There have been a number of papers comparing Objectivism to Austrian Economics. The motivation appears to be Rand’s relationship with Ludwig Von Mises, since both are known for advocating Laissez Faire Economics. Most of these papers have focused on ethics, particularly whether the subjective theory of value in Austrian Economics (AE) is consistent with Objectivist ethics. The majority of these papers have argued that AE (at least the Menger-Mises side) and Rand are actually very similar and compatible, but not all including Rand herself. In order to arrive at these conclusions, the authors have often provided nuanced explanations of what the Austrians or Rand said. For instance, Richard Johnsson argues:
It seems to be a well-established fact that there are similarities between Rand and Menger, despite the objectivist/subjectivist issue. Once we concede that something can be intrinsic value, in Moore’s sense, I believe the differences between Austrian subjectivism and Rand’s Objectivism vanish.[i]
Roderick Long concludes in his paper, Praxeology: Who Needs It:
I have argued that the features of Misesian praxeology that Rand found most objectionable—its aprioristic methodology, its value subjectivism, and its claims about motivational psychology—can be reinterpreted in ways that make them congenial to Rand’s philosophical principles while still preserving the essential points that Mises was seeking to make. Hence there is no reason for those of a Randian philosophical bent to deprive themselves of the powerful methodological instrument developed by Mises and his fellow Austrians: praxeology, the a priori science of human action.[ii]
And Ed Younkins argues:
Objectivism’s Aristotelian perspective on the nature of man and the world and on the need to exercise one’s virtues can be viewed as complementary with the praxeology of Austrian economics.[iii]
Objectivists are generally more critical of the Hayek branch of AE. For instance, David Kelley writes “if a defense of freedom depends on individualism, and individualism presupposes individuals capable of genuine self-direction, Hayek cannot successfully defend freedom.”[iv] Ed Younkins says this about Hayek, “Hayek is primarily concerned with the nature, scope, limits, use, and abuse of reason in human life. For Hayek, a man’s knowledge of the world and himself is at best limited, incomplete, and uncertain.”[v]
This paper will focus primarily on the similarities and differences of the epistemology of various Austrian Economists (Menger, Mises, Hayek) and Rand. Rand and the economists will be taken at their word. Unlike many previous researchers, this paper will argue that the epistemological theories of Austrian Economists are incompatible with Objectivism and inconsistent with the science project of the Enlightenment.
Menger lays out his epistemology in his book Investigations into the Method of Social Sciences.[vi] Lawrence H. White in the introduction to the book, explains.
Fortunately, Menger draws and even emphasizes a suitable distinction between the “realist-empirical orientation of theoretical research” and the “exact” orientation (p. 59). The search for so-called ,”exact laws” alone is more appropriately considered the task of purely theoretical research in economics. We can make sense of “exact laws” as theoretical propositions which (necessarily) take an “if-then” form: if conditions A and B hold, then condition C must also obtain. Menger rightly insists (pp. 70, 215) that realist-empirical generalizations (e.g., A and B are usually accompanied by C) can by their nature never attain the strictness that necessarily characterizes logical implications. The two sorts of “laws” are on different epistemological planes. So without too much dissent from Menger’s thought we may divide economic theory from economic history where he divided strict theory from what he considered an empirical sort of theory. What is empirical is really historical, and this accounts for its different status from what is deductive.[vii]
Lawrence H. White goes on to explain:
But this is not because, like some economists, he (Menger) sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science. [viii]
As a person who has a masters’ degree in physics and a BS in Electrical Engineering and has worked with scientists and engineers his whole life, I am unaware of any so-called theoretical side of chemistry or other natural science that is ‘non-empirical, non-falsifiable (“exact”)’ nor have I ever heard such an idea proposed by others.
Ed Younkins describes Menger’s epistemology as:
Menger distinguishes between the empirical-realistic orientation to theory and the exact orientation to theory (36–44). Whereas the empirical-realistic branch of economics studies the regularities in the succession and coexistence of real phenomena, the exact orientation studies the laws governing ideal economic phenomena. He explains that empirical-realistic theory is concerned with regularities in the coexistence and succession of phenomena discovered by observing actual types and typical relationships of phenomena. Empirical realistic theory is subject to exceptions and to change over time. Theoretical economics in its realistic orientation derives empirical laws that are valid only for the spatial and temporal relationships from which they were observed. Empirical laws can only be alleged to be true within a particular spatiotemporal domain. The realistic orientation can only lead to real types and to the particular. The study of individual or concrete phenomena in time and space is the realm of the historical sciences.[ix]
Younkins and White both seem to agree that according to Menger there is theoretical side of economics that is exact and cannot be tested empirically. Menger argues there is also an empirical side of economics, which is not exact and subject to change over time.
Menger’s epistemology should be familiar as it is a restatement of the analytic-synthetic distinction. “Analytic propositions are true by virtue of their meaning, while synthetic propositions are true by how their meaning relates to the world.”[x] Not surprisingly the origin of this distinction can be found in Kant and comes from his metaphysics, in which he argues there is a noumenal and phenomenal realm.[xi] The noumenal realm is a realm of pure ideas and phenomenal world is a realm where our senses are engaged. This logically gives rise to an epistemological analytic-synthetic distinction.
Leonard Peikoff states, “The theory of the analytic-synthetic dichotomy presents men with the following choice: If your statement is proved, it says nothing about that which exists; if it is about existents, it cannot be proved.” Menger seems to disagree with at least the analytic (theoretical) side. Menger seems to argue that theoretical laws of economics can be derived by just thinking about them. Somehow these theoretical laws can tell us something empirical about economics. Whether that is true or not, it is not consistent with Objectivist epistemology and it is not science. The philosophy of science is a complex topic especially now days when Karl Popper is supposed to be the foremost philosopher of science and the Copenhagen Interpretation of Quantum Mechanics appears to undermine objectivity and even the law of identity. However, even these deviations in the philosophy of science do not suggest that science can be divorced from empirical evidence.
