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Open Letter to Martin Gurri

Here’s a letter to Martin Gurri:

Mr. Gurri:

I’ve not yet had the pleasure of meeting you, but respected friends speak highly of you and your work. One of these friends forwarded to me a tweet in which you wrote: “I just think it’s very difficult to tell the history of not only China’s, but Japan’s ‘economic miracles’ without giving industrial policy a large role. Probably not as large as a non-Hayekian would give it! But large.”

I’m skeptical. David Henderson and Don Lavoie offer reasons to doubt that Japan’s economic growth was much-promoted by industrial policy. Similar reasons for skepticism about any positive role played by industrial policy in promoting economic growth in China are given by Ronald Coase and Ning Wang (in their 2012 book, which you mention) as well as by Nicholas Lardy. And Arvind Panagariya, in his masterful new book, compiles solid evidence against the case that industrial policy – or at least any such policy aimed at promoting exports and discouraging imports – did much to fuel growth in countries that used such policy.

But of course no such empirical investigations can finally settle the matter one way or the other. Unless a society is stateless, the state will affect the allocation of resources, thus making impossible any proof that some beneficial outcome would nevertheless have occurred without state action, and might even have turned out better. State intervention might, just might, be responsible for any observed positive direction of any economy. Almost anything’s possible.

It’s as if the direction of a 12-crew boat successfully headed away from a storm is attributed, not to the eleven oarsmen rowing away from the storm, but to the lone oarsman paddling towards the storm. Sure, tales can be told of how the clever actions of this lone oarsman are necessary for the boat to arrive in more propitious waters. But who’d swallow any such story? Not I. For similar reasons, I don’t swallow assertions that efforts by government to countermand the market are really what strengthen the market and promote economic prosperity. Quite the contrary, in fact.

My understanding of economic theory – including public choice – tells me that it’s highly unlikely that government officials can improve on market outcomes. Such officials are subject to political pressures, they spend other people’s money, and they’re without the incentives that direct and discipline the decisions of residual claimants. In the case of industrial policy the problem is amplified because such policy is intended to override the information revealed in market prices – phenomena that, as Hayek showed, alone perform the indispensable function of marshalling and putting to use the inconceivably vast amounts of dispersed information that must be taken account of if economies are to grow or even to sustain themselves.

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