Thursday, 18 July 2013

The free market is NOT perfect: Property rights improve efficiencies

As outlined in my last post on this topic - 'The free market is NOT perfect: Knowing Economics 101 is not enough' - I will be doing a series of posts rebutting the claims of free market advocates masquerading as 'libertarians' that we would all be better off if the government was not involved in the free market.  Indeed the only way to create a more efficient society where everyone is better off is if the government stopped getting involved.

These points of view have been gaining momentum in recent times, especially in the United States, although I have noticed more and more people starting to join libertarian type organisations here in Australia as well.  Indeed, in the lead up to an election, these voices tend to get significantly louder.  I will be rebutting many of their claims in the coming weeks - however I am by no means left-leaning in my preferred economic outlook.  I believe that market mechanisms are broadly the most efficient because they most closely play to the human condition.  However I believe that the market is NOT perfect and that regulation and intervention is needed to maximise efficiencies.

If you want a truly free market...give up property rights

Free market advocates and the libertarian strain of these in particular rail against rules, regulations and government intervention in the operations of the markets claiming that all this does is create inefficiencies.
Fine libertarians...if you don't like rules and regulations then the first thing I want you to give up is property rights and see what that does to market efficiency.
Property rights form no part of a true free market economy.  By property rights I mean the right to

  • Intellectual property rights including
    • Patents
    • Trademarks
  • Physical property rights
If you truly want a free market - you should not be attached to these rights in any sort of way.  They are government rules and constructs that create barriers to entry for new participants.

However property rights create incentives to innovate

Property rights, especially intellectual property rights, encourage companies to innovate and to invest funds in research and development.  If you have no legal right to protect your intellectual property you would never spend the funds required to undertake research, especially in industries where the cost of doing so is significant such as the pharmaceutical industry.

What the property rights allow you to do is to be guaranteed a return on your R&D spend.  This return is not forever, however, and eventually others are also allowed to use your technological advances to improve their products.  Product improvements and leaps in innovation create advances for an economy as a whole.  Property rights are key to the incentive process and to avoiding the free rider problem associated with free markets.

Libertarians often point to the internet as an example where the lack of property rights causes companies to constantly innovate to have the best product and stay one step ahead.  This is fine for those industries which have low upfront investments however industries which require a high level of upfront capital spend with highly uncertain outcomes at the end do not operate in the same way and it is simplistic to just look at one industry

The system is NOT perfect...but that doesn't mean we should get rid of it

Free market enthusiasts often look at the failings of the current system and of over-regulation and inefficiencies caused by property rights and use it as an example of why we should do away with them altogether.  They are most definitely right about the failings of the system
  • Creates significant barriers to entry
  • Companies 'hoard' patents or spend significant amounts of money on patent collections in order to protect themselves from being sued
  • Other vulture companies register patents for things that may be developed in the future in order to collect rents for work they have not done themselves
These are all problems and need to be addressed by reforming the intellectual property system.  It does not mean that the system has no merits - it means that we need to address the problems within it.

If you allow property rights for create market power...and need measures to stop this abuse of power

If we acknowledge that property rights are beneficial, we need to look at the way in which we are tilting the market.  We are tilting it in favour of some companies and business over other business, employees and consumers.  This suggests that you need to regulate businesses in some form or another - in my next post I shall put forward my arguments in favour of labour, competition and market regulation.

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