This is an excellent book that cuts through the morass of theories about the source of wealth to make an identification that gave me a thrilling “Eureka!” moment, followed by an “Of course! Why didn’t I see that?” which comes with every brilliantly made, clearly expressed discovery. Thank you for clearing the cobwebs on the vital issue on the source of ongoing wealth — the dissemination of your well-supported identifications can make the difference in the quality of life in all nations for all lifetimes to come.
This post is serving a dual purpose of being my outline for my talk at Atlas Summit 2016 and to explain my ideas on Intellectual Capitalism.
The most important question in economics is: What is the source of real per capita increases in wealth? In my talk at Atlas Summit 2015, I examined how many prominent economists throughout history have answered this question. I finished this survey with the latest research in this area which is known as “New Growth Economics.” I explained where I thought these economists had gone off track and where they were inconsistent with Ayn Rand’s ideas. I concluded with an outline of a science of economics that I think is consistent with Objectivism, natural rights, and the founding principles of the United States.
In this talk I am going to investigate this question from a bioeconomics point of view. Bioeconomics or thermoeconomics (aka biophysical economics) attempts to tie economics to biology and thermodynamics. In other words its goal is to provide a physical as opposed to a sociological basis for economics. This area of study has been around since the 1920s and has never been accepted as part of mainstream economics for good reason. In most cases the research in this area has been an endless way of restating or proving the ideas of Thomas Malthus, a favorite of the environmentalist movement. The famous physicists Edwin Schrodinger, of the Schrodinger wave equation in quantum mechanics, waded into this area and developed some interesting ideas about life and entropy. However, it turned out that a number of his ideas were based on an unsound position about entropy or the second law of thermodynamics.
Despite this I think there is some useful information to be gleaned from this work and the goal of providing a physical basis for economics. Most of the economics profession disagrees, however there was a lady from Russia who thought that ethics was based in reality, specifically the biological reality of man and what is necessary to sustain his life, despite the scorn of most philosophers. Rand showed that ethics was not arbitrary whim, but derived from the nature of man.
I am going to do something unusual, I am going to state some of the most important claims of this talk upfront.
- If man did not invent, then the study of economics would be the same as the study of human evolution.
- Inventions are the equivalent of genetic changes from an evolutionary point of view.
- Rand’s metaethics and biological evolution are aligned.
I bet that you think that some of these claims are bit far out. However, I think you will have to admit that if I can show that these are true then they have profound consequences.
Rand’s analysis of ethics starts with the understanding that man is a living organism and he has some things in common with all living organisms and some things that differ.
“An organism’s life depends on two factors: the material or fuel which it needs from the outside, from its physical background, and the action of its own body, the action of using that fuel properly. What standard determines what is proper in this context? The standard is the organism’s life, or: that which is required for the organism’s survival.”
The Virtue of Selfishness, “The Objectivist Ethics.”
“If an organism fails in the basic functions required by its nature … [it] dies.”
The Virtue of Selfishness, “The Objectivist Ethics.”
Rand’s ability to build an ethics on biological reality is a profound accomplishment and a big reason why Objectivism became so important to me. Ethics is about what we should do. It’s a code of action. Economics as I define it is about how we accomplish this: that is how we survive. As Rand points out for most organisms their code of actions is hardwired in their genetics. “How” to accomplish these goals is also hardwired.
“A plant has no choice of action: the goals it pursues are automatic … determined by its nature.”
The Virtue of Selfishness, “The Objectivist Ethics.”
This is what I mean by metaethics, it is the ethics of non-volitional beings.
Rand’s metaethics is aligned with the fundamentals of biological evolution. Evolution is built on two or three very simple observations: 1) a selection mechanism, commonly called natural selection, and 2) a change mechanism, which includes sexual reproduction and asexual genetic changes. Rand’s point that if an organism fails it dies which is another way of stating that there is a selection mechanism. The idea of a selection mechanism is an inevitable result of the nature of life and its fundamental alternative, death. The “goal” of life is not competition (selection of the fittest) despite the natural selection component of evolution. By “goal” I mean the natural direction the process will take. In the case of life and evolution, the goal is to maximize the amount of energy converted into life.
