Why Industrial Policy Fails

For the same reason we don’t cancel the coming NFL season and rely on experts to declare the Super Bowl champion. 

Letter to The WSJ.

"In his insightful exposé of the ugly realities of the Chips Act (“The Semiconductor Boondoggle,” Inside View, Aug. 15), Andy Kessler quotes National Economic Council director Brian Deese’s assertion: “The question should move from ‘Why should we pursue an industrial strategy?’ to ‘How do we pursue one successfully?’” Mr. Kessler then observes that “this is as wrong as Soviet or Chinese five-year plans.”

True. But more might be said about what is perhaps the most important factor condemning industrial policy to failure, namely, the absence of any genuine market test.

The only way to determine which industries truly contribute to economic growth is through market competition—through the process of each firm, spending only its investors’ own money, going head-to-head with other firms to attract customers. Only in the free market is no one compelled to fund or patronize any firm, and only in the free market is no one prevented from, or penalized for, experimenting with different peaceful ways to attract suppliers and customers. The resulting competition thus reveals which firms contribute most to economic betterment.

Industrial policy short-circuits the market’s discovery process. Such policy is premised on the fantasy that politicians or bureaucrats, spending other people’s money and protected from the competition of politically disfavored rivals, can foresee not only which particular products are best to produce, but also which of the countless alternative means of producing these products are the most efficient (that is, most sustainable).

Just as it would be folly to cancel the coming NFL season and instead rely on experts to declare the next Super Bowl champion, it would be great folly to cancel economic competition and instead rely on experts to declare which firms should and shouldn’t survive.

Prof. Donald J. Boudreaux

Mercatus Center, George Mason U."