Malinowski’s Magic, Science and Religion, and the Modern Political Triad

Donald J. Trump is all the rage at the moment and his ascendance to the GOP primary frontliner has been a shock for most political observers. It is especially strange because the proposals that he is making like partly closing the Internet or making America great again through the sheer power of personality are transparently absurd and border on pronouncements of a shaman. Almost similarly bizarre and unfulfillable promises come from the Democratic candidate, Bernie Sanders.

In addition to the shamans, there is another irrational current in the primary campaign represented especially by candidates like Ben Carson and Mike Huckabee. These people believe in the justification or perversity of certain social practices by the mere fact that they seem to them to be required or prohibited in their holy book.

While these politicians may seem outliers, they are just somewhat radical versions of the two dominant undercurrents in modern political thinking, leftism and conservatism. One can say that Trump is not exactly conservative because of his economic stances but it is actually an accident of the US political history that many conservatives are more favorable to economic freedom than the left.

One is almost forced to ask how it is possible that in the age of enormous scientific and technological progress in a country to which we owe so much of it people can still have political views that are exploited by the likes of Trump, Sanders, Carson and Huckabee. Why do people not massively embrace the alternative to the respective ideologies of leftism and conservatism, or combinations of the two, the alternative whose even moderate application since the end of the 18th century and till the end of the 19th launched an unprecedented wave of human progress? Why after all what illiberal politicians have done in the 20th century are people not turning to liberalism (in the classical and not modern US sense of the word)?

The answer to this question may lie in the findings of a person who is probably not known to most people nowadays, one of the founders of modern anthropology Branislaw Malinowski, in particular in his essay “Magic Science and Religion”.

In it, Malinowski sets out to explore three fundamental types of thinking as relates to how people should act in the world that often does not simply give them what they want and occasionally bring catastrophes: magic, religion and science. He does it in the context of primitive tribes and he starts by making an important point that even though many people perceive people living in such tribes as completely irrational, they actually have rudiments of science, i.e. the framework of acting in the world based on systematic acquisition of knowledge about the world starting from observation broadly defined:

These natives, and I am speaking mainly of the Melanesians who inhabit the coral atolls to the N.E. of the main island, the Trobriand Archipelago and the adjoining groups, are expert fishermen, industrious manufacturers and traders, but they rely mainly on gardening for their subsistence. With the most rudimentary implements, a pointed digging-stick and a small axe, they are able to raise crops sufficient to maintain a dense population and even yielding a surplus, which in olden days was allowed to rot unconsumed, and which at present is exported to feed plantation hands. The success in their agriculture depends —besides the excellent natural conditions with which they are favored—upon their extensive knowledge of the classes of the soil, of the various cultivated plants, of the mutual adaptation of these two factors, and, last not least, upon their knowledge of the importance of accurate and hard work. They have to select the soil and the seedlings, they have appropriately to fix the times for clearing and burning the scrub, for planting and weeding, for training the vines of the yam-plants. In all this they are guided by a clear knowledge of weather and seasons, plants and pests, soil and tubers, and by a conviction that this knowledge is true and reliable, that it can be counted upon and must be scrupulously obeyed.

[…] Can we regard primitive knowledge, which, as we found, is both empirical and rational, as a rudimentary stage of science, or is it not at all related to it? If by science be understood a body of rules and conceptions, based on experience and derived from it by logical inference, embodied in material achievements and in a fixed form of tradition and carried on by some sort of social organization—then there is no doubt that even the lowest savage communities have the beginnings of science, however rudimentary. Most epistemologists would not, however, be satisfied with such a “minimum definition” of science, for it might apply to the rules of an art or craft as well. They would maintain that the rules of science must be laid down explicitly, open to control by experiment and critique by reason. They must not only be rules of practical behavior, but theoretical laws of knowledge. Even accepting this stricture, however, there is hardly any doubt that many of the principles of savage knowledge are scientific in this sense. The native shipwright knows not only practically of buoyancy, leverage, equilibrium, he has to obey these laws not only on water, but while making the canoe he must have the principles in his mind. He instructs his helpers in them. He gives them the traditional rules, and in a crude and simple manner, using his hands, pieces of wood, and a limited technical vocabulary, he explains some general laws of hydrodynamics and equilibrium. Science is not detached from the craft, that is certainly true, it is only a means to an end, it is crude, rudimentary, and inchoate, but with all that it is the matrix from which the higher developments must have sprung.

