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 @ 11:01am

    Re: Re: Perspectives

    Douglas:

    Do not contend. Prove.

    In contrast to your contention, I offer treatment of one condition, the reduction of cholesterol. There are several competing treatments for reducing cholesterol. Forget that we know anything about any of these medicines and assume we began with six different cholesterol medications.

    We soon discover that one class of cholesterol medications causes a rare but serious condition and some people are unable to use that medication. Fortunately, there is a competing medication that does not cause the condition (or does so in a nearly insignificant portion of the population). None of these medications have control of the market, except for the market for those people who are affected by the "rare by serious" condition, who are only able to take one medication.

    Now, I am happy that the medical company received millions in patent profits so it could afford to investigate an alternative cholesterol-reducing drug that did not have the side affect. I wish I did not have to pay the premium, but a "free market" (though a free market has not existed back to the time of the cave man) would never have created my medication because the demand was insufficient to reimburse the cost of bringing the drug to market.

    I should point out that "refining" drugs is not patentable. The USPTO, district courts and the CAFC have thrown out the "improvements." Even if there was an "improvement," the original drug would be available as a generic once the original patent expires.

    I am unsure of what you mean by the pharmaceutical industry being in a saturated market. More people take drugs every year. The number of prescriptions grow yearly by double digits.

    As for medical research existing before pharmaceutical patents, that is true. Of course, that was also before clinical trials, thalidomide, and the increased cost and time it took to develop one drug. I suppose that when it cost $50,000 to bring a drug to market, it happened all the time. When it costs between $400 and $500 million dollars to develop a drug, it is laughable to think that someone would make such a dumb investment if the result could be reverse engineered almost immediately. Would you invest in a new housing development where the average price of a house was $1 million, and a second housing development featuring identical homes was built shortly after, with identical features, but cost only $100,000 each? To think the first investment would ever happen is laughable.

    As I have also pointed out in other posts, the pharmaceutical industry is about to face a huge crisis because development of new drugs is happening slower than old patents are expiring. In another decade the bulk of existing patents will have expired, and patented pharmaceuticals will make up less than 10% of all available drugs (it could be less than 5%). Pfizer is already feeling the pinch. Lipitor's patent is about to expire, and the patents on Norvasic, Zyrtec and Neurontin have already expired. Pfizer has been laying off researchers because their reduced income, soon to be reduced even more, will not support the current size of their research staff. If you want to halt all drug research by pharmaceutical companies, eliminate patents.

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