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Intellectual Capitalism: Philosophy

In my book Source of Economic Growth I outlined a school of economics that I called Intellectual Capitalism.  This is the first of a series of posts I intend to write to expand upon that outline.  Most schools of economics do not explicitly state the philosophical foundations upon which they are based.  In this post I will layout the philosophical foundations of Intellectual Capitalism by comparing it to the philosophical foundations of the major schools of economics.

Neoclassical

econgrowth.smallMost mainstream modern economics is based on the ideas of Adam Smith.  Smith is part of the Scottish Enlightenment and this is key to understanding the philosophical basis of Smith’s and modern economics philosophical underpinnings.  The father of the Scottish Enlightenment was Francis Hutcheson, who believed that we have moral senses (similar to vision, hearing, smell, taste, and touch).  This elevates emotions to valid epistemological tools.  Adam Smith picked up on Hutcheson’s ideas in his book The Theory of Moral Sentiments.

Smith was also a close friend of David Hume, one of the giants of the Scottish Enlightenment.  Hume argued that causation was an illusion and attacked induction as invalid.  He also picked up on Hutcheson’s ideas on moral philosophy.  Smith never explicitly states that he agrees with Hume, however they admired each other and Smith never rejects Hume’s ideas.  The result is that economics is not based on the same philosophy of science as were the hard sciences of physics, chemistry, and biology.  Furthermore it means that Smith and modern economics rejects Natural Rights, which are based on reason (the philosophy of the hard sciences).

This rejection of the philosophy of science by economics, at least implicitly, in my opinion is one of the reasons modern economics has been stuck in the equivalent of pre-Newtonian physics.

Keynesian

This is perhaps the second largest school of modern economics and is named for John Maynard Keynes.  Keynes was somewhat circumspect about his philosophical underpinnings, however it appears that Kant can be considered his most important philosophical influence.  In the paper “The Philosophy of John Maynard Keynes (A Reconsideration)” by Elke Muchlinski he shows that Keynes and Kant shared a common epistemological approach.

His method provides a background for his conception of convention which still encompasses the fragility and precariousness of knowledge. Keynes rejected formal logic as inadequate for his purposes to outline the process of acquiring knowledge.

This should hardly be surprising as Keynes confuses cause with effect, by making consumption the key to the economy.  It is clear that Keynes rejects the philosophy of science.  Note there is only one correct philosophy of science, so I will no longer qualify that this was the philosophy of the hard sciences.[1]  If logic (and evidence) is precarious then the only other potential epistemological tool is emotion.  The result is that Keynes also rejects Natural Rights as a valid moral theory.

Marxism

It is probably incorrect to consider the ideas of Karl Marx a school of economics, as it is really more a school of sociology.  Marx greatest intellectual influence was Kant with a close runner up being Hegel.  As a result, Marxists reject the philosophy of science, reason, and Natural Rights.

Austrians

The founder of Austrian Economics is Carl Menger who stated explicitly that the philosopher Franz Brentano was his biggest intellectual influence.[2]  Brentano is best known for his influence on psychology and Sigmund Freud.  Brentano like the Scottish Enlightenment argues that emotions are valid epistemological tools.  This appears to the basis for Menger’s subjective theory of values and prices in economics, which has been picked up by most of modern economics.  It is important to note that when Menger and the Austrians talk about subjective values, they do not mean that each individual chooses for himself, they mean the choices are disconnected from reality.

It is clear the foundation of Austrian economics is antithetical to the philosophy of science.  Their subjective theory of values is not limited to economic decisions but to all values, which means they also reject Natural Rights.

From Menger there are two slightly variations in modern Austrian Economics: Hayek and Mises

Hayek

  1. A Hayek is a direct descendant of the Scottish Enlightenment and he set down his ideas on epistemology in his theory of cultural evolution. This theory explicitly rejects reason (logic and evidence – or the philosophy of science) as the source of knowledge.  Instead Hayek substitutes that knowledge is gained and held collectively and not necessarily consciously.  For more information see Hayek: Friend or Foe of Reason, Liberty and Capitalism?  As a result, Hayek also rejects the idea of Natural Rights.

Von Mises

Ludwig Von Mises’ equivalent of Hayek’s cultural evolution is praxeology which is the study of human action.  Praxeology starts with an a priori theory of economics.  From these fundamental axioms of human action all of economics can be derived without any reference to observation (empirical evidence).  This makes praxeology part of philosophical rationalism and a system of math or logic at best.  This means that praxeology explicitly rejects the philosophy of science.  Because they reject the philosophy of science and adhere to the subjectivity of values and prices, they reject the idea of Natural Rights.

