Industrial Policy

Marginal Revolution is sparring with Dani Rodrik over Dr. Rodrik’s post “Should industrial policy be fit for polite company?” in which he said that since we tolerate massive state intervention in the spheres of education, health care, and so on, we shouldn’t rule it out so dogmatically in the sphere of industrial development.

This drew a sharp response from Alex Tabarrok at Marginal Revolution, who commented:

“politicians… are prone to corruption and rent-seeking by powerful groups and lobbies.”

Absolutely correct. The obvious conclusion? Industrial policy is a good idea. I kid you not.

I should have thought Dr. Rodrik’s post was relatively pedestrian. I think I’m a pretty doctrinaire free-markets advocate, but there’s no question that state policy has sometimes played a positive role in industrialization – hard as it was for me to swallow as an undergraduate. From Governing the Market (1990) by Robert Wade:

The key question is what has determined the level and composition of investment in these countries. There are plenty of facts about Taiwan, Korea, and Japan which better fit the neoclassical FM [Free Market] and SM [Simulated Free Market] theories than the political economy GM [Governed Market] theory. But it is clear both that less economic liberalization occurred in the 1960s and 1970s than neoclassical accounts suggest, and that much government intervention has gone beyond the limits of “good” neoclassical interventions. Government resources and influence have prompted investments to be undertaken which would not have been undertaken in strictly FM or SM conditions, thereby generating production and investment outcomes different from what would have happened if government had not intervened in this way. …

We can grant Adam Smith his point about the efficacy of eighteenth-century English government: “Though the profusion of government must, undoubtedly, have retarded the natural progress of England toward wealth and improvement, it has not been able to stop it” (1776:327). But we should reject the unargued assumption that “without MITI Japan would have grown at 15 percent per annum instead of only 10 percent (unnamed Japanese economist quoted approvingly by Little 1979:491). (342)

How can government intervention have such different results in different places? William K. Tabb in The Postwar Japanese System (1995):

Japanese would respond to the same incentives the same way we do if they saw themselves in the same situation faced with the same choices; however, they often are not. … The constraints within which choices are made are not the same. The institutions that constrain behavior may have the same labels – “corporation,” “labor union,” “democratic political system” – but these words represent different phenomena in Japan. … [For some] the oxymoron “laissez-faire-oriented intervention” holds great salience and avoids the objectionable use of the Ministry of International Trade and Industry, “planned markets.” (13)

I am fully prepared to find that Wade and Tabb are superseded, and, having just read The Elusive Quest for Growth, I am fully alive to the growth-destroying activity of governments. But I was surprised to see Dr. Rodrik’s post treated as lunacy when I thought it only restated what we know well about the development of at least some economies.

HERE are the posts in order:

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