 2/0/11.

[5] Real-World Relativity: The GPS Navigation System, http://www.astronomy.ohio-state.edu/~pogge/Ast162/Unit5/gps.html, October 3, 2010.

[6] The Ayn Rand Institute, Introducing Objectivism, http://www.aynrand.org/site/PageServer?pagename=objectivism_intro, 2/0/11.

[7] Wikipedia, What is Life?, http://en.wikipedia.org/wiki/What_is_Life%3F_(Schrödinger), Edwin Schrödinger, 10/6/10

[8] Rand, Ayn, For the New Intellectual, p. 15.

[10] There are few exotic life forms that do not need oxygen, but all require energy to overcome entropy.

[11] BNET, Physiological Effects of Dehydration: Cure Pain and Prevent Cancer, http://findarticles.com/p/articles/mi_m0ISW/is_2001_August/ai_78177228/, 10/6/10.

[12] Hayflick, Leonard, Entropy Explains Aging, Genetic Determinism Explains Longevity, and Undefined Terminology Explains Misunderstanding Both, PLoS Genetics, http://www.plosgenetics.org/article/info:doi/10.1371/journal.pgen.0030220, 10/7/10.

[13] The Philosophy of Aristotle, Adventures in Philosophy  http://radicalacademy.com/philaristotle4.htm, 10/7/10.

[14] “The Moratorium on Brains” The Ayn Rand Letter, I, 3, 5.

[15] This should more accurately be stated that the rate of growth in productivity due to the introduction of new technologies exceeded the rate of growth in population.

[16] Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Harper Collins, New York, 2010, p. 75.

[17] This example ignores the cost of transport the wine and cloth, but it illustrates the general concept.

[18] Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Harper Collins, New York, 2010, p. 56.

 

February 22, 2011 Posted by | -Economics, Innovation | , , , , , | 19 Comments