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Industrial-Policy Advocates Routinely Display Their Ignorance of Economics

Here’s a letter to the Washington Post:


It’s difficult to decide which of the many fallacies fueling Henry Olsen’s case for U.S. industrial policy to counter China is most egregious (“How can we keep China in check? Curb free-market fundamentalism.” June 27). One candidate is Olsen’s mistaken assumption that intentions are results. Beijing surely does have an “intent to dominate a range of militarily crucial technologies, including artificial intelligence and information technology.” But history and economics reveal that any such intention is regularly thwarted by reality.

With no special talent for predicting the future, freed from market discipline by being able to spend other people’s money, and buffeted by shifting political winds and palace intrigue, government officials often bestow tariffs, subsidies, and other special privileges on firms and technologies that prove inferior to ones that arise in free markets – free markets which use far more information than can possibly be known to government officials, and that incessantly subject firms and technologies to the stern discipline of trial-and-error competition of the sort that industrial policy is designed to eliminate. Olsen can learn much of this relevant history by reading Matt Ridley’s new book, How Innovation Works: And Why It Flourishes in Freedom. (Note the subtitle.)

Ridley’s book is no outlier; its thesis reinforces the findings of economists who’ve researched the realities of industrial policy and of government attempts to guide innovation. G.C. Allen, Charles Schultze, Thomas Hazlett, David HendersonRobert Higgs, Don Lavoie, Deirdre McCloskey, Arvind Panagariya, Nathan Rosenberg, and Adam Thierer are just some of the scholars whose careful research gives us powerful reasons to believe that America’s adoption of the industrial policy sought by Olsen would make us, not richer and stronger, but poorer and weaker.

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