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Quotation of the Day…

… is from pages 234-235 of Nathan Rosenberg’s and L.E. Birdzell, Jr.’s excellent 1986 book – one that all well-meaning advocates of, and sympathizers with, calls for industrial policy should read: How the West Grew Rich:

The need to expose investment decisions to the risk of being proved wrong implies the decentralization of decision-making authority, since any central authority will be highly motivated to withhold financing from those who are bent on proving that the central authority made a mistake, or on imposing on the central authority the cost of scrapping splendid-looking facilities whose only fault is that some interloper has devised more productive facilities or discovered that the work done in the facilities can be accomplished more cheaply in some other country – or perhaps need not be done at all. The social cost and risk of such moves might be well worth financing, but the private cost and risk to centralized decision makers are prohibitive.

DBx: Proponents of industrial policy are fond of asserting that private investors are commonly misled by prices, profits, and losses into investing mistakenly – into investing in ways that promote the well-being of private investors and high-level corporate executives at the long-term expense of consumers, workers, and the larger public good. Historical evidence for this assertion is weak, as are theoretical justifications for it.

Among the many flaws in the asserted theoretical case for industrial policy is that those who make this case almost never compare the incentives that actually confront decision-makers in open, competitive markets with the incentives that actually confront the politicians and bureaucrats whose decisions would override those made by participants investing and spending their own money in markets. At the end of the above passage from Rosenberg and Birdzell, an important incentive confronting political decision-makers is highlighted. Why do proponents of industrial policy – overly eager to identify poor incentives operating in private markets – ignore the poor incentives operating on political decision-makers?

Note that political operatives almost surely have worse incentives, in most cases, to invest for the public good than do private-market operatives. The reason is simple. The former have the power to coerce thousands, millions, hundreds of millions of strangers to do their bidding; the latter do not.

Do this simple thought-experiment: I give you a gun and convince others that it’s morally acceptable for you to use that gun to compel these others to do as you say. You want to improve your and your family’s economic prospects. You can peaceably risk your own wealth and time experimenting with different economic offerings that consumers will be free to buy or to reject, or you can use your gun to conscript inputs from your fellow citizens and then to compel them to buy your outputs (or at least to forcibly prevent them from buying outputs sold by others in competition with your outputs).

What would you do? Which option would you choose?

Perhaps you are such a lovely person that you would never dream of using your gun and accompanying license to coerce others for your personal benefit. Such persons exist, but they are very rare. My guess is that you are not such a saint. And you’d be wise to guess that I, too, am not such a saint. The human population, poorly stocked with such saints, is not one in which it is wise to create such power and authority.

Now suppose that you – with the gun and its accompanying authority – are reminded that your fellow citizens, when going about their commercial affairs uncoerced, are myopic and not as bright as you (and as your friends who generously advise you on the proper aim of your gun). How do you respond? Omigosh, you would be derelict in your duties as duly appointed superintendent of the economic affairs of your fellow citizens not to use your gun to protect your investment plans from being disrupted by the short-sighted, drunken-donkey-like decisions made by your fellow citizens. Without you and your well-intentioned coercion, your fellow citizens will find themselves impoverished and virtual slaves to devilish but prudent foreigners who wisely choose to construct their economies with coercion. You must avoid that outcome. Your gun is your resource.