Bonus Quotation of the Day…

by Don Boudreaux on March 30, 2022

in Complexity & Emergence, Innovation, Reality Is Not Optional, Science, Trade

… is from page 141 of the late Stanford University economic historian Nathan Rosenberg’s 1991 paper “Critical Issues in Science Policy Research,” as this paper is reprinted in Rosenberg’s 1994 book, Exploring the Black Box: Technology, Economics, and History:

An important source of scientific progress, in advanced industrial societies, has derived from the attempt to deal with difficulties, unexpected problems, or anomalous observations that first arose in connection with new product designs or novel productive processes.

DBx: Yes.

Much of this scientific progress would have not occurred had the U.S. government followed the advice offered decades ago by the likes of Barry Bluestone, Robert Reich, and Felix Rohatyn to implement “industrial policy.” The reason is that government administrators in charge of designing and implementing industrial-policy schemes would have very often directed resources away from firms pursuing new product designs or novel productive processes, and toward firms producing familiar – or officially approved – products, and doing so using familiar or officially approved processes. The reason is that new products and novel productive processes are likely to be inconsistent with the industrial policy. Or, at least new products and novel productive processes – by their nature unfamiliar and having especially unpredictable consequences – would be viewed with suspicion by the mandarins charged with enforcing the industrial policy.

As noted in an earlier post, proponent of industrial policy will of course deny that their schemes are inconsistent with innovation and genuine economic change. And I suspect that these denials will be sincere. But these denials are the equivalent of someone who denies the impossibility of making a kosher ham sandwich. (Apologies to Russ Roberts.) The very essence of industrial policy is to give government officials the power to override the decisions of consumers, entrepreneurs, and investors in order to (attempt to) ensure that the resulting pattern of economic activities conforms to the pre-conceived vision and plans of the industrial-policy designers. A pre-conceived vision put in the form of a plan and coercively imposed simply cannot admit much, if any, genuine innovation.

Industrial-policy proponents will protest. “No!” they’ll insist. “We’ll permit innovations, but only those that will contribute to the furtherance of our vision.” Well, first, any such protest concedes that some innovation will be suppressed. Second, there is no way for industrial-policy advocates or government officials to predict the full consequences of any genuine innovation.

Suppose that in the mid-20th century the U.S. had in place an industrial policy meant to ensure no loss of manufacturing jobs in the U.S. Malcolm McLean then comes along with his innovative idea for container shipping. Containers are big metal boxes that must be manufactured. And so it’s quite plausible that the industrial-policy mandarins would have looked favorably upon this innovation and allowed it to move forward. So far, so good.

But of course one consequence – a consequence the magnitude of which wasn’t fully appreciated when McLean’s idea first arrived – turned out to be dramatically reduced costs of ocean shipping. The resulting lower cost of importing goods and component parts from abroad would in my hypothetical – as it did in reality – greatly increase the profitability of outsourcing much low-wage manufacturing processes from the U.S. to foreign countries. For the industrial policy to continue, government would have to squelch pursuit of these profits. The resulting political tensions would be great, not least because other countries with more reasonable governments would soon overtake the U.S. in being able to manufacture, export, and import at much lower costs.

Even if the industrial policy eventually wound up being ‘protected’ from the consequences of the earlier decision to allow Americans to manufacture large numbers of shipping containers, I suspect that surprise experiences such as this one would have put industrial-policy mandarins on high alert in the future against innovations. And as Nathan Rosenberg would predict, one unfortunate result would have been a decline in the U.S. of scientific progress.

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