However, alongside what may be called science, there exist two more frameworks that, at first sight, are difficult to distinguish clearly but are actually, as Malinowski brilliantly demonstrates quite different. These frameworks are magic and religion. The difference between the two is that a magician strives to directly influence what happens in the world, although there is no explanation whatsoever how this is supposed to work:

Compare a rite carried out to prevent death in childbed with another typical custom, a ceremony in celebration of a birth. The first rite is carried out as a means to an end, it has a definite practical purpose which is known to all who practice it and can be easily elicited from any native informant. The post-natal ceremony, say a presentation of a new-born or a feast of rejoicing in the event, has no purpose: it is not a means to an end but an end in itself.

Religion is also a response to the imperfection of the world but from a different angle. Where magic strives to militate against things that cannot be changed either in principle or with application of the existing knowledge or technology, the essence of religion is to find certain elements of the world that would give consolation in the face of its clear imperfection. The most important such elements in probably all religions are the tradition and the human mind that is considered as an immaterial spirit.

In order to grasp better the nature of primitive religious ceremonies and their function, let us analyze the ceremonies of initiation. They present right through the vast range of their occurrence certain striking similarities. Thus the novices have to undergo a more or less protracted period of seclusion and preparation. Then comes initiation proper, in which the youth, passing through a series of ordeals, is finally submitted to an act of bodily mutilation: at the mildest, a slight incision or the knocking out of a tooth; or, more severe, circumcision; or, really cruel and dangerous, an operation such as the sub-incision practised in some Australian tribes. The ordeal is usually associated with the idea of the death and rebirth of the initiated one, which is sometimes enacted in a mimetic performance. But besides the ordeal, less conspicuous and dramatic, but in reality more important, is the second main aspect of initiation: the systematic instruction of the youth in sacred myth and tradition, the gradual unveiling of tribal mysteries and the exhibition of sacred objects.

[…] We may, therefore, lay down the main function of initiation ceremonies: they are a ritual and dramatic expression of the supreme power and value of tradition in primitive societies; they also serve to impress this power and value upon the minds of each generation, and they are at the same time an extremely efficient means of transmitting tribal lore, of insuring continuity in tradition and of maintaining tribal cohesion.”

[…] To primitive man, never, even under the best conditions, quite free from the threat of starvation, abundance of food is a primary condition of normal life. It means the possibility of looking beyond the daily worries, of paying more attention to the remoter, spiritual aspects of civilization. If we thus consider that food is the main link between man and his surroundings, that by receiving it he feels the forces of destiny and providence, we can see the cultural, nay, biological importance of primitive religion in the sacralization of food. We can see in it the germs of what in higher types of religion will develop into the feeling of dependence upon Providence, of gratitude, and of confidence in it.

[…] Thus the belief in immortality is the result of a deep emotional revelation, standardized by religion, rather than a primitive philosophic doctrine. Man’s conviction of continued life is one of the supreme gifts of religion, which judges and selects the better of the two alternatives suggested by self-preservation—the hope of continued life and the fear of annihilation. The belief in spirits is the result of the belief in immortality. The substance of which the spirits are made is the full-blooded passion and desire for life, rather than the shadowy stuff which haunts his dreams and illusions. Religion saves man from a surrender to death and destruction, and in doing this it merely makes use of the observations of dreams, shadows, and visions. The real nucleus of animism lies in the deepest emotional fact of human nature, the desire for life.

At the first sight, the connection between Malinowski’s observations about primitive tribes and politics in modern highly complex and developed societies may seem tenuous at best but when one looks closer at the essence of the three main political ideologies of today, it becomes difficult not to see magic, science and religion embodied in them.

Let us start with leftism. It is obvious that all kinds of people on the left believe with varying degrees of confidence in the possibility for the human societies led by technocrats restricted by democracy to manipulate social outcomes. From the very beginning, leftism was an attempt to address the social problems in a manner similar to that of natural science. Despite the lip service that is paid to science, however, the approach of the left seems to have much more to do with magic, however, because of two key things.

First, much of the left’s belief in the benefits of deliberate (whether top-down or democratic) meddling with spontaneous social order is based on disregard or willful misinterpretation of important historic facts. One major line of such misjudgment consists in widespread claims that many kinds of social problems were worsening or at least not improving during the short relatively ‘laissez-faire’ phase in Western history. According to this story, consumers were robbed by monopolies and sold junk and dangerous stuff, workers were mercilessly exploited, there was little or no education for most people, the list could go on indefinitely. A cursory look at the relevant historical facts will show to anyone who wants to see that those beliefs are blatant myths.

