The Rebirth of Industrial Policy: A Grave Historical Error?

Revival of State Capitalism

Since the financial crisis, Western economies have seen a resurgence of large-scale industrial policies. These mission-oriented policies are a response to various perceived issues, including climate change and the recent push among Western countries to lessen their reliance on China. This revival of state capitalism, evident in numerous Western countries through expansive government programs, needs to be examined within a broader macroeconomic and ideological context. In our new book, Moonshots and the New Industrial Policy: Questioning the Mission Economy, we do just that. The book, a collaborative effort by twenty-three researchers worldwide, offers theoretical approaches and comprehensive descriptions of industrial policy dilemmas. We collectively conclude that the rebirth of large-scale industrial policy is a significant historical blunder.

Lessons from the Past

In the 1990s, there was a general agreement that the role of policy was to establish well-balanced, universally effective framework conditions for businesses. These conditions should be as independent as possible of factors like company size, age, sector, financing structure, ownership form, and ownership category. The formation of the European Union's internal market and the introduction of competition into previously monopolized sectors increased the need for change and boosted economic development. These economic policies were largely a response to the disastrous industrial policies of the 1970s, which saw entire industries sustained by extensive direct and indirect subsidies for decades. The lesson was clear: top-down industrial policy hinders structural change, benefits special interests, and encourages stagnation.

Return of Interventionist Industrial Policy

Fast forward three decades, and it seems these lessons have been forgotten. The financial crisis of 2008-9, the prolonged euro crisis of 2009-12, and the pandemic have brought active, interventionist industrial policy back into focus. This revival is cleverly marketed under slogans such as "mission-oriented innovation policy" and "the entrepreneurial state," championed by renowned economists like Mariana Mazzucato and Dani Rodrik. These scholars argue that, akin to how the moon landing program spurred economic development in the United States, similar "moonshots" should be launched in other areas, rallying both private and public actors towards common goals like eradicating homelessness or curing cancer.

Why Industrial Policy Missions Often Fail

However, our book reveals several reasons why this seemingly attractive policy is actually problematic. The list of ambitious moonshot projects that have failed is long, including the US war on homelessness, Brazil's attempt to rebuild its shipbuilding industry, the Swedish "million program" to boost housing supply, the US's attempt to use aid to build up developing countries, and Richard Nixon's "war on cancer." We outline seven reasons why these missions typically fail: 1. Missions cannot solve "wicked" (i.e., highly complex) problems. 2. Politicians and government agencies are not immune to self-interest. 3. Decision-makers lack sufficient information to design missions appropriately. 4. Missions are subject to rent-seeking and mission capture. 5. Missions distort competition. 6. Government support distorts incentives and creates moral hazard. 7. Opportunity costs are overlooked. These seven factors are prevalent in the industrial policy failures analyzed in our book. They are also relevant to the mega-investments and so-called green deals currently being rolled out worldwide, many of which are unparalleled in industrial history.

The Role of Policy in a Market Economy

A market economy is based on a decentralized process that allows for experimentation, evaluation, and selection. Companies and individuals interact spontaneously and test the economic feasibility of different solutions. The main role of policy should be to establish the rules of the game that provide relevant actors with the right incentives to find cost-effective and suitable solutions to society's major challenges.

Conclusion: A Historical Mistake?

The resurgence of industrial policy signifies a rebirth of the symbiosis between the state and capital owners. However, both economic theory and historical experience suggest that this is a mistake. The sooner we acknowledge this and make a U-turn, the less costly and painful the recovery will be.

What are your thoughts on this matter? Do you agree that the revival of large-scale industrial policy is a historical mistake? Share this article with your friends and let's get a conversation going. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.