… is from pages 39-40 of Kristian Niemietz’s superb 2019 book, Socialism: The Failed Idea That Never Dies (original emphasis):
It is a common misunderstanding that the main role of competition is to act as a spur: we work harder when we are under competitive pressure than we do when we can take our current position for granted. But this was never the main issue: socialist economies had other (less benign) ways of spurring people on. What they lacked, however, was the knowledge-creating capacity of competition. This is the main role of competition in economic life. Socialist economies deprive themselves of the vast amount of knowledge created by competition. To a lesser extent, so do market economies that hinder the competitive process, for example, by erecting barriers to market entry.
DBx: Because this reality is often ignored, it must be often repeated: Any government-erected obstruction of the ways that people may invest and spend their own money – as entrepreneurs, investors, and consumers – destroys some amount of economic knowledge that would otherwise have been generated and acted upon. (Even when, for some non-economic reason, such an obstruction can be justified, some relevant economic knowledge is nevertheless destroyed.)
This reality makes the claim that industrial policy will actually improve the economy highly suspect. Industrial policy necessarily destroys economic knowledge, and the more extensive such a policy, the more knowledge it destroys. Until and unless advocates of industrial policy do what they have yet to do, or even to attempt to do – namely, explain how government officials will generate and acquire knowledge to replace that which their trade restraints and subsidies destroy – they should be ignored.
The fact that industrial-policy advocates are not ignored testifies only to the abysmal state of the public’s understanding of economic reality.