What determines if an organism or a species survives is its automatic code or DNA that determines both what it should do and how it should do it. For instance a plant values water and it grows roots into the soil to obtain water. Both the value and how to achieve the value are “hardwired” by its DNA. This shows that Rand’s metaethics hints at the idea of a genetic code that is changeable biologically.
The unique nature of man is that he is a rational animal according to Rand and Aristotle. This means that man does not have an automatic code of values or automatic knowledge, in other words he does not have an instinct. This provides the advantage of being able to obtain new knowledge and react to different situations in unique ways but it also means that we have to define our own code of values and acquire knowledge.
Biology provides support for Rand and Aristotle. Human (homo sapiens sapiens) brains use 25% of the bodies total caloric intake, despite the fact that they are only 2% of the total weight. This is significantly more than other animals. Mammals’ brains only use 2%-10% of their total caloric intake. 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.
It 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.
All organisms have a certain minimum number of calories they need to obtain to stay alive. This resting rate of burning calories we can consider to be entropy. Entropy was originally a concept from thermodynamics. One dictionary definition of entropy is that it is a measure of thermal energy per unit temperature that is not available for useful work. Here we are just using entropy to denote that every living being consumes energy that is not available for the organism to do useful work. We could just say that life requires energy without probably any loss of meaning. Failure to overcome this entropy results in the death of that organism. Life requires a profit meaning we have to produce more than the amount of energy than we consume. A loss is when we spend more energy than we have obtained. This provides us a biological definition of profit and loss and shows that consistent losses result in biological death, just like consistent financial losses result in the financial death of an organization.
On a species level (except humans), life attempts to overcome entropy by adaptations that make it more successful at acquiring useful energy. The more successful the species is at acquiring useful energy, the greater its population (and territory) will become, which will increase its chances of having offspring and useful adaptations. However, it will mean that the individuals in the species will also eventually begin to compete with each other for the resources that provide the energy to overcome the entropy. Because of population increases and using up the available energy, the species will be back at the point at which the calories it acquires are just on the edge of starvation, otherwise known as the Malthusian trap. Then, another adaptation of that species or another species will result in excess free energy, an increase in the population of that adapted species, and the process will repeat.
Humans have a low genetic diversity especially for a species with our population and geographic territory. This would appear to be inconsistent with biological evolution, however it is important to remember that humans adapt the environment to their needs, while other organism adapt to the environment. The way humans adapt the environment is by creating things to solve problems and these are called inventions. An invention is a unique combination of elements that solves an objective problem. Thus the invention of how to make (preserve) fire solves the objective problems of cooking and providing warmth. Humans do not wait for genetic changes they create inventions that allow them to change the environment. This means that inventions function like genetic changes for humans. Our inventions allow us to create a great diversity of beings that can survive in dry hot deserts, wet tropical forests, and frigid arctic conditions. A human with a club and fur skin is a different species (organism) from a non-biological evolution point of view than a man with a high power rifle and wearing synthetic fibers who raises cows, chickens, and grows wheat.
When humans created a new invention our population increased and many times our territory also increased. The two biggest historical examples are the Agricultural Revolution and the Industrial Revolution. After the Agricultural Revolution the population and geographical territory of humans expanded rapidly. The Agricultural Revolution was really a group of inventions. Unfortunately, the Agricultural Revolution did not result in humans escaping the Malthusian Trap (living on the edge of starvation). This was because the surplus energy provided by agriculture was taken up by the increase in human population, which is the same thing that happens to organisms with successful genetic mutations.
How did we escape the Malthusian Trap then? We had to create inventions at a rate that gave us a profit that exceeded the rate at which human population expanded. This happened during the Industrial Revolution for the first time in history. Since the beginning of the Industrial Revolution the percentage of people escaping the Malthusian Trap has continued to increase despite an explosion in our population. Something happened at the beginning of the Industrial Revolution that had never occurred in human history: we started inventing at an unprecedented rate. The question is why that occurred? Before the Industrial Revolution, around 1800, inventions occurred roughly at a rate that was proportional to our population, however this is not what happened in the Industrial Revolution. The explosion of inventions was fairly isolated to a small population in a relatively small geographic area, specifically the people of Great Britain and the United States. The reason this occurred is that this was the first time in human history that large groups of people had access to property rights in their inventions (i.e., patents).
An interesting question is whether other organisms could evolve biologically fast enough to escape the Malthusian Trap? The answer is no, because organisms modify themselves (adapt to the environment) and to escape Malthusian Trap it is necessary to modify the environment. An organism that was highly effective at modifying itself would just become so successful that it would destroy its inputs (consume all its resources).
Would it be possible, as some environmentalists suggest, that once we escaped the Malthusian Trap we could just stop inventing and stay at our present level of wealth? No, because of entropy or diminishing returns. The classical economists argued that diminishing returns were due to the lower quality of inputs overtime. For instance, once it was found that coal was useful the initial coal could be picked up off the ground and used relatively near where it was found. Over time people had to start mining the coal and transporting it over longer distances. As they dug into the ground water would collect in their mines and that had to be removed. The easy to mine coal was used up first. This problem is related to the randomness conception of “entropy.” The coal is not uniformly spread throughout the world.
The result is that our output (wealth) will decline over time if we do not continue to invent. The second law of thermodynamics says that we cannot create a perpetual motion machine. When environmentalists offer the solution of sustainability they are attempting to build a perpetual motion machine.
Sustainability is not Sustainable
They are trying to create a system in which the quality of the inputs never decreases. The environmentalists are correct that we create waste (low value outputs) and we will not be able to forever use the same processes without running into problems. However the solution is not to stop inventing and freeze our technology, but to continue to create new technologies at a rapid rate. This has the following implications for economics:
- 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.
- 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 best human example of this that I know of is the Dark Ages. The level of European technology declined. For instance, the process of creating concrete was lost. The Romans had a mechanical reaper for corn, which was lost until Cyrus McCormick invented a new (commercially practical) reaper in 1837, and numerous construction techniques, such as those used to build the Pantheon were also lost. As a result Europe’s population decreased and so did its population density. Another, example is Easter Island around 1600, where the islanders cut down all the trees and lost the top soil to farm and without the tall trees they were no longer able to fish. Because the Easter Island Polynesians were technologically stagnant their inputs declined until they could not longer support their population. It is estimated that their population fell from a peak of 15,000 to 10,000 down around 2,000. Farmland is another example where the output declines overtime without new technologies.
This leads to the question of whether inventions are subject to diminishing returns. I discuss this is great detail in my book Source of Economic Growth. Here I will just cover some of the most basic points. An invention is a unique combination of elements (things, components) that provide an objective result. Every invention can be a component (element) of another invention. As a result, every invention opens up a number of potential inventions. The number of potential inventions expands combinatorially as new inventions are created.
However, this is just potential inventions. Studies have shown that narrow areas of technology often appear to be subject to diminishing returns over time. Meaning the next invention is more expensive or provides less performance gain or both. For instance, vacuum tubes were limited in their switching speed and how small they could be made. The cost and performance of military jets is another example. There was a chart created by an undersecretary of the Army, Norman Augustine, showing that in the not too distant future a single jet fighter would cost the entire GDP of the U.S. The physical speed of vehicles also seems to have peaked.
Generally, these technology bottlenecks have been solved by cross over technologies. For instance, vacuum tubes were replaced with discrete transistors, which were replaced by integrated circuits. Ray Kurzweil, futurist and prolific inventor, has shown that despite the limitations of individual areas of technology, computing power has been growing at a relatively uniform rate since Babbage created the mechanical computer around 1822.
The cost performance limitations of jet fighters have been overcome by electronics and UAVs. Electronics have allowed old airframes to be upgraded significantly in performance, without the cost of building better or even new airframes.
