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Industrial Policy 2.0 Is Just as Lousy as Industrial Policy 1.0

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In my most-recent column for AIER I offer only a handful of the many criticisms that are appropriately leveled against the truly horrendous piece by Sridhar Kota and Tom Mahoney endorsing such government intervention [2]. (It’s especially distressing that this gawdawful piece appears in the opinion pages of the Wall Street Journal.) A slice:

Third and more fundamentally, when and to the extent that trade and markets are free, Americans benefit from innovation no matter where it occurs. Kota and Mahoney seem blind to the reality that if Lee in Shanghai figures out how to produce steel at a lower cost, Americans who are free to buy steel unimpeded on global markets reap the benefits of the resulting lower price of steel no less than if this innovation were done by Lou in Youngstown.

Fourth and even more fundamentally, the authors mistakenly write as if the amount of innovation is fixed.

Yes: if a foreign country attracts more investment to create manufacturing plants it will likely also become the site of greater innovation. This fact is so in part because an increased number of factories that produce outputs for sale in competitive markets naturally inspires people who work in those factories to creatively devise better and more efficient uses of those factories. But greater innovation in these cases also comes from a deeper source – namely, the improved policy climate that itself heightened the attractiveness of putting factories in those locations.

Countries that attract more investment typically are countries whose public policies and private attitudes have become more favorable to markets, including to the innovation which is the source of economic growth. So it’s quite natural that as countries industrialize according to market forces the peoples of those countries unleash more of their innovative energies.

Importantly, this increased innovation abroad does not decrease innovation here in the U.S. Innovation here is merely rechanneled into different avenues.

Stop Dissing the Service Sector

One of these avenues is the service sector. This sector (although you’d never guess it by reading Kota and Mahoney) has for a century now been the single largest sector of the American economy. As the U.S. manufacturing sector continues to shrink relative to the U.S. service sector, a greater portion of American innovation occurs in the provision of services. Yet Kota and Mahoney mistakenly write as though innovation is driven exclusively by manufacturing and occurs exclusively in that sector.

By the way, don’t suppose that innovation in manufacturing is somehow better than innovation in services. Among the most spectacular innovations since the end of World War II are Sam Walton’s, and later Jeff Bezos’s, revolutionary improvements in retailing. Other innovations in services are Fred Smith’s creation of affordable overnight package delivery and Sergei Brin and Larry Page’s improvements in search engines. And let’s not forget innovative services such as ride-sharing, music streaming, and social media.