It is interesting that this rejection of empirical evidence allows Austrians to continue to advocate ideas that have been shown by empirical evidence to be incorrect.  Among these are Australian Business Cycle Theory (ABCT) and their argument that intellectual property and patents in particular inhibit economic growth.

Despite praxeology’s rejection of empirical evidence, Mises and his follower vehemently reject mathematics in economics and also seem opposed to the use of formal logic in economics.  This obvious contradiction escapes them.  I will talk more about the role of mathematics in economics below.  The Austrians’ criticism of some of the mathematical approaches to economics is correct, but not for the reasons they state.

Note that Murray Rothbard is alone in Austrian economics in advocating for Natural Rights, however he also accepts praxeology and the subjective theory of values and prices.  These positions are completely contradictory.

 

Mathematics in Economics

There is a branch of mathematical economics that grew out of the Cowles Commission that attempts to use the mathematics of linear algebra to model the economy.  Paul Romer is part of this group.  The idea is that using linear algebra every variable (state) in the economy can be accounted for and therefore the whole economy can be modeled.  The Austrians critique this area is based on the limits of reason.  However, that is not the problem with this area of economics.  These mathematical models cannot take into account new technologies (inventions) and inventions are the most important thing that happens in the economy.

Unfortunately, neoclassical as well as classical economics seems better adapted to the analysis of replication than to that of technological change.  The vast economic changes since the Stone Age, or for that matter during recent centuries in the West, were possible only because of technological progress.

Jacob Schmookler

As the famous economist Jacob Schmookler points out above, this problem is not limited to mathematical economics.

Is mathematics appropriate in economics at all then?  Yes mathematics is appropriate, when it is used correctly.  Mathematics cannot just be used to make non-empirical hypothesis seem more scientific, and it is inappropriate to use mathematics to make heuristic models (think ptolemaic epicycles) at least without acknowledging it.  Mathematics is only appropriate when it is the reflection of the underlying economic principles and empirical observations, it can never be the driver.  This is a problem occurring in modern physics today also.

Econometrics is an attempt to make economics an objective empirical science and therefore when used appropriately is a valid tool of economics.

 

Intellectual Capitalism

It should be clear that Intellectual Capitalism is based on the philosophy of science.  If you are uncertain what the philosophy of science is, here is an overview that I wrote.  This means that Intellectual Capitalism is grounded in human biology, evolution, and to some extent the ideas of entropy.  I explain this in much more detail in my book Source of Economic Growth and in the article Inventing at the Intersection of Biology and Economics.  As a result, values and prices are objective (not to be confused with intrinsic).  They are based on the fact that humans have certain objective needs and natures.

This brings up another point, which is that economics is not just a social science.  It applies to a person on a deserted island.  Intellectual Capitalism defines economics as the study of how people obtain the things they need to survive.  There is no distinction between mere survival and thriving.  The idea that because you have enough food for a day, or a week or a year, that economics is not about survival is short sighted.  All the evidence shows that one’s standard of living is related to how long one will survive.  This is partly because almost no-one has everything they will need to live forever.  For instance, think of all the food, medical care, shelter etc., you will need for the rest of your life.  This amount of resources exceeds all but less than one percent of the people in the world.  Also one’s standard of living determines one’s chances of surviving natural disasters, illness, and other disruptions.

Intellectual Capitalism is the only school of economics that explicitly recognizes that man’s most important asset is his ability to reason (think) and this is true in economics also.  This also means that Intellectual Capitalism is explicitly based on Natural Rights and therefore is consistent with the ideas of John Locke, Ayn Rand, and the founding ideals of the United States.

[1] The Copenhagen interpretation of quantum mechanics also rejected the philosophy of science.  A number of people have begun pointing out the problems this has and is causing in modern physics.

[2] http://mises.org/library/philosophical-origins-austrian-economics

 

November 3, 2015 Posted by | Intellectual Capitalism | , , , , | 1 Comment

The Two Most Important People to the US Presidential Election are not in the Race

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

John Maynard Keynes

Based on this quote you might think that the two most important people in the US presidential election are John Maynard Keynes and Friedrich Hayek. However, both of these men were influenced profoundly by two philosophers whose importance extends far beyond economics, Immanuel Kant and David Hume.

humeKant’s influence on today’s leftist movements is hardly likely to be surprising to most people.  Kant’s attack on reason and reality started the whole German philosophical movement, which has been written about extensively.  For instance, Stephen Hick’s excellent book Explaining Postmodernism shows this connection as do many other people.  The connection between Kant and Keynes may seem more tenuous except that American leftists are inevitably Keynesians.  However, the paper “The Philosophy of John Maynard Keynes (A Reconsideration)” by Elke Muchlinski shows that Keynes and Kant shared a common epistemological approach.

