Industrial Policy Redux

11 February 2010 at 12:03 am 10 comments

| Peter Klein |

Keynesian economics is not the only once-discredited doctrine making a comeback following the financial crisis. Despite the well-publicized failures of MITI, Sematech, and similar ventures, people are now calling for a new US industrial policy. Here’s a former Shell executive writing in the WSJ about America’s “foolhardy fondness for ‘free market’ philosophies that tell us it’s OK to export all our jobs,” and complaining that “[w]e’ve never systematically used government incentives to help U.S. industry compete across the board. It’s time we did, like everyone else.” Oy vey. A more serious, but equally troubling, proposal comes from Nobel Laureate Edmund Phelps, calling for a “First National Bank of Innovation.” Writing in HBR, Phelps and Leo Tilman worry that high-risk, long-term investments aren’t getting adequate funding, but don’t explain exactly how government funders would compute NPV on anything other than political grounds (which suggests a new acronym: Net Political Value).

Entry filed under: - Klein -, Bailout / Financial Crisis, Innovation, Public Policy / Political Economy. Tags: .

The Capitalist Kibbutz Mizzou Seminar on Evolutionary Models in Economics and Organization Theory

10 Comments Add your own

  • 1. Ferran  |  11 February 2010 at 12:17 pm

    Quoting the HBR article you mention: “Unfortunately, most financial firms lack the expertise to invest in business ventures on a sufficient scale” (Phelps & Tilman 2010). Very clear indeed: all the needed expertise (and funds) to invest in long-term projects are in the government, where personal incentives are “aligned” with stakeholders (society) interests.
    Or in other words, the authors seem to suggest that we should try the current governance system in China, and see if we like it? Not sure I want to be counted in, thanks.

  • 2. David Hoopes  |  11 February 2010 at 4:34 pm

    Ferran is perfectly correct. As he points out, we should see that highly centralized economies have flourished. For example compare Poland before and after capitalism. Look at how well government investors did whilst under the Soviet whip. Later, with individuals making decisions for themselves the Polish economy……..became an incredible success story. Public officials have neither the knowledge nor the incentive to invest in technology or anything else. This would be less depressing if it didn’t seem so obvious.

  • 3. Beefcake the Mighty  |  11 February 2010 at 7:27 pm

    “(which suggests a new acronym: Net Political Value)”

    Brilliant!

  • 4. srp  |  11 February 2010 at 9:11 pm

    This fits right in with your interest in political entrepreneurship….

  • 5. Arend  |  13 February 2010 at 4:00 am

    Lol, had to read Ferran’s and David’s comments like three, four times in order to be sure they were both sarcastic. Saves me an angry reply, negative feelings and a flatulence ulcer. :)

    On the positive side, there seem to arise opportunities for articles and books that debunk industrial organization once again. Although debunking industrial organization on scientific grounds is somewhat besides the point in an environment that is infected by power politics, which is imho exactly what Keynesianism and IO have in common (although I once read some article of Hopenhayn that said that his models imply totalitarian control of the industry/economy and in that sense may be somewhat unrealistic… hehe).

  • 6. lextown  |  14 February 2010 at 10:24 am

    The more important question remains, however, whether or not high-risk, long-term investments are getting adequate funding? Phelps et al. may still have a valid (albeit pragmatic) point.

  • 7. Michael E. Marotta  |  16 February 2010 at 6:04 am

    “THE MAN WHO FOUND THE MONEY: John Stewart Kennedy and the Financing of the Western Railroads” by Engelbourg and Bushkoff (MSU Press, 1996) tells of long term, high risk financing in the days before the government taxed the resources and regulated the opportunities. Kennedy was the banker for J. J. Hill, but he started in the 1850s. The long-term story is that frequent refinancing was necessary and most ventures failed.

    Last summer in NEW INDIVIDUALIST David Kelley and Roger Donway engaged on whether and to what extent life is enterprise and in that they raised the problem of whether the entrepreneur is paid for risk (which is calculable) or uncertainty (which is not).

    “AGAINST THE GODS: The Remarkable Story of Risk” by Peter L. Bernstein posits that capitalism was made possible by Fermat and Pascal. All societies have merchants, but capitalism was possible only when uncertainty could be transformed into calculable risk. (In the words of Thomas Caldecot Chubb, “If there were no losses, there would be no premiums.”)

    All of which is to say that economic success — entrepreneurial success — requires many factors, all of them necessary and yet not sufficient. If it could be bottled, it would be on the shelves.

  • 8. lextown  |  16 February 2010 at 9:01 am

    I disagree with the last sentence of your conclusion Michael. There are also examples where politically motivated monetary incentives have stimulated innovative entrepreneurial activities; and these activities were not only an economic success but arguably also a success from a social point of view.

    Consider for example the case of renewable energy technology in Europe, specifically in Germany. For a related article see for instance here: http://linkinghub.elsevier.com/retrieve/pii/S0301421504002393

    One could also go one step further and argue that most high-risk investments are motivated by something other than calculable risks. Talk to any successful venture capitalist, and you will likely hear that mere financial calculations play a remarkably limited role as part of the actual investment decision.

  • 9. David Hoopes  |  16 February 2010 at 2:30 pm

    The bio-tech “industry” would seem to provide anecdotal evidence on investors’ willingness to finance long term high risk projects. The stuff usually doesn’t make it to market. If it does it takes forever to get there. Yet, bio-tech ideas find investors.

  • 10. Michael Marotta  |  17 February 2010 at 7:08 am

    When rich people lose their own money, that’s just the way it goes, the cost of the reward of profit. But do we really want the government losing billions while chasing pipe dreams? Imagine the “Whatever-gate” headlines as project after project is repeatedly refunded with no return.

    Ayn Rand called them “muscle mystics” the people who think that material objects have the power to create wealth. Capitalists have factories. Capitalists are rich. If we have factories, then we will be rich. Richard Feynman warned about “Cargo Cult Science.” Cargo Cult Economics would be another expression of the “muscle mystic” model. Capitalists invest in risky high tech ventures and get rich, therefore….

    You can have a business plan. You can have patents. You can have talent. You can have funding. You might not have success.

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