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Quotation of the Day…

… is from page 18 of the late Nobel-laureate economist Ronald Coase’s brilliant article titled “The Federal Communications Commission” – an article that first appeared in the October 1959 issue of the Journal of Law & Economics:

This “novel theory” (novel with Adam Smith) is, of course, that the allocation of resources should be determined by the forces of the market rather than as a result of government decisions. Quite apart from the malallocations which are the result of political pressures, an administrative agency which attempts to perform the function normally carried out by the pricing mechanism operates under two handicaps. First of all, it lacks the precise monetary measure of benefit and cost provided by the market. Second, it cannot, by the nature of things, be in possession of all the relevant information possessed by the managers of every business … to say nothing of the preferences of consumers for the various goods and services….

DBx: Each of the above two points – so familiar to all economically literate persons – are among the key arguments against industrial policy that advocates of such policy continue to ignore. Advocates of industrial policy have never bothered to explain just how the political officials charged with carrying out such a policy will get the detailed information that they must have if their interventions into the market are to improve the economy’s overall performance.

We proponents of free markets have an explanation of how such information is gotten and used rather well, if never perfectly, when markets are allowed to operate. (See, for example, here, here, here, and here.) It’s not as if industrial-policy advocates have an explanation of such knowledge acquisition and use by government officials that shows how industrial policy might outperform the market. No. Industrial-policy advocates simply don’t bother to answer the question of how industrial-policy mandarins will learn what these mandarins must learn in order to out-perform the market. The issue is completely ignored by industrial-policy proponents as if it is irrelevant or of only secondary importance. Yet, in fact, no economic issue can be more central and important.

We are, I take it, to accept the purported ability of industrial-policy mandarins to outperform the market as a matter of blind faith.