There is no macro evidence that inventions are subject to diminishing returns.
I have approached the question of “What is the source of real per capita increases in wealth?” from both a New Growth and Bioeconomics point of view and they both provide the same answer, inventions. This is consistent with Rand who points out that man’s mind is the ultimate source of all human wealth. Inventions are just the application of man’s mind to the problems of life.
Inventions are the evolutionary equivalent of genetic changes. Manufacturing (reproduction) and distribution are the evolutionary equivalent of reproduction and territory expansion of new biological organisms.
Profit and loss have a real physical meaning. They are not just an arbitrary way of keeping score in a parlor game as both the left and to some extend the economics profession treats them. Those people who advocate making profits illegal are advocating death, literally.
Sustainability is not Sustainable because of entropy. However, if peoples’ natural rights are protected and their rights to their inventions are secured, then technology can grow much faster than entropy.
This research shows that Rand’s criticisms of economics were spot on and the whole of economics needs to be rethought in light of these insights.
 As Rand explains it “by an automatic knowledge and an automatic code of values.” The Virtue of Selfishness, “The Objectivist Ethics.”
 Rational means the ability to reason. Reason is volitional and people can choose to not exercise their ability to reason.
 Suzana Herculano-Houze, Scaling of Brain Metabolism with a Fixed Energy Budget per Neuron: Implications for Neuronal Activity, Plasticity and Evolution. http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0017514, accessed February 20, 2016. Also see http://www.human-memory.net/brain.html access 2/20/16.
 My investigation of this issue has shown me that out present conception of entropy and the second law of thermodynamics has some inconsistencies. The easiest problem to understand with entropy (2nd law) is that it only applies to an isolated system. However an isolated system is one that in which there is no gravity. Such a system does not exists.
Here a couple of amazon reviews of my Book Source of Economic Growth, which examines the two most important questions in economics: 1) What is the source of real per capita economic growth, and 2) What caused the industrial revolution? The industrial revolution is important, because it is the first time any large group of people escape subsistence living (Malthusian Trap) and their incomes start to grow. By examining these questions, the book devises a science of economics that is consistent with natural rights, the founding of the United States, and is tied to the biological reality of life.
The Importance of Invention
Dale Halling has authored a well-written and clearly-argued treatise on the importance of “invention” in economic growth. He begins with an accurate summary of ideas from Adam Smith, John Stuart Mill, Ludwig von Mises, Joseph Schumpeter, and John Locke who are viewed as having had good ideas that were not exactly correct, and an accurate summary of ideas of Karl Marx, Thomas Malthus, and John Maynard Keyes as having had bad ideas that were completely incorrect. Then he continues with arguments that recognition and proper valuation and protection of intellectual property has been essential to economic development in various countries. The final chapter is a fictional interview with a patent lawyer from the Midwest (which he is himself) talking about the prosperous future that would occur if government behaves wisely. In that future, laws are based on reason and Wall Street and Washington power are a thing of the past. I highly recommend this book to everyone interested in the subject matter.
John Christmas, author of “Democracy Society”
A Great Place to Start.
The first book on economics that is based on sound reasoning. Economist want be viewed as scientists, but until they incorporate the sound principles of human reason like those found in this book it will forever be a “dismal science” This is a great start in the right direction. It is exciting to think of the human potential once we grasp the proper formulas and processes.
by Tony Stonecypher
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.
Most 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.
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. 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.
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.
The founder of Austrian Economics is Carl Menger who stated explicitly that the philosopher Franz Brentano was his biggest intellectual influence. 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
- 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.
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.
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.
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.
 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.
Dale B. Halling’s new book Source of Economic Growth is now available. This book examines the two most important questions in economics: 1) What is the source of real per capita economic growth, and 2) What caused the industrial revolution? The industrial revolution is important, because it is the first time any large group of people escape subsistence living (Malthusian Trap) and their incomes start to grow. By examining these questions, the book devises a science of economics that is consistent with natural rights, the founding of the United States, and is tied to the biological reality of life.
