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There Is No Saving Industrial Policy

Here’s another letter to the correspondent to whom I wrote earlier in the day. (This letter is rather wonky, but it’s important to untangle these deep misunderstandings.)

Mr. F__:

After reading my previous letter in which it was said that only market signals can give producers knowledge of the preferences of consumers, you write that my “criticism of industrial policy doesn’t apply to Oren Cass given he explicitly says he wants to raise the value of work and not consumption.”

While you’re correct about Oren’s stated goal, you’re incorrect that this goal is immune to the economic case against industrial policy.

When economists use the word “consumption” we mean by it the ultimate ends of economic activity, whatever these might be. Oren insists that the ability to get and remain secure in manufacturing jobs is not merely a means of earning income to buy consumption goods, but is itself an economic end – that is to say, a consumption good. Yet even if we grant that on this matter Oren is correct, his case for industrial policy remains invalid.

Consumption goods must be traded off against each other; buying a larger house means sacrificing, say, more restaurant meals or more leisure. Each of these things is a good, but being a ‘good’ alone tells us nothing about how many units of each to acquire because acquiring more units of one good necessarily means acquiring fewer units of others. In a free market, prices and wages guide producers to produce, and consumers – spending their own incomes – to consume, the ‘correct’ mix of the countless different kinds of consumption goods.

But under Oren’s industrial policy, the number of manufacturing jobs would be artificially increased with subsidies and tariffs. Even granting that these jobs are (as Oren believes them to be) consumption goods, replacing market signals with government commands eliminates the information necessary to know how the value of additional manufacturing jobs compares with the value of the other consumption goods necessarily sacrificed to make those jobs possible. With market signals overridden, all we have is Oren Cass’s, or some government officials’, hunches about what is the proper mix of manufacturing jobs with other consumption goods.

Hunches, alas, are not information.

Oren’s only escape from this problem is to assert that every additional manufacturing job, regardless of how many such jobs already exist, is worth whatever is sacrificed to make that job a reality. But I doubt that even Oren believes that ever-more manufacturing employment should be pursued at the cost of casting every American into impoverishment.

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