The Perils of 'Industrial Policy'

by Don Boudreaux on September 24, 2008

in Government Intervention, Myths and Fallacies, Reality Is Not Optional, Regulation, The Economy

Here’s my latest column in the Pittsburgh Tribune-Review.  In it, I do my best to explain why "industrial policy" — now being called for by some prominent business executives — is a very, very, very, very, very bad idea.  I conclude my column with these paragraphs:

Uncle Sam, though, has sufficient power to keep its industrial policy "working" for quite some time.

But by "working," I mean working only on its own narrow terms. It
would work to protect established producers by successfully freezing
the economy, making static that which was once dynamic — making
stagnate that which was once constantly refreshed with new ideas and
new opportunities and killing that which was once alive.

An industrial policy seriously pursued by Washington will make
Americans (and, indeed, people all across the globe) significantly
poorer. Prosperity is not, and cannot be, created or maintained by
policies built on the premise that producers must be served by
consumers.

Prosperity means the widespread satisfaction of consumer
desires. Firms that satisfy those desires should be celebrated and left
free to do their thing. But the moment they stop meeting consumers’
desires, for whatever reason, these firms must also be left free to perish.

That’s the only "industrial policy" we need.

Be Sociable, Share!

Comments

comments

82 comments    Share Share    Print    Email

{ 42 comments }

Flash Gordon September 24, 2008 at 10:00 am

I recently read somewhere, don't remember where, something that resonated: Nobody hates capitalism like capitalists. Nobody hates competition like competitors. I guess it could also be said that nobody hates a free market like those who depend on it for their living and their wealth.

Well, maybe Muirego hates those things more.

Plac Ebo September 24, 2008 at 10:01 am

How is prosperity measured? Consumption? Satisfaction surveys? Can prosperity only be measured in the past and present? Is there any mechanism to plan for future prosperity?

Sam Grove September 24, 2008 at 10:59 am

This points out muirgeo's misapprehension that the financial mess is a market failure, when actually, it's the market performing its function of taking down those who attempt to cheat in the market. The government has attempted to delay this reaction and proposes to delay it even further.

The proposed bailout is not a market function, it's the political system doing what it always does, attempting to thwart the market and reality at the expense of taxpayers.

If you want to keep business out of government, then you must keep government out of business.

Flash Gordon September 24, 2008 at 11:34 am

Is there any mechanism to plan for future prosperity?

Yes, indeed. Most anything written by Ludwig von Mises or F.A. Hayek or Milton Friedman will explain.

BoscoH September 24, 2008 at 1:09 pm

Great letter. The only way it could have been better is if you'd have suggested that industrial policy would have given us a Prius made of steel. That would have gone over well in Pittsburgh.

Sam Grove September 24, 2008 at 1:39 pm

Is there any mechanism to plan for future prosperity?

The market is our "mechanism" for discovering, creating, and choosing the possibilities before us. Any "plan" for the future will restrict the possibilities and our choices.

The people are not of one mind, therefore the imposition of a plan will result in conflict at best and oppression at worst.

For humanity, there is no "plan" that will produce desired results.

Plac Ebo September 24, 2008 at 2:25 pm

How does the market balance short-term vs long-term needs of a society?

BoscoH September 24, 2008 at 6:01 pm

How does the market balance short-term vs long-term needs of a society?

A lot better than anyone who thinks they can decide. The issue is information. A few hundred million people each have a different understanding of their own needs, short and long term. They purse these needs by participating in the market. They have a heck of a lot better chance of each achieving some level of satisfaction than for a politician or regulator to decide what their needs really should be and then try to pursue those, more often than not failing anyway.

Sam Grove September 24, 2008 at 8:32 pm

An unmolested market provides the most accurate signals to participants regarding the state of flux of the market allowing them to make better informed choices in the balancing act of life.

Sam Grove September 24, 2008 at 8:39 pm

A free market…as libertarians define it, provides a venue for the pursuit of billions of plans.

A planned market permits only one plan at a time.

A regulated market perverts plans…and the planners.

Plac Ebo September 24, 2008 at 9:18 pm

You appear to understand human nature. Will short-term pursuit of self-interest give way to long-term sacrifice if necessary for the survival of a society?