Mr. Halling gave a related talk at Atlas Summit 2015 entitled The Source of Economic Growth. No school of economic thought is consistent with Objectivism, which is why Ayn Rand, in the very first sentences of “Capitalism: The Unknown Ideal”, said “This book is not a treatise on economics. It is a collection of essays on the moral aspects of capitalism.” Patent attorney and novelist Dale Halling proposes a science of economics that is consistent with Rand’s philosophy. The path to that understanding of economics results from examining the source of real per capita increases in wealth, which puts man’s mind at the center of economics. No other school of economics puts emphasis on man’s mind, which is one reason why Rand had a tenuous relationship with even free market economists.
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.
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 biological entropy. For instance, humans have invented agriculture to increase their supply of food (energy). 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. For instance, our bison standing on coal will never be able to harness the potential energy in that coal unless the species evolves to eat the coal.
The distinguishing characteristic of homo sapiens is their ability to reason. Man is a rational animal according to Aristotle’s classical definition. Man uses his reason to alter his environment (invent) and increase the energy available to him. Note that I am not limiting myself to the arcane definition of invention provided by the law. Anything that man creates to solve an objective problem is an invention. If a device/service is not found in nature separate from man then it is an invention. For example, the ability to create fire or harness it is an invention of man. No other animal has the ability to create or harness fire. Man did not have some sort of inherent knowledge of how to create or harness fire.
If humans did not invent, then studying economics would be the same thing as studying the evolution of humans. While trade is also unique to humans, trade is not the fundamental basis of economics. Trade is an invention of man. If everyone produces the same thing, then there is no reason to trade. For instance, if we all produce wheat, then there is no reason or ability 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 and production is severely diminished.
Diminishing Returns: Sustainability Isn’t Sustainable
Biological entropy implies diminishing returns. For all species of life there is a limited supply of the resources (free energy) and conditions necessary to sustain a particular form of life at any point in time. The concentration or ease of extracting these resources varies as a result of the non-homogenous nature of the universe. A species of life thrives where it has a high concentration of resources (low biological entropy for the species) and as its population expands it has to expand to areas of low concentration of resources (high biological entropy), which results in diminishing returns. The species are then constrained by the Malthusian Trap.
The way this is expressed in economics is that the use of any one resource results in diminishing returns for that resource. The question of limited human resources has been the subject of Economics since Malthus and David Ricardo. I will explore the idea of diminishing returns and its relationship to invention, by examining the idea of sustainability. Sustainability is an attempt to overcome or at least manage diminishing returns. There are numerous and conflicting definitions of what sustainability means. However, most sources point to the World Commission on Environment and Development (WCED), also known as the Brundtland Report. According to the 1987 Brundtland Report, sustainability is: “Meeting the needs of the present generation without compromising the ability of future generations to meet their needs.“ This definition is not testable and is incredibly vague. What are the “needs” of the present generation? Do we need the Internet, satellites, SUVs, etc.? How do we know if this will compromise future generations ability to meet their needs?
Since this is not a productive path of inquiry, let’s take the word “sustainable” literally. A sustainable technology would be one that can be used indefinitely by humans without side effects and without any diminution in its effectiveness. This definition violates the laws of physics. According to the second law of thermodynamics, entropy always increases in a closed system. As a result, any use of technology at least produces waste heat – a side effect. Sustainability taken literally is an attempt to create a perpetual motion machine. Even the Sun’s energy will not last forever and it is not infinite. This is true whether we are talking about absolute entropy or biological entropy. Is the sustainability movement unrealistically optimistic?
