economics

Is It Time for an American Industrial Policy?

American Compass
Political Science, Duke University
Genesis
Response
Penultimate
Finale

Oren Cass

American Compass

May 20th, 2020
A group of exceptionally talented young engineers is preparing to launch a new company. They have two possible business plans: In one, they develop an app called BooBoo that allows a user to hire a stranger to jump out from behind a tree and scare the user’s friend, recording video of the incident and sharing it online. In the other, they commercialize a new material called SteelSeam with the potential to reduce home-construction costs by 20 percent. Assuming potential paydays of equivalent value for the founders, does it matter which one they pursue? Not to the market.
The market is very good at some things, ill-suited to others. It excels, for instance, at helping buyers and sellers determine the price at which supply of some commodity will match its demand. It is inappropriate for divvying up chores in a marriage or raising an army to beat back an invasion. The task of allocating capital falls somewhere in between. The market gives investors every incentive to maximize their private return and efficiently facilitates their efforts. But those incentives are a function only of the private costs and benefits associated with an investment—how much profit can the business generate how quickly, with what required capital and what risk? No economic theory holds that the attractiveness of a choice will correlate with its value to the society.
The investments chosen, therefore, are not necessarily those beneficial to an economy’s long-term trajectory; the productivity of its workers; or the resilience, prosperity, and security of its nation. Investors have no incentive to distinguish between profits earned through growth and innovation versus cost-cutting and offshoring, or between the proceeds of paradigm-shifting innovation versus patent lawsuits. The brutal logic of the market ensures that incentives will act powerfully, but also that considerations unbacked by incentives go ignored.
Insofar as a nation requires investment for purposes beyond immediate, private profit—to provide infrastructure, build scale and expertise, foster innovation, insulate against risks, protect national security, and so on—policymakers must find a way to ensure such concerns factor into the investor’s decisionmaking, or else supplement private investments with public ones. Such efforts are called industrial policy.
America has some industrial policy today—we subsidize research and development generally, invest tens of billions annually in the National Institute of Health, and require domestic supply chains for military procurement. But we are hamstrung by a general belief that we should have no preference between BooBoo and SteelSeam and that, when we get a SteelSeam, we should not care what operations it conducts domestically. We have the BooBoos to show for it.
The time has come to acknowledge that we want those engineers to pursue SteelSeam, and when they’re ready to build their first SteelSeam factory we want them to build it here. Policymakers should use the many tools available to make those preferences felt in the market—not to undermine the market but rather to strengthen it, by allowing it to do what it does best in pursuit of goals we share.
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