Sam Grove September 24, 2008 at 9:24 pm

Will short-term pursuit of self-interest give way to long-term sacrifice if necessary for the survival of a society?

It's called saving and investment. Tens of millions of people do it.

That's why attempts to fix the rate of interest must be opposed. High interest rates encourage saving.

Keynesian policies encourage consumption.

Plac Ebo September 24, 2008 at 10:19 pm

Can all the problems that a society faces be measured in dollars; and reduced to, and solved by the individual's pursuit of dollars?

vidyohs September 24, 2008 at 10:57 pm

"How does the market balance short-term vs long-term needs of a society?
Posted by: Plac Ebo | Sep 24, 2008 2:25:59 PM"

I would say that the market is not concerned with balancing short-term or long-terms needs of a society. The purpose of a market is to satisfy the needs of those directly participating in the buy sell of a market transaction.

Nor should the market concern itself with balancing short-term or long-term needs of society, that invisible hand (6 billion plus of 'em) doesn't care, it just is. And, it is best left alone unrestricted and unregulated to make its own decisions about its needs.

In short when I go into Kroger's to buy a package of meat on sale, I never ever ever think of balancing the needs of society, I just want my fricking meat. I leave Kroger's to figure out how much meat to put on sale and when to put it on sale. So, far they do a pretty good job without my interference via regulations.

People make it difficult by over-thinking themselves……too clever by half as the Brits say. (This is a rhetorical statement Plac Ebo, not directed at you personally)

Plac Ebo September 24, 2008 at 11:09 pm

Can a society prosper (or even survive) if it doesn't consider long-term needs? If so, is the "invisible hand" up to the task?

Sam Grove September 24, 2008 at 11:48 pm

Can a society prosper (or even survive) if it doesn't consider long-term needs? If so, is the "invisible hand" up to the task?

Yes and, society is not a thing that considers.

Members of society may, and quite often do, consider the long term.

Anyone who starts a business will eventually find themselves considering the long term.

People who start social organizations usually do so with an eye toward the long term.

The solution to long term needs is found in the endeavors of humans creating means of production, in people saving for retirement and college funds, in gifts to universities, etc.

It is a very good thing not to put all our eggs into a single basket of "a plan" or an agency, for such will eventually fail, and the more people are dependent on it, the more will suffer.

The roman empire collapsed, but there are still Italians.

Sam Grove September 24, 2008 at 11:53 pm

Can all the problems that a society faces be measured in dollars; and reduced to, and solved by the individual's pursuit of dollars?

I think all the resource and production problems can be.

Some things can't easily be measured in monetary terms, like the value of a good idea.

It's value can only be realized when implemented and its effect is often immeasurable.

Randy September 25, 2008 at 8:28 am

Sam Grove,

I'd just like to say that was some brilliant work in those last several posts. Clear and to the point.

Plac Ebo September 25, 2008 at 10:11 am

"… The roman empire collapsed, but there are still Italians."

Your philosophy sounds like it will result in the greatest good for the smallest number. Do you have any concern for the survival of a nation, or is it survival of the "individual" only?

Randy September 25, 2008 at 11:35 am

Plac Ebo,

Utilitarianism is a faith. When you hear a politician refer to the "greater good", the "people", the "nation", etc., you should understand that politicians use such words in the same way that they use the word "god". That is, as a rhetorical device used to manipulate the unwary.

Plac Ebo September 25, 2008 at 11:57 am

"Utilitarianism is a faith. …"

Are you saying that libertarianism isn't a faith?

Sam Grove September 25, 2008 at 1:12 pm

Your philosophy sounds like it will result in the greatest good for the smallest number. Do you have any concern for the survival of a nation, or is it survival of the "individual" only?

A "nation" is an abstract creation. All that actually exists is individuals and their behaviors.

When the Roman empire collapsed, it merely signified the end of a system of rule fed by conquest.

As most individuals worked in agriculture, it is likely that most people made out just fine. The system of rule was not created for their benefit in the first place, but for the benefit of the rulers.

