Just Because A Market Benefits From A Gov't Handout Doesn't Mean It's Good Overall

from the looking-at-the-bigger-picture dept

Arnold Kling rips apart a particularly silly New Yorker article by James Surowiecki which attempts (and fails) to show that libertarian economists are hypocrites. The basic reasoning from Surowiecki is that libertarian economists believe strongly in market forces -- but, at the same time, the stock market has reacted positively to news of a potential economic stimulus package. Thus, he concludes, libertarians should support the stimulus package (the market says so!) even if the concept of an economic stimulus package goes against libertarian ideals.

This is silly and wrong for a number of reasons, but it brings up a mistake that I've been seeing made around here all too frequently: the idea that if one market benefits from a certain government handout, then clearly "the market" has benefited overall. So, of course the stock market is looking forward to a government handout -- because those involved in the stock market will benefit from such a handout. However, that does not mean that it's really the best thing for the wider economy. Surowiecki's mistake is thinking that the stock market is a proxy for the overall economy. That's the sort of mistake made by someone totally unfamiliar with the stock market -- so it's a bit surprising to see Surowiecki make it.

As for the similar arguments I've been seeing around here, some of our more vociferous patent system defenders have been posting links to studies that have showed that certain industries have benefited from patent protection. Well, duh. But, of course, those industries don't represent the larger market. So, for example, there is some evidence out there that pharmaceutical companies have benefited from patent protection, but there's also even more evidence that doing so has come at a huge cost to actual healthcare, which has a huge multiplier effect on the economy (in a bad way). The fact that one single segment of an industry benefits from government handouts -- whether in the form of a stimulus package or a gov't granted monopoly -- is hardly proof that the wider market is aided by it. In fact, historical evidence suggests just the opposite. Investment is put towards these more inefficient (on purpose!) markets, rather than what would best serve the wider market.

Filed Under: economics, free market, gov't handouts, james surowiecki, libertarians, markets

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  1. identicon
    Lonnie E. Holder, 22 Jan 2009 @ 6:55am


    I have seen two themes over and over again with respect to pharmaceutical patents and providing the money needed to research new drugs in studies and papers by anti-patent people:

    1. Pharmaceutical patents do not provide benefit for society as a whole (I assume because patented drugs cost more than unpatented drugs).

    2. Some kind of support is required to replace the incentive provided by patents because of the amount of money it takes to develop a new drug (estimates vary, but $400 to $500 million per developed drug seems like a average that has support).

    What these studies have never addressed satisfactorily is whether society would have received the same benefit from the pharmaceutical industry without patents that it has with patents; i.e., would the pharmaceutical industry have developed the same drugs without patents that it did with.

    In fact, there is evidence that the pharmaceutical industry would have concentrated on making existing drugs really cheap, but development of new drugs would crawl or halt altogether.

    Question: Is society better off without new life-saving drugs, or is it better off with expensive life-saving drugs?

    Anti-patent studies have yet to provide an option to the support patents currently provide, other than, if there is a need, the market will find a way. Maybe it will, and maybe it won't. Maybe the market will be so busy supporting innovative software developments that there will be no money for new AIDs drugs. Faith is a good thing when it comes to God and the church, but with investment intensive pharmaceutical research it is a dicey thing.

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