Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

institutions necessary to support a market economy. A report issued by the United Nations Development Program placed much of the blame for world poverty on bad government. Without good governance, reliance on trickle-down economic development and a host of other strategies will not work, the report concluded.8

The reality is that nobody ever likes the umpire, but you can’t play the World Series without one. So what are the rules for a functional market economy? First, the government defines and protects property rights. You own things: your home, your car, your dog, your golf clubs. Within reasonable limits, you can do with that property as you wish. You can sell it, or rent it, or pledge it as collateral. Most important, you can make investments in your property having full confidence that the returns from that investment will also belong to you. Imagine a world in which you spend all summer tending to your corn crop and then your neighbor drives by in his combine, waves cheerily, and proceeds to harvest the whole crop for himself. Does that sound contrived? Not if you’re a musician—because that is pretty much what Napster did by allowing individuals to download music without paying any compensation to the musicians who created it or to the record companies that owned the copyrights. The music industry successfully sued Napster for facilitating piracy.

Property rights are not just about houses, cars, and things you can stack in a closet. Some of the most important property rights involve ownership of ideas, artwork, formulas, inventions, and even surgical procedures. This book is as good an example as any. I write the text. My agent sells it to a publisher, who contracts to have the book printed and distributed. The book is sold in private stores, where private security guards are hired to handle the massive, potentially unruly crowds trying to get a signed copy. At every juncture, only private parties are involved. These would appear to be straightforward market transactions; government could only get in the way. Indeed, I might curse the government for taxing my income, taxing the sale of the book, even taxing the salary that I pay the nanny to look after my children while I write.

In fact, the whole transaction is made possible by one thing: copyright law, which is a crucial form of property right for those of us who write for a living. The United States government guarantees that after I invest my time in producing a manuscript, no company can steal the text and publish it without compensating me. Any professor who photocopies it to use it in a class must pay the publisher a royalty first. Indeed, the government enforces similar rights for Microsoft software, and a related property right, a patent, for the pharmaceutical company that invented Viagra. The case of patents is an interesting one that is often mischaracterized. The ingredients in Viagra cost pennies a pill, but because Pfizer has a patent on Viagra that gives it a monopoly on the right to sell the product for twenty years, the company sells each pill for as much as $7. This huge markup, which is also common with new HIV/AIDS drugs and other lifesaving products, is often described as some kind of social injustice perpetrated by rapacious companies—the “big drug companies” that are periodically demonized during presidential campaigns. What would happen if other companies were allowed to sell Viagra, or if Pfizer were forced to sell the drug more cheaply? The price would fall to the point where it was much closer to the cost of production. Indeed, when a drug comes off patent—the point at which generic substitutes become legal—the price usually falls by 80 or 90 percent.

So why do we allow Pfizer to fleece Viagra users? Because if Viagra did not get patent protection, then Pfizer never would have made the large investments that were necessary to invent the drug in the first place. The real cost of breakthrough drugs is the research and development—scouring the world’s rain forests for exotic tree barks with medicinal properties—not making the pills once the formula is discovered. The same is true with drugs for any other illness, no matter how serious or even life-threatening.* The average cost of bringing a new drug to market is somewhere in the area of $600 million. And for every successful drug, there are many expensive research forays that end in failure. Is there a way to provide affordable drugs to low-income Americans—or poor individuals elsewhere in the world—without destroying the incentive to invent those drugs? Yes; the government could buy out the patent when a new drug is invented. The government would pay a firm up front a sum equal to what the firm would have earned over the course of its twenty-year patent. After that, the government would own the property right and could charge whatever price for the drugs it deemed appropriate. It’s an expensive solution that comes with some problems of its own. For example, which drug patents would the government buy? Is arthritis serious enough to justify using public funds to make a new drug more affordable? How about asthma? Still, this kind of plan is at least consistent with the economic reality: Individuals and firms will make investments only when they are guaranteed to reap what they sow, literally or figuratively.

I once stumbled on a curious example of how ambiguous property rights can stifle economic development. I was working on a long story on American Indians for The Economist. Having spent time on a handful of reservations, I noticed that there was very little private housing stock. Tribal members lived either in houses that had been financed by the federal government or in trailers. Why? One principal reason is that it is difficult, if not impossible, to get a conventional home mortgage on an Indian reservation because the land is owned communally. A tribal member may be given a piece of land to use, but he or she does not own