A key issue for the sustainability movement is the use of so called non-renewable resources, such as the use of fossil fuels and the using up of other natural resources (diminishing returns). The way this is often phrased today is Peak Oil, Peak Water, Peak _____ (Pick Your Favorite Resource). Peak Oil (natural resource) occurs when the amount of oil that can be extracted reaches its maximum or the point at which we reach the maximum net energy output from oil. The alternative definition takes into account that even if we can extract more oil, this is irrelevant if it takes more energy to extract the oil than we receive from the oil. The supposed solution for our Peak Oil problem is to develop renewable energy resources. The Clean Energy website provides the following definition “Renewable energy is natural energy which does not have a limited supply. Renewable energy can be used over and over again, and will never run out.” What is a natural energy? Either all energy is natural, comes from nature, or only animal muscle power is natural. The natural qualification is complete nonsense – unless they really want us to go back to animal muscle only. The “never run out” qualification violates entropy. All energy resources will run out. All energy sources, fossil fuels, solar, hydroelectric, tidal, biomass, hydrothermal, fission, fusion, etc are solar or at least stellar. For instance, hydroelectric energy is the result of the Sun heating the oceans or other large bodies of water. As the water evaporates and then condenses in the form of rain or snow on land masses it is collected in dams. The dams convert the gravitation force of the water into electric energy. Fossil fuels are created by plants converting sunlight into biomass (including animals). The biomass is trapped underground by sea sediment and the pressure and heat converts the biomass into oil, coal, natural gas, etc. Fission is the process whereby heavy elements, generally Uranium, are split into lighter elements and energy is released. These heavy elements were created in a star that has long since expired. Thus, all energy is Solar or at least stellar. The Sun will not last forever and does not provide unlimited energy. The concept of renewable energy that “will never run out” and “can be used over and over again” is false. So was Malthus correct? Are humans doomed by entropy to eventually return to the Malthusian Trap or worse? Is the defining characteristic of economics that diminishing returns (entropy) will always force humans back to the point that we are on the edge of starvation? If so, will evolution pass humans by and humans will become extinct?
This concept of peak resources is not new. You can find numerous examples of “Peak Oil” historically. For instance, the fertilizer crisis of the 19th century. In 1830 it was discovered that bat guano was an excellent fertilizer. Population exploded, as guano was used in Europe because of the additional food (energy) produced as a result of this excellent fertilizer and mechanization. The best sources of guano began to run out fairly quickly. People predicted the equivalent of “Peak Guano.” The question was not whether we would have “Peak Guano,” but Peak Fertilizer. In other words, we did not have a guano problem we had an invention problem. The Haber-Bosch process was invented in 1909, which allowed fixing nitrogen in air and solved the “Peak Guano” problem.
Reason magazine in the article Peak Everything? discussed how logical, scientific projections showed we would run out of lithium, neodymium, and phosphorus. Peak lithium was going to limit the batteries necessary for electric cars. In fact, we would run out of lithium faster than we would run out of oil. The solution is a new invention that replaces lithium with zinc air batteries. Note the solution was not a better way to extract lithium, but to make the supply of lithium irrelevant. New invention creates a paradigm shift. Peak neodymium is going to limit our ability to build the electric motors of hybrid cars as well as other products. Interestingly, neodymium magnets were invented to overcome the problem of peak cobalt. In the area of permanent magnets, it appears that a new induction motor will eliminate the need for permanent magnets. Peak phosphorus is a repeat of Peak Guano. Peak phosphorous threatens our ability to provide enough fertilizer for our agricultural needs. One solution is to expoit human waste. Phosphorous is a byproduct of human urine. The phosphorous can be recycled using a no mix toilet.
Paul Romer has observed, “Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.”
The computer industry has also been beset by predictions of impending doom, when it could no longer achieve Moore’s law of doubling the number of transistors every eighteen months. Ray Kurzweil has shown that if you restate Moore’s law as computational power, every time a technology reaches its limit to improve computational power a new technology takes over. Using this he shows that computational power has been growing exponentially since 1900. The first computational devices were electromechanical. When these devices reached their limit, they were replaced with relay devices; these were replaced with vacuum tubes, then transistors, and finally integrated circuits. However, if you trace the speed of machines beginning with the invention of the steam engine, it peaks at around supersonic flight. It is hard to determine if this is an economic/technological limitation or political limitation.
