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Austrian Economics and Aristotle

Austrian Economics is always claiming a strong connection to the Philosophy of Aristotle.  The Austrians main connection to Aristotle is the idea of apriorism.  In philosophy apriorism is defined as the philosophical doctrine that there may be genuine knowledge independent of experience.  This apriorism shows up particularly in Menger and Mises.  In Mises case it is clearly related to his ideas on praxeology.  In Menger’s case this comes from his epistemology in which he states there is an exact theoretical side of science and an inexact empirical side of science.  The question is whether the Austrians’ claim to following Aristotle’s ideas or being neo-Aristotelian has any validity.

One of the most defining points of Aristotle’s philosophy was his disagreement with Plato’s “Theory of Forms.”  Plato argued that we cannot trust our senses and the world they perceive is at best a vague, shadowy version of the real world.  For more see Plato’s Allegory of the Cave.  According to Plato if you see a red ball there is a perfect version of red and a perfect version of a ball in the “real world” and we are seeing some sort of distorted versions of these.  Plato’s real world is often represented as being up in the sky, sort of a heaven.  Since we cannot trust our senses, Plato’s answer is that we must just think about what has to be true and that will lead us to the truth.  This is known as rationalism.

Aristotle rejected Plato’s ideas and said we could trust our senses.  In order to verify (and integrate) that our conclusions from our senses are valid Aristotle created rules of thought or logic.  It is important to remember that to Aristotle these conclusions were always based on (tested against) the real world evidence.  In other words, logic was useful in reasoning about the world, but the ultimate proof was reality.  This makes him diametrically opposed to Plato’s rationalism.

There is a famous painting entitled The School of Athens by Raphael in which Plato is pointing to the sky and Aristotle has his hand out pointing to the world before us that illustrates the differences between Aristotle and Plato.  Aristotle’s epistemology is based in this world, where Plato thinks that the real world is somewhere else.

How did Austrians ever get the idea that apriorism is consistent with Aristotle?  A search of Aristotle on the Internet Encyclopedia of Philosophy of Philosophy and the Stanford Encyclopedia of Philosophy does not show any mentions of apriorism or apriori.  An informal search of academic papers and books finds only a couple of mentions of Aristotle and apriorism, except by Austrians (Austrian/Objectivists).  Both argue that apriorism is inconsistent with Aristotle’s philosophy.  One book says that Aristotle the empiricist exposes the vanity of armchair natural scientists and it is clear that Aristotle lies on the side of empiricism not apriorism.[1]

This idea that apriorism is consistent with Aristotle appears to come from Aristotle’s concept of axioms.  Aristotle had one axiom, the principle of non-contradiction according the Stanford Encyclopedia of Philosophy.  The explanation (justification) of this axiom sounds similar to the Austrians apriorism.

“Before embarking on this study of substance, however, Aristotle goes on in Book Γ to argue that first philosophy, the most general of the sciences, must also address the most fundamental principles—the common axioms—that are used in all reasoning. Thus, first philosophy must also concern itself with the principle of non-contradiction (PNC): the principle that “the same attribute cannot at the same time belong and not belong to the same subject and in the same respect” (1005b19). This, Aristotle says, is the most certain of all principles, and it is not just a hypothesis. It cannot, however, be proved, since it is employed, implicitly, in all proofs, no matter what the subject matter. It is a first principle, and hence is not derived from anything more basic.

What, then, can the science of first philosophy say about the PNC? It cannot offer a proof of the PNC, since the PNC is presupposed by any proof one might offer—any purported proof of the PNC would therefore be circular.”[2]

 

This axiom was expanded to three axioms, the law of identity, the law of the non-contradiction, and the law of the excluded middle.  It seems to me that the other two laws follow from the law of identity.

This sounds similar to how Austrians justify their apriorism, however the Austrians extend the idea to state:

(a) that the fundamental axioms and premises of economics are absolutely true;

(b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true;

(c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and

(d) that the deduced theorems could not be tested even if it were desirable.[3]

While this was written by Murray Rothbard it is the logical conclusion of Menger’s “theoretical science.”  These ideas are diametrically opposed to those of Aristotle.  Austrian Economics is not Aristotelian, not science and not consistent with Objectivism.

econgrowth.smallI have pointed to an economic theory that is consistent with Aristotle, science, and Objectivism.  Part of my insight came from  “New Growth Economics”, whose  central point is that wealth is created by the human mind.  This should be exciting to Objectivists, because that sounds very much like Ayn Rand.  It also points to an objective basis for economics.  Every human needs to acquire and consume a minimum number of calories or they die.  This provides an objective standard that is very similar to Rand’s standard for her ethics.  It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.