Keynes delineated an epistemological approach to the theory of probability. He conceived probability in a broader sense, not only as a class which is capable of numerical measurement. He made a turning point to the categories of knowledge, ignorance, rational belief and precariousness. His method provides a background for his conception of convention which still encompasses the fragility and precariousness of knowledge. Keynes rejected formal logic as inadequate for his purposes to outline the process of acquiring knowledge. To defend his view of uncertainty inherently to all economic questions he relied to conceptions of degree of credibility, degree of confidence and conventional judgment.

Seeing Kant’s and Keynes influence on a Hillary Clinton or an Elizabeth Warren is probably pretty easy for many people.

What is perhaps less well known is David Hume’s influence on U.S. conservatives and Friedrich Hayek. The blog The American Conservative calls Hume “The First Conservative” and the First Principles, a conservative philosophical journal agrees. Hume gave us the problem of induction, denied that causality exists, and most importantly for this article, he rejected Locke’s natural rights and the idea of ethics based on reason.  Locke’s natural rights are enshrined in the Declaration of Independence, form the basis for the Bill of Rights, and was the foundation of most of common law at the time. Ultimately, Hume attacks reason and science in order to make room for religion and tradition.

Hayek was highly influenced by Hume.  This paper entitled, Hayek on the Role of Reason in Human Affairs, Linda C. Raeder, Palm Beach Atlantic University, explains:

For Hayek, the rules of morality and justice are the same as they were for David Hume: conventions that have emerged and endured because they smooth the coordination of human affairs and are indispensable, given the nature of reality and the circumstances of human existence, to the effective functioning of society. For Hayek as for Hume the rules of morality and justice are not the products of reason and they cannot be rationally justified in the way demanded by constructivist thinkers. And since our moral traditions cannot be rationally justified in accordance with the demands of reason or the canons of science, we must be content with the more modest effort of “rational reconstruction,” a “natural-historical” investigation of how our institutions came into being, which can enable us to understand the needs they serve.

It might be harder to see Hume’s influence on a Jeb Bush or Chris Christie, but it is there.  The libertarians might argue that this argument does not apply to Rand Paul or a Ted Cruz, however the libertarian movement is also profoundly influenced by Hume and Hayek.  For instance, the libertarian think tank Foundation for Economic Freedom (FEE) has a whole series of excellent lectures on the Scottish Enlightenment extolling the virtues of this philosophical movement, which definitely includes Hume and Hayek.

What is missing from this election is a candidate that represents John Locke, natural rights, reason – in other words the values on which the United States was founded.

Paraphrasing Ayn Rand, in a debate between two irrational positions, it is the one that asks its followers to believe in the most fantastical and the one that is willing to be the most ruthless that will win.

 

 

For those of us in the patent business this means we are unlikely to see any improvements as a result of this presidential election.  Patent law is based in natural rights and reason.

August 17, 2015 Posted by | philosophy | , , , , , , , | Leave a comment

Austerity: Why it is Key for Both Short Term and Long Term Economic Growth

Keynesians have continually argued that cutting government spending will kill economic growth.  They point to Great Britain as showing that austerity does not work.  The UK introduced an austerity package that included substantial cuts in government spending and tax increases in June of 2010.  Since then the UK’s growth rate has been anemic.  However, there are a number of flaws with the Keynesians argument.  First, the UK raised taxes, which is not austerity.  Second, the US and the West are already actuarially bankrupt so we have to cut our budgets.  See US Goes Bankrupt by 2019.

It is not an austerity program when you raise taxes.  This is like a family saying they were instituting an austerity program by demanding their boss give them a raise.  In addition, the UK raised capital gains taxes from 18% to 28%, which is the taxes that hit business formation the most.  Raising capital gains decreases the return on investing in new economic activities and investors can easily decide not to invest their capital so this tax reduces economic activity more quickly than other taxes.  If the UK had not raised taxes, they would most likely now be experiencing an economic boom.  The empirical data clearly shows that lower government spending results in greater economic activity.  As an example of one study that clearly shows this see “The Size and Functions of Government and Economic Growth”.  This study clearly shows that the lower government spending the greater subsequent growth of the economy.  (see Graph)

Logically, if a government absorbs 50% of a country’s GDP then the cost of goods and services on average have to be twice as much as they would otherwise be.  In order to pay the expenses of government, a private sector producer who would normally charge $1.00 for a good in the absences of any government costs will now have to charge $2 and pay $1 of it to the government.  If the government consumes 25% of the economy then the average cost of goods and services has to be 33% higher than they otherwise be.  The simple math to figure this out is to take the reciprocal of 1-government spending.  If you want to stimulate “demand” as the Keynesians are constantly suggesting, then the way to do it is to cut government spending not increase it.  Imagine the increase in demand if the US were to reduce its total government spending of about 50% of the economy down to 25% of the economy.  This means that the average cost of goods and services would fall 39%.  How many more cars, computers, software, etc would people purchase if they were 39% cheaper?  Austerity is one of the keys to both our short term and our long term economic health.

