… is from page 223 of my GMU Econ colleague Mark Koyama’s, and his co-author Jared Rubin’s, superb 2022 book, How the World Became Rich:
Markets are also crucial for sustained economic growth. Textbook economics often focuses on the efficiency properties of markets: the principle that in a competitive market, prices will be bid down to marginal cost so that there is no deadweight loss. But from a long-run perspective, what matters more is that markets provide incentives for innovation. Growth episodes like the Industrial Revolution were not planned by policy-makers. They resulted from an untold number of decisions by private individuals to experiment with new production methods or to build new factories or to mechanize production.
DBx: Indeed so. It follows that industrial policy strikes at the very heart of a market economy. Industrial policy aims to achieve concrete outcomes conceived in advance by planners. Imposition of such a policy, therefore, must block any and all innovation that might disrupt the path to the plan’s pre-conceived goal. Because creative, disruptive innovation is essential for economic growth, industrial policy necessarily diminishes the prospects of such growth. And the more comprehensive is the industrial policy, the greater the suppression of growth.
Industrial-policy advocates might agree that their schemes reduce growth. They will claim that industrial policy is justified as a means of achieving non-market outcomes that are worth the sacrificed growth. But there is absolutely no reliable information or knowledge that industrial-policy advocates possess, or could possess, that enables them to know that their claim is correct. They can’t possibly know what the benefits would have been of the innovations that are suppressed by their interventions. Unable to know what these benefits would have been, industrial-policy proponents cannot in truth insist that the benefits that they hope to achieve with their policies will be worth the costs.
Even if we overlook the economic and ethical problems with using government to bestow on Jones and Jackson non-market benefits by denying to Smith and Williams opportunities for gaining through the market, we have no good reason to believe that industrial policy would in the long-run prove to be a net benefit even to Jones and Jackson. For example, the blue-collar workers who today’s NatCons propose to help with industrial policy might well themselves, over time, be made worse off by the officious affections of industrial-policy advocates. After all, Jones and Jackson – and, even more likely, their children and grandchildren – will be among those who are denied the benefits of the foregone innovations.