Table of Contents
What is wrong with our age is precisely the widespread ignorance of the role which these policies of economic freedom played in the technological evolution of the last two hundred years. People fell prey to the fallacy that the improvement of the methods of production was contemporaneous with the policy of laissez faire only by accident.
– Ludwig von Mises
Before the process of economic production takes place in the real world, it is planned in the mind of the individual undertaking it. Human reason allows us to develop concepts and ideas to achieve economic outcomes. Technology can be thought of as the plan for economic action, and the mechanism by which man achieves his ends. Technology is akin to a recipe for cooking a meal; it is not a physical part of the meal, but the cognitive knowledge that brings it all together. Ideas, recipes, and technology are forms of capital, in that they increase the productivity of the production process. However, they are non-material forms of capital, which makes them abundant. A person using a technology or an idea does not reduce the ability of others to use it, nor does he reduce its productivity. The implications of the non-physicality of this form of capital are significant.
The process of technological advancement is the continuous development and application of new and better ideas and methods to the process of production, leading to a progressive increase in output per unit of time. Capital accumulation will quickly run into diminishing returns without technological advancement. As the fisherman begins using a fishing rod, his output increases. Without technological advancement, he would continue to invest in more fishing rods, to the point he had no use for more fishing rods, and the extra investment was just providing him with rods he never needed to use. He would, of course, stop investing at that point.
But if the fisherman is able to think and come up with new ideas for technologies to deploy capital to create, he can produce new capital goods that are more productive than the fishing rod. The process of capital accumulation will then continue to increase productivity without running into diminishing returns. The fisherman’s reason makes him suspect that fishing will be more productive if he is able to do it from a boat rather than from the shoreline. He invests some of his time and output into building the boat, and then tries it. As discussed in the previous chapter, this investment is expensive and uncertain. It necessitates deferring consumption, it suffers depreciation, and it entails the risk of failure. But if it does succeed, his productivity will increase. Continuing to invest in more identical boats will now also run into diminishing returns, but human reason will continue to look for new technologies to employ. With each new technology and invention, new limitations to production emerge, and capital can be deployed to improve them. A better, bigger, faster, safer boat, and new specialized equipment can continue to be invented as long as capital is being accumulated to finance it. Not only will the new technologies allow you to pull in more fish, but they will also enable you to catch types of fish that were unattainable before.
Technology and Labor
The substitution of more efficient methods of production for less efficient tones does not render labor abundant, provided there are still material factors available whose utilization can increase human wellbeing. On the contrary, it increases output and thereby the quantity of consumers’ goods. “Labor-saving” devices increase supply. They do not bring about “technological unemployment.”
– Ludwig von Mises
The rise of industrialization and the utilization of large amounts of power in economic production has been accompanied by incessant complaints about technology replacing labor. On an intuitive and superficial level, this appears to make sense. The more machines are used to increase output and productivity, the less reliant producers are on workers to generate the same level of output. As individual factories procure machines, they lay off unnecessary workers. Perhaps the most famous and original example of rage against the machine in response to the fear of job loss came from the Luddites, who organized campaigns to break automated looms, which they argued would destroy the livelihood of the British textile worker. Mechanized farming was said to put farmers out of work. The steam engine was going to make large chunks of the labor force redundant. Telephone operators were needed to connect phone calls when telephones were first invented and deployed, but as automated switchboards were invented, the demand for operators collapsed. More recently, many fast food restaurants are deploying increasingly sophisticated automated tellers that reduce their need for workers. This line of thinking is also central to the Marxist creed, as Marx argued that the gains of mechanization would accrue to the capitalists at the expense of the workers, whose pay would not increase, and whose ranks would dwindle as the rapacious capitalists abandoned them to unemployment.
Were the Luddites right? Would continued automation result in the unemployment of large chunks of the population, leading to horrible societal consequences? The commonalities between their complaints and Marxist theories are an obvious red flag to the contrary. Moreover, empirical observation does not support the Luddites’ contentions. But the definitive answer can only be attained through the economic way of thinking.
After more than two centuries of automation and industrialization, we somehow find that the vast majority of British adults who want employment can find it, and at wages that far exceed those the Luddites fought for. While it is true that very few, if any, Brits are doing the menial jobs their ancestors performed in the eighteenth century, they have jobs nonetheless. Even as the population of Britain continued to increase, more jobs continued to be found, and Brits today earn more and work in much better conditions than their ancestors did in the eighteenth century. Had the Luddites and Marxists been right, one would imagine that two centuries of technological progress would have left absolutely nobody with a job today, let alone leaving them with better jobs.
