≡ Menu

Yet Another Reason to Reject Industrial Policy

Here’s an e-mail that I sent to one of my graduate students, Jon Murphy:


Thanks for alerting me to the happy fact that Art Carden linked in a recent essay of his to my 2016 EconLib piece “The Prosperity Pool.” And kudos for drawing from my essay an important lesson that I’d not realized is there.

The lesson you draw is that, because government officials are paid mostly in public acclaim rather than in monetary profits, government officials in charge of industrial policy would not be content to do what most entrepreneurs in the market do – namely, to make any of the many small but real contributions to economic well-being of the sort that have overwhelmingly been responsible for raising our standard of living. In contrast to all but a tiny number of entrepreneurs, government officials in charge of industrial policy would be driven to go for economic advances that are big, flashy, and attention-grabbing.

These officials are unlikely to realize that modern prosperity grows mainly from the accumulation of countless small improvements in goods, services, and production and distribution processes. But even if politicians and their hirelings grasped this reality, they’d win no notice and applause from the public for arranging for small improvements, no matter the number of these improvements. Instead of experimenting with the likes of better perforations in paper towels, with greater varieties of fit for shirts and pants, with more-convenient methods of brewing coffee, and with new inventory-control procedures that shave a few percentage points off of costs, officials in charge of industrial policy would devote their energies toward promoting economic advances that grab headlines and impress voters. As a result, industrial policy would direct too many resources toward the pursuit of large and glitzy projects and too few toward unnoticed small advances the accumulation of which is primarily responsible for our modern standard of living.

Thanks again for this insight. It’s lovely. I wish that I’d thought of it!