In addition, while the left has often emphasized the need to scientifically rearrange society and social democrats are fond of reminding us that they are ideology-neutral people who are just looking at where carefully collected evidence collected by social research leads them, there is a big problem with much of that research. The problem is that it is overwhelmingly dominated by methods taken in one way or another, and with different degrees of modification, from natural sciences and engineering. This process went so far that, for instance, finance specialists apply Fourier transforms (a method from electrical engineering) to analyzing the evolution of financial market indices. It has strong similarities with the famous “cargo cults” with figures of planes replaced by misused mathematical and computational instruments.

At the same time, a large part of the modern left seems to be completely at odds with the optimism of the Progressive movement. Post-modernists that largely drive this line of thinking generally reject the objectivity of science (whether natural or social) wholesale, attempting to reduce all kinds of social interactions to exercises of power. The difference with the technocratic left, however, is ultimately not a one of principle. A cargo-cult-like, pseudoscientific mysticism is replaced by a strong belief that prima facie harmless acts like jokes or market exchanges are actually exercises of great social power. By trying to control them, the postmodernist left seeks to manage society in no-less direct way than their technocratic brethren, and the foundation of their ideas is every bit as similar to magic.

The second major strand in human political thinking – conservatism – corresponds to a different major mode of thinking analyzed by Malinowski – religion. The affinity goes beyond the very close relationship between conservatism and religion in almost every instance. Conservatism always tries to sacralize certain features of society, especially hierarchies and social roles and is suspicious of any changes that may even remotely threaten them. It sometimes tries to rationalize those features but such attempts are usually half-hearted and deeply unconvincing, often boiling down to the idea that although we cannot know why a given social feature has not been weeded out over a long period, it must be beneficial for this very reason.

It is also frequently talks about so-called ‘transcendent’ entities and values mirroring the fascination of the primitive cultures with the idea of life and rebirth cycle. The language of patriotism, for example, almost makes one feel that even if one dies defending the transcendent Fatherland one will sort of continue living because one was always part of it, and it is still there. In a similar vein, conservative cultures encourage affection and sacrifice based on blood relations.

Leftism and conservatism, thus, respond to the imperfections of the social world like magicians and priests. The only ideology that argues that the imperfections of the social world should be addressed in keeping with the basic knowledge about human beings and society is liberalism. Liberals realize that human beings’ ability to learn, knowledge and good character traits are highly limited but decentralized mechanisms of cooperation and exchange actually allow to put them to use while keeping the human dark side in check. Faced with grandiose schemes of social design from above, it always asks the annoying questions about the possibility of the actually existing humans and institutions to achieve the goals of such schemes and such schemes’ unintended consequences. At the same time, liberals do not accept the claims that certain social institutions an practices or their absence are valuable or to be prevented for their own sake, which puts them sharply at odds with conservatives.

The answer to the question why liberalism has so far had such a difficulty in winning in the political realm is that its adversaries correspond to two other fundamental modes of human thinking about the imperfect world. But the fact that science has won out in most other important realms should be the reason for hope.

Not Golden but Copper Fetters

The graph below may contain the answer to the question that haunted the economists for more than 80 years: what sparked the crisis that shaped so much of the social history and economic science that followed it – the US Great Depression.


Source: NBER Macroeconomic History Database

The graph very vividly contains a pattern which my version of the Austrian Business Cycle Theory (see this issue of NPPE and the empirical working paper with application to the Great Recession) predicts should happen in the case of an unsustainable boom caused by a credit expansion. In brief, such a policy may cause investment projects to be started that seem artificially profitable because the prices for certain inputs (which I call the “contested goods”) do not immediately adequately reflect the changed demand for them.

Historically, the Federal Reserve embarked at a monetary easing in early 1927. At the time, the American economy was undergoing dramatic productivity improvements. The main engine of such productivity improvements, along with other factors was the process of electrification, especially of the factories, and the accompanying changes in factory organization, e.g. switching from the multi-story to the single-story pattern, and from central motors to unit motors.

The input which was and is essential in electrification is copper, and the title of this post is directly polemical in relation to the famous book by Barry Eichengreen that blamed the Great Depression on another metal, that probably wasn’t to blame after all – gold.

It is visible from the graph that shortly after the start of the credit expansion, copper shipments started taking off but the price of copper followed them only with a lag of around a year, with the final spike from 17,7 to 21,3 cents per pound happening within just one month. After that, the shipments and price fell but still stayed at a level 21% above September 1928. The unsustainable projects were probably kept afloat for some time by new credit creation which followed the relatively tight credit conditions of 1928. But in November 1929 copper shipments collapsed by staggering 33%.

