Here’s a letter to a rising college senior who asked me to keep him anonymous.
Mr. N__:
Thanks for your e-mail. I’ll be happy to read a draft of the paper that you plan to write this coming semester.
You say in your e-mail that you “see no real problem in letting industrial policymakers experiment with different ways to improve economic performance. An experiment which fails will be ended with another one tried. Where’s the harm?”
With respect, I disagree, and for too many reasons to list here. But I spell out what is perhaps my most fundamental disagreement.
The seriatum experiments carried out under industrial policy are wholly unreliable compared to the concurrent experiments that are always taking place in free markets. Industrial-policy experiments compete only against hypotheticals – against the goals articulated beforehand by their proponents, as well as against what people imagine might have occurred otherwise. No such experiment competes concurrently – that is, at the same time – against actual alternative attempts to satisfy market demands.
Suppose that ABC, Inc., protected from competition and subsidized by industrial policy, annually produces 250 million smartphones. Is this outcome successful or not? It’s impossible to tell because other producers were restricted in their ability to compete with ABC. Had competition not been restricted, perhaps the XYZ Co. would have arisen to annually produce 300 million smartphones or, maybe, would have innovatively introduced a completely new kind of device that’s far superior to the smartphones produced by ABC.
With restrictions on entry into the industry and on consumers’ ability to spend their incomes as they see fit, if ABC nevertheless goes bankrupt we can confidently conclude that this industrial-policy experiment failed. But if ABC remains solvent and active, we can make no confident conclusion about the outcome of this industrial policy because we have no knowledge of what would have occurred if ABC weren’t protected and subsidized. What appears to be a brilliant success might well be a stunning failure when compared to what would have arisen under market competition. Yet with industrial policy, no such comparisons are possible. In free markets, such comparisons are made every moment of every day.
Despite their verbal eloquence, the excellence of their motives, and the fervor of their pleas, proponents of industrial policy have no access to the knowledge they’d need in order for them to engineer actual economic improvements. And as Deirdre McCloskey writes, “the model of the future is no substitute for the entrepreneur’s god-possessed hunch.”
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
