This book review was written by Eugene Kernes
Excerpts are provided by with permission from an author.
“Industrial policy is the deliberate
governmental support of industries, with such support falling into two
categories. First are broad policies
that assist all industries, such as exchange rate management and tax breaks for
R&D. Second are policies that target
particular industries or technologies, such as tariffs, subsidies,
government procurement, export controls, and technological research done or
funded by government.” – Marc Fasteau, and Ian Fletcher, Introduction, Page
2
“Short-term investing can accomplish many important economic
tasks, but some of the most crucial investments must be long term. And there is nothing in capitalism
guaranteeing that capitalists will have sufficiently long time horizons. But without long-term investments, whose
payoff may not come for years or even decades, businesses often won’t develop
the next generation of technology, instead sticking with variations on what already
exist. Companies with short time
horizons will cede market after market to rivals with longer time
horizons. Entire industries can be
outcompeted by foreign rivals with time horizons artificially lengthened by
their home country’s industrial policies.” – Marc Fasteau, and Ian Fletcher,
Chapter 1: Why The Free Market Can’t Do Everything, Page 14
“The advantageousness of industries changes as technology
advances. Yesterday’s high technology
becomes commoditized, loses patent and trade-secret protection, and diffuses
around world. Therefore, a
technologically static industry’s advantageousness will generally decline over
time, though barriers to industry entry can slow this process.” – Marc Fasteau,
and Ian Fletcher, Chapter 2: The Dynamics Of Advantageous Industries, Page 27
Is This An Overview?
Industrial policy is a deliberate governmental support for
industries. For government to support
innovation, commercialization, retention of advantageous industries, reduce
foreign competition for internal markets, and to manage the exchange rate to
balance trade. Government intervention
is needed due to limits of the markets, to have government supply that which
the markets cannot. The limits to free
markets include externalities, a focus on short term investments, and limited
production and innovation to what provides the firm with readily monetized
products.
Firms that rely on markets tend to lose competitiveness to
foreign firms which are supported by governments. Loss of competitiveness that leads to a loss
of jobs, wealth, and tax revenue which hinders national defense. Effective industrial policy includes a
proactive mobilization of resources, long term strategies, coordinated related
policies, and are consistent enough for firms to know how to allocate
investments. Policies need to enable
advantageous economic activities, which are activities that contain increasing
returns, high income elasticity of demand, susceptibility to repeated
improvement, competition not limited to on a basis of price, and can accumulate
human capital. Industrial policy enables
a mixed economy that is part public, part free-market private, part regulated
private.
Caveats?
This book can be difficult to read, as
various parts of the book contain a more technical manual on industries and
policies. The book is a guide for those
seeking to know what policies are available and industries affected, not an
introductory book on economic development.
This book can be used by every state, not just the United
Sates. The book provides an economic
history of various states, with various successes and failures in using
industrial policy. As every state can
use the same policies, each state can reciprocate a policy that is being used
against them. Each state can reciprocate
the denial of technology and limit the internal market to foreigners. This can exacerbate conflicts rather than
provide opportunities for cooperation.
The way the ideas in the book are expressed have
contradictions. 1) The authors claim
that the U.S. is supporting free trade with a lack of government support, then
proceed to show how much government has been involved in developing
industries. The authors critique should
be about the difference between what is publicly claims and what is being done,
rather than on lack of government intervention.
2) The author makes the claim that government intervention is needed, as
government can potentially improve outcomes when the free market provides
suboptimal outcomes. If government is
needed when markets produce suboptimal outcomes, then markets can be claimed to
be needed when government produces suboptimal outcomes. Within the economic history provided, the
authors provide references to governments not being optimal. 3) For effective industrial policy,
governments require predicting the future of how technology will evolve, and
which markets would be profitable. Then
to support those industries and markets with various policies, such as
educating people for those future needs.
The problem is that this claim requires government officials to be
rational agents. Effective government
intervention requires the same conditions which Neoclassical economic
perspective held, that people are omniscient and omnipotent. These views are no longer considered
acceptable assumptions in economics.