The costs related to copper were also highly significant. Its price rose by 44% between September 1928 and March 1929 to reach 21,3 cents per pound.  The shipments data are in thousands of short tons, and the price for copper is in cents per pound. Thus, if we assume that at the peak consumption in March 1929 the US economy accounted for 150 thousand short tons, at the price of 21 cent per pound, this would have constituted around $63 mln. in the then current prices just in that month alone, and around $750 mln. in yearly terms. To put this in perspective, compare with the total net capital formation in 1929 of $10,49 bln, and the GDP of a bit more than $100 bln.

To the extent that copper costs were concentrated in certain investment projects, the rapid increase in copper price must have presented the entrepreneurs undertaking those projects with huge unexpected cost increases. A large part of the affected projects were probably frozen which resulted in the collapse in copper shipments whose magnitude is hardly explicable otherwise. This, perhaps, in combination with some other, less important, inputs ignited the economic crisis which was turned into a catastrophe by Hoover’s and FDR’s attempts to counteract it,

The Waste of Resources in Chinese Construction as the Biggest Economic Story of Our Time

In 2008, when the Chinese leadership were seriously afraid that the global economic crisis could significantly decrease the Chinese economic growth, they embarked on a range of measures to stimulate the economy. In the end, the main way these measures seem to have worked is through launching a construction boom which had no precedent in human history and perhaps will never be repeated again.

Already in 2011, The Economist Intelligence Unit in the report titled “Building Rome in a Day…” was alarmed by the scale of the boom. According to the report’s calculation, at the end of 2010, China had the urban population of just 44.9%, yet it already had the residential space per head approaching that of the UK. The UK then had the level of urbanization of around 90% and the average disposable income level many times higher than China. Since then, the construction boom has continued for 4 more years. The potential magnitude of over-construction that this (as well as evidence like enormous ghost cities) suggests is simply beyond comprehension.

Chinese construction growth

Looking at the chart above, one can notice that the growth rate in Chinese construction spending was falling rapidly after around 2006. Then there was a turnaround starting from 2008 which was probably fuelled by stimulus measures even before the main stimulus package was announced. Indeed, the index of the Chinese monetary policy stance estimated by Sun (2014) suggests dramatic loosening of the monetary policy stance in early 2008 that continued until early 2009. Then, monetary policy was loosened substantially again in 2011.

Chinese monetary policy stance

And it wasn’t just the China’s central bank’s loosening. As an example, in just the first six months of 2009 the big four Chinese state banks were ordered to lend the equivalent of 700 billion pounds.

The main problem with this boom is that it means a waste of important resources on an enormous scale. In this post I will just deal with steel the importance of which for multiple production processes does not need to be explained (but there were of course other resources wasted on an astronomical scale, for instance cement and copper). The chart below illustrates the dynamics of steel production in the world, China and the US. The chart is based on the World Steel Association’s data.

World steel trends

It is notable that in 2014 China produced almost as much steel as the whole world in 2001, and half of the world’s total for 2014. Since the net steel imports have been relatively low (the highest share was around 9% (74 mln. mt) in 2014). If we reasonably hypothesize that at least the increase in the amount of steel produced after 2008 over the 2008 level was wasted in the stimulus (but perhaps it has been even higher), the resulting picture is staggering. If one also recalls that the construction boom meant colossal wasting of other resources like copper, cement, as well as many others, the title of this post ceases to be controversial. It is impossible to say at this stage how many people all over the world were and will be made substantially poorer because of this but this number is obviously very large.

Aggregation of preferences and economic calculation under socialism and capitalism

A course on the aggregation of preferences at my university, or more specifically, a cursory admission by the instructor that the aggregation of preferences taken as ordinal rankings is meaningless from the actual welfare point of view made me draw a connection between the meaninglessness of the aggregation of preferences and the socialist calculation debate.

Recall that Hayek claimed that the main problem of socialism was that the planners don’t have access to the individual-level knowledge, including the knowledge of individuals’ utility functions. However, if the meaninglessness of aggregation is taken into account, it can be shown that even if planners had access to individuals’ utility functions (which in any event are a fiction), socialist calculation would still be impossible.

To understand why, imagine an economy where all the capital has just been nationalized but market allocation of finished consumer goods was preserved. In the beginning of the first planning period the planners decide on the set of goods and services to be produced and distribute a certain amount of monetary units (valid until the end of the period) among the population. By the end of the period, they record a set of quantities of various goods and services sold and the relevant prices.

For the following period the planners make some changes to the set of goods and services but distribute the money the same way. In the end of the period they get another set of quantities and prices. But the fundamental problem is that there is no rational way for the planners to compare the two sets of quantities and prices. And they would not be helped even if they could calculate a social utility function based on individual utilities.

