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See! No Gulags! Industrial Policy Works!

Here’s a letter to the Washington Post:


As displayed again in Jeanne Whalen’s report “To counter China, some Republicans are abandoning free-market orthodoxy” (Aug. 28), advocates of industrial policy – including Oren Cass and other conservatives – perform according to a well-rehearsed script.

Act 1: Repeat fallacies as if they’re established facts. An example, as reported by Ms. Whalen, is to assert that “U.S. businesses also aren’t investing as much as they used to on new equipment.” In reality, U.S. industrial capacity hit an all-time high in the first quarter of 2020, making it 16% greater than it was when China joined the World Trade Organization in 2001 and 156% greater than in 1976.

Act 2: Divert attention with red herrings – such as when they note that U.S. government research and development spending has since 1976 fallen as a percentage of gross domestic product. True, but unmentioned is the fact that private businesses – which are accused of being myopically focused on enriching shareholders with cash in the short-run – have steadily increased R&D spending. In 1976 business R&D expenditures were 0.8% of GDP; in 2016 business R&D expenditures were 1.8% of GDP – thus causing total R&D expenditures in 2016 to be 2.7% of GDP (compared to 2.1% in 1976).*

Act 3: Straw-man the case against industrial policy – as when one industrial-policy fan is reported to have accused libertarian opponents of such policy of believing it to be “equal to” Soviet-style central planning.

Act 4: Steadfastly ignore the key question asked by industrial-policy opponents: “How will government officials get the information they need to allocate resources better than resources are allocated by entrepreneurs, investors, and consumers risking and spending their own money in competitive markets?” Industrial-policy proponents simply continue to believe, as a matter of faith, that government will somehow know what to do and how best to do it – a fact that adds irony to the error of the accusation made by another industrial-policy proponent that those of us who oppose industrial policy are “naïve.”

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

* I converted all R&D dollar figures in the linked piece into 2012 dollars using this inflation adjuster, and then used this link as my source for annual U.S. GDP.


See also Scott Lincicome’s brilliant response to this report on conservatives’ embrace of industrial policy.