Inventions are the result of applying man’s reasoning power to the objective problems of life.  The way we become wealthier is by increasing our level of technology.  I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.

All species are biologically designed to spend most of their existence on the edge of starvation.  The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.

 

[1] Walter E. Wehrle, The Myth of Aristotle’s Development and the Betrayal of Metaphysics

[2] Aristotle’s Metaphysics http://plato.stanford.edu/entries/aristotle-metaphysics/#FundPrinAxio

[3] Murray N. Rothbard,” In Defense of “Extreme Apriorism”, https://bastiat.mises.org/sites/default/files/Defense%20of%20Extreme%20Apriorism,%20In_6.pdf, accessed November 25, 2016.

November 26, 2016 Posted by | -Economics, bioeconomics, Blog, philosophy | , , , , , | 1 Comment

Carl Menger: Austrian Economics vs. Objectivism

I am giving a talk with Will Thomas at Atlas Summit 2016 on Austrian Economics.  I have been assigned to discuss the Austrian economists Carl Menger and F A. Hayek.  I will have about eight minutes for each Menger and Hayek.  This post presents the basic ideas I will present on Carl Menger.

Carl Menger is commonly considered the founder of Austrian economics.  Menger wrote his first book Principles of Economics in 1871.  It is very difficult to nail down Menger’s position on a number of issues.  For instance, he is known for developing the subjective theory of value in Austrian economics, which was in response to the labor theory of value of classical economics.  The labor theory of value is that value of an item is equal to the value of all the labor that went into making the item.  This is an intrinsic theory of value and rejected by almost all economists today.  However, many people including some Objectivists argue that Menger really was advocating an objective theory of value instead of a subjective theory of value.

For instance, consider these two quotes by Menger from Principles of Economics:

Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115  (objective?)

The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146  (subjective?)

MengerModern Austrians and most economists today have accepted the subjective theory of values.  The logical result of accepting the subjective theory of values is that no rational theory of ethics is possible, which is exactly what Mises, Hayek, modern Austrians and modern economists, such as Milton Friedman, have concluded.  This means that Natural Rights and Rand’s ethics are inconsistent with the subjective theory of values.  This has important implications particularly for property rights, but in fact makes all of law subjective.

Despite the contradictory statements by Menger I think it is fair to say that he was advocating a subjective theory of values.  Menger was most influenced by philosopher Franz Brentano who also was highly influential of Freud.  Franz Brentano maintained that our senses were invalid and could not tell us anything about the world.[1]  In addition, the Austrians who follow and praised Menger have adopted the subjective theory of value.

Another question that arises is whether Menger’s epistemology was reason or consistent with science and Objectivism.  Again you can find contradictory interpretations, even among Objectivist.  However, in his book Principles of Economics he is clear that the techniques of the physical sciences at the time were not the ones he was applying in his study of economics.  Menger described his epistemology in more detail in his book Investigations into the Method of Social Sciences, where he suggests that all science has a theoretical, non-empirical side and an empirical side.[2]  The theoretical side creates universal truths that cannot be subject to empirical proof or disproof.  That is not science.  It appears to me that Mises’ praxeology follows Menger’s theoretical side, which is philosophical rationalism.  While Hayek follows the empirical side of Menger, which rejects the efficacy of reason.

Menger’s Principles of Economics provides almost no empirical evidence for his positions.  In addition, he shows no interest in the most interesting economic phenomena in history, the Industrial Revolution.  This is inconsistent with a scientific approach to economics.

Menger shows only a passing interest in what causes economic growth, particularly per capita increases in wealth.  He argues that economic growth is the result of creating more second or high order goods.  His explanation appears to be the basis of the Austrian Business Cycle Theory.  This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists.  Not only has this already been said by other economists, but it is wrong.

In conclusion, Menger seems to commonly make contradictory statements, which makes him difficult to pin down, however it appears clear to me that Menger is not consistent with Objectvism on metaphysic, epistemology, or ethics.  Menger’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.