But an even more interesting question is why we can say that the allocation of resources in markets is relatively rational in contrast to the socialist case. It is not enough just to say that when an entrepreneur receives a profit after reallocating certain resources, it means that the relevant consumers were able to pay to her more than the consumers of the stuff which was previously produced with the help of the relevant capital and thus, the overall welfare has been enhanced.

After all, it is possible to imagine cases in which (if they are taken individually) such reallocation may prima facie seem to decrease the overall welfare. Imagine, for instance, that the land under a popular skating rink is profitably reallocated to a golf club which is used by a few rich people in contrast to the skating rink being used by lots of people. It doesn’t seem suffice to say that the new owner of the land is earning higher profits than the previous owner who used the land for the skating rink.

What allows to resolve this problem is a realization that it is only possible to have really high (in the total amount) profits for long periods of time if you are making substantial innovations useful for large swathes of people, allowing them to fulfil new needs or old needs in better ways (compare the total profits of Apple with those of Louis Vutton, for instance). But this is of course the case only because our world is as it is at the level of people’s actual abilities, resources and their ability to be transformed into valuable goods and services. In particular, the very rich don’t seem to be able to earn a really large share of income by producing stuff mostly for themselves mostly through their own contribution.

Thus, even the hypothetical case with the skating rink can be resolved. If it isn’t analysed separately, one can see that the former owner gets paid for the land. This money can allow either her directly or someone else to whom she might lend the money to buy different capital goods, and it is more probable that that capital may be more profitable invested into serving larger numbers of people than the very rich again.

US chemical industry may be a locus of a new unsustainable boom. And there could be other loci

As the third part of my dissertation project, I am trying to predict in which industries of the US economy we can see a boom-and-bust pattern in the near future given the highly expansionary monetary policy that the Fed has been conducting to boost the recovery from the Great Recession.

Among many US industries, the chemical industry stands out in this respect. Companies in this industry have recently (between 2011 and August 2014) announced the undertaking of at least 196 projects aimed at building new chemical plants or upgrading or restarting old ones with projected investments in the amount of $124 bln. For the purposes of predicting business cycles, the new plants projects are more interesting because it they take more time to complete.

Presumably, the relevant projects are already being reflected in the manufacturing construction figures published by St. Louis Fed (see below). And it is plausible that there is more going on than just the chemical industry.

Manufacturing const. spending

Manufacturing construction spending has almost reached its peak monthly level of February 2009 (especially given that the chart ends with October). Growth was especially strong in 2014 (from $46 bln. in March to $59 bln. in October, an increase by 28%).

At the same time, the prices of the main intermediate and capital goods used in construction don’t show a similar dynamic.

One can look at the PPI* for iron and steel products, for instance.

Iron and steel PPI
Or at the PPI for concrete products.

Concrete PPI

Or for construction machinery and equipment.

construction  machinery and equipment PPI

Those discrepancy between the rising manufacturing construction spending and the dynamics of the prices of the inputs into construction is important because it may reflect the failure of prices of inputs to fully reflect the changed market conditions and thus lead to cost overruns for projects undertaken on borrowed funds. This is, in brief, the mechanism of a boom-and-bust pattern which I offered in the paper on the Austrian Business Cycle Theory which is forthcoming in the New Perspectives on Political Economy.

However, a caveat is in order. This post isn’t a precise forecast of a boom and bust in the US. Even if I am right about the pattern, the power of accumulating innovation may compensate for the potential boom tendency.

*The PPI data are from BLS.

Germany’s Great Depression and Sticky Wages

Reading Peter J. Evans on the Great Depression in Germany made me wonder whether the causes of the catastrophe without which, as Evans convincingly shows, Hitler would never have come to power were the same as in the US.

This paper suggests that indeed they largely were. If there is widespread deflation it means that the revenue of many firms falls. Firms need to slash costs, including wages. But if wages are not allowed to fall (enough), firms will have (regardless of any Keynesian demagoguery) to lay people off. Thus, you get the mass unemployment disaster in the US and Germany. In Germany it was due not to the then government’s activism but due to trade unions and probably the general atmosphere of violence at the time, especially the violence by unemployed communists.

Ironically, in contrast to Hoover in the US who did everything to make businesses keep wages from falling, German chancellor Heinrich Brüning tried to achieve the opposite result when the scope of the catastrophe became apparent. For this he was savaged and is still savaged by folks like Krugman.

The final interesting question is to what extent the unemployment created through wage fixing causes falling output. There are two such ways which can’t be captured by Keynesian-style aggregate reasoning. One is that it is generally not possible to immediately replace the laid-off workers by capital.

