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It is often claimed that “markets fail” because of free-riding. In other words, since creators and entrepreneurs are sometimes unable to “capture” the full-value of what they are creating, they will not be doing enough creating from society’s standpoint. If we were able to have “free-riders” compensate entrepreneurs for all of the great things they are doing, we’d get a “socially optimal” amount of great things, or so it is supposed.

Wouldn’t folks who abide rigidly by this idea also have to argue that there is nothing to fear in international competition? Think about it. Suppose a Chinese entrepreneur endeavors to do something awesome, like, I don’t know, invent the wheel. The gains to inventing the wheel accrue to all kinds of people who do not pay for wheels. For example, my grandma never had a car, but she surely benefited from other people being able to drive trucks (with wheels!) to make sure her local grocery store was well stocked).

If you subscribe to this particular market failure view, then the inability of Chinese entrepreneurs to capture all the gains they create would prevent production from reaching a socially optimal level, or even prevent it from happening at all. If this is true, then there should be no worry about foreign “competition” threatening to take over all of the cool stuff that we might have invented ourselves. You cannot have it both ways. If free-riding leads to the inevitable failure of private markets, then such free-riding limits the ability of international competitors to “take away” whatever is happening here.

Now of course I do not believe that free-riding dooms markets, though I do recognize that free-riding does make certain transactions much more difficult to engage in. I think measuring the seriousness of this problem runs into the same counterfactual problem we run into when evaluating macro policy. We ONLY see the inventions that are created and that overcome the potential free-rider problem. So, while I want to argue that for most inventions we know of today they were created despite the fact that much of the gains did not accrue to the creators, but many did accrue to the “free-riders”, that still does not mean that lots of stuff was not created that we cannot see. Nonetheless, it is a good thought exercise to think of what is required for an invention to imply prosperity. The real gains do not likely accrue to the guy who invented the wheel. The real gains likely do accrue to those who know how to do something with it.  To illustrate, the really neat invention of the Google search engine has made plenty of programmers rich, but Google only employs less than 10,000 workers. It would be useful to think how much the invention of Google has allowed employment and productivity elsewhere to expand. Nonetheless, my priors tell me that we do get an “efficient” amount of invention despite the fact that much of the gains end up accruing to others. And even if we were to show that they did not, it is not clear that policymakers have the ability to help us get to the right amount.

One Response to “Free Riders, Blessing or Curse?”

  1. Michael says:

    It is interesting to read that the Austrians now favor getting rid of patents. I don’t know the whole arguement to know whether I’d agree with getting rid of much of the IP rules, but I can sympathize with some of the things I consider abuse, such as being sued for singing “Happy Birthday.” Part of there arguement, I think, is that ideas aren’t exactly a scarce good, although knowledge is.

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