Should Government ‘Pick Winners’? It’s Worked Before

(Bloomberg Opinion) -- On both sides of the political aisle, U.S. leaders are becoming more interested in industrial policy -- government efforts to promote the growth of certain sectors of the economy