[1] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

[2] p. xi https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS

 

March 21, 2016 Posted by | -Economics, philosophy | , , | 5 Comments

Carl Menger: Principles of Economics

This is a review of Carl Menger’s book Principles of Economics published in 1871[1].  I will be judging this book on three criteria: 1) Is it adhering to the philosophy of science? 2) Does it address the question of what is the cause of real per capita increases in wealth? and 3) Does it address the Mengerquestion of what was the cause of the industrial revolution?  These last two questions are the most important in all of economics and it is impossible to write something that is profound if it does not address a profound question.  I will also be analyzing Menger’s “subjective” theory of value and prices.

 

Philosophy of Science

Menger addresses this issue in the Preface.  He discusses the remarkable advances of the hard sciences and the high regard in which they are held.  He also laments that economics is held in very low regard.

This method of research, attaining universal acceptance in the natural sciences, led to very great results, and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge, and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science.  (P.47)

Menger however never states why it would be improper to use the philosophy of natural sciences.  He implies that he is using the “empirical method” however he never explains what he means by that.  The rest of the book has almost no empirical evidence in support of Menger’s positions.  Menger’s lack of clarity on this point is consistent with much of the rest of the book.  This means that it is often possible to argue that Menger held two contrary positions and find support for both in this book.  This in and of itself is support that Menger did not follow the philosophy of science, however it is a useful rhetorical tool.  In addition, his major protégé, Ludwig Von Mises, explicitly rejects the philosophy of science, in favor of philosophical rationalism.

Menger’s major intellectual influence was Franz Brentano, an Austrian philosopher best known for his works related to psychology.[2]  Brentano wrote a book entitled Perception is Misception, in which he claims that perception is erroneous.  “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.”[3]  Since Menger considered Brentano a friend and intellectual influence and Menger did not refute this position, it is reasonable to assume that Menger was sympathetic to Brentano’s anti-perception idea.  This anti-perception point of view is very reminiscent of Plato.  Plato’s ideas are not consistent with science.

The overwhelming evidence is that Menger did not follow the philosophy of science.  This means that none of the major Austrian economists, Menger, Von Mises, or Hayek based economics on the philosophy science.  Austrian economics is not a science.

 

Source of Economic Growth

This section, The Causes of Progress in Human Welfare p. 71, is the part of Menger’s book I consider most important.  It also appears to be the payoff for pages of description of first, second, third, etc. order goods.  Even Menger admits that his definition of these is a bit vague, however first order goods appear to be consumables or consumer goods.  Menger argues that economic growth is the result of creating more second or high order goods.  This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists.  Not only has this already been said by other economists, but it is wrong.  He also has one throw-away line about human knowledge.

“Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.”

He never builds on this, he does not explore how human knowledge is created, how it results in increases in economic wealth, or what knowledge is important to economic growth.  His followers, such as Mises also do not build on this, they all focus on increases in savings and capital as the cause of growth in the economy.

In a technologically stagnant economy adding more capital at best can lead to some sort of optimum output, but can never exceed this level.  (I describe and provide evidence for this in much more detail in my book Source of Economic Growth).  As a simple example, imagine Robinson Crusoe fishing with a spear.  The spear is a second order good or higher under Menger’s approach.  Now if Crusoe creates more spears will he have more fish?  No, since he can only use one spear at a time.  At best having more spears will allow him to replace his spear more quickly if he breaks or loses a spear.  Another example is that if every farmer that can use a tractor has one, then giving them more tractors will not increase the production of first order goods.  This has been shown empirically and Robert Solow’s paper (Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320) is just one of many that prove this.

Menger fails to answer the question of what causes real per capita increases in wealth.

 

Industrial Revolution

Menger never mentions the industrial revolution in this book.  The Industrial Revolution is the first time that people escape subsistence living (the Malthusian Trap) in large numbers.  It is the most significant event in the economic history of the world and Menger shows no interest in it.  By the time Menger wrote Principle of Economics the Industrial Revolution was at least seventy years old and had exploded in the United States.  This shows a profound disinterest in the empirical side of economics.  It would be like an astronomer ignoring and eschewing the telescope or biologist who refuses to do or even explore the results of dissections.

Menger does not compare the economies of different countries or the economy of a country at different times, despite the profound differences in the economies of countries around the world.  This is not how a scientist thinks or works.  Instead Menger examines propositions in his own head, like the monks of the middle ages arguing over how many angels can dance on a pin head.  Menger’s style is completely consistent with Mises praxeology – philosophical rationalism.

The cause of real per capita increases in wealth is increasing levels of technology (new inventions) and the cause of the Industrial Revolution is legally enforceable property rights for inventions (patents) as William Rosen, shows in his excellent book The Most Powerful Idea in the World and I show in my book Source of Economic Growth.

Menger does not discuss inventions, technology, knowledge, patents or their importance in economics.  Menger fails to add anything useful to the two most important questions in all of economics.

 

Subjective Value

Menger is generally credited with the idea of subjective value in economics.  This is described as a reaction to the labor theory of value described in classical economics, which is an intrinsic theory of value.  Despite this many people have argued that Menger was not advocating a subjective theory of value.  Note that when modern Austrians use the term subjective value they mean that values are disconnected from reality – they are peoples’ arbitrary decisions.  The interesting thing is that in his Principles of Economics you can find support for both positions.  For instance, if you want to argue that Menger was advocating an objective theory of valuation you can provide the following quotes:

Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115

Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs. p 116

Menger also makes this distinction between real and imaginary goods.  He appears to be making a point about objective values, however he never does anything with these concepts once he introduces them.

Note that Menger never defines what he means by needs.  Are needs anything someone wants?  Menger never says.  Then he talks about the satisfaction of needs.  Is this a personally, subjective decision?  Menger never says.

On the other hand if you want to say Menger was advocating the modern value subjectivism of Austrians, then you can find these quotes.

It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. P. 121

The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146

Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals. P.146

Another factor favoring the subjective theory of values is that Menger is clear that ethics and morality are outside the study of economics.

But it seems to me that the question of the legal or moral character of these facts is beyond the sphere of our science. P. 173

Here he is talking about the morality of charging interest, however it is clear that this statement is a more general statement about economics.  This suggests that Menger’s ethics, like most Austrians, is some version of Utilitarianism, which means he rejects Locke’s and Rand’s Natural Rights.  Another quote that supports this point of view is Menger’s ideas of property.

The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves. P.76

Property, therefore, like human economy, is not an arbitrary invention but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods.  P. 97

The first quote is really Menger’s definition of property.  Note that this over 200 years after Locke.  It is a clear rejection of Locke and Natural Rights.

The second quote is a forerunner of the inane idea that property “rights” are socially useful tools for allocating scarce resources adhered to by Austrians.

Menger’s position on subjective value is confused.  Note that this is not the work of scientist, which shows once again that Menger’s ideas are not based on the philosophy of science.  Despite this Menger’s rejection Natural Rights, rejection of ethics in economics, and the direction his students took suggests that on balance Menger was an advocate of the radical subjective theory of value.

 

Conclusion

I undertook this task because a number of people I have respect for argued that Menger was not the same as Hayek or Von Mises.  In addition, a number of well-known Objectivists have tried to reconcile Austrian Economics with Objectivism.  I have analyzed in depth the irrational roots of the two main branches of Austrian Economics: 1) Hayek and 2) Von Mises.  I have shown that the positions of Austrians on a number of positions are absolutely flawed including their position on property “rights”, the Austrian Business Cycle, their position on fractional reserve banking, and their position on intellectual property.  Carl Menger has not proven to be the savior of this fall from grace.  This is not to say that other schools of economics are better or that there is nothing useful in Austrian economics.  For instance, Menger’s marginal utility is a useful concept, but hardly profound.

I found Principle of Economics boring, repetitive, and written in the pseudo-scientific style of many pop management books or psychological self-help books.  This is consistent with other books I have read by Austrians.  The best writer among the major Austrians is Hayek.

I did not force myself to read every word of Principle of Economics because it is boring, repetitive, and non-scientific.  I will not apologize for not reading all of a book that is clearly not based on science.  I also will not waste my time reading anymore books by Austrians.  I know more about the underlying tenants of Austrian economics than many of its proponents, just as I know more about the underlying tenants of christianity than many of its proponents.

Objectivism and Austrian economics are incompatible.  I think many Objectivists are fooled into supporting Austrian economics because they talk about free markets.  Austrian economics is not the product of reason, the Enlightenment, and the philosophy of science.  It is best described as a branch of the Scottish “Enlightenment”, which really was a counter enlightenment movement.  If Objectivism wants to make progress in economic science it needs to wall itself off from Austrian economics.

 

[1] https://mises.org/sites/default/files/Principles%20of%20Economics_5.pdf,

[2] https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.

[3] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

November 16, 2015 Posted by | -Economics, -Philosophy, Innovation, Patents, philosophy | , , | 1 Comment