Note that the regulatory burden government imposes is not part of the government spending but it has the same effect as government spending on the economy so that should be taken into account.  For instance, the cost of complying with the federal tax system is estimated by the Heritage Foundation at $431 billion.  Simplifying our tax code to say a flat or fair tax could reduce this cost by more than 90%.  As a result, any intelligent austerity program would include simplifying our corrupt tax code.  This is the exact opposite of what the UK did.

This is not to suggest that we do not need a government.  However, ”The Size and Functions of Government and Economic Growth”  study showed that even at the very low level of 15% of GDP for total government spending countries continued to have increased growth rates.  People forget that it was common among Western countries for total government spending to be below 10% of GDP until around 1900.  If Keynesians and Socialists really cared about people they would focus on economic growth.  There is no way to make the average person wealthier without growing the economy.  Charity never increased the average wealth of anyone.  The only reason we ever escaped the Malthusian Trap was because of the increase in per capita wealth.

 

October 2, 2011 Posted by | -Economics | , , , , , , | 2 Comments

Keynesian Economics

I received the following question:

So is Keynes right or wrong?

You can make up for lack of private sector spending after a panic, thus maintaining demand.

OR

You can’t make up for lack of private sector spending after a panic, because the money is just borrowed, which causes inflation, or is taken from the private sector and just redistributed, not increasing demand in the aggregate.

My answer is:

If you actual follow what Keynes states, which is run a budget surplus during good times and spend the surplus during bad times you can moderate the economic cycle.  Note the moderation will include dampening the upside.  In addition, this substitutes government decision making for private decision making, which always results in less growth over time.

The way Keynesian economics works in practice is that it is an excuse to spur demand by deficit spending, usually by programs like cash for clunkers or tax rebates to people who do not pay taxes.  In these cases they are stimulating consumption (mainly).  No one ever got rich by consumption or stimulating the economy by consumption.  Think of a farmer eating his seed corn, this stimulated demand but he is likely to starve to death.  The other common example is to suggest that we break everyone’s car window.  This increases demand and consumption, but are we any wealthier?  No, all we have done is transfer money from the rest of the country to the auto glass industry.  When Keynesian policies result in the country having to borrow money to spur demand, then it does lead to either inflation, higher borrowing costs, or higher taxes or a combination of all three.  This reduces future economic activity and usually the amount of economic activity is not conserved but subject to entropy.  I think you can sum up Keynesian economics in practice as consumption creates wealth, which is clearly nonsense, no matter how many PhD trained ivy-league economist professors repeat it.

I think of my chart on page 11(reproduced here) as showing the boundary layer condition for wealth.  In engineering and physics we look for boundary layer conditions to check and setup our answers to problems.  The income per capita chart clearly shows that the only way to grow income per capita is by changing our level of technology.  Look at the major suggestions on how to spur our economy.  Keynes: consumption equals wealth creation.  This is clearly complete nonsense.  Supply side economics: this normally focuses on reducing taxes and regulatory burdens.  When an economy is running at less than its optimum point this will cause economic growth, but without inventions we will eventually stagant.  Now regulations and taxes can reduce the incentive to invent, so there is overlap.  Monetarists: If we just manage the money supply appropriately we will create economic growth.  Money is just a medium of exchange and a medium of measurement.  While screwing with the money supply messes up the functioning of the economy, even if the money supply is stable it will not create anything that makes us wealthy.  Invention-side economics is the only way to increase our wealth over time – it is the boundary layer condition.  An interesting example from the book is Eli Whitney’s invention of the cotton gin.  The US was producing just 4000 bales of cotton per year before the Whitney’s invention.  Ten years later in 1801 we were producing over 100,000 bales of cotton per year, more than a 50x increase.  “But for” (as lawyers like to say) Whitney’s invention the output of cotton would have hardly changed.  Inventions are game changers in the economy.  The other approaches are just tinkering around the edges at best.


February 2, 2010 Posted by | Innovation | , , , | Leave a comment

   

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