Here’s a letter to a young man who is unhappy with what he calls my “inflexible resistance to reasonable industrial policy proposals.”
Mr. Kallio:
You write that my “faith in economics 101 and perfect market prices blinds” me to “the possibility that reasonable industrial policy will protect industries and jobs that markets don’t value enough.”
You misunderstand the argument for markets and against industrial policy. This argument does not rely on market prices being “perfect.” Instead, it relies on the existence of market prices set by producers who spend their own money on producing goods and services to be offered for sale to consumers – consumers who spend their own money – with no party obliged by government to deal with another or prevented by government from dealing with others. While none of the resulting prices is ever perfect, each price sends a reasonably reliable signal about the relative scarcity, at each moment, both of different consumer goods and services and – very importantly – also of different inputs.
That market prices work well enough is attested to by the enormous and still-growing affluence of ordinary people in market economies. The success of market prices also is revealed when one recognizes the astonishing complexity of global supply chains, which were not – and could not possibly have been – designed by anyone.
The case for relying upon markets is backed not only by overwhelming historical and empirical evidence, it’s based also on sound economic theory. In a contrast that couldn’t be more stark, the case for relying upon government officials to override market processes by consciously allocating resources is backed only by magical thinking. The few alleged successes of industrial policy are all questionable. And industrial-policy proponents have a grand total of no theoretically coherent explanations of how government officials will acquire and process enough of the detailed knowledge that must be acquired and processed if these officials are to improve upon market processes and outcomes.
The people who rely upon faith to support their position are not those of us who oppose industrial policy; it is industrial-policy proponents themselves.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
