Part 1 of 2 As regular readers will know, I'm about as froth-mouthed free market as it is possible to get without descending into Randian lunacy. Yet even I support government interventions into the economy at times: it's only the times and methods used that are to be argued about.
A case in point is the existence of the patent system. I'm not about to claim that everything is peachy with the system we currently have, but this is a walk through of why economists, and yes, even froth-mouthed free marketeers, think that we need something like it – even if not exactly what we've got.
The basic problem is something called “public goods”. No, these are not things that the public likes, nor what the public wants. Nor is it particularly the things that would be good for the public. It's, strictly speaking in the jargon, things that are non-excludable and non-rivalrous. In any form of a free market or capitalist system (the two are very different ideas: one refers to how goods and services are distributed, the second to who owns the productive assets) these public goods also pose a particularly thorny problem.
The non-rivalrous part means that if I have more of something then there is no reason why someone else must be deprived of some in order that I might have more.
This clearly is not true of apples: if I have an apple (or an Apple) then, given we do not have infinite apples (nor Apples), then someone else cannot have one. And even if we do have an infinite number then people cannot have the one that I have.
Apples and newtons
It is true, though, of knowledge: the fact that I am using Newton's equations to move my under-volcano secret base to the Moon does not deprive you, in any manner at all, of the use of Newton's equations to calculate an apple's fall (or the trajectory of Gorilla Glass fragments after an Apple falls).
The non-excludable part is that there's no way that I could stop you using something even if I wanted to. I can stop you from eating my apple by eating it first. But I can't stop you using those equations simply because there's no way I can scurry around the world and hide all the copies from you.
Given these two parts of the definition these public goods do cause us problems. For imagine this: I have to spend some time and effort (or gilt and pelf if you prefer) in order to produce one of these public goods. But I'm going to find it damn hard to profit from having done so if there's no scarcity of it once I've done so (the non-rivalrous part) and I can't stop you using it even if I wanted to (non-excludability). So how in buggery can I make my money back now?
The general end point of this line of thinking is that we then will not get enough of these public goods. For not enough people will perform the effort to produce them given the difficulty of profit.
No, this doesn't mean that no one will ever work on equations: there are indeed those motivated by a pure love for trying to understand the universe. We just think that we might well get less of these desirable things than we could get if we changed the incentives a bit.
Another very closely related idea is that of an externality: a side effect of what someone is doing but one that isn't being taken into account in the incentives (or prices) that lead to the decision being taken. We normally meet such externalities when they're negative ones like pollution. Unless the polluter pays then we end up getting more pollution than we might really desire. Naturally, the polluter doesn't have to take into account the costs of the pollution to others when he calculates his profit margin.
We also have positive externalities: two useful ones to consider are basic education and vaccination.