I’ve been thinking a lot about our colleague Gideon Rachman’s recent piece on the revival of industrial policy, which looked at the way in which many of the world’s largest countries and regions, including the US, China, India, and the EU, are increasing state intervention in the economy, or least talking about it. His take is basically that this is an old and bad idea, one that will lead to geopolitical conflict.
The topic is a hugely important one, although I disagree with his conclusions. Industrial policy is indeed old, but I don’t think it’s bad. And how you think about it is in part about how you define it.
People mean many different things when they talk about industrial policy. Some refer to the totally state-planned economy of the USSR. Others think about China’s model of state-run capitalism. Still others are thinking about the sort of public-private relationships between job creators and educators in places like Germany, or the spaghetti bowl of common interests between corporations and the state in places like South Korea, Japan, Taiwan and Singapore.
I think about industrial policy in a very broad context, starting with the notion that the private sector and the market system don’t always allocate resources in the national interest, but rather in the interests of the asset-owning class. Thus, the voting public may have reason, at times, to elect politicians who will create policies that do explicitly target shared national interests.
It’s not about picking winners (no Solyndra emails please, it was a rather tiny mistake compared to other things the government did in technology, like inventing the internet). It’s about creating an even playing field (nope, the market hasn’t done that all by itself, hence five companies owning 40 per cent of the market), and prioritising investment into things that will create a more resilient economy and society.
That’s no longer radical in the US. Indeed, it’s becoming the status quo on both the right and the left that we need some public intervention in the market system after half a century of laissez-faire. I think this Marco Rubio speech to House conservatives will be seen as a bit of a line in the sand.
As I have written before, industrial policy is actually a deeply American idea — our first Treasury secretary, Alexander Hamilton, was all about using markets to prioritise national interests. China has learnt much from this approach. This is why, according to research, it has over the past 40 years or so been one of two big economic winners from globalisation, along with large multinational companies.
On that score, look out for my column in a week or so that will have some really amazing McKinsey Global Institute data on how big corporations impact the economy and households. If you had any doubts about my statement on markets awarding asset owners disproportionately, this will put it to rest.
You can’t group all countries’ approaches towards industrial policy together — Europe and to a certain extent China probably need less public intervention in markets while the US needs more. The nature of the networked economy and the platform giants that underpin it simply push things towards a winner take all end. That’s not politically sustainable.
The question is how the state can intervene in ways that are productive. I won’t rehash what I’ve written about the various Biden administration initiatives (most of which I think are great, some of which come with risks of unproductive spending), but I will say that I think the US needs a co-ordinated approach around creating the next big productivity boom around climate change, something I argued for here. It’s all about holding on loosely, and creating a floor under the right things.
Also, given the now weekly breakdown of some bit or other of critical infrastructure, I’d like to see a lot more systems thinking and possibly even a resiliency tsar in the White House, someone who could cut through intra-agency BS and get all the troops in every part of government marching in the same direction on supply chain resilience, food security, technology standards, cyber security, etc.
Once that happens, the private sector would follow. I’d love to see some really competent ex-military leader in such a role — someone who isn’t captured by the private sector or bogged down by the challenges of being a career politician. Gideon, making a special guest appearance, do you agree, and if so, does anyone’s name come to mind? I’d ask readers the same . . .
Recommended reading
The narrative feature story in The New Yorker on the revival of the Native American language of Penobscot is one of the best of its form that I’ve read in years. It’s not only a wonderful yarn, but it also touches on key intellectual property issues.
The New York Times did a good round-up of the state of thinking on cryptocurrency regulation and the fintech industry’s efforts to increase lobbying around the issue.
Ed, I loved your analysis of the geopolitics of vaccines.
And finally, I’ll be reading my friend Zachary Karabell’s new book on the history of Brown Brothers Harriman, reviewed here by my FT colleague Robert Armstrong.
Gideon Rachman responds
Hi Rana, glad my column got you thinking. As you say, “industrial policy” can mean lots of different things. Broadly speaking, I mean the state, rather than the market, “picking winners” — either favoured industrial sectors or particular companies or both. Industrial policy is also strongly associated with protectionism and state subsidies.
I think attitudes to these ideas are often strongly coloured by when you grew up — formative experiences and all that. Which is an indirect way of saying that I think I’m quite a bit older than you. (I’m 58 and you are in your mid-20s, right?) Growing up in Britain in the 1960s and 1970s was a strong inoculation against the idea that the state was good at picking winners, fostering innovation or running industries. The sorry tales of British Leyland (cars), International Computers Limited and the UK government’s Industrial Reorganisation Corporation, prepared the ground for Thatcherism and privatisation.
I don’t think Britain’s experiences with industrial policy were uniquely awful. In my column, I quoted Swaminathan Aiyar, the Indian economist who is worried that his country is returning to the failed policies of state intervention of the 1970s, which as Aiyar notes, were a “terrible flop”. The Indian tech sector emerged after the state began to withdraw from the economy — and its success was driven by the private sector.
You cite China as a model of successful state intervention. I see it differently. Deng Xiaoping’s economic revolution was based on encouraging the private sector and foreign investment. It is true that China has retained a large state sector. But, generally, that is the least efficient and productive bit of the economy.
Of course, I’m not saying there can be no role for the state in guiding the economy. If there are overwhelming environmental reasons to encourage particular technologies, the state can do that through regulation and taxation. But once we get into state subsidies or state-run industries, I get nervous. At that point, politicians’ egos and (often) their own financial interests come into play. The results can be ugly.
Your feedback
And now a word from our Swampians . ..
In response to ‘Where have America’s babies gone?’:
“In your column discussing Millennial birth rates, you touch on dampened economic prospects, but as an American born in 1995, the myriad impacts of climate change upon future generations ranks as my most substantial natal concern (ditto for my cohort of friends). Millennials have internalised facts in climate science, and its conclusions are clear: swift action is needed to prevent catastrophe and suffering for the future inhabitants of earth. The continued failures of a dysfunctional Congress to pass comprehensive climate change legislation increase the uncertainty around what quality of life my potential children would experience. As politicians and oil magnates continue to sacrifice their grandchildren’s biosphere for extra profits today, they should not be surprised if some of their children decide not to give them those grandchildren after all.” — Michael Sheely, Santa Cruz, California
Source: Economy - ft.com
