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Look Who’s A ‘Market Fundamentalist’

Here’s more (surprise!) on industrial policy.

Mr. M___:

Thanks for your reply to my note of a few days ago.

Insisting that U.S. industrial policy (as you say) “is needed to make sure our economy is strong enough to compete with China,” you allege that I build my argument against industrial policy “on discredited market fundamentalist ideas which only George Mason/Mercatus Center types have faith in.”

Hmmm. Is arithmetic discredited outside of a few buildings in northern Virginia? Central to the argument against industrial policy – an argument that I did not develop but find to be compelling and worth repeating – is the reality that government cannot direct resources to favored firms without denying those resources to other firms. Adding resources here requires subtracting resources there. And so U.S. industrial policy can artificially strengthen some American firms only by artificially weakening other American firms.

And is intellectual humility discredited outside of Fairfax and Arlington? Another key part of the argument against industrial policy is that, absent the information conveyed by market prices, industrial-policy mandarins have no way to know if it’s worthwhile to add resources here at the cost of subtracting resources there. Until industrial-policy proponents explain substantively how government officials will acquire the detailed information necessary to carry out industrial policy productively, I refuse to trust substance-free assertions that empowering the state to override market-determined patterns of resource allocation will make the American economy stronger.

Finally, guess which George Mason devotee of market fundamentalism wrote the following:

What we should be able to teach our students is that the main competition going on is one of U.S. industries against each other, over which sector is going to get the scarce resources of capital, skill, and, yes, labor. Government support of an industry may help that industry compete against foreigners, but it also draws resources away from other domestic industries. That is, the increased importance of international trade does not change the fact the government cannot favor one domestic industry except at the expense of others.*

My apologies; it’s a trick question. The above-quoted market-fundamentalist idea was expressed by someone with no affiliation or affinity with GMU Econ or Mercatus: Paul Krugman.

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

* Paul Krugman, “What Do Undergrads Need to Know about Trade?American Economic Review, Vol. 83, May 1993, pages 23-26. The quotation is found on page 26.