Political governments may be sold as a benefit for the common good, but their actual functioning is to establish and maintain hierarchies of control over wealth, with the greatest benefits accruing towards the top. All governments are actually oligarchies and many aspire to participate in the oligarchy.

Political power hierarchies are manifestations of human adaptation to tribal hierarchy and even the "modern state" is just as primal in nature, relying entirely upon extortion to maintain itself.

Evidence of this can be seen in numerous manifestations, from the obsequious behavior of many toward political celebrities, to the attraction a certain kind of woman has toward the powerful, to the occasionally revealed dalliance of elected officials, etc.

Freedom and the concurrent free market is what is best for all. (whatever muirgeo may say to the contrary)

Oil Shock September 25, 2008 at 1:12 pm

Your philosophy sounds like it will result in the greatest good for the smallest number.

True, but that smallest number is actually bigger than the greatest number from any other philosophy. Also my philosophy will result in great good for the rest of us mere mortals.

What is your philosophy? I'm curious because every other system I know of results in a great good for a tiny, handful elites and misery for the rest of us mere mortals.

Do you have any concern for the survival of a nation,

Yes, to some degree. National borders are artificially drawn. I truly have concern for the individuals who make up the little communities, regardless of where the borders are and regardless of the names of these nations.

Do you concern only with the survival of some artificially defined nation? Do you care for the individuals who make up that nation or do you just count them as pawns?

or is it survival of the "individual" only?

Yes, Survival and freedom of every individual. Because it is in my self interest to champion the cause of individual freedom.

Do you care only about the collecitve or do you have any concern for the individuals ?

Oil Shock September 25, 2008 at 1:12 pm

Sam Grove September 25, 2008 at 1:22 pm

libertarianism isn't a faith

The real faith in this world is that government is immune, or can somehow be made immune, to the corruptions we observe and that have been observed in the political venue for all of history.

Libertarians hold that this corruption is a systemic flaw of political hierarchies and thus cannot be removed. The flaw is based on the fact of human nature and political power.

As Lord Acton put it: "Power corrupts."

Sam Grove September 25, 2008 at 1:24 pm

Thank you Randy, but I was helped by Plac Ebo's sincere and respectful demeanor in asking questions.

Plac Ebo September 25, 2008 at 2:40 pm

Political governments may be sold as a benefit for the common good, but their actual functioning is to establish and maintain hierarchies of control over wealth, with the greatest benefits accruing towards the top. All governments are actually oligarchies and many aspire to participate in the oligarchy.

How is that different from any concentration of power- cartels or large corporations for example?

Sam Grove September 25, 2008 at 2:58 pm

Governments wield political power, the power (and the authority) to initiate force to attain goals

Corporations can only wield political power indirectly, through political influence.

Please define 'power cartel' and give an example so I may address the question specifically.

Plac Ebo September 25, 2008 at 3:05 pm

You have avoided answering if libertarianism is a faith. You are good at pointing out problems with current systems of government. You are also good at selectively reporting libertarian style adjustments to economies that are successful. But, I suspect that a full-blown libertarian government (whatever flavor) would reveal shortcomings just as the USSR revealed the shortcomings of Marxism. Philosophies sound good on paper. It's not until they are put into practice that all the flaws surface. The same human nature that corrupts government will undermine a libertarian style society. Wealth and power will concentrate. What is the difference if power and corruption are labeled government or free market enterprises?

Plac Ebo September 25, 2008 at 3:27 pm

Sam ……. cartels and large corporations were used as examples of "concentration of power."

Minimizing or eliminating government and politics will not stop the abuse of power by the rich and powerful. The rich and powerful don't need our government. They can create their own patchwork of pseudo-governments to attain the same ends. It's not solely political power that is to be feared. It's the concentration of any type of power.

Sam Grove September 25, 2008 at 3:28 pm

You have avoided answering if libertarianism is a faith.

What does it matter whether I say if libertarianism is a faith? It is a matter for your judgment.

I haven't asked you to take my word on faith, I only try to answer your questions as best I can.

Libertarians support individual freedom and that all individuals are morally equal in that regard.

Libertarians support a free market as an extension of individual freedom. We have good reason to think that political control of resources does not work due to the Austrian economics observation that prices convey critical information and political management obscures the information.