Diminishing returns for a given natural resource in a technology static scenario occurs because high order areas of the natural resource are exploited first. It takes more energy to extract lower order areas (high biological entropy). For instance, man first exploited gold nuggets picked up from the ground. Eventually, man dug for the gold or panned, which required more energy because it was less ordered. Note that even this change required new (additional) technologies – a shovel and pick or a tin pan. Modern techniques of gold mining, e.g., cyanide leaching, have allowed formerly unprofitable mines to be reopened. This is because the new technology allows us to exploit even lower order areas of gold. Diminishing returns only apply in a technology static environment. These diminishing returns can be modeled as a decaying exponential.
Are Inventions Subject to Diminishing Returns?
Every invention is a combination of known elements – you cannot create something from nothing. This follows from the natural law conservation of matter and energy. As a result, every invention opens up the possibility of more inventions by building on earlier inventions. Creating these inventions takes energy, but the number of potential inventions we can conceive of increases with every invention we create. As a result, the number of potential inventions grows factorially. There are four ways in which inventions could be subject to diminishing returns: 1) the number of inventions are limited, 2) the inventions in a narrow area of technology are limited 3) the returns on devoting more resources, as a percentage of total resources, to inventing declines, and 4) the cost of creating the next invention in any technology could increase.
The number of potential inventions, however, is not subject to diminishing returns. In fact, the opposite is true. The number of potential inventions grows factorially as new inventions are created.
Inventions in a narrow area of technology are subject to diminishing returns. Early inventions would appear to provide the greatest return and latter inventions appear to provide more limited returns. Ray Kurzweil has studied this and found that new technologies appear to follow an S-curve with the greatest return in the middle of the S and eventually declining in return. Cross pollination between the primary area of technology and other areas of technology appears to prevent diminishing returns in a narrow area of technology, similar to how substitute resources prevents diminishing returns for natural resources.
Would it logically follow, if a greater and greater percentage of a country’s or the world’s resources were devoted to discovering inventions you would hit a point of diminishing returns? The answer is no country has ever come close to testing this hypothesis. Countries throughout history have under invested in inventions and provided little or no incentive for inventors. Those countries that have devoted the most resources to inventing, have seen the greatest economic returns. The U.S. has historically devoted the most resources to invention. It has historically had the strongest laws protecting the rights to inventions, which has resulted in greater resources being devoted to invention. England had some of the strongest laws protecting inventors at the beginning of the Industrial Revolution and it was the hotbed of invention at that time. The Italian city states of the 15th and 16th centuries had some of the first laws protecting inventors and they had a much higher standard of living. Among their inventions were modern glass making techniques and a modern banking system. There is a minimum amount of resources that must be devoted in a country to agriculture and maintenance just to keep up with the decline due to human biological entropy. If inventive activity were so large as to crowd out those activities necessary to overcome biological entropy, you would have to assume that there are diminishing returns at that point.
The idea that the cost per invention could increase to the point of diminishing returns, seems to have credence if we look at a narrow technological area. For instance, the cost of improving the aerodynamics of airplanes is extraordinarily expensive. However, modern electronics allow us to improve the aerodynamics of planes by putting in control systems that allow a plane to be unstable aerodynamically. Commercial supersonic flight was not feasible economically in the 1970s because of aerodynamic drag. This problem can be solved today fairly inexpensively with electronic control systems. The cost of inventing in electronics grew tremendously with the advent of the integrated circuit. The advent of personal computers and software have driven down the cost of inventing in electronics and a wide variety of other areas. There is evidence that the cost of inventing is decreasing over time, if we do not limit inventing to a narrow area of technology.
Diminishing returns can be modeled as a decaying exponential. Inventions across all areas of technology are not subject to diminishing returns. Potential inventions grow factorially, which is much faster than diminishing returns shrink. Thus, it is entirely possible to grow our technology faster than the limitations of diminishing returns. However, it is not foreordained that humans will invent. Humans are volitional beings and they can choose not to invent. There is plenty of evidence that when humans choose not to invent then they become subject to diminishing returns and their society declines or becomes extinct. For example, Jared Diamond’s book Collapse argues that many societies collapsed because of environmental problems.
