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Posts Tagged ‘Profit’

Frequent contributor (and my brother-from-another-mother) Tom suggests we add an “ask a libertarian” section.  Now we are hardly mouthpieces for a wildly diverse movement that is part party, part philosophy, and we won’t try to be.

But we’re certainly glad to engage readers and try to shine some light on why we think freedom, limited government and private cooperation could lead us to a better world.  We can’t speak for everyone, but we can offer you our particular lens on an issue that concerns or interests you.

Hence, the inaugural Reader Questions.  The topic: Patents, exclusivity, and innovation.  Tom’s question is a good one, and I’ll reprint it in full:

I’m hesitant to form strong opinions on issues involving patents and intellectual property because, well, I’m not a lawyer. I have a hard time drawing the line between where patent laws encourage innovation and where patent laws change innovators’ focus from the act of innovating to milking patent protection to finding a balance with patent-assisted profits and further innovation, perhaps at the cost of further innovation.

I guess what I’m pondering, fueled by the role of pharmaceutical companies in American health care, is when do patent laws become a reverse incentive for innovation, artificially elevating prices and discouraging or eliminating competitive innovation for similar products?

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Take a look at this video.

The video is useful because the producer really tries to strip away many confusing aspects of the health care industry, and in doing so, presents a very clear case for single-payer, government-run, socialized health care. The clarity is a strength and a weakness, because the argument is exposed for its wrongness and illogic.

The video lists water treatment, police, fire, postal service, and the coast guard as being provided for by the government, just because they are essential services, services that we need just to get by. I’m willing to accept that explanation perhaps, but a simple historical explanation would suffice. The government has opted to provision and run such services. The producer claims that these services that are government run because they are essential, and health care is just as essential, so it should be government run. Do you see the fallacy yet?

By the way, the post office is a particularly terrible example, because of how obviously inefficient it is. Milton Friedman demolished the case for a government-run postal service in Capitalism and Freedom, and let’s not forget the story of Lysander Spooner. Strangely, even President Obama seems to understand this.

Anyway, the fallacy is pointing to unrelated sectors with completely different characteristics as evidence that the government can run one more sector. What counts as essential, anyway? Is food essential? A market provisions food quite efficiently, even when correcting for insane distortions from agricultural subsidies.

The problem with the video’s argument is that it proves too much. What isn’t essential? What shouldn’t be provided for? If everyone pays everything they have to the government, everyone can have everything! Margaret Thatcher was correct when she noted that the problem with socialism was running out of other people’s money.

The producer demonizes profit. On a market, profit is not money that is being skimmed out of the product that would otherwise go to producing something of value for consumers. Profit is a signal to a producer that they are producing something of value to a consumer. Loss is a signal to a firm that they are not doing something of value and that resources should be put to other uses. The problem with government provision of services is that they don’t respond to such signals. Maybe the fire department is a small enough portion of the economy that this doesn’t matter, but to say that the police and the criminal justice system function fine without these signals is laughable.

Why would a self-interested agent sell insurance if they were not getting something for it? The mistake here is a common one from the American left. The mistake is considering only the utility of consumers and not producers. Leftists forget that consumers on a market are also producers if they own a company or work for a wage. So, it’s silly to expect people not to engage in mutual voluntary exchange, which creates value. The instigation of class warfare by labeling investors as rich people is unfortunate as well.

Also, even if profit were immoral and unjustifiably selfish, this leftist sentiment of trusting agents in the government as somehow not responding to incentives is bizarre. People in government are just as self-interested as private agents, but troublingly, they have access to public power that makes them less accountable.

This video also has the same mistake that I’m seeing everywhere in discussions about health care reform. The purpose of insurance is not to provide care for customers that would otherwise not be able to pay for such care. An insurance firm does not aim to redistribute from healthy types of clients to sickly types of clients. They buy off risk and distribute it into their pool of clients so that they can turn a profit.

The whole discussion about health care reform in the media is frustratingly muddled. There are a few separate issues on the table which are often conflated. Lowering costs is a separate issue from increasing access. Indeed; these two goals are at odds. I cringe when I hear someone preach about a panacea that could feasibly accomplish both for the long-term. The claim is just absurd on its face.

Now, it’s true that insurance companies sometimes aim for profit by denying coverage in really seedy ways. Such behavior is to be expected from a highly regulated industry with all sorts of distorted incentives and firms that don’t have answer to market discipline. Still, that kind of behavior has little to do with the rise in costs. Joseph Newhouse’s 1992 paper attributes the rise in costs to advances in technology, correcting for all the usual suspects, such as aging, moral hazard from increased insurance, increased income, supplier-induced demand, and factor productivity from the fact that much of the sector is a service industry. Think of all the wonderful yet expensive technologies today that we have that did not exist in the 1960s.

The video ends with an amusing analogy of how fire departments might work if they looked like insurance companies. It’s effective because this is a false analogy. Insurance companies are subject to all sorts of distortional regulation that explain their actions, but none of that applies to fire departments. Economists have the difficult job of trying to show effects that are not easily seen. See Bastiat.

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