As biological beings, we require resources in support of our biological existence and comfort. The urge to survive and reproduce is the primary motivation for humans…as with all living creatures.

Political government, as a manifestation of human tribal instincts, enables people to cheat at the task of survival.

Rather than producing and trading, political power enables some to acquire the means for survival without the effort of producing and trading.

Discussion of libertarianism can go in two directions:

1. Morality, individuals own their lives and have the right to maintain and defend their lives and that accruing individuals into groups does not increase the rights that the individuals possess.

2. Economics for individuals to possess the freedom to maintain their lives and pursue goals, they may not be interfered with by any agency so long as their actions cause no harm to other individuals.

I can discuss either aspect at length but if I might suggest, you can access many materials on these subjects.

Sam Grove September 25, 2008 at 6:30 pm

Minimizing or eliminating government and politics will not stop the abuse of power by the rich and powerful. The rich and powerful don't need our government. They can create their own patchwork of pseudo-governments to attain the same ends. It's not solely political power that is to be feared. It's the concentration of any type of power.

You might consider that wealth supports government to protect them from the masses.
The French and communist revolutions are not forgotten.

It takes taxation and/or central banking to raise armies. There is no corporation comparable to any degree, in size and power, to the U.S. government.

As long as the people are armed, they need fear no threat from the merely wealthy.

Political power via the hierarchical state is the crux of all arbitrary power.

I expect you are speaking of so-called economic power.

Three guys wash ashore on a deserted island.
Gus has a gun.
Gerry has a sack of gold.
Frank has a cache of food.

Who ends up with the goods?

Plac Ebo September 25, 2008 at 6:56 pm

Sam …. I brought up the "faith" question because Randy mentioned it earlier. I tossed it out for anyone to address and I think it's a valid question. My impression is that Libertarians think they have a monopoly on promoting "individual freedom." That is quite assumptive for an untested philosophy. As I hinted at earlier, what Marxism promised the working class was quite different from the results when put into practice. How do you know that Libertarianism would do any better?

Furthermore, how many people really want as much freedom as Libertarians promise? As a country prospers its citizens are willing to trade freedoms for safety nets and increased security. How are Libertarians going to impose their desired level of freedom on a society if the population doesn't want it?

One last point and then I'll stop. You said earlier, "… political control of resources does not work due to the Austrian economics observation that prices convey critical information and political management obscures the information. …" Isn't that true of any control of resources? As I claimed earlier, wealth and power will concentrate in a Libertarian system as well as any other. The rich and powerful don't need government to flex their muscle, but they will use it if it's available. The so-called free market in a Libertarian system will be skewed just as in any other system. A powerful business can obscure critical information as well as any government.

Randy September 25, 2008 at 7:27 pm

Plac Ebo,

Yes, Libertarianism is also a faith. Good point. Utilitarianism is a faith that leaves its adherents more susceptible to political manipulation. Libertarianism is a faith that leaves its adherents less susceptible to political manipulation.

Oil Shock September 25, 2008 at 7:46 pm

Furthermore, how many people really want as much freedom as Libertarians promise? As a country prospers its citizens are willing to trade freedoms for safety nets and increased security. How are Libertarians going to impose their desired level of freedom on a society if the population doesn't want it?

Libertarianism is not about majority. So the question of "how many" is irrelevant. If 10 of you want to get together and pool your resources to create a safety net, nobody will stop you. But If I don't want to be part of that 10, then don't force me. So the term "impose" is ruse. If you choose to voluntarily sell yourself into slavery, it will be allowed. So nobody will impose freedom on you.

Oil Shock September 25, 2008 at 7:47 pm

Sam Grove September 25, 2008 at 8:02 pm

As I hinted at earlier, what Marxism promised the working class was quite different from the results when put into practice.

Marx assumed that man's nature was a product of his surroundings, that if you placed man into a communist system, his motivations would change to work for the common good.

Libertarian philosophy presumes that man has an inherent nature, self interest, and the functionality of an economic system must be based on man's fundamental nature.

Isn't that true of any control of resources?