But there is another, a bit less obvious, reason. In the case of mass unemployment caused by preventing wages from falling in the face of deflation, people who retain their jobs with the same (or too high) wages are actually nominally better off than before the crisis because their purchasing power is higher. But the problem is that they can’t just replace the laid-off people’s consumption. One won’t necessarily increase the consumption of bread just because it’s price has fallen. Thus, to meet their additional needs, there should have been a substantial reshuffling of the production structure. Which of course takes time.

Obituary. Kakha Bendukidze

Yesterday came very sad news. The author of unprecedented liberal reforms in Georgia, entrepreneur, philantropist, teacher, visionary, and one of the most extraordinary human beings, Kakha Bendukidze passed away in the age of 58. I had the honour to know Kakha personally, although not very closely, so I thought I should share some of my thoughts.

The most memorable thing about Kakha was his frankness. He always said what he thought and as he thought it, bluntly and often very aphoristically. Perhaps, the most amazing words that he said were, “Everything is for sale, except conscience”. By this he meant that as the driver of the Georgian liberal reforms he would try to privatize as many government functions as possible but not for his or some politicians’ gain. Among other delightful turns of phrase I immediately recall were, “The only thing that should be owned by government is the Great Seal of the Realm” and “importing the institutions of civil society is like importing maturity”.

I called the reforms that Kakha managed to push through in Georgia unprecedented for a reason. I am not aware of another example of such an extensive, deep and fast economic liberalization. Among the most impressive measures were essential abolition of antitrust and labour law (both formally stayed on the books but just formally) but lots of other things have been achieved. He even tried to abolish the central bank but did not have time for it.

What was very unusual, though, was that, despite having been first a big businessman in Perestroika-era Russia and then a high-level statesman in Georgia, Kakha was never corrupted where almost anyone would have been. He always remained above all a teacher who was most excited when he could show people the truth, especially the truth of something which most people failed to see. Perhaps, his favourite project was the Free University of Tbilisi which he founded and in which he often lectured. And his students truly loved him.

His dedication to seeking and promoting the truth meant that he was a passionate enemy of stupidity. The thing you were most terrified of in his presence was to say something stupid. I remember how scared I was of exactly this when I first met him in a restaurant in Tbilisi in May 2010. But after getting to know him you realized that even when he was very angry with people, it was because he wanted them to reach their true potential.

When people like Kakha die I sincerely wish I could believe in the afterlife. But in tribute to his devotion to truth I cannot.

The economic and moral case against patents

One of the most conventional of conventional wisdoms today is the idea that the development of new ideas will at least be highly jeopardized in the absence of intellectual property, especially of patents which this essay is dealing with for the sake of brevity.

There are two apparently sound basic arguments for it, one moral and one economic. The moral argument is based on the notion of desert. By analogy with the Lockean idea that an individual has a right to the physical objects which are products of her labor, it is claimed that the results of intellectual labor must also belong to their creators.

The economic case for patents rests on the belief that certain ideas can be very difficult (costly) to come up with but easy to understand and utilize once they are made public in order to achieve material gains. The latter may lead to the inability of the would-be developers of certain ideas to receive adequate compensation of their costs, thus leading to low incentives for discovery and innovation.

However, despite the apparent strength of those arguments, there are both empirical and theoretical reasons for doubting that patents are necessary for scientific and technological progress. Of course, it is far beyond the scope of this essay to even list all those arguments, but it is possible to sketch the most important ones.

Now let us turn to the economic counter-arguments. On the fundamental level, there is something odd about the notion that there can be certain ideas that:

1) require a lot of effort, and (or) resources, and (or) thinking to arrive at;

2) can be immediately understood and put into application once made public;

3) can bring its user substantial profit.

It is tempting to believe that it is at least very unlikely that an idea may satisfy all those conditions simultaneously. For instance, there are a lot of ideas that satisfy (1) and (3). A good example of such ideas is the TEA laser technology. As Michael Polanyi rightly noted in his classic book Personal Knowledge,

So in 1971, when Harry Collins studied the spread of a technology called the TEA laser, he discovered that the only scientists who succeeded in copying it were those who had visited laboratories where TEA lasers were already up and running: “no-one to whom I have spoken has succeeded in building a TEA laser using written sources (including blueprints and written reports) as the sole source of information.[1]

Many ideas also meet criteria (2) and (3). They usually fall into the category of entrepreneurial discoveries, the term coined by I. Kirzner (1973). It often only takes a substantial degree of alertness and chance for an entrepreneur to notice an opportunity to receive profit. At the same time, no significant effort, amount of thinking or allocation of resources may be required.

Finally, there is a probably much smaller set of discoveries that satisfy (1) and (2). Those are some discoveries made by fundamental science. Their key feature is that they do not have an immediate commercial application.

In addition to this line of reasoning, even if there is a very small set of ideas that satisfy all the three conditions in question, it is still impossible to predict the future discoveries, otherwise we would have already made them. The mostly abysmal performance of futurologists of all kinds is a testament to that.

Therefore, someone who would wish to derive profit from appropriating the discoveries made by others would have to maintain a heterogeneous set of resources in order to be able to cling to the opportunity of copying as soon as it arises. This means that such an entrepreneur will have to bid away resources most of which will stay idle for considerable periods of time.

The empirical evidence generally seems to confirm the idea that patents are not exactly very useful for innovation. First, Hall et al. (2013) document that only 4% of UK innovating firms actually obtain patents for their products. Balasubramanian and Sivadasan (2011) find a similar figure (about 5.5%) for US manufacturing companies.

At the same time there is an obvious direction of influence of patents which is troubling for economic progress. Patents are one of the pure cases of monopoly. Their existence stifles competition and limits the dissemination and sharing of knowledge. Thus, it would seem from the viewpoint of economic theory that patents do not contribute to and probably impede the achievement of their goal.

However, perhaps there are certain special cases where the use of patents is warranted. Let us now return to the issue of pharmaceutical drugs which was mentioned in the beginning of this essay. The pharmaceutical industry is considered to be a prime example of a field where patents are essential for innovation. The popular explanation for this is that huge up-front investment needs to be made into developing, testing and obtaining the regulatory approval of new drugs whereas it is very easy to copy them once they are made public.

In reality, original drugs are not exactly copied. Instead, they are reverse-engineered into generics. Reverse engineering requires sophisticated technological processes and usually takes around six months. But this is not the end of the process. The producer of a generic drug must make sure that it is bioequivalent to the original drug. Finally, the generic drug must be approved for entry into the market by the regulator, although the requirements for obtaining such approval are less stringent than for original drugs. According to Appelt (2010, 12), generic drug producers in the EU usually start the preparation for market entry of the new generic drug three years before such entry. In countries with more lax regulatory frameworks, like India (Rai 2003), this process may take less time but is still a matter of years.

Thus, it would seem that the economic rationale for patents fails even when applied to the apparently most promising case, in addition to being dubious from the theoretical standpoint. But perhaps patents are ethically justified even if they are an economic non-starter?

As was mentioned in the beginning the main ethical argument for patents is grounded in the notion of desert. According to this logic, someone who originated an idea must be able to get an adequate reward for it, just as the creator of a valuable material object is. Perhaps, rewarding the desert is an integral part of prosperity in the broad sense of societies being virtuous.

There are at least three issues that cast serious doubt on this idea. First, it is unclear whether the notion of desert has any determinate meaning. Who and on the basis of what criteria should decide what remuneration the originator of an idea is entitled to? There does not seem to be a plausible answer to those questions. This arbitrariness is perhaps best reflected in the question of the duration of the term of patent protection. Should it be 20 years, 50, 70? The question seems to be rhetorical.

Another problem arises from the fact that, as was shown above, it is implausible that the originator of an idea may not derive certain remuneration for it in the market. The originator of a new basic scientific discovery may, if she so wishes, switch from doing basic science to creating marketable products on the basis of her discovery. The commercial success the discoverer of the properties of the DNA James Watson is a good example of this. And if an idea has an immediate commercial application, its creator will, as a rule, have a certain advantage before her potential competitors in exploiting it commercially, even, as it turns out, in the pharmaceutical sector.

Finally, perhaps the most important ethical objection to patents (and intellectual property in general) is that the idea of intellectual property is in a certain sense an oxymoron. The main rationale behind property rights is that they bolster personal autonomy of individuals by allowing them to predictably use in their projects certain material objects or parts of certain objects. But property rights are only necessary because the relevant objects are scarce in one way or another, or, in other words, because they cannot be simultaneously used without certain limitation. But there is no such scarcity with respect to ideas. No objective features of ideas are changed by their use, no matter how many people use them.

As a consequence, what intellectual property rights do is create artificial scarcity where there is none which leads to actually restricting by force legitimate property rights and liberties. Quite a problematic way to promote virtue.


Appelt, S. 2010. “Entry and Competition in the Pharmaceutical Market following Patent Expiry: Evidence from Macro and Micro Data.” Inaugural-Dissertation zur Erlangung des Grades Doctor oeconomiae publicae (Dr. oec. publ.) an der Ludwig-Maximilians-Universitat Munchen.

Balasubramanian, N. and Sivadasan, J. 2011. “What happens when firms patent? New evidence from US economic census data.” Review of Economics and Statistics 93: 26-46.

Hall, B., Helmersy, C., Rogers, M. and V. Sena. 2013. “The importance (or not) of patents to UK firms.” Oxford Economic Papers 65 (3): 603-29.

Kealey, T. 2013. “The Case against Public Science.” CATO Unbound. August 5.

Kirzner, I. 1973. Competition and Entrepreneurship. The University of Chicago Press.

Rai, S. 2003. “INTERNATIONAL BUSINESS; Generic Drugs From India Prompting Turf Battles.” The New York Times. December 26.

[1]Quoted in Kealey (2013).

The Problem with Logical Possibility

Modern philosophy makes much of the notion of logical possibility. In particular, this notion lies at the heart of the tendency of modern philosophers to use obviously unrealistic thought experiments. It also underlies the popularity of the possible worlds logic. But is the notion of logical possibility as uncontroversial as it is taken to be?

Philosopher Roderick Long was, in my view, on target when he wrote.

Thus I essentially agree with Fraçois’s answer: “Just because we can imagine the gravitational constant being, not 6.674×10^-11 m^3 kg^-1 s^-2, but rather 6.252×10^-11 m^3 kg^-1 s^-2, does not mean that it can actually be 6.252×10^-11 m^3 kg^-1 s^-2. Just because we can write it down and make calculations based on it doesn’t mean it’s actually possible.”

The source of the problem with logical possibility is that it is necessarily relative to our knowledge about a particular phenomenon. Thus, for instance, until it was discovered that the Earth is moving through space, it had been logically possible that it stays stationary. But after it it has become logically impossible.

It may be countered that in some cases the human mind is just capable of seeing that something must be so, but not in others. For instance, we are just capable of seeing that the Pythagoras theorem is true. But we cannot see that, say, the gravitational constant must have the observed value. However, the question is what can make us sure that we can never see that claims like the latter are necessarily true. There does not seem to be an obvious reason for that.

In other words, there is no good reason to believe that certain facts about the world are merely contingent. Any attempt to prove the contrary must rely on implicit claims to access to some kind of Platonic realm of certainty only in certain supposedly purely mental spheres (e.g. mathematics), which borders on religion.

Piketty’s capital/income ratio decline puzzle for the UK, France and Germany

One of the most important purported empirical contributions of Piketty’s Capital in the 21st century is the U-shaped evolution of the world capital/income ratio in the 20th century where, after, this indicator starts falling dramatically in 1910, hits the trough in 1950 and then starts growing again.

As we now know thanks to Phil Magness, a substantial part of this U-shape is due to the strange decision by Piketty to include into the calculation the capital/income ratios for the socialist countries which are a priori set equal to 100%. However, another part of the decline between 1910 and 1950 arises from the performance of three large European countries – the UK, France and Germany.

If one looks carefully at the declines of the capital/income ratio in those countries, as calculated by Piketty (pp. 116, 117 and 141 of Piketty’s book), one may notice that the lion’s share of this decline in the two former and a large part of the decline in Germany took place just within the 1910s. This involved a dramatic decline in the total value of capital in the narrow sense. In the UK it grew a little between 1920 and 1950 but not even remotely sufficiently to reach the pre-1910 level.

The question that arises here is why such a decline took place in that decade, especially why it started in 1910. While the answer to the latter question may lie in Piketty’s beloved averaging techniques, if it does not, then the causes of such dramatic decline become even more mysterious than they are if it really hit in full force with WW1.

But even WW1 does not seem to explain why the decline was so dramatic. After all, WW1 was followed by the Great Depression and WW2 but, even taken together, they did not produce a comparable decline in the capital/income ratio.

Thinking that something is amiss here, I decided to focus for the sake of brevity on the British case and look for comparison for the British stock market data for the 20th century to see if they match the decline between 1910 and 1950. The results are not very good for Piketty’s calculations.


If you click at the graph above (de Long 1996), you will see that the evolution of the British stock market value was quite different from the evolution of the capital/income ratio calculated by Piketty. While there is a sharp drop that starts during WW1, the stock market value recovers and reaches its pre-WW2 peak around 1937 at a level which is far higher than at the start of the WW1-related decline..

This seems to cast an even bigger doubt on Piketty’s calculations of the capital-income ratio for the UK for 1910-1950 because it is unclear how the evolution of the stock market value could diverge so much and for such a long period of time from that of the capital/income ratio in the absence of an especially rapid growth in the national income.


De Long, J. B., Grossman, R. 1996. The British Stock Market and British Economic Growth, 1870-1914. Available at: