… is from pages 42-43 of the May 9th, 2020, draft of the forthcoming monograph from Deirdre McCloskey and Alberto Mingardi, The Illiberal and Anti-Entrepreneurial State of Mariana Mazzucato:
Profits have the latent function (as the sociologists put it) of sending out memos concerning whether resources are being used badly or well. Governments regularly don’t get the memos, or refuse to read them, because the politics has other messages in mind, chiefly the preservation of the status quo and the enrichment of the politically powerful.
DBx: Profits and losses in markets are, like the prices that result in them, vital both as signals of which resource uses work better than others, and as incentives for resource owners to find ever-more-useful combinations of resources.
When profits and losses are set by markets, the criteria for which uses are ever-more-useful are determined ultimately by consumers spending their own money. To the extent that government interferes in markets – for example, with tariffs and subsidies – government distorts and sometimes even mutes these market signals and incentives.
I repeat here – because the objection is central yet routinely ignored – the ought-to-be astonishing observation that advocates of industrial policy, grand or petit, offer no explanation of how the government officials whom they wish to entrust with power to override market signals will get the information these officials need to cause the economy to perform over time better than do competitive markets.
Advocates of protectionism and industrial policy never tire of pointing out – as if it’s breaking news – that real-world markets seldom work as perfectly as do the model-markets in economics textbooks. Impressed by their discovery of a reality known and repeatedly trumpeted since before the time of Adam Smith, these advocates of intervention believe themselves to make a case for tariffs and subsidies simply by pointing to this reality. If these proponents of protectionism and industrial policy would apply this same logic to, say, transportation, they would begin by announcing breathlessly – as if to an audience unaware of the fact – that automobiles sometimes crash and kill. (“And notice that the automobile companies don’t put this gruesome fact front and center in their advertisements!”) These interventionists would then therefore conclude that government should coercively obstruct people’s particular automobile-riding choices whenever government officials divine that particular rides will kill or maim.
It should be the case – but it will never be the case – that those who propose protectionism and industrial policy as means of strengthening the home economy should be ignored until they offer some plausible, substantive explanation of how (always imperfect) government officials will get the information necessary to out-perform (always-imperfect) markets. Merely asserting that government officials ‘will take a longer-run view’ or ‘will support the industries of tomorrow’ sounds lovely to gullible ears. Who, after all, opposes the taking of a longer-run view? Who objects to supporting the industries of tomorrow? The substantive and key question is how will government officials get the information necessary to achieve the happy outcomes promised by these glorious phrases. Proponents of protectionism and industrial policy never as much as ask, never mind answer, this question.