No. In a free market, such concentrations are limited by competitive forces. It is the competition that discloses the information through pricing.

If you will observe, there are a number of monopolies in the U.S.

In California there is PG&E and PacBell, many water service jurisdictions, garbage collection, etc,. All these monopolies are enforced by law.

History shows that theories of monopoly are faulty and products of the desperate cries of businesses that are being out-competed in the market. Such was how the Sherman anti-trust statutes came into being.

The only case of a near monopoly in the open market that I'm aware of was the case of, gosh, was it Alcola aluminum? The company had a 97% market share, and rather then using it's market share to raise prices, it actually kept lowering them.
Why? The other 3%. (expecting the next question)

Same with Standard oil. Rockefeller introduced numerous production efficiencies which enabled the company to keep lowering the price of oil.
Competitors, unwilling or unable to introduce similar efficiencies, went crying to politicians for relief, claiming that if Standard Oil kept out-competing them, they would go out of business and SO would raise prices.

To this date, I am unaware of any market monopoly that has behaved according to this theory.

What does often happen is companies will secure a monopoly privilege from government to avoid having to compete for our dollars…garbage collection being a good example.

Sam Grove September 25, 2008 at 8:25 pm

We all have faith in something. I have faith in my own rational.

Many people have such faith in the claims of others.

Facts are unreliable things. The facts of history that we take for granted are based on faith in the reporting and interpretations of others.

Noting that most of us progressed through government schools, we often come out of same with a certain interpretation of historical event with the tendency toward viewing "the government" as a reliable source of accurate information and an authoritative keeper of history.

Thus many of us go though life believing that the American civil war was "about slavery" and that the government is the 'good guy' always on our side.

The reality is far more complex, and when we realize that the people in government are much like people in business (except that many people in government were lawyers). You have your good and your bad. And then you have systemic problems.

I do think that people are corruptible and that there are different kinds of corruption. And I agree with Lord Acton the power corrupts.

If there is anything government is about, it's about power.

An article of faith is the stories of the robber barons, not to say there there weren't such, but that we are given the impression that these robber barons had some kind of market advantage, when deeper inspection reveals that they were enabled by access to political power…the huge land grants to some, (but not all) railroads, for instance.

Sam Grove September 25, 2008 at 8:27 pm

I have faith in my own rational.

Supposed to be: I have faith in my own rational faculty.

Unlike many people, I know exactly what I have faith in.

Sam Grove September 27, 2008 at 10:56 am

As I claimed earlier, wealth and power will concentrate in a Libertarian system as well as any other.

I think not to the degree we observe now.

The rich and powerful don't need government to flex their muscle, but they will use it if it's available.

BS! Why do you think the rich and powerful all support government?

In fact, many of them are in government, and if not actually in government they make sure they have friends in government.

The government is a device to legitimize rule in the minds of a subject people. Without that psychological device, a people cannot be ruled.

An armed and knowledgeable populace will not tolerate to being ruled General Motors, etc. Would you?

Hans Luftner September 27, 2008 at 11:55 pm

A major reason why political governments get away with the power they wield is that they have a certain illusion of legitimacy. It can't be tyranny, the story goes, because every so often we can vote on which candidate will rule us. We can send a letter to our congressman. WE THE PEOPLE are the government, so we rule ourselves. We're free.

Let General Motors try exercising any coercive power over anyone without a backstory like that.

The U.S. military can kill with impunity in Iraq, & they're Brave Heroes Protecting Our Freedom, but when Blackwater does the exact same things, even to a lesser degree, they're derided as the murdering thugs they are.

Most people will excuse & rationalize just about anything the government does, no matter how atrocious, so long as it's "their" government. This is the key to the whole thing. No amount of voting will fix this, nor will any armed revolution.

The fundamental question, as I see it, is "Why should the state be held to a different standard than anyone else?"

Randy September 28, 2008 at 4:14 am

"Why should the state be held to a different standard than anyone else?"

Answer; it shouldn't.

Next question; Since I have no power to hold the state to any standard, what should I do about it?

My answer; Ignore the state. Recognize the propaganda as propaganda. Deal honorably only with those who still believe in honor.

Previous post:

Next post: