State of Innovation

Patents and Innovation Economics

Why Austrian Economics Subjectivity is Wrong and Condemns Economics to Being a Pseudo-Science

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.[1]

econgrowth.smallAccording 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.[2]

wealth.v.longevity

 

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.[3]  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[4]  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.[5]  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.

[1] 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.

[2] Of course it is entirely possible that Von Mises (see footnote 1) believe trying to stay alive is an arbitrary choice.

[3] 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.

[4] 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.

[5] Murray Rothbard tried to span this contradiction.  A likely result was the non-sense of anarcho-capitalism.

Advertisements

June 13, 2016 Posted by | -Economics | , , , | 3 Comments

F. A. Hayek: 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 econgrowth.smallMenger 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 Hayek.

F. A. Hayek won the noble prize in economics. He is probably best known for his book The Road to Serfdom, which was written during world war two. In academic circles Hayek is best known for his work on how prices in a market economy provide information and result in a spontaneous order.  This work is closely related to Adam Smith’s ideas about the “invisible hand.”  Ayn Rand and Hayek never met, but Rand was highly critical of Hayek.[1]

Hayek considered one of his great achievements his work on “cultural evolution”, which lays out his epistemology.  One commentator summarizes Hayek’s cultural evolution this way

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

The History of Hayek’s Theory of Cultural Evolution, Erik Angner

Dept. of History and Philosophy of Science

Hayek’s objection to central planning is not based on individualism, but on the fact that central planning substitutes the knowledge and decisions of a few people for that of the group.  This disrupts the process of cultural evolution according to Hayek.

This group basis of evolution is based on Hayek’s belief that reason is limited at best.

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

The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek: A Critical Comparison, Linda C. Raeder is Associate Editor of HUMANITAS and a Research Associate at the National Humanities Institute

David Kelley summarizes Hayek’s position on Capitalism best.

This case for market freedom is essentially negative. Hayek seems to think that if socialist planning were possible, socialism might be the morally ideal system. But the inescapable ignorance of would-be planners excludes that possibility: ―If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.‖10

 

http://www.reasonpapers.com/pdf/33/rp_33_1.pdf

Symposium: Rand and Hayek on Cognition and Trade

Rand versus Hayek on Abstraction

David Kelley The Atlas Society

Hayek also accepts the Austrian economics position of subjective values and as a result rejects a rational or scientific ethics.  “No universally valid system of ethics can ever be known to us,‖3 which is obviously not consistent with her view.”[2]

It is clear that Hayek is inconsistent with Ayn Rand’s metaphysics, epistemology, and ethics.  Hayek’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.

 

[1] https://www.youtube.com/watch?v=GXJX9StfE1g

[2] http://www.reasonpapers.com/pdf/33/rp_33_1.pdf, Symposium: Rand and Hayek on Cognition and Trade, Rand versus Hayek on Abstraction, David Kelley The Atlas Society

March 21, 2016 Posted by | -Economics, philosophy | , , , | 1 Comment

Rebirth of Reason Website Attacks Patents

The website Rebirth of Reason, which is supposed to be an Objectivist website, posted an article entitled Patent Scam.  Below is my open letter to the author of this article.

 

Dear Ms. Vera S. Doerr,

 

If someone displayed the ignorance in criticizing Objectivism that this article does about patent law, Objectivists would be furious.  First of all it is clear that you do not know how to read a patent.  You don’t know the difference between the claims and the background, you don’t know the difference between an independent claim and a dependent claim or a patent and a patent application.  In fact it is clear that you did not read the patent application, which can be found here http://www.freepatentsonline.com/20140215201.pdf.  If you had read the patent application and understood how patents are written, instead of the summary from the article, you would clearly have seen that the invention is not about a device which can turn into a “cell phone, a smartphone, a tablet PC, a laptop, a personal computer, a netbook, a personal digital assistant, an e-book reader, a TV and/or other computing devices…”  You would have seen that this was about a device with a foldable display that takes certain action when it is folded in different ways.  These actions are explained in the patent application as making or receiving a phone call, sending or receiving an electronic document, activating or deactivating a software program, and connecting to or disconnecting from a network.

Despite your ignorance of patent law, electronics technology, and the specifics of the invention, you pontificate that “the technology behind it (the invention) would be so diverse that no material, no hardware, no software, existing today even as a theoretical prototype, could be combined into such a device.” Perhaps you are unaware that one of the requirements of a patent is the enablement requirement under 35 USC 112.  It requires that the inventor explain his invention in enough detail that one skilled in the art be able to practice the invention.  But you don’t have to take my word for it, foldable displays are known, see displays.  Having a foldable display that when folded in a certain way receives a phone call, or sends a document, is well within the reach of today’s technology.  As a patent attorney, with a BS in electrical engineering, a MS in physics, and named inventor on nine patents, I can assure you that this patent application is enabled and could easily be built by one skilled in the art.  Now that I have shown that to you, you will probably turn around and say it should not be patented because it is obvious, further proving your ignorance of patent law, logic, and reason.

Next you state that everyone is doing this and you “simply cannot believe this patent scam! Worse: it’s actually legal!”  This is clearly an appeal to emotion not logic.  You continue this unsubstantiated attack on the patent system, suggesting it is a legal hold up game that people are using to get rich.  Your article is worthy of a muckraking SOCIALIST journalist or a follower of Kant, Hegel, or Kierkegaard, but not someone writing on the Rebirth of Reason  or someone who has studied Ayn Rand.

Rand stated that Patents and Copyrights are the source of all property rights, because they protect the source of all human creation, the products of man’s mind.  Patents are property rights for inventions and your attack on the patent system is really an attack on the very basis of property rights.

There is a SCAM going on here Ms. Doerr, but it is not patents.

 

Sincerely,

Dale B. Halling

August 30, 2014 Posted by | News, Patents | , , , | 4 Comments