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. icon
    Mike (profile), 22 Jan 2009 @ 2:57pm

    Re: Perspectives

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

    Yes, this is true, but for the wrong reason. It has nothing to do with the fact that patented drugs cost more than unpatented drugs, but with how health care would work in the absence of patents.

    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).

    The $400 to $500 million is totally bogus. Read Merrill Goozner's book, and you'll discover the *real* number is more like $30 to $40 million -- at best.

    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.

    You're asking the wrong question. It's not whether the same drugs would be developed, but if more people would be healthier. That's the key issue here, right. It's about healthcare -- not having more drugs.

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

    Wrong assumptions. Woefully wrong assumptions. Redesign a healthcare system such that there are incentives to keep people alive, and there will be every incentive in the world to create new life-saving drugs *as well* as invest in preventative healthcare programs. The problem, right now, is that the patent system pushes most R&D money into monopoly efforts -- not into keeping people healthy. The incentives are misaligned.

    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.

    Ok. As I said, all you need to do is align incentives -- and if you don't think that there's tremendous money to be made in saving people from AIDS, you're wrong. The incentives are there. It's just that the patent system has distorted them.

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