A Needed Debate on Industrial Policy

August 12, 2010 | Devon Swezey,

Industrial policy is back in vogue.

In the midst of a fragile global economic recovery, governments around the world are taking a new interest in managing their economies and strategically targeting particular industries they hope will form a new foundation for growth.

A vigorous debate is being waged among policymakers, business leaders, and intellectuals about the utility of industrial policy and it's place in the 21st century global economy.

This week's Economist magazine has a set of stories about what it terms "Leviathan Inc."--a new era of government involvement in business and the economy. The Economist takes a decidedly negative tone toward government investment in emerging sectors like clean energy, arguing that this new round of industrial policy will likely produce "some modest successes and a crop of whopping failures."

But the history of industrial policy is much more nuanced, and those on both sides of the argument can point to examples that bolster their case. In a fairly clear-cut example of corporate welfare, the Economist cites the case of Meccano, a French toy manufacturer that was bailed out by the French government after a year of poor sales during the financial crisis. Better to do what we can to "keep the beast at bay" and cut down on bureaucracy than for the state to "pick winners," according to the magazine.

On the other side of the coin, there is a long and rich history of strategic government investment fostering increases in productivity and the creation of whole new industries, which the Economist readily admits.

In the 1950s and 60s, the U.S. government helped create the modern microchip industry by buying virtually every microchip that firms could produce. NASA bought so many purpose-built microchips for its Apollo Project, the price of an Apollo microchip fell from $1000 per unit to $30 per unit in the span of a couple years.

Federal investment of one kind or another was also instrumental for the successful development of countless other technologies that went on to spawn new industries and generate trillions of dollars of wealth, including jet engines, personal computers, and the Internet. Breakthrough has written about these and other "industrial policy" successes in "Case Studies in American Innovation."

With many examples of both "whopping failures" and spectacular successes, it is no longer enough to simply argue against all forms of industrial policy. Rather, the debate must shift to a much-needed conversation about how to structure industrial policy to help boost innovation and productivity in high-value sectors of the economy.

With that debate in mind, the Breakthrough Institute has released two new articles about the need for a new industrial policy for clean energy technology, a position gaining support from many different corners of the business and policy world. The first article, "In Defense of Bill Gates," argues that despite attacks from both the left and the right, Bill Gates was right to call for massive government investments in energy breakthroughs to make clean energy cheap enough to be deployed at scale. The second article, "In Defense of Andy Grove: Towards and More Effective Industrial Policy," defends former Intel Chairman Andy Grove's recent call for industrial policy targeting high-tech manufacturing, and argues that manufacturing must be seen as a core part of the nation's innovation ecosystem.

Stay tuned at the Breakthrough Institute Blog as the debate over a new 21st century industrial policy heats up.

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