Mises’ epistemology is described in his praxeology, which is supposed to be the study of human action. The Action Axiom is the fundamental starting point of praxeology and it states “that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals.”[xii] According to Mises the principles (axioms) “are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts.”[xiii] Mises continues, “A fashionable tendency in contemporary philosophy is to deny the existence of any a priori knowledge. All human knowledge, it is contended, is derived from experience.”[xiv]
According to Long, Rand objected to this idea of a priori knowledge in her marginalia of her copy of Human Action. “There is no ‘a priori’ knowledge,” Rand insisted in the margins; “[t]here is no knowledge not derived from experience” (Rand 1995a, 113–14).”[xv]
Long argues that Rand’s definition of axioms is the same as Mises’ a priori. Long admits that Rand ultimately bases her axioms on reality while Mises does not, but relies on Rand’s explanation of an axiom as “a proposition that defeats its opponents by the fact that they have to accept it and use it in the process of any attempt to deny it.”[xvi]
According to praxeology the attempt to deny the action axiom necessarily means that you are acting towards a purpose. While it might be true that the person arguing against the action axiom is taking action toward a goal, it is not true that a person having a seizure is taking ‘conscious actions toward chosen goals’. A person in an abusive relationship suffering from ‘battered person syndrome’ is not engage din conscious actions toward chosen goals. Advocates of praxeology might argue that the abused person feels responsible for the abuse they are suffering and therefore they are working toward the goal of relieving their guilt. Any impartial observer would say that the abused person’s actions are not working toward relieving their guilt or getting out the abusive relationship. In economics it is at least an open question whether the idea of unintended consequences fits the action axiom. In that case the result obtained was not those the person(s) was striving for.
Note, Rand says that an axiom requires a person accept it in any attempt to deny it. Arguing that person having a seizure is not engaged in conscious actions toward chosen goals, does not mean that they have accepted the action axiom.
Another part of Mises’ action axiom is, human action is necessarily always rational. According to Mises, “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.”[xvii] Mises further states, “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.”[xviii]
This is a clear contradiction between Rand and Mises on an epistemological and ethical level. This is not a minor disagreement, but goes to the very fundamentals of Mises’ praxeology and Objectivism. Long however argues that this is not the case. “Mises of course did not mean that people always pursue the most rationally defensible ends (for Mises there are no such things) or even that, given their ends, people always choose the most rationally defensible means to their ends. In part, what he meant was simply that human action is purposeful.” [xix] According to Long, when Mises says people always act rational, he means “in a manner appropriate to their situation in the way of actually seeing it that is constitutive of their action. And this is a claim that Rand has no reason to reject”[xx]
Rand defines reason as, “reason integrates man’s perceptions by means of forming abstractions or conceptions, thus raising man’s knowledge from the perceptual level, which he shares with animals, to the conceptual level, which he alone can reach. The method which reason employs in this process is logic—and logic is the art of non-contradictory identification.”[xxi] Thus for Rand to act rationally is to act in accordance with reason. This does not include all purposeful actions. Hitler acted purposively to kill off the Jews, but this action cannot be considered rational according to Rand.
All the massaging of what Rand and Mises meant cannot reconcile these two radically different positions. While English was Mises’ second language, his ideas about praxeology were fundamental and Mises never retracted his statements or reinterpreted them and neither did Rand. An informal review of video lectures by Austrian Economists shows that they take Mises at his word. It is very dangerous to reinterpret what people are saying.
Mises is clear that praxeology is a type of philosophical rationalism.
“[Praxeology’s] cognition is purely formal and general without reference to the material content and particular features of the actual case. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori.” Mises, Human Action, p. 32
“All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given.” Mises, Human Action, p. 66
“Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case.” Murray N. Rothbard https://mises.org/library/praxeology-methodology-austrian-economics.
Philosophical rationalism is defined as “the doctrine that reason alone is a source of knowledge and is independent of experience.”[xxii] Philosophical rationalism is commonly associated with Descartes and Spinoza. Here is what Rand said about rationalism.
[Philosophers came to be divided] into two camps: those who claimed that man obtains his knowledge of the world by deducing it exclusively from concepts, which come from inside his head and are not derived from the perception of physical facts (the Rationalists)—and those who claimed that man obtains his knowledge from experience, which was held to mean: by direct perception of immediate facts, with no recourse to concepts (the Empiricists).[xxiii]
Mises’ epistemology is not science. At a minimum science always requires that concepts (hypothesis) are checked against reality and reality is ultimate determiner of what is true. William Thomas, Director of Programs at The Atlas Society, argues that Mises was not a philosophical rationalist and shows that some of the concepts Mises uses, such as money, can only be derived from experience. This is another attempt to massage the words of Mises. What this shows is that Mises’ praxeology and his ideas about money result in a logical contradiction. Rand’s response from Atlas Shrugged might be “contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong.”
An interesting point is that Mises’ subjective theory of value is fundamental to his ideas on praxeology. “Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper . . . “[xxiv] “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.”[xxv] As a result, it is impossible to separate the subjective theory of value from Mises praxeology.
George Reisman makes some important point about Mises’ contention that economics (science) should be value-free.
The notion that science and value should be divorced is utterly contradictory. It itself expresses a value judgment in its very utterance. And it is not only self-contradictory, but contradictory of the most cherished principles of science as well. Science itself is built on a foundation of values that all scientists are logically obliged to defend: values such as reason, observation, truth, honesty, integrity, and the freedom of inquiry. In the absence of such values, there could be no science. The leading historical illustration of the truth of these propositions is the case of Galileo and the moral outrage which all lovers of science and truth must feel against those who sought to silence him. [xxvi]
F.A. Hayek’s epistemological ideas are contained in his ideas on “cultural evolution”. Hayek was proud of his ideas on cultural evolution and considered them central to his ideas on economics. “The theory (cultural evolution), of which Hayek himself was proud, is on all accounts central to his economic, social, and political project”[xxvii]
Cultural evolution is the idea that social institutions, such ethics, law, and economic systems are created by a non-rational evolutionary process. “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.”[xxviii]
Bruce Caldwell describes cultural evolution as:
The term “cultural evolution” refers to the evolution of a tradition of learnt rules, norms, ethical precepts, and practices, “especially those dealing with several property, honesty, contract, exchange, trade, competition, gain, and privacy” (Hayek 1988:12). This cultural heritage emerged through “a process of winnowing and sifting, directed by the differential advantages gained by groups from practices adopted for some unknown and perhaps purely accidental reasons” (Hayek 1979:155). The traditions and institutions that resulted allowed the development of a vast extended order, one capable of sustaining huge increases in population, an order that would have been considered fantastical to earlier humans existing under more primitive conditions.[xxix]
According to Hayek, no individual is capable of using reason to determine which social institution will end up with the best result beforehand or why a particular set of social norms does work well. Linda C. Raeder in Humantis makes this point and also points out that David Hume’s ideas entered the mainstream libertarian movement through Hayek.
“The picture of man as a being who, thanks to his reason, can rise above the values of civilization, in order to judge it from the outside . . . is an illusion.” For Hayek, morals, values, and reason are entirely natural phenomena, evolutionary adaptations which have enabled man to survive and flourish in his particular kind of world.
Perhaps no other area of Burke’s and Hayek’s thought is as congruent as their understanding of the role of reason in human affairs; their views are so close as to suggest that Hayek’s thought on this issue is merely an elaboration, although quite an extensive one, of Burke’s theme. Hayek developed several of Burke’s most crucial insights: 1) the priority of social experience (or “tradition”) over reason; 2) the notion that inherited social institutions embody a “superindividual wisdom” which transcends that available to the conscious reasoning mind; and 3) the impotence of reason to ‘design’ a viable social order.[xxx]
David Kelley elaborates on this point:
Hayek, by contrast, is a critic of what he calls ―constructive rationalism. His concept of rationalism is somewhat idiosyncratic, and is not equivalent to Rand‘s conception of reason. Nevertheless, it leads him to claim that ―no universally valid system of ethics can ever be known to us, which is obviously not consistent with her view. For Hayek, moral rules have a status lying ―between instinct and reason.
Is Hayek anti-reason? It’s hard to say, however arguing that reason is fundamentally limited (as opposed to making a mistake) in understanding reality without any real evidence is an attack on reason itself. Like Hume, Hayek cannot say reason is completely impotent, because what would be the point of writing. Writing presumes some ability to reason.
Hayek’s case for freedom is based on the limits of reason. In order for Hayek’s cultural evolution to work, you cannot substitute the decisions of a single leader (or small group) for those of the masses. To do so undermines the evolutionary process. As David Kelley explains:
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.
Hayek does not think that reason can tell you how or why social institutions, including the law and ethics work. This is totally inconsistent Rand’s ideas and undermines the very idea of science.
Interestingly, Hayek’s position on ‘the subjective theory or value’ is a fundamental part of his epistemology, just like Mises’. His cultural evolution requires that we cannot formulate a rational ethics because that would undermine the evolutionary process. As a result, every ethical system is subjective and therefore so is every law. The most we can do is put our faith in the process and blindly hope our ethical and legal systems are better than they were in the past because of the evolutionary process of cultural evolution.
Economics vs. Philosophy
It is clear that Austrian Economics’ epistemological positions are incompatible with Objectivism and science more generally. However it is entirely possible that despite this, Austrian Economics has achieved great things in economics. For instance, David Kelley has shown that John Locke made a number of epistemological errors with respect to perception, in his book The Evidence of the Senses, and yet Locke’s ideas on Natural Rights are still profound and fundamentally sound.
In this case however, when Objectivists and Austrians are talking they are not even speaking the same language. For instance, when Rand says she is for capitalism, she means “a social system based on the recognition of individual rights, including property rights”[xxxi] By individual rights, Rand means a moral claim based on man’s nature and discovered using reason. Austrians do not think that a rational ethics is possible. As a result to Austrians, capitalism is an economic system that has low levels of governmental interference, based on some utilitarian criteria. (You cannot live without an ethical system, so most Austrians default to utilitarianism)
When Objectivists talk about property rights, they mean an ethical claim to take action with respect to something, such as land. This ethical claim is based on a rational, natural rights system. When Austrians talk about “property rights”, they do not really mean a “right” in any way except a purely arbitrary legal claim. Austrians argument for “property rights” is a purely utilitarian or historical argument (Hayek) that can be fudged to meet the utilitarian goal or historical precedence.
These differences result in real differences in economic policy. Menger, for instance, advocated 1) public works constructed by the state such as roads, railways and canals, 2) government established agricultural and vocational training institutions, 3) state intervention to stop clearing of forests on private property in the mountains of Austria when this clearing had serious and bad effects on agriculture, and 4) government intervention to stop child labour.[xxxii] Hayek was in favor social security, some sort of government provided health care, emergency government assistance for natural disasters, and suggested that manipulating the money supply might be used to alleviate recessions/depressions.[xxxiii]
Even Ludwig Von Mises waffles on economic policies that are inconsistent with capitalism as an Objectivist would define it.
There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule.[xxxiv]
Note that Mises justification for fire regulations is based on utilitarianism, which Rand condemns as “’the greatest good for the greatest number’ is one of the most vicious slogans ever foisted on humanity.”[xxxv]
The Austrians sound a lot more like modern conservatives than capitalists. When it is a government policy that Austrians are in favor of, they are quite happy to override peoples’ individual rights. They just want these programs to be run more efficiently. Austrians make a number of errors in their analysis of the economy also, however there is not time in this paper to take on these issues.
Austrians often argue that if you do not support the Austrian school of economics then which school (economists) do your support then, as if this was an election or a smorgasbord with a limited number of choice. Science is a creative endeavor and we are not limited only the existing choices.
New Growth Economics’ central point is that wealth is created by the human mind. This should be exciting to Objectivists, because that sounds very much like Ayn Rand. It also points to an objective basis for economics. Every human needs to acquire and consume a minimum number of calories or they die.[xxxvi] This provides an objective standard that is very similar to Rand’s standard for her ethics. It also ties economics to biology, particularly human biology, just like Rand tied her ethics to biology.
Inventions are the result of applying man’s reasoning power to the objective problems of life. The way we become wealthier is by increasing our level of technology. I explain this in more detail in my book, Source of Economic Growth; in my Savvy Street article, entitled ‘Inventing at the Intersection of Biology and Economics’; and in my 2015 & 2016 talks at Atlas Summit.
All species are biologically designed to spend most of their existence on the edge of starvation. The fact that human beings, starting around 1800, were the first species to permanently escape this condition, needs a profound answer based on man’s unique nature, his ability to reason.
[i] Richard C.B. Johnsson, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 317-335.
Subjectivism, Intricism, and Apriorism,:Rand Among the Austrians, Penn State University Press, http://www.jstor.org/stable/pdf/41560286.pdf.
[iii] Edward W. Younkins, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 337-374, Menger, Mises, Rand, and Beyond, Centenary Symposium, Part II Ayn Rand Among the Austrians, http://quebecoislibre.org/younkins28.pdf
[v] Edward W. Younkins, The Road to Objective Economics: Hayek Takes a Wrong Turn, http://rebirthofreason.com/Articles/Younkins/The_Road_to_Objective_Economics_Hayek_Takes_a_Wrong_Turn.shtml
[vi]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf , INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS
[vii]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf , INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xi.
[viii]https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf , INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS, Introduction, p. xiii, Lawrence H. White.
[ix] Edward W. Younkins, The Journal of Ayn Rand Studies Vol.6 no. 2 Spring 2005 pages 337-374, Menger, Mises, Rand, and Beyond, Centenary Symposium, Part II Ayn Rand Among the Austrians, http://quebecoislibre.org/younkins28.pdf
[x] Wikipedia, Analytic–Synthetic Distinction, Accessed October 21, 2016, https://en.wikipedia.org/wiki/Analytic%E2%80%93synthetic_distinction.
[xi] Kant’s noumenal/phenomenal distinction is restatement of Plato, in which there is a realm of forms (ideas) and the imperfect world we live in.
[xii] Murray N. Rothbard, “Praxeology: The Methodology of Austrian Economics”, https://mises.org/library/praxeology-methodology-austrian-economics
[xiii] Ludwig Von Mises, Human Action, p. 32, https://mises.org/sites/default/files/Human%20Action_3.pdf
[xiv] Ludwig Von Mises, Human Action, p. 32, https://mises.org/sites/default/files/Human%20Action_3.pdf
[xvii] Ludwig Von Mises, Human Action, 1.I.32, http://www.econlib.org/library/Mises/HmA/msHmA1.html
[xviii] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 104.& https://mises.org/library/what-do-austrians-mean-rational , What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.
[xxiii] “For the New Intellectual,” For the New Intellectual, 30, http://aynrandlexicon.com/lexicon/rationalism_vs_empiricism.html.
[xxiv] Murray N. Rothbard, “Praxeology: The Methodology of Austrian Economics”, https://mises.org/library/praxeology-methodology-austrian-economics
[xxv] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 104.& https://mises.org/library/what-do-austrians-mean-rational , What Do Austrians Mean by “Rational”?, MISES DAILY ARTICLES, Accessed 6/9/16.
[xxvi] George Reisman, Capitalism: A Treatise on Economics, p. 36, http://www.capitalism.net/Capitalism/CAPITALISM_Internet.pdf.
[xxvii] Erik Angner, The History of Hayek’s Theory of Cultural Evolution, p. 3, http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf.
[xxviii] Erik Angner, The History of Hayek’s Theory of Cultural Evolution, p. 3, http://institutoamagi.org/download/Angner-Erik-The-history-of-Hayeks-Theory-of-cultural-Evolution.pdf.
[xxix] Bruce Caldwell , The Emergence of Hayek’s Ideas on Cultural Evolution, p. 6, http://www.gmu.edu/depts/rae/archives/VOL13_1_2000/caldwell.pdf.
[xxx] Linda C. Raeder, The Liberalism/Conservatism Of Edmund Burke and F. A. Hayek: A Critical Comparison, HUMANITAS, Volume X, No. 1, 1997. National Humanities Institute, http://www.nhinet.org/raeder.htm.
[xxxii] Social Democracy For The 21st Century: A Realist Alternative To The Modern Left, http://socialdemocracy21stcentury.blogspot.mx/2012/08/rescuing-menger-from-austrians.html, accessed October 23, 2016.
[xxxiii] Nicholas Wapshott, Hayek on health care, social safety nets and public housing (quoting from Road to Serfdom) https://sites.google.com/site/wapshottkeyneshayek/hayek-on-health-care-social-safety-nets-and-public-housing accessed October 23, 2016.
[xxxiv] Ludwig Von Mises, Human Action, The Scholar’s Edition, p. 741, https://mises.org/sites/default/files/Human%20Action_3.pdf.
[xxxv] Textbook of Americanism,” The Ayn Rand Column, 90, http://aynrandlexicon.com/lexicon/utilitarianism.html.
[xxxvi] Calories make a convenient catch all for all human requirements including air, water, micronutrients etc.
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 video, The Austrian Theory of the Business Cycle | Roger W. Garrison, from the Von Mises University does a good job of explaining the Austrian Business Cycle Theory (ABCT). The key point is that increasing the rate of savings (capital) results in increased economic growth in the future. The theory was worked out by Von Mises and Hayek. The foundation of the theory is very similar to classical economics, which held that economic growth was the result of increases in capital. The video has a number of charts and graphs to make it look more scientific, however no empirical evidence is provided to support the theory. Other work may provide empirical evidence, but I know of counter evidence as well.
This article will first discuss ABCT of recessions and some small errors in the theory. Then I will show that ABCT is incorrect about what causes economic growth and its failure to explain economic history, particularly the Industrial Revolution.
Austrians are always focused on showing that Keynes economic theories are wrong, and they are certainly right about this. Austrians argue that there is a trade between investment and consumption, which they call the sustainable Production Possibilities Frontier. Keynesian theory would say there is no difference between consumption and investment. Certainly there is a trade between investment and consumption. The Keynesians somehow argue that by eating your seed corn you will be wealthier. However, a minor problem with ABCT is that it equates savings with investment. The two are not necessarily the same.
ABCT then states that recessions are caused by Central Banks (the Federal Reserve in the US) arbitrarily lowering interest rates below the market rate, which causes mal-investment and reduces the saving rate. Unless we narrowly define saving as putting money in a bank, savers have a number of choices which are not directly affected by interest rates. For instance, savers can put their money in stocks or corporate bonds. The return on stocks and corporate bonds is more related to the success of the underlying company than the interest rate set by the Central Bank, so the disincentive to save is not a strong as suggested by the ABCT. The second question is why does this cause mal-investment but increased saving does not. In both cases the investment intermediary is a commercial bank. Now if we were talking about direct government spending then the case is clear. In that case the government is not subject to the market. However, commercial banks are subject to the market. If interest rates are lower because of additional savings or because the Central Bank set them lower does not change their loan approval process. In addition, the ABCT completely ignores tax and regulatory policy. Are Austrians really saying that recessions can only be caused by Central Banks setting interest rates too low? Why not too high? This is why Austrians are obsessed with what Central Banks are doing and seem somewhat oblivious to other issues.
These are not my real complaints with the ABCT however. My real complaints are 1) recessions happened before there were Central Banks and 2) economic growth is not caused by increases in capital. Central Banks are a fairly new creation and fractional reserve banks did not exist in the world until around 1650s. The United States did not have a Central Bank until 1913, but there were recessions before that in the US. There were certainly recessions in the world before there were banks, including one huge one called the Dark Ages. ABCT fails to explain the source of all recessions, including the recession of 2001.
ABCT is also wrong on what causes economic growth. Robert Solow did an econometric study of the US economy to determine how much of the growth was due to increases in labor, how much was due to increases in capital, and how much was due to increasing levels of technology. According to Wikipedia
[This] technique has been applied to virtually every economy in the world and a common finding is that observed levels of economic growth cannot be explained simply by changes in the stock of capital in the economy or population and labor force growth rates. Hence, technological progress plays a key role in the economic growth of nations, or the lack of it. http://en.wikipedia.org/wiki/Growth_accounting
Robert Solow won the Nobel Prize in economics for this work. (This is not an endorsement of everything Solow says)
I would change the bolded part to state that the only way to obtain real per capita increases in wealth is through increasing levels of technology. This becomes more apparent if you look over longer timeframes. If we had the same technology as our ancestors in 1600, even with today’s total capital, would we be any wealthier than our ancestors? We would not live longer, we would not be able to produce any faster, the only difference might be that we had more savings to fall back on or disseminate existing technologies. However there was very little technological change at the time, so the increase in technological dissemination would have been small. As a result, we would be essentially no wealthier than our ancestors. Our standard of living is defined by our level of technology. I discuss this in much more detail in my upcoming book, “Source of Economic Growth.”
Note that the ABCT does not account for technological change. As a result, the theory should hold up in a technologically static world. However, this is totally inconsistent with economic history. The Industrial Revolution started in Great Britain and the United States. There is no evidence that these countries had larger savings or capital stocks than say France or China or Holland or Japan. The Industrial Revolution was really a perpetual invention machine, driven by inventions not by capital. The source of all wealth is the human mind. The application of the human mind to problems of survival is called inventing, which is how we increase our technological level.
Austrian Business Cycle Theory does not hold up under scrutiny. Austrians have misidentified the source of economic growth and have a defective model for what causes recessions. Naturally they prescribe the wrong medicine. Austrian Economics is not pro-capitalism, it is not consistent with the enlightenment, reason, and science, which I have described in other posts.
PS: I mentioned above that the Austrians misdiagnosed the recession of 2001. They love to say that Greenspan created a bubble economy, which implies that in fact there was no real economic growth in the late 1990s. The narrative that Greenspan created a credit bubble by holding interest rates too low does not fit the facts. The economic growth of the late 1990s was built on new technologies that have made our life immeasurably better. Real incomes and industrial production rose significantly in the late 1990s. In addition, the effective Fed funds rate in the late 1990s was between 5.5 and 6.5%, which looks tight by today’s standards. The Federal Reserve’s balance sheet was stable. There was an inverted yield curve in 2000, which happened as Greenspan was increasing interest rates. The commodities index was falling slightly in 1999 and rose slightly in 2000. M1 was essentially flat in the late 1990s and M2 was growing slowly. The evidence is overwhelming that the recession of 2001 was not caused by Federal Reserve “printing” too much money. In fact the evidence points to the idea that Greenspan was too restrictive and caused an inverted yield curve in his desire to cause the stock market to cool off, which caused the recession. It is true that the stock market had gotten ahead of earnings, but recent experiments in economics show this is a common with new investors and is not necessarily the result of easy credit.
The Austrians, such as those on the Von Mises website, like to tout that they are pro-freedom, capitalists, and arch enemies of the socialists and Keynesians. Strangely enough this means that they have aligned themselves with socialists in opposing property rights for inventors and attacking Locke’s ideas on property. Even more fundamentally the Austrians seem to share intellectual roots with the socialist or more broadly the post-modernist movement, which is a reactionary movement opposing the enlightenment, reason, and science. I have written on Fredrick Hayek’s anti-reason, anti-natural rights, moral relativist positions in Hayek vs. Rand: Patents and Capitalism.
However, Hayek was not the only Austrian with post-modernists roots. Von Mises was clear that values and prices are subjective. By this the Austrians do not mean that they are personal or that each person puts a different value on things, they mean unconnected in anyway with reality. Von Mises also said that economics is a value-free science. This may sound high-minded, but science is not value free. Science starts with an objective reality, demands logic and evidence, and morally requires that scientist report data accurately. These positions of Von Mises place him firmly in agreement with the post-modernists (socialists, Keynesians). Some people think I am misinterpreting the Austrian position so here is a video of a talk from the Mises University that demonstrates that the Mises people are serious about the subjective theory of value. They are not saying it depends on your circumstances, they are saying there is no connection to reality between prices or values in economics. The meat of the video starts at 7:35 in which the speaker states “value is just a state of mind.” At 7:57 he is clear that value has no extensive property, which means it is not related to the real world. 8:16 the speaker states that all we have is a state of mind – that value exists only in the mind of the individual. 9:23 value is a state of mind. 9:54 there is no relation between the external world (reality) and the judgments of our minds – this is as clear as it will get that the Austrians are ignoring reality and believe economics is separate from reality. 11:14 The speaker describes profit as subjective.
Of course this position cannot logically be held to be true so you will find contradicting statements in the talk. Just like people who deny reality, meaning they deny A is A, the position cannot be held without contradiction. But since they deny reality matters in economics, they free themselves from the science of non-contradictory thinking – logic. This makes the Austrians consistent with the post-modernist (socialist) movement. I cannot say that every Austrian economist makes this mistake, but it is the accepted position of the modern Austrian school of economics and it got its start with Von Mises.
The speaker is trying to destroy the intrinsic theory of value. Classical economists followed the labor theory of value which is an intrinsic theory of value. According to this theory the value of an item is the sum total of the labor that went into the item. The Austrians are correct that the classical economists’ position was incorrect, but their solution is no better. They want to say value is determined without reference to the real world – that is it is all in the mind of the valuer, while the classical economists said value could be determined without reference to the valuer. Both are nonsense. Objective valuation has to take the position of the valuer and the item being valued into account. Ayn Rand has a great explanation of this topic in Capitalism the Unknown Ideal starting on page 13 I believe.
Capitalism is based in reality, reason, and the ethics of natural rights. Austrians are not capitalists.
Libertarians and Austrians, including such organizations as the CATO Institute, Von Mises, and the Wall Street Journal, have put forth a number of arguments against patents and intellectual property. These arguments include that ideas (an invention is not just an idea, but I will let that go) are not scarce and therefore patents are not real property rights, patents are monopolies, patents inhibit the growth of technology, patents require the use of force to enforce one’s rights, patents are not natural rights and were not recognized as so by Locke and the founders, among other arguments. I have discussed most of these arguments earlier and will put the links in below. One of their favorite fall back arguments is that patents limit what I can do with my property. For instance, a patent for an airplane (Wright brothers) keeps me from using my own wood, mechanical linkages, engine, cloth, etc. and building an airplane with ailerons (and wing warping). This according to the libertarian argument is obviously absurd. After all it is my property. Here is an article Scarcity, Monopoly, and Intellectual Property on the Von Mises website where you can see almost every variation on the arguments mention above either in the article itself or in the comments.
Can I do whatever I want to with my property, or are there restrictions? Well when I buy a book, a movie, or a song, it does not give me the right to make unlimited copies of them. I have a property right in the physical book, but not the rights (copyrights) to make copies. Of course, many Libertarians think copyrights are absurd also, so let’s look at another example. Let’s assume you own your house and land outright. Does that give you the right to do whatever you want to with you land? Most likely, your land has easements for utility lines, such as water, gas, sewer, electricity. You are not allowed to do anything that interferes with those easements. You might object that I don’t own the easement, so this is a bad example. So let’s say you own a bulldozer, does that give you the right to bulldoze my apple orchard and build a house there? It is your property after all and according to the libertarian argument you are allowed to do whatever you want to with your property. You might object, that of course the libertarians did not mean that you could take advantage of my property to build on. Of course that begs the question, what is property? If a patent and copyright are property rights, then this is exactly the same situation. Another example where you are prohibited from doing something with your property, is in the case of water drainage. In particularly wet areas of the US you are prohibited from moving the earth on your land so water drains onto your neighbors property more freely – and no this is not an EPA rule, this is common law property rights. In parts of the country where water is scarce you are prohibited from damming up water on your land. If you buy land in a residential neighborhood you are prohibited from setting up a pig farm. Just because I own a gun, doesn’t give me the right to go around shooting people. The libertarian argument that patents are not real property rights because they prevent others from doing something with their property fails even the most cursory review.
One of the common themes that runs throughout all Libertarian arguments against patents is that Libertarians’ do not seem to know what property rights are, or how they arise. Here is a post on point, Property Right, Possession, and Objects; this post not only explains the proper basis of property rights, but why the Libertarian point that property requires possession is a fallacy. Libertarians have failed to provide a clear definition of what property rights are and how they arise. In fact, most anti-patent libertarians believe property rights are a useful social convention for distributing scarce resources. This is interesting, because they can become so adamant about what is their property. But nothing in this concept of property has anything to do with RIGHTS. If another, better system comes along for distributing scarce resources, then your property is gone.
Property rights do not give the owner the right to do whatever they want with their property. The source of property rights is creation, not the idea that it is a socially useful convention. Patents recognize the metaphysical fact that the inventor is the creator of his invention and are completely consistent with other property rights in prohibiting an owner of other property from using it to build his invention.
Below is a list of other Libertarian arguments against patents and why they fail.
Inventions are not scarce:
Patents are monopolies
If patents are a monopoly, as some suggest, then it should led to certain outcomes. A close examination shows that none of the supposed monopoly effects result from granting patents.
This post explains the characteristics of a monopoly and a property right and poses three questions to show the difference. Patents fit all the characteristics of a property right and none of a monopoly. Note that professional license, such as a law license has some of the characteristics of a monopoly.
This post contains a number of quotes from philosophers explaining that patents are not monopolies.
This post compares the definition of a monopoly to the rights obtained with a patent. It shows that the rights obtained with a patent do not confer a monopoly.
This post traces the ideas of Locke and William Blackstone to show patents and copyrights are natural rights.
Patents inhibit the growth of technology:
This post shows that those countries with the strongest patent systems are the technological leaders of the world Patents: Monopoly or Property Right a Testable Hypothesis
Patents require the use of force
This is one of the more absurd arguments by libertarians. All property rights are enforced by the government’s use of force. If someone trespasses on your land or steals your car, the government threatens or uses force to get it back. The same is true for patent, which are property rights in inventions.
In order to understand why patents are property rights, we first have to understand what property rights are. The Austrian School of Economics theory of property rights is that they are a social construct necessary to efficiently distribute scarce resources. According to Austrians intellectual property is not scarce and therefore not property. Since IP is not property it is a monopoly and represents the immoral aggression on the part of the state.
The Austrians position is incorrect, logically, historically, and empirically. Property rights in the US are based on Locke’s formulation that property rights result from the act of creation. Note this is update for modern language. Austrians and Libertarians have purposely mischaracterized Locke to create a straw man argument as to why Locke was wrong. Adam Mossoff has an excellent paper on point. Locke’s ideas were incorporated into US law by Blackstone’s Commentaries on the law. This book was even more influential on US law than England, but is incorporated into almost all common law countries.
The Austrian formulation of property rights does not explain why people come to own property rights, but Locke’s does. In addition Locke’s formulation which is based on the idea that you own yourself or stated another way that you have property rights in yourself, explains why murder and slavery are illegal and immoral. It also explains how you come to hold property rights. Finally, it explains almost all of our basic criminal law and property law. Under science and Occam’s razor the simplest theory that explains the most facts is the correct theory. The Austrian theory of property rights fails.
The other theory of property rights is that the King, the State, or the collective is the ultimate owner of all property. The State just allows you to have control of certain resources until they believe someone else should control the resource. This theory has some historical basis but is not really a theory of property rights, since the most basic right of property is the right to exclude. Clearly under this theory you do not have the right to exclude. This theory has the same problems as the Austrian formulation of property rights and logically implies that everyone is actually a slave of the State, since they do not own themselves.
Notwithstanding the problems with the Austrian formulation of property rights is it true that inventions (IP) is not subject to scarcity? Inventions require the time and effort of inventors, they required labs, computers, facilities, materials, etc. So clearly the creation of inventions is subject to scare resources. But is the distribution of inventions subject to scarcity? VCs usually budget ten times as much to get a new invention in the market as is necessary to create it. If it took no resources to distribute inventions and information then there would be no need for schools, universities, doctors, lawyers, engineers, marketing and sales people, etc. So clearly it does take resources to distribute inventions.
Notwithstanding that the Austrians are wrong about the scarcity of IP, is IP a monopoly? Here a number of posts that show definitionally, logically, legally, and empirically patents are not monopolies.
More on the Myth that Patents are Monopolies https://hallingblog.com/more-on-the-myth-that-patents-are-monopolies/.
This post contains a number of quotes from philosophers explaining that patents are not monopolies.
Property Rights, Possession and Objects https://hallingblog.com/property-rights-possession-and-objects/
This post explains the difference in the concepts of property rights, possession, and objects. Most economists and patent detractors confuse these concepts. The origin, definition, and legal basis of property right are explained.
The Myth That Patents are a Monopoly https://hallingblog.com/the-myth-that-patents-are-a-monopoly/
This post compares the definition of a monopoly to the rights obtained with a patent. It shows that the rights obtained with a patent do not confer a monopoly.
I was confronted with the statement that there are “Hugh transaction costs related to patents.” This statement implies the assumption that these transaction costs are unjustified. I disagree with the premise, but since all systems can be improved I will provide a number of specific proposals to reduce the transaction costs.
The alternative proposed by the author of this statement, was to shorten the length of patents and increase government funding of R&D. The proposed system of government funding for research is not effective substitute for patents. The history of government funding for research is mixed at best and much more expensive than patents. The US patent system is completely funded by user fees (in fact Congress has been stealing user fees to pay for their pet projects). The patent system has been significantly more effective at stimulating innovation than government funded projects – see Zorina Khan’s work including her book The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (NBER Series on Long-Term Factors in Economic Development) also see The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, by William Rosen.
Litigation Costs: There has been a very effective propaganda campaign to suggest that the patent litigation is out of control. The implication is that there is an explosion in patent litigation. This is just not true.
“The real facts of the so called litigation crisis are that for the past two decades the number of patent lawsuits commenced annually has been about 1.5 percent of all patents granted. In 2006, it was 1.47 percent. This is business as usual. Most patent lawsuits, moreover, settle before trial. In 1979, some 79 percent of patent cases settled before trial, while in 2004 almost 86 percent did. Matters are actually improving.
Also, the U.S. has few patent trials. For instance, in 2001 only 76 patent lawsuits were tried and only 102 went to trial in 2006. By no measure can 102 patent trials be considered a national litigation crisis. The annual report of Federal Judicial Caseload Statistics, which is on the Internet, provides the factual antidote to false claims of a litigation crisis (www.uscourts.gov/ caseload2006/contents.html).” see http://www.manufacturingnews.com/news/07/0629/art2.html
Even though this data is a little old nothing has changed in the last several years. In a $14.4 trillion economy built on technology this is anything but a litigation crisis.
There is also a myth that there is a patent quality issue in the US. This is not supported by the facts.
“As to the massive numbers of “unworthy patents” argument, the real-world test is how many patents are challenged and the outcome of those challenges. Between 1981 and 2006 the USPTO issued more than 3.1 million patents. In that period, 8,600 were challenged at the Patent Office through inter partes and ex parte reexaminations. The number challenged amounts to less than three-tenths of one percent. Of those challenged, about 74 percent resulted in claims narrowed or cancelled. In addition, almost 60 percent of the relatively few patents challenged in a court trial are sustained.
My point is that the USPTO’s work is certainly not perfect, but the Patent Office is also not pouring out a stream of bad patents.” http://www.manufacturingnews.com/news/07/0629/art2.html
By every objective measure: R&D per patent, GDP per patent, and number of citations per patent patent quality is increasing. See https://hallingblog.com/2010/01/07/patent-quality-nonsense/ and https://hallingblog.com/2009/08/18/patent-quality-myth/.
Cost and Time to Obtain a Patent: When Edison applied for his light bulb, he received a patent in 3 months. The reason it takes so long to obtain a patent today is because Congress has been stealing money from the Patent Office.
I have an angel investor friend who was a highly successful entrepreneur who complained that when he invested in a company he did not know about hidden prior art and this created a large amount of uncertainty. He supported the idea of publication of patents. However, the answer was not publication of patents, which breaks the social contract, but fully funding the patent office – as the Edison example above proves.
Disingenuousness of Libertarian Argument about Costs of Patents: All property rights systems have some costs involved in them. GE employs 600 attorneys to comply with tax laws, it probably employs another 600 to comply with SOX, discrimination laws, environmental laws, health and benefit laws. However, it probably employs less 100 patent attorneys. Their patent costs are a drop in the bucket compared to dealing with tax and other regulatory laws. The Libertarian attack on patents in light of all the other burdens imposed on business is disingenuous.
Patents are property rights and companies’ purposeful infringement of other people’s property rights is not a regulatory burden, it is the result of purposeful belief that they can get away with the theft. It is called efficient infringement. See “Technology Theft as a Business Strategy” https://hallingblog.com/2010/03/24/pat-choate-technology-theft-as-a-business-strategy/
Patent Litigation: While patent litigation costs are similar to litigation costs generally, there are a number of things that can be done to make the system more efficient. Some are changes to government and some are private sector initiatives.
Secondary Market/Title Insurance for patents. Before the advent of title insurance it was very expensive to buy a piece of land. You had to pay an attorney for a title report that did not come with any insurance. Lawsuits over the boundaries of real property were epidemic before the advent of modern survey tools. Patents are in the same position where no title insurance has been created. Unfortunately, antitrust law undermined the first efforts to create a title insurance/secondary market for patents. Patent pools were a way to determine the validity of patents, enforce patents, and widely license the patents in a cost efficient manner. But the antitrust idiots said that they were illegal. Today, Luddites are using the rallying cry of “patent troll” to kill off the beginning of a secondary market – see https://hallingblog.com/2009/09/18/in-defense-of-patent-trolls/ For more information see Jump Starting a Secondary Market for Patents https://hallingblog.com/2009/11/16/jump-starting-a-secondary-market-for-patents/.
Accelerated Patent Court: A new court similar to the ITC that has expertise in patents and accelerates the patent litigation process is needed. The court should be sufficiently funded and have procedures that allow patent cases to be resolved in under a year. Perhaps the court would be limited to issuing injunctions as a remedy as opposed to economic damages. The goal of this new court is to establish the US as the premier arbiter of patent rights. The US is the best positioned country to protect patent rights, despite our recent history. This would increase the US’s standing as a technological leader in the world and draw innovative companies and people to the US.
Judges: Appoint judges with technical backgrounds and who have passed the patent bar to adjudicate patent cases. Judges without these qualifications make silly mistakes, such as stating that any invention that is just a combination of known elements is suspect whether it should obtain a patent. All inventions are combinations of known elements – it is called conservation of matter and energy. You cannot create something from nothing. (For more on the Supreme Court’s ignorance see https://hallingblog.com/2010/01/19/ksr-supreme-ignorance-by-supreme-court-2/ )
Patent Reciprocity: One of the largest costs of obtaining patent protection is foreign filing. Patent reciprocity would significantly reduce this cost.
If you drive your car across the border into Canada you do not lose title to your car. If you take your manuscript across the border into Canada you do not lose the copyright to your manuscript. But, if you take your invention across the border into Canada, you lose your patent protection and anyone can steal the invention – not the physical embodiment, but the underlying invention.
Patent reciprocity would automatically provide patent rights in a foreign country when you obtained a patent in the US and vice versa. This idea was first proposed by the US in the mid 1800s according to B. Zorina Kahn’s book “The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920“. Unfortunately, the idea died and since then patent rights have been part of the convoluted process of trade negotiations.
Patent reciprocity would significantly increase the value of patents and increase the value of research and development. As a result, it would spur investment in innovation. Reciprocity would increase the valuation of technology start-up companies in all countries that participated. It would also increase per capita income.
Eliminate Maintenance Fees: Maintenance fees are the major cost associated with a patents filed outside the US.
Maintenance fees are a backhanded way of introducing a “working requirement” to patents. Working requirements for patents have always been rejected in the US. These fees favor large entities and reduce the effective life of patents.
A strong patent system pays for itself several times over in increased tax revenues from increased economic activity. The supply side returns from a strong patent system probably exceed the return resulting from lowering the capital gains tax.
Reduce Formalism in Patents: A large part of the cost of obtaining and litigating a patent is overly formalistic requirements. The Non-obviousness requirement should be repealed. It is not logically a part of the definition of an invention and is the source of uncertainty, and increases the cost of both obtaining and enforcing/defending patent lawsuits. For more information see Non-Obviousness a Case of Judicial Activism https://hallingblog.com/2010/06/18/non-obviousness-a-case-study-in-judicial-activism/.
Some of the other overly formalistic requirements include the rules on restrictions, the inequitable defense, and the silly requirements related to section 101. Restrictions are required for trivial differences that are embodiments of the same inventive idea. The doctrine of equivalents has been dead for over a decade. Formalism over logic rules in the realm of inequitable conduct. USC 101 issues related to software inventions also place form over function that require absurd recitations to computer hardware. All of these formalistic requirements favor patent thieves at the expense of real innovators.
It is common for pundits to declare that the last two recessions were due to easy money on the part of the Federal Reserve. Both free market proponents, such as Austrian economists, and Keynesians agree on this point. David Faber even did a one hour show called the “Bubble Decade.” First, let’s distinguish between easy credit bubbles and investment manias. The recession of 2008 was clearly the result of excessive debt and is therefore a credit bubble. Not only did the Federal Reserve hold interest rates low, but more importantly the federal government pursued a number of policies to encourage overinvestment (borrowing) in the housing sector. Among these policies were the creation of Fannie and Freddie Mac and their investment in subprime mortgages and debt rating agencies, sanction by the SEC, that rated securities based on these mortgages as AAA. Both of these contributed to a false sense of security on the part of investors. It was believed that even if these securities (CMOs) failed the government would stand behind any mortgages backed by Fannie and Freddie.
Now compare this to the recession of 2000. There were no policies encouraging debt (or equity) investments in technology start-up companies. Banks do not loan money to even highly successful technology start-up companies. Even very accommodative money policies by the Federal Reserve do not result in direct loans to these companies. The Fed has small indirect effects. For instance, easy money by the Fed makes it easier for founders to mortgage their house (or other property) and invest in their start-up. Another indirect effect is that lower interest rates make it more attractive to invest in technology start-ups than debt instruments. A third indirect effect is low interest rates encourage margin accounts for stock investors. As a result, it is unlikely that the investment mania of the late 90s was the result of easy money policies on the part of the Fed.
Some people seem to believe that manias and bubbles can only occur because of easy money policies on the part of the Federal Reserve (Central Bank). This cannot be right, because the tulip mania of Holland reach its peak in 1623. This was before fractional reserve banking. The first fractional reserve bank was the Swedish Riksbank established in 1656. The first central bank was not established until the next century. Clearly, investment manias can occur without central bank.
Gold is one of the most sensitive barometers of inflation due to excessive money creation. The price of gold fell from about $400.00 an ounce in 1996 to below $300.00 per ounce in 1999 and most of 2000. This is not the sort of response we would expect in gold prices, if the Federal Reserve was inflating the money supply. The Discount Rate was 4 ½% in November 1998 and was increased to 6% by May 2000. Again this is not one would call an easy money policy. The investment mania in technology companies in the late 90s was not the result of over inflating the money supply. Part of the deflation of the late 90s was due to a rapid increase in the amount of goods and services being produced, due to the new technologies being developed. This may be one of the cases where the GDP measurement actually understated the actual growth.
The recession of the 90s was not caused by too easy money, but imprudent tightening of the money supply. Alan Greenspan was determined to cool the stock market. As a result, the Fed increased interest rates until they caused a recession. The yield curve turned negative 1999 or early 2000. A negative yield curve would never occur in a free market economy – that is without a central reserve bank. No one would ever loan out money for a longer term at a lower interest rate in than a shorter term loan. An inverted yield curve is the product of a central bank.
The economic growth of the 90s was built on companies developing new technologies, which is the only way to increase real per capita income. As a result, the recession of 2000 was relatively mild. Alternatively, the housing bubble was built on easy credit and did not result in new technologies. The recession of 2008 was the deepest since the recession of 1980.
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