≡ Menu

The Knowledge Problem Doesn’t Disappear Just Because It’s Ignored

Here’s a letter to the Wall Street Journal:


Greg Ip is correct to be skeptical of industrial policy, but his skepticism should be deeper (“This Part of Bidenomics Needs More Economics,” July 12). Industrial policy’s root problem isn’t that economists have yet to study adequately; it’s root problem that it ignores market prices. Information about relative scarcities supplied by market prices is essential for determining not only which outputs to produce but also how best to produce these – for example, for determining which of the countless possible mixes of different inputs for producing steel is the least costly. Get this mix wrong and either too little steel is produced or too many resources are used to produce steel, leaving fewer resources available to produce other outputs. Multiply such a mistake across several industries through many years and economy-wide growth is significantly lowered even if every firm showered with industrial-policy privileges appears to be successful.

Detailed information about relative resource scarcities – scarcities that often change unexpectedly – is available only if market participants on the spot are free to make buying, production, and selling decisions using their own local knowledge. One result of such decision-making is an ever-changing pattern of market prices that conveys throughout the economy information about relative resource scarcities. Because it intentionally disregards market prices, industrial policy blinds economic decision-makers to information that is required to ensure maximum economic growth.

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