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. Numerous construction techniques, such as those used to build the Pantheon. 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 and the Polynesian. 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.
Now that we have some idea of what wealth and economic growth are, let’s look at some examples of what is not economic growth. When Tony slaughters a cow and eats it he has consumed some of his wealth. He has one less cow, but he has food in his belly that he needs to live. Is he wealthier now? Well he needs food to eat in order sustain his life. If he starves to death, he is certainly not wealthier. However, Tony now has less of what he needs to sustain his life in the future. Wealth is the surplus above what one needs to live today. Consumption is not wealth. Interestingly, being overweight was traditionally considered an indicator of wealth. The excess fat meant you could sustain yourself without eating for longer because you could not find food, or because you were sick and could not hold food down. In fact, it was fashionable for women and men to be overweight in the 1700 and 1800s. Fat was an indicator of wealth, both because the person could sustain themselves without food longer and because it indicated that the person had plenty of food, compared to the calories they consumed. In societies that live on the edge of starvation or what is called the Malthusian Trap, being overweight is a source of wealth.
The Malthusian Trap is named after Reverend Thomas Malthus (1766 -1836), who postulated that human population would always grow faster than the food supply, dooming humans to subsistence living, i.e., living on the edge of starvation. Oddly enough Malthus was correct until about the time he died. The advent of the Industrial Revolution changed this situation; first for the people of England and the US, then the West and today for at least half of the world’s population. The economist Gregory Clark has shown that policies to alleviate human suffering in a non-Malthusian Trap economy just result in additional misery in a Malthusian economy.
Another example of what is not economic growth, but our present GDP measurements do count as increases in wealth is known as the broken window fallacy. This was first explained by the French economist Frederick Bastiat (1801-1850). The fallacy is explained by this story. A window to your house is broken by a windstorm and you hire window installer to fix it, the window installer and the person who makes windows have additional work and income. The window installer is wealthier, but is this economic growth? The house is now in the same position it was before the window was broken, but you are out the cost of the window. The amount of profit the window installer has made is less than you paid, because window installer has costs, such as the cost of the gas to get to your house, the cost of the glass. Even adding up the profits of all the people the window installer paid does not add up to the cost you paid for the window. The reason for this is we have to consume food and other resources to stay alive as we discussed above. What this means is that your broken window has actually resulted in less wealth not more. This is not surprising. If our fisherman, Randy’s boat is damaged he is not wealthier. Even after he fixes his boat, he lost out on time he could have been fishing. Destruction does not create wealth, it reduces it. Unfortunately, you will hear politicians and economists talk about natural disaster causing economic growth all the time. An article in NPR discussing Superstorm Sandy that hit the U.S. northeast in 2012 stated:
But there may be a silver lining to all that destruction: Some economists argue that reconstruction from Sandy could help stimulate the national economy in 2013.
The reason economists are confused about whether destruction causes economic growth is that our measurement of the GDP does not count the destruction of property and life. This is like the gambler who only counts his winning.
 Farewell to Alms: A Brief Economic History of the World, by Gregory Clark, Princeton University Press 2000.
 Could Post-Superstorm Sandy Rebuilding Energize The Economy?, by Joel Rose, NPR, December 31, 2012, http://www.npr.org/2012/12/31/168363901/could-post-superstorm-sandy-rebuilding-energize-the-economy.
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