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The Predilection for Planning: National Industrial Policy, Again

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It seems that no matter how many times governmental planning is implemented and fails, the temptation to try to design the economic system through political means remains irresistible. One of the reasons for this was explained in the 1880s by the English economist Walter Bagehot, who warned, “All Governments like to interfere; it elevates their position to make out that they can cure the evils of mankind. And all the zealots wish they should interfere, for such zealots think they can and may convert the rulers and manipulate the State control.”

But besides the zeal of those who believe that they know how best to order, arrange and plan the evolution and direction of society, there are those who see in the use of the state means to acquire income and wealth through governmental intervention and redistribution. Writing in the 1890s, the Italian economist and sociologist, Vilfredo Pareto, asked his readers to imagine two French industrialists: “One is constantly on the job in his factory, wholly concerned with improving production and cutting costs. The other goes off to Paris to pay court to the politicians and their chosen ministers. The results are different. The first industrialist, with great effort, will manage to save 2 or 3 per cent on his expenses; the second will be able to obtain a protective duty of 50 per cent or more…. [A] protective duty of exactly this amount has been obtained quite easily by Italian farm interests, thanks to political intrigue. . . .” The lure of easy riches through state manipulation of prices and production, rather than through open, competitive achievement in the market, draws members of the business community away from their factories and to the centers of political activity.

Both the zeal of the social engineer and the lure of wealth through the use of political, means are at work in America. With the United States economy languishing in the remains of an economic recession, the proponents of a new industrial policy are coming to the foreground. And segments of the business community, seeing cost savings, extra profit margins and larger market shares “on the cheap” through governmental subsidies and trade supports are supporting the latest campaign for national industrial planning. And make no mistake about it. That is what it is — a campaign for economic planning by governmental officials.

In the April 6, 1992, issue of BusinessWeek, the cover article called for an “Industrial Policy.” A seven-point program was proposed: 1) Increased governmental spending on civilian research and development, extending from basic scientific research to new manufacturing technologies; 2) Increased federal funding to assist small-to medium-sized firms to adopt new technologies and production methods, including job-training grants and low-cost equipment loans; 3) Federal funding for expanded communications networks for identifying new technologies and manufacturing practices in foreign countries; 4) Federal funding for infrastructure improvements for encouragement of high-tech industries; 5) Expanded federal funding of the Export-Import Bank to stimulate and subsidize export sectors of the United States economy; 6) Increased federal funding for public education to increase the number of math and science majors so that the business community can have a more educated work force, and 7) Permanent tax credits for long-range business planning of research and investment.

BusinessWeek tried to assure the weary reader that what was being proposed was not a policy of government picking winners and losers. Rather, theirs was a proposal for a “knowledge-based growth policy” in which the government would “sow a lot of seed corn” but “it will be up to the private sector to risk its own money to develop commercially valuable ideas.” American economic growth, BusinessWeek admitted, was based on “individual achievement,” but “superachievers” do not stand alone. They can be successful only if the U.S. [government] backs their research and ideas.”

But in spite of BusinessWeek ‘s attempt at soothing words and assurances, the fact is that what is being proposed is governmental funding and planning of scientific knowledge and technological development. If dollars are to flow from Washington to centers of research and development, some agencies in the government will have to decide which institutions are to be the beneficiaries of this financial largess and what projects are to receive the funding. Governmental departments authorized to disperse these funds will have to take on the responsibility of selecting what types of basic scientific research and which technological applications appear the most promising and attractive.

BusinessWeek recommends delegating this authority to the scientific community: “The policy would rely on the well-established decentralized decision-making system of the scientific community, one of peer review.” But this would merely further politicize the scientific community. Those in a leadership role in the scientific associations responsible for the disbursement of funds will become increasingly attuned to the political winds of Washington; and the applicants for financial assistance will be increasingly sensitive to the scientific prejudices of those in the associations upon whom they are now dependent for gaining access to government money.

The planning aspect of BusinessWeek ‘s agenda comes out most clearly when it discusses the matter of subsidizing and funding the introduction of new technologies and production methods in various forms. The magazine holds up as examples state-level policies already in place around the country: “Budding local industrial policies [in Pennsylvania and Ohiol are geared toward preserving the stable, high-paying factory jobs.” State governmental departments have been given the responsibility precisely to pick among potential winner and losers for funding, and in making these decisions they then must decide the shape and form they wish manufacturing and industry to take in their areas of jurisdiction.

The hidden premise is that those who man these departments have the capacity to determine the shape of future market conditions and determine which companies am the “right” ones to support for the changing times to come. And the hidden presumption is that “politics” does not and would not enter into the decisions concerning the distribution of the subsidies and financial supports.

The mercantilist element in BusinessWeek ‘s planning proposal takes the form of export subsidies for selected industries and firms through expanded funding for the Export-Import Bank. And it is also reflected in the magazine’s demand that the government “should help companies gain access to foreign markets” and “spend more time and money expanding its trade missions overseas.” Federal agencies will be required to expand their role in charting the future direction of American foreign trade, in cutting deals with foreign government, and managing the flow of goods and services across international borders.

And if BusinessWeek ‘s program is adopted, the federal socialization of education would be expanded: “The government should address the glaring weakness in science and math in primary and secondary schools. It should subsidize the education of more engineers and scientists.” The government will “plan” the supply of engineers and scientists through educational grants and student loans. And the federal government will have to take an even greater direct role in making sure that Johnny can do math in every school in the country.

“The new growth agenda will not come cheap,” BusinessWeek admits. “Done right, the cost could add up to billions of dollars.” But the magazine concludes with the confidence that “[ilt’s the best investment America can make.”

BusinessWeek is correct when it says that, if implemented, its agenda would not come cheaply. The money would have to come from higher taxes or increased governmental borrowing. And the resulting deficit-spending would put more pressure on the Federal Reserve System to expand the money supply in an attempt to prevent interest rates from rising as a consequence of the increased governmental demand in the financial markets. That would, of course, constitute more inflation.

But the cost would not only be measured in dollars. It also would cost Americans a lot more of their economic freedom. The production and pricing of goods and services would come even more under the direct or indirect control of the state. ‘Me arena of unregulated “individual achievement,” praised by BusinessWeek, would be narrowed. Market relationships would be politicized and corrupted even more than they already are as a result of governmental intervention. And more and more businesses would see their potential profitability in the halls of political power, and less from the peaceful, efficient productivity of market transactions.

As a consequence, and contrary to BusinessWeek ‘s optimistic conclusion, a national industrial policy would be the worst “investment” America could make.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).