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Kota’s and Mahoney’s Very, Very Bad Idea

Here’s a letter to the Wall Street Journal:


Sridhar Kota’s and Tom Mahoney’s case for U.S. industrial policy is an avalanche of assertions ranging from the simply naïve to the deeply fallacious (“Innovation Should Be Made in the U.S.A.,” Nov. 16). Just to list them all would require a long essay. So let’s ignore, for example, their unwarranted assumption that politically appointed bureaucrats, when allocating resources, would somehow be impervious to political pressures.

Instead focus on Kota’s and Mahoney’s fundamental error of presuming that the amount of innovation in particular industries is determined by the amount of capital invested in those industries. In fact, it’s the other way ‘round: capital accumulation is not the cause of innovative ideas; it’s the result. As Deirdre McCloskey has discovered from her careful and wide survey of economic history, “capital in the face of very, very good ideas is easily acquired. Capital is not the constraint.”* The constraint is good ideas.

But industrial policy – by turning over to government officials the task of coming up with creative entrepreneurial ideas, and giving to these officials the power to veto ideas from private-sector entrepreneurs – reduces the supply of good ideas. As such, Messrs. Kota’s and Mahoney’s scheme would fail not only to produce the efflorescence of innovative ideas that they desire, it would also reduce the productivity (and, hence, the value) of capital invested in American industries

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Deirdre Nansen McCloskey, Why Liberalism Works (New Haven: Yale University Press, 2019), page 233.