My column for the September 28th, 2008, edition of the Pittsburgh Tribune-Review could have been written today . Bad ideas issued by people suffering a combination of hubris and economic ignorance (the latter often fuels the former) are zombie-like. Beneath the fold you can read my case for why so-called “industrial policy” is a variant of central planning.
‘Industrial policy’ is another name for central planning
Today’s economic woes, although not remotely close to being as bad as those of the Great Depression, are nevertheless — like the Great Depression — causing lots of people to rethink the role of government in the economy. The clamors for more regulation are as loud today as I ever recall them being during my adult lifetime. (I turned 50 this year.)
Especially scary are the calls for an “industrial policy.” This term is jargon for central planning.
In America today the desire for industrial policy springs from the fear of change — from the anxieties people suffer about competing in a dynamic market economy in which producers serve consumers (rather than vice versa).
In any economy deserving of the adjective “successful,” consumers are sovereign. Producers exist to satisfy consumer desires. If consumers no longer choose to buy girdles or to send telegrams, then producers who once prospered by supplying girdles and arranging for the sending of telegrams have no case for remaining in business.
Consumers put these firms in business to start with and consumers retain the authority to put them out of business.
Industrial policy reverses this relationship. Consumers would exist for the benefit of producers.
Or, more precisely, consumers would exist for the benefit of already-established producers — firms, industries and occupations that happen to be dominant at the time the industrial policy is implemented. Tomorrow’s producers would be excluded by the policy, prevented from ever emerging.
The firm that would produce the yet-to-be-invented device for curing lung cancer; the industry that would manufacture an amazing but yet-to-be invented automobile engine that runs on tree leaves; specialists who educate us using a yet-to-be-invented remarkable process — these producers, and countless others similar to them, would be harmed, not helped, by industrial policy.
The only way industrial policy can ensure that existing industries, firms and jobs are not “destroyed” is if this policy strictly curtails competition. And the competition that must be strictly curtailed is not only that from foreign firms but also competition from new firms created here at home and from homegrown inventions and innovations.
Any new product, new firm or new way of producing existing products threatens some established producers. If entrepreneurs were free to put innovations and inventions in place — and if consumers were free to buy the resulting output of goods and services — the outputs and profits of established firms would inevitably diverge from what is called for, or presumed, by the “industrial policy.”
To restore the profits of these established firms to their previous levels would require government either to subsidize these firms or to crack down on the inventions and innovations. In both cases, consumers would be forced to pay for products that they don’t want — either by being taxed to fund the subsidies or by being denied the opportunity to spend their dollars buying the consumption goods of their choice.
Things get worse. This “policy” of blocking economic change would invariably become more and more costly. Protected from competition, firm managers get lazy and less diligent. Why go the extra yard if Uncle Sam will protect you from the consequences of not doing so? So the size of the subsidies necessary to keep the “industrial policy” intact — that is, to keep established producers from suffering threats to their markets and bottom-lines — will rise.
Likewise, as established firms become increasingly unresponsive to consumer demands, the temptation of would-be upstart firms to try to win consumer patronage will intensify and consumers’ desires to patronize these entrepreneurial upstarts will intensify right along with it. Black and gray markets will develop.
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.