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To Repeat: Industrial Policy Is Naive and Blind Arrogance

Here’s a letter to National Review:


Ryan Bourne eloquently exposes the political naivete of Oren Cass and other ‘national conservatives’ who champion the use of industrial policy as a means of improving the American economy (“National Conservatives Can’t Wish Away Political Realities,” April 17). To be surprised, as Mr. Cass & Co. are, by the frequency of rent-seeking and the fulfillment of political fetishes when politicians have the authority to allocate resources is akin to being surprised by the frequency of fornication and the fulfillment of sexual fetishes when ladies of the night have the authority to operate brothels.

But the case for industrial policy suffers a second flaw, one that dooms industrial policy to failure even if government officials were miraculously rendered apolitical. The second flaw is inescapable ignorance. Mr. Cass might well successfully instruct government on how to achieve some particular concrete outcome, such as increased employment in manufacturing. But neither he nor anyone else can possibly know that the net effect of this government-engineered reallocation of resources would be a net positive for the country.

When government uses industrial policy to allocate resources into the particular kinds of manufacturing operations favored by industrial-policy designers, ask: How many of these resources come from other manufacturing operations? How many come from the service sector? How many come from agriculture and the extractive industries? The unfathomable complexity of a modern economy makes acquisition of such knowledge impossible. Yet even if we did know that X tons of steel, Y acres of land, and Z hours of labor were diverted from the service sector (say, from the building and staffing of medical-research facilities and on-line-retailer warehouses), how can we know that this altered allocation of resources will redound to the country’s net benefit? How can we know that the value of the outputs lost from these diminished service-sector operations isn’t greater than the value of the outputs made possible in the manufacturing sector? How can we know that the particular jobs destroyed in the service sector are inferior to the particular jobs created in the manufacturing sector? How can we know what effect this forced reallocation of resources will have on innovation in the manufacturing sector or in other sectors? (Are we to expect subsidized and protected firms to become more innovative?) And how can we know what effect will be visited on the country’s overall well-being by this changed pattern of innovation?

We can’t know. No one can. There is literally no source of information that reveals to Oren Cass or to anyone else that the net results of any industrial-policy scheme will be economic improvement for the country.

In a free market, in which people spend and invest their own (and only their own) money, resources are allocated by market prices and asset values that convey at least some information about consumers’ preferences, resource scarcities, and expected economic changes. This information isn’t perfect, but at least it’s real, objective, and – judging by the success of market economies compared to nonmarket ones – pretty darn good. In contrast, with industrial policy the only ‘knowledge’ used to allocate resources is the mix of personal preferences and hunches of politicians, bureaucrats, and their intellectual shamans.

Industrial policy censors the vital information that markets continually extract from the economic actions of millions of market participants and replaces it with the armchair speculations of a handful of individuals who arrogantly believe that they possess the God-like power not only to fully enough survey the present but also, from their think-tank suites or political chambers, to accurately foresee the future in all of its unfathomable detail.

Let’s give the last word to Adam Smith:

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.*

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

* See Book IV, chapter 2, paragraph 10 of Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776).

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