In a technologically stagnant society, entropy and diminishing returns will prevail and that society will become extinct.
It appears that the sustainability movement is overly optimistic, in a technologically stagnant society. However, if humans choose to invent in broad technological areas, then they can escape this fate. Invention is the key to escaping the Malthusian Trap and growing real per capita income. This is consistent with Robert Solow’s paper “Technical Change and the Aggregate Production Function” paper and the subsequent work in this area of economics which shows all real increases in per capita income are due to increases in technology. It is also consistent with groundbreaking econometric studies of Jacob Schmookler, in chapter V, “Productivity Advance: A Case of Supply and Demand” of his book Invention and Economic Growth.
In a technologically dynamic society, inventions will result in growth that outstrips entropy and diminishing returns. People will escape Malthusian Trap and their per capita income will grow.
The question about whether humans are doomed to a Malthusian existence, where economic growth cannot keep up with population growth, has been one of the most vexing questions since the beginning of economics. Malthus was clearly correct for all of human history other than the last 200 years. Even since then he has been correct for the majority of humans until the last 40 years or so. On the other hand, critics of Malthusian theories have pointed to the West’s ability to overcome all predicted population bombs and resource limitations during the last 200 years. Critics often point to the famous bet between Paul Ehrlich and Julian Simon over the price of commodities. The reason this debate has been so contentious and has not been resolved is clear. There is no predetermined answer. It depends on whether large groups of people decide to invent fast enough. I say large groups because Matt Ridley has shown in his book, The Rational Optimist, that small population groups cannot even sustain their initial level of technology. The book provides numerous examples of how various groups of humans regressed technologically because of inadequate population densities to support specialization, such as Tanzania. The book summarizes the lessons by quoting economist Julian Simon “population leading to diminishing returns is fiction: the induced increase in productivity is scientific fact.”
 Some animal trade like items across time. If I have extra wheat, I give it to someone who does not have enough and they return the favor later. Usually this only occurs between family members in other species.
 Brundtland Commision, Wikipedia, http://en.wikipedia.org/wiki/Brundtland_Commission, 11/7/10.
 Note that have been some alternative explanations proposed for how oil is produced that does not involve this biomass conversion
 Mark Ridley had numerous “Peak Oil” examples in his book The Rational Optimist: How Prosperity Evolves, Harper Collins, 2010, New York, pp 121 -156.
 Bailey, Ronald, Reason.com, Peak Everything?, April 27, 2010, http://reason.com/archives/2010/04/27/peak-everything, 10/16/10.
 Bailey, Ronald, Reason.com, Peak Everything?, April 27, 2010, http://reason.com/archives/2010/04/27/peak-everything, 10/16/10.
 Kurzwiel, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 67.
 If there is a limited amount of matter and energy in the Universe, which is open to debate, there may be a limitation to the number of potential inventions. However, this limitation would be so large as to be meaningless for all practical purposes.
 Kurzweil, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 44.
 Kurzweil, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 44.
 Diamond, Jared, Collapse: How Societies Choose to Fail or Succeed, Penguin Group,New York, 2005.
 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
 Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966, pp 86-103.
 Matt Ridley in his book The Rational Optimist shows that self sufficiency is an economic dead end. Only large groups of humans can afford to have people specialize so some or all their time is devoted to inventing.
 Ridley, Matt, The Rational Optimist: How Prosperity Evolves,Haper Collins,New York, 2010,p. 83.
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.
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. 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? 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. 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. Aging is a process of increasing biological entropy. This is caused at least in part by disorder in genetic information. 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.
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.
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.
 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.
 There are few exotic life forms that do not need oxygen, but all require energy to overcome entropy.
 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.
 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.
 The Autobiography of Charles Darwin, location 680-686, by Charles Darwin (Mar 17, 2006) – Kindle eBook
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:
- Business Models
- Featured Videos
- Intellectual Capitalism
- Legal Philosophy
- Press Release
- Regulatory bill of Rights
- sarbanes oxley
- Sarbanes Oxley