The root of the Luddites’ confusion was their treatment of labor as if it were a consumer good, acquired for the utility it provides, rather than a producer good, acquired for the production of consumer goods. A consumer good for which a superior alternative can be found is no longer demanded and can lose its economic value, which is what happened to typewriters after the invention of computers. But demand for a producer good is not necessarily contingent on its utility to the purchaser; it is dependent on the good’s usability for production. Even if a factor of production was to be replaced in one production process, it would still be valuable if it could be utilized in another production process.
Labor, in particular, is the least specific factor of production, and it can be redirected to other jobs or industries. And labor, being made up of human time, is also the ultimate resource, whose scarcity underpins the scarcity of all other resources. Everything is made with the input of human labor, and we live in a world of scarcity where there is always a large demand, at the margin, for more goods and services. As technological advancement increases the productivity of labor, and therefore makes labor more valuable, it allows for the production of more economic goods, alleviating scarcity. However, it does not, and cannot, eliminate scarcity, which is, after all, the scarcity of human time itself. As long as humans have unmet needs, there will be avenues for directing human labor to meet those needs. No matter how much human productivity increases, human wants can increase further, and human reason can continue to devise better solutions to the problems of scarcity. It can always invent better products, better technologies, and safer production methods and generate new demand. We will never “run out of jobs,” because we can always use more humans making more scarce products to meet other humans’ ever-increasing wants. Scarcity can never be eliminated, because time is always scarce. Work can never end, and man can only choose which tasks to prioritize. The more tasks he can delegate to machines, the more time he has to perform many of the infinite number of tasks he would like to carry out but cannot because of the scarcity of his time.
There was a time when moving humans or luggage around could only be accomplished by hiring other humans to carry them. A strong, healthy man would be able to carry another man, or several dozen kilograms of weight, and move them a few kilometers in a day. The job of carrying heavy things without the support of capital had very low productivity, and it was so unpleasant to perform that it seems to have mainly been the purview of slaves. Only those who could own slaves could afford this kind of labor with any sort of regularity. The vast majority of the population, however, could only move their own bodies and things as far and fast as their own feet could carry them.
As humans developed the wheel, the possibilities for moving weighty matter around were expanded. By pulling a carriage with wheels, the worker could now move heavier weights over longer distances; in other words, his productivity increased. Combining the carriage with a horse would increase the productivity of the worker even further. With the dawn of the Industrial Revolution, and the invention of the train, car, truck, shipping container, and airplane, the productivity of modern transportation increased far beyond preindustrialization levels. One truck driver can now move up to 50,000 kg of weight at a speed of 100 km/h for 16 hours a day. A handful of crew members can fly an Airbus A380 weighing 575 tons, 300 of which are cargo, at a speed of 903 km/h. With a crew of 20–40 people, the world’s largest container ship, the HMM Algeciras, can move 24,000 twenty-foot shipping containers, each weighing up to 25,400 kg, with a total shipping weight of around 672,000 tons at a speed of 15.2 knots, or 28 km/h.
From the domestication of the horse to the building of the HMM Algeciras, there has been a succession of inventions—the wheel, carriage, horseless carriages, trucks, trains, and airplanes—and somehow jobs in the transportation industry have yet to be eliminated. Not only that, but there is certainly a larger percentage of full-time jobs in the transportation sector today than existed before the invention of the wheel. In primitive societies that predate the wheel, there cannot be the level of specialization that would have allowed for many careers dedicated to transportation, as all individuals had to spend the majority of their working hours providing their own basic needs. With low levels of capital, low utilization of nonhuman energy sources, and primitive technological development, labor output was close to the level needed for basic survival. In such a world, most people need to work on producing their own food, and very few people can specialize in other jobs. Given the very low productivity of pre-wheel transportation technologies, it is unlikely many people had enough surplus economic production to hire someone to work in transportation full time, as that person’s opportunity cost would represent a significant part of the food they would otherwise produce for himself. Only someone who was enslaved and had no free will would be forced into this kind of job.
As technology advances and productivity increases, each person’s production rises above their daily survival needs. Scope for specialization then emerges, as more workers can be fed by the efforts of others, thus freeing them from having to engage in subsistence labor and allowing them to produce more sophisticated goods. As productivity increased in the transportation industry, it became feasible for free people to willingly want to work in transportation. As technology and productivity continued to improve, the conditions and pay for jobs in transportation continued to improve.
