Oren:
Debating Mike Munger at Pairagraph, you include as part of your case for industrial policy the assertion that “No economic theory holds that the attractiveness of a choice [of how to invest] will correlate with its value to the society.”
This claim is incorrect. The economic theory of how investors who are free of government direction are led to make socially advantageous choices is very well-developed. It’s the theory of profits and losses that is part of the more general theory of microeconomics. And it dates back to the writings of Adam Smith.
Here’s how it works; it’s quite beautiful and not difficult to grasp:
Consumers left free to spend their incomes as they choose reveal, through their spending choices, the relative values they attach to all products on offer. The resulting relative prices of different products both inform and incite entrepreneurs to direct resources to those productive activities featuring the largest differences between selling prices and costs of production. Production opportunities for which this difference is greatest are those for which the social value of increasing production is greatest. Happily, these opportunities are also those for which potential profits are greatest.
Businesses that successfully seize these opportunities earn profits; business that don’t succeed at doing so suffer losses. Further, profits attract yet more resources into these socially productive activities until unusually high profits there are no longer available. In contrast, businesses that waste resources by producing outputs that sell at prices too low to cover costs are driven by these losses to stop those activities. Owners of resources freed by losses from wasteful activities have strong incentives to redirect their resources into activities that produce positive value for others.
In this way, the attractiveness of each investment choice “will correlate with its value to the society.” This account is at the core of the economic theory of markets.
You will undoubtedly protest that this competitive process does not work perfectly. And you will be correct about this fact. But you will be incorrect in your protest’s implication that the case for free markets requires perfection. The economic argument for free markets is that markets over time allocate resources better than can any other method – better than tradition and better than politicians and government bureaucrats.
By now I’ve read many of your pleas for giving government officials increased power to override the processes by which markets allocate resources. But disappointingly, I’ve yet to find in your pleas any evidence that you actually understand the case for markets. The case as you present it is invariably not only a straw man, but a poorly fashioned one to boot. Even more disappointingly, I’ve yet to find in your case any explanation whatsoever of how the government officials who you would empower to override market processes will get the information required for them to perform better than the markets that they displace.
Whatever the shortfalls, lacunae, and qualifications of the economic theory of how markets allocate resources toward socially valued uses, those of us who oppose industrial policy at least have such a theory – and it’s one with a fair amount of empirical support. In contrast, you have absolutely no such theory.
We opponents of industrial policy offer theory and evidence; you offer straw men and assertions. So I close with this challenge: Tell us, publicly, just how government officials charged with carrying out industrial policy will get the necessary information to out-perform markets. Until you do so, you will not have earned the right to have your assertions or your policy proposals taken seriously.
Sincerely,
Don
