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
    Douglas Gresham, 22 Jan 2009 @ 10:00am

    Re: Perspectives

    Actually, I'd contend that the patent system is holding back the creation of new drugs rather than encouraging them. Patents create misaligned incentives if we're actually talking about curing diseases. If one has the patent on the most effective treatment for a particular disease, then you've essentially got control of that market even if your drug is a tiny amount better than the competition (unless your pricing is a long way out). This means there's a lot more gain in improving treatment for something pretty much cured - or more accurately, marketed as such - than for research into diseases in less affluent markets. There's also a huge incentive for the existing market leader to continually refine their drug, not to make it more effective but to renew their monopoly.

    It's something of a crisis in the industry - they're basically competing in a saturated market, and the individual best course of action doesn't expand that market and is destructive for the industry as a whole as well as being sub-optimal for curing disease.

    I also take exception to your last statement; software development and drug research are not zero-sum games. If getting rid of patents means more wealth is created, then both win. Anyway, medical research existed before pharmaceutical patents, so the idea that it'll vanish is laughable.

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