Many people continue to find more work in transportation as the productivity of transport increases. Instead of one worker carrying one man, we now have one worker sailing a ship that carries thousands or an airplane that carries hundreds. The amount of work done increases proportionately to the increase in productivity. More people travel, more work gets done, more trade takes place, and more needs are met. The more capital is employed in transportation, the more productive a transportation worker becomes, and the more they are paid.
To Luddites and Marxists, the invention of the wheel would have appeared as an unmitigated disaster—just think of all the lost jobs in the carrying-painfully-heavy-stuff industry! But in reality, it was a great boon for humanity, as it freed humans from carrying heavy loads and allowed them to focus on more productive jobs instead.
The value of goods, as discussed in Chapter 1, comes from their suitability to fulfilling human needs. The human need for movement and transportation cannot be eliminated by being met more efficiently. Humans are mobile, and they do not like to stay in the same place for long. Diminishing returns set in as a result of being in the same place, and individuals seek to move. Trade requires the movement of goods, and the larger the scope for trade, the more productivity gains can be had. These economic realities make transportation a need that has existed in all times and places, and one has no reason to expect it will be eliminated any time soon. Individual jobs in transportation at any time represent the most productive and technologically advanced solutions available to the problem of transportation up to that point. When a new technology is invented, it does not eliminate the need for transportation; it allows labor to be directed to a more productive solution for transportation.
Therefore, it is no coincidence that humanity’s economic conditions continue to improve with technological advancement. The more productive our technology, the better off we are. If humanity were to listen to the Luddites and fight technological advancement, none of us would have any time to do any of the immensely productive things we do in today’s modern society. We would be too busy engaging in very primitive tasks, like carrying heavy loads, to be able to do anything else.
The bad news for Luddites is that their opponent is far more powerful than even they imagine. They are not up against greedy capitalists looking to cheat workers; they are up against the full force of economic reality and human action responding to economic incentives. The value that accrues to humanity from new inventions that enhance our productivity is far too significant and tempting for legislation and machine breakers to overcome. The Luddites are always destined to lose to whoever appreciates technology, because its adopters can use it to gain much higher productivity.
While the Luddites of the early nineteenth century did succeed in destroying many machines and some factories, these victories against human advancement were few and far between. Their movement died and their ideas became the butt of jokes, while technological advancement continued to make life better for everyone. They were utterly powerless to stop the ingenuity of billions of human beings from making life better for all of us. Once a wheel, loom, car, airplane, or software code is invented, people recognize the value it provides in terms of increased productivity. Violent restrictions may succeed in delaying these technologies, but they also serve to increase the returns for those who manage to get around them. The individuals, businesses, or regions that utilize a productive technology not utilized elsewhere can produce at lower prices.
Technological advancement does not eliminate demand for labor, but there is compelling evidence that it does eliminate slavery. As specialization and productivity increase along with capital accumulation, a worker’s output becomes increasingly valuable, allowing him to command a more valuable reward for his labor. Rather than “exploiting” workers, the market allows them to produce with the highest productivity, which makes them more valuable to those who employ them, and reduces the returns on enslaving them. The benefits of mutual cooperation grow as the productivity of workers increases.
Slavery and highly productive capital goods do not coexist. The deployment of highly productive capital goods makes the willing cooperation of the worker increasingly valuable, as they can willingly or negligently sabotage very expensive equipment worth orders of magnitude more than the wage they are paid. Unless he is paid enough to willingly want to work, forcing a slave to manage expensive capital goods carries a large risk. In this way, capitalism encourages the rise of more mutually beneficial exchange at the expense of coercive arrangements like slavery.
Capital accumulation and the division of labor have also resulted in the development of advanced power sources, which allow us to deploy ever-increasing amounts of energy to meet our needs. As will be discussed in the next chapter, before the deployment of modern capital-intensive energy sources from hydrocarbons, human energy consumption was very close to human energy production. In a pre-capitalist world, a person’s own hands and legs produced most of the energy he could command. In such a world, acquiring the service of another man is highly valuable. With very little energy available to meet a person’s needs, a second person’s energy output has a huge marginal value, making slavery economically attractive and slaves valuable. But as energy consumption increases with new technologies, to the point where the average citizen of a rich country now consumes as much energy as the output of 200 slaves, most of the work slaves did can now be outsourced to machines that are much more productive, reliable, and accurate. With hundreds of machine slaves providing energy, the marginal value of one extra human slave becomes increasingly low. As the number of machines we have grows, the economic logic of slavery becomes less and less compelling. It is no exaggeration to say that technological innovation and capital accumulation made slavery obsolete and set slaves free.
When there was little or no capital, transportation was a job that was only acceptable for slaves. When there were carriages, you had free men willingly take on a job in transportation, because the productivity was high enough to compensate them sufficiently for their time. This allowed them to buy sufficient sustenance from others specialized in the production of food. With the introduction of the car, the job of a taxi or truck driver became even better rewarded, and working as a driver was an attractive occupation for millions of people all over the world. The more technology advances, the more capital is invested in a job, the more productive the job becomes, and the more rewarding the work is. Today, many highly skilled engineers, technicians, and various other professionals work in the shipping and transportation industry, and their productivity is high, allowing them a high standard of living.
Technology and Productivity
We have inherited from our forefathers not only a stock of products of various orders of goods which is the source of our material wealth; we have no less inherited ideas and thoughts, theories and technologies to which our thinking owes its productivity.
– Ludwig von Mises
As better technologies are deployed, productivity rises and living standards increase. But the non-scarce nature of technology makes it unique as a method for increasing the value of human time. Whereas labor, property, capital, energy, and money are scarce, ideas are not. When the wheel’s inventor used it, his productivity increased. When his neighbors copied him, they, too, were able to increase their productivity without decreasing the productivity of the inventor. As people emulate an invention, they benefit from it, and everyone’s productivity increases. As more people benefit from the invention of the wheel, they are likely to add innovations to it, thereby allowing everyone to benefit from the higher productivity such innovation brings.
The non-scarce nature of technology makes it arguably the fundamental driver of long-term economic growth. Labor is expensive, as it comes at the cost of our leisure, and the more our income grows, the more we are able to afford leisure. Capital is also expensive, as it comes at the expense of increasingly valuable consumption, and it inevitably runs into diminishing returns without technological advancement. There are only so many fishing rods you can employ. Trade and specialization will have limits if they are not combined with technological progress, which itself faces no such limits and allows for indefinite increases in economic productivity. After the wheel was invented, it allowed for a large array of technologies to be built on top of it. These then opened additional possibilities for innovation. Carriages, trolleys, pushcarts, cars, buses, trucks, trains, and airplanes were developed with wheels. These devices, and the wheel itself, will continue to be improved upon by users and engineers. Only the improvements that increase productivity are adopted, while the ones that do not improve it are discarded. Technological improvement creates new, more intensive divisions of labor, increasing specialization and allowing for increased productivity. As long as humans economize, they will continue to dedicate their reason to finding better solutions to their problems.
One can see support for the argument that technological innovation is the driver of long-run growth in the empirical observation that larger populations witness faster economic growth than smaller populations. Had economic growth been a product of resource availability, then you would expect a smaller population to have a greater abundance of resources per capita, allowing it to increase its productivity and living standards faster than a more densely populated area. If resources alone drove economic well-being, one would expect that sparsely populated areas would have higher incomes than more crowded areas. But if technological innovation is the driver of long-run growth, then one would expect the opposite to be true: Larger populations would lead to more individuals coming up with productive ideas, and since these ideas are non-rival, they would spread to the whole population, leading to higher productivity growth. A society of 100 million people will have many more people able to devise new ideas like the wheel than a society of 100 people. Imagine if one out of 100 people comes up with an innovation every year. The smaller society would have one innovation every year to improve their productivity, while the larger society would have 1,000,000 innovations every year. Since these are non-rival, everyone in the society could copy them and benefit from the increased productivity they entail.
The preceding discussion is the essence of a paper by economist Michael Kremer, who finds that population growth rates across time correlate positively with population size. If the driver of economic growth were the availability of physical resources, then you would expect that lower-population societies would be able to grow faster since more resources are available per capita. But if the driver of economic growth were technological advancement, then you would expect to witness the opposite: Societies with high populations produce more technological discoveries and thus achieve faster economic and population growth. In another test of the same hypothesis, Kremer compares the population density and economic growth rates across different geographic regions that were historically isolated. The data show that the more highly populated geographic areas had faster economic growth than sparsely populated, again, supporting the notion that technological innovation, not economic resources, drives economic growth. More population density means more non-rival innovations and technologies will spread to the entire population, allowing higher productivity and increasing living standards.
Another unique aspect of ideas and technological innovations is that they are very difficult to destroy, unlike physical property and capital. Once the wheel was invented, destroying any particular wheel would not have destroyed the idea of the wheel. The idea would have lived on in the minds of everyone who saw it, and it could be reproduced indefinitely. Natural calamities, and man-made ones like vandalism, theft, and government, can and have destroyed unfathomably large quantities of capital over the millennia. But technologies and ideas have always been much harder to destroy. They live on in the minds of people who observed them, or in their writings. And while writing can be destroyed, what is in the minds of humans cannot be controlled. It is more difficult to kill ideas than to kill a person or destroy an object. You may violently assault or kill a person holding an idea or use physical torture to get him to denounce it, but you cannot stop him from thinking it. The last bastion of human freedom will always be the thoughts humans hold in their minds, which no force on Earth can overrule.
Physical capital, as discussed in the previous chapter, also suffers from the problem of depreciation, an inevitable consequence of its physical nature. Physical capital is constantly decaying, on top of the risks of destruction it also faces. Not only do material objects originate in ideas, they only survive in the long term as ideas as their individual physical manifestations decay and are destroyed. The ideas, technologies, and knowledge that go into making bridges, buildings, engines, computers, wheels, or medicines are all more economically significant than any individual manifestation of these technologies.
The introduction of the printing press was a monumentally important technology for humanity because it allowed for the mass printing of ideas, making it far harder to destroy them as they spread via a growing number of copies. The invention of digital media and the internet was another aid to humanity’s capacity to preserve its ideas and technologies, as it made copies of information far cheaper to produce. A simple digital data storage device worth a few dollars, or the wage of a few hours’ labor for the majority of people worldwide, can store the books of the world’s largest library.
Technological Innovation and Entrepreneurship
This evolutionary process of selection and variation continues indefinitely with technologies, and there are no good reasons to expect it to stop, because it is ultimately driven by humans’ need to economize—an eternal problem that cannot be evaded. Humans are always economizing, and that requires the application of reason to improve the process of production. Technological innovations increase productivity, but they do not end economizing action; humans still need to economize and seek ways of improving their productivity, and the new innovation simply opens up more horizons for finding newer innovations.
The predominant model for understanding technological innovation is that it is a product of scientific advances discovered by scientists. While understandably popular among the universities that teach it, a closer look at the realities of technological innovation shows a far more dynamic and market-driven process. Technological innovations are only innovations if they pass the market test and increase productivity, commanding enough of a market price to compensate the producer for deploying them. Failing to achieve success on the market implies that the productivity increase of the technology does not justify the initial cost. The difference between a curiosity or a toy and a technological innovation lies purely in the latter’s ability to raise productivity.
In The Economic Laws of Scientific Research, Terence Kealey provides a very compelling illustration of the inextricable link between markets and technological innovation. Kealey rejects the linear model for technological advance, in which academic science findings are applied to produce technological innovations, and offers a wealth of compelling evidence to the contrary. The increase in the productivity of the textile industry in the eighteenth century came through the inventions of craftsmen who owed nothing to academics. British agricultural productivity growth in the nineteenth century came without government support for agricultural research and development, but from farmers and inventors. Most significantly, the Industrial Revolution was not birthed from the laboratories of scientists, but from the workshops of workers, sometimes illiterate. Thomas Newcomen, who invented the first commercial steam engine, was a barely literate provincial blacksmith who had no knowledge of whatever scientific advances were supposed to have inspired the industrial engine. His work with pumps led him, after a decade of experimentation, to reverse the process of a pump in order to produce an engine. Whereas the pump uses mechanical power to move fluids, an engine uses moving fluids to produce mechanical power. It was a simple idea, inspired by the enormous economic reward for producing an engine, not by theoretical scientific discoveries. Kealey illustrates this to also be the case for James Watt, Richard Trevithick, and George Stephenson, and other pioneers of engines:
It will be seen, therefore, that the development of the steam engine, the one artefact that more than any other embodies the Industrial Revolution, owed nothing to science; it emerged from pre-existing technology, and it was created by uneducated, often isolated, men who applied practical common sense and intuition to address the mechanical problems that beset them, and whose solutions would yield obvious economic reward.
Looking back at the Industrial Revolution generally, it is hard to see how science might have offered very much at all to technology, because science itself was so rudimentary. Chemists who subscribed to the phlogiston theory, or to the view that heat was a substance, or who tried to build perpetual motion machines, were not likely to be of much use to engineers. Indeed, during much of the nineteenth century, the reverse was true; scientists scrambled to catch up with engineers. Carnot’ s descriptions of the laws of thermodynamics, for example, emerged from his frustration with Watt’s improved steam engine, because that steam engine broke all the rules of contemporary physics. Watt’s engine was more efficient than theory stated it could be, so Carnot had to change the theory.
It is more accurate to say that the invention of the steam engine created thermodynamics, rather than the other way round. A similar story can be seen with the invention of the airplane. The majority of scientists at the beginning of the twentieth century were adamant that flight was not possible, even after it happened. Yet it was two bike-shop-owning brothers who had no scientific training who managed to achieve it. Physics was then revolutionized to explain and rationalize flight. Technological innovation is born from the desire to achieve ends and secure profits by serving others.
Further, Kealey illustrates that technological advances of the Industrial Revolution happened in Britain, which had virtually no government support for science, and not in countries like France, which spent profligately on financing official science.
As human knowledge has advanced, our ideas have resulted in the creation of ever-more complex machines to produce the outputs we value. As operating machines became increasingly repetitive and predictable, humans began to devise ways to automate the instructions machines needed. Cloth-making looms were equipped with guiding patterns and punch cards that would produce reliable patterns in fabric without requiring conscious and continuous human supervision. Some mechanical devices were utilized to perform mathematical calculations at a faster and more reliable rate than humans could achieve.
In 1822, English polymath and inventor Charles Babbage worked on developing a “difference engine,” which was used to compute polynomial functions.81 He was unable to complete its construction, although his design survived, and in 1991 the London Science Museum constructed an operational machine based on his design. In 1833, Babbage started work on a more general design, the Analytical Engine, which would incorporate many of the essential features of modern-day computing, a century before any modern computer manufacturer achieved commercial success.
Perhaps the most fascinating aspect of Babbage’s design was that it was programmable using punch cards. Ada Lovelace, the daughter of Lord Byron, developed an algorithm in 1842 to calculate a sequence of Bernoulli numbers on Babbage’s machine, giving her a strong claim to the title of world’s first programmer. While Babbage and Lovelace were unsuccessful in developing commercial computers, they were instrumental in advancing the science and art of computer development until it bore fruit in the twentieth century. The Babbage Analytical Engine was too difficult and expensive to successfully construct and operate commercially, given the industrial and technological reality of the nineteenth century; but by the twentieth century, it had become possible.
Electricity would enter into the operation of these machines, increasing their productivity and complexity. Highly sophisticated wiring boards and circuits would be needed to control them. As the sophisticated new breed of electric machines could compute difficult mathematical problems, they were termed “computers.” In 1941, Konrad Zuse, a German engineer, constructed what is regarded as the first programmable computer, the Z3.
The instructions that operated the early computer machines were coded into them through electric circuits or punch cards. Getting an early computer machine to perform a slightly different function usually required adjustments to its hardware and processes, as well as sophisticated rewiring. By the late 1940s, it became possible to store these instructions in computers electronically with the ENIAC (Electronic Numerical Integrator and Computer). In the 1950s and 1960s, computer programming languages were developed that would allow for programs to be specified in a more abstract way, independent of the computer’s architecture. The development of these standardized programming languages, and the growing number of people worldwide who could read, understand, and write them, brought about an entirely new type of economic good with enormously transformative implications.
Software can be thought of as the purest form of technological good. It consists entirely of data and has no physical form, but it increases productivity enormously. It can be communicated around the world very quickly with modern communication tools, and it is non-rival and non-scarce. Applying software to an industrial process allows for the increased automation of the machines’ functions, requiring less human supervision and labor. Software allows for far better organization of resources and supply chains, reducing costs and increasing efficiency.
This economic development has had an outstanding impact on the world over the past seven decades. Ideas and technologies can now be coded, through abstract letters and numbers, into hardware that controls a program’s operation and allows it to perform evermore complex tasks. For most of the population of nineteenth-century Britain, the punch cards inserted into obscure and highly complex machines must have seemed unintelligibly insignificant. Today, software, the instructions codified into standard languages that tell machines to perform functions, has invaded every industry in the world. It is impossible to imagine a single avenue of economic production that has not increased its productivity through the utilization of machines that run on software.
Property in Ideas
Can ideas and technology be considered property? To answer this question, we return to the discussion in Chapter 2, in which a distinction was made between economic and non-economic goods. Both types of goods offer utility to individuals, but economic goods have value because they are scarce. Scarce goods are those available in supplies so limited it is impossible to satisfy the demand for them; this forces humans to make choices about how to consume and allocate them. In other words, scarcity forces humans to assign value to goods. Ideas, being immaterial, have no limit on their supply, so the available supply can always meet whatever demand exists. This precludes the development of a market value for ideas, unless the individual who possesses an idea creates a market for it by restricting access.
There are two ways of creating scarcity in the access to ideas in order to generate a market value for them. The first is for the person with the knowledge to choose not to disclose it publicly, and to only disclose it to individuals who pay for it. Trade secrets, secret recipes, and proprietary technological processes are examples of this voluntary and peaceful method of establishing property in technology and ideas. The second is to make the knowledge public but use the coercive power of the state to prevent others from using the knowledge for profit. Examples of this include intellectual property laws, like copyrights and patents. Kinsella explains these:
A patent is a grant by the state that permits the patentee to use the state’s court system to prohibit others from using their own property in certain ways—from reconfiguring their property according to a certain pattern or design described in the patent, or from using their property (including their own bodies) in a certain sequence of steps described in the patent.
Copyrights pertain to “original works,” such as books, articles, movies, and computer programs. A copyright is a grant by the state that permits the copyright holder to prevent others from using their own property—e.g., ink and paper—in certain ways.
In both cases, the state is assigning to A a right to control B’s property—A can tell B not to do certain things with B’s property. Since ownership is the right to control, IP grants to A co-ownership of B’s property.
An excellent treatment of this topic from a legal and economic perspective can be found in Stephan Kinsella’s Against Intellectual Property. A key insight is that when information and knowledge of certain production processes become publicly known, the only way to prevent others from using it is to impose restrictions on the ways in which they can use their own property. The only way to copyright published information is to make it illegal for owners of the published good to use their own property of ink and paper to recreate the copyrighted, published work. Similarly, patents can only work by imposing restrictions, with the threat of government violence, on producers’ ability to use their own equipment in a similar way to that described in the patent.
Both patents and copyrights require the use of violent threats against individuals engaging in peaceful economic production. In both cases, the government assigns to the copyright or patent holder the right to control the property of others. From a legal perspective, intellectual property laws must involve the assignment of a claim of ownership and control on the physical property of others: The copyright or patent holder asserts control over the property of everyone on the planet who could use their own property.
As Wendy McElroy explained in Contra Copyright, Again:
My ideas are like stacks of money locked inside a vault which you cannot acquire without breaking in and stealing. But, if I throw the vault open and scatter my money on the wind, the people who pick it up off the street are no more thieves than the people who pick up and use the words I throw into the public realm.
Chapter 4 elaborated on how property is, according to Menger, “not an arbitrary invention, but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods.” Understanding the praxeological rationale for the development of the institution of property explains the arbitrary, unworkable, and contradictory nature of the concept of intellectual property. Ideas are not scarce, so their demand can never exceed their supply—there is no limit on how many wheels can be produced from the idea of the wheel. The absence of scarcity makes the application of the framework of property inapplicable to ideas, as there is no conflict over scarcity to be avoided. This makes intellectual property incompatible with property rights.
With the economic approach to these questions, the notion of intellectual property laws is intellectually untenable, and it reduces to nothing more than aggression on the part of the bodies that impose these laws on the property of anyone who may fall foul of them. Abolishing intellectual property laws does not prevent producers from keeping trade secrets; it just places the cost of maintaining the secret on the producer and requires him to only resort to peaceful methods of enforcing it. There is nothing about ideas that makes enforcing their scarcity an acceptable exception to the non-aggression principle, which will be discussed in more detail in Chapter 16. Even if there were an increased benefit to some segment of society, or to society overall, it does not justify the initiation of aggression against peaceful people.
Yet a closer look at the alleged benefits of intellectual property shows that they have been massively exaggerated. Intellectual property laws, at the margin, increasingly incentivize innovators to obtain monopoly licenses at the expense of innovating to meet consumer demand. At the margin, these laws magnify the reward for obtaining state monopoly licenses for ideas and lead innovators to dedicate growing quantities of resources toward meeting that end, rather than seeking to satisfy consumers.
This is most apparent in the pharmaceutical and software industries, where large bureaucratic corporations can be increasingly seen as enormous patent trolls, whose primary focus is on hiring lawyers, patenting, litigating, and defending against litigation; while developing consumer software and drugs are an increasingly secondary focus.
While we are taught to value innovations for their own sake, valuable innovations are those that consumers value enough to make them profitable. Without intellectual property laws, the only way to monetize ideas and innovations is for idea holders to ensure their ideas provide greater value to consumers than the available alternatives. With intellectual property laws, entrepreneurs can legally ban their competitors from competing, and succeed by dint of their monopoly power over their ideas. The satisfaction of consumer wants becomes a secondary concern. By limiting the number of providers on the market, government enforcement of intellectual property laws effectively comes at the cost of consumer satisfaction.
A common argument from supporters of intellectual property rights is that rewarding innovators with monopoly profits for a period of time will incentivize them to produce more than they otherwise would. Society overall would be better off allowing this form of aggression against peaceful property owners in order to protect innovators and incentivize them to come up with new ideas. Yet the theoretical and empirical arguments for the increased benefits to society from intellectual property laws are very weak. In an excellent study of the patent and intellectual property system, Levine and Boldrin present compelling evidence suggesting that intellectual monopoly laws are counterproductive to innovation. The focus on patents directs companies’ energies away from innovation toward lawsuits and a patent arms race, where competitors seek to acquire as many patents as possible to use as bargaining chips to avoid getting sued and to derail each other with lawsuits. The high cost of drug development, usually cited as the justification for monopoly profits, comes predominantly from the cost of litigation and regulatory approval required to secure drug approval and patents.
Boldrin and Levine examine these laws and find little empirical support for the idea that intellectual property leads to greater innovation or growth:
[T]here is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the “patent puzzle”: in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.
In 1983 in the United States, 59,715 patents were issued; by 2003, 189,597 patents were issued; and in 2010, 244,341 new patents were approved. In less than 30 years, the flow of patents more than quadrupled. By contrast, neither innovation nor research and development expenditure nor factor productivity has exhibited any particular upward trend. According to the Bureau of Labor Statistics, annual growth in total factor productivity in the decade 1970 –1979 was about 1.2 percent, while in the decades 1990–1999 and 2000–2009 it has been a bit below 1 percent.
The simplistic view of intellectual monopoly rights is that they incentivize innovators. But on closer inspection, it is clear they have the opposite effect. Innovation itself always has strong motivation driving it, and it is facilitated by building on others’ innovations. Intellectual monopoly laws do not provide an added incentive for innovators as much as they hinder innovators by preventing them from building on the work of others. Most inventors come across their inventions when trying to scratch their own itch, and the invention will provide them value in itself regardless of what others do with it. Further, being the first to come across an innovation provides the inventor an enormous advantage in being able to market and sell it without having to resort to coercive intellectual property laws. Over the centuries, the greatest inventions, along with the most innovative works of literature, music, and art, have been produced without the need for copyright or patents. In fact, one could argue they were developed precisely due to the absence of copyright laws, allowing their producers to cheaply access the work of those who inspired and provided them with the foundations for their own creations. It is common for intellectual property law advocates to focus on the benefits to the inventor of greater earnings, but they are very quiet on the topic of the enormous cost this entails to the many more potential inventors who cannot access ideas or build on them without paying exorbitant fees.
Ideas are the only non-scarce productive assets. As technology and telecommunication become cheaper, copying productive ideas just becomes easier and cheaper. The cheaper it is to spread and copy good ideas, the more productive the world becomes. Intellectual property laws impose a higher cost on the transfer of ideas. In today’s world, this primarily benefits the people who work in the field of intellectual property, but not the creators or the producers, and not the copiers or society at large. “If I have seen further, it is by standing on the shoulders of giants” was how Isaac Newton paid tribute to the many people from whom he learned. In his time, obtaining the knowledge of others required paying large sums of money to obtain expensive manuscripts. The printing press, industrialization, and the internet have decimated the cost of acquiring knowledge and made virtually all of humanity’s knowledge accessible to anyone with a $20 phone and an internet connection. Intellectual property laws raise this cost again, reversing centuries of technological progress in reducing the cost of communicating knowledge, leaving countless millions of geniuses and producers deprived of knowledge they could use to become more productive. If the past hundreds of years of progress have given the vast majority of humans on Earth access to a very large number of giants’ shoulders, intellectual property laws are a tax for standing on these shoulders. One can only imagine how much more creative and productive humanity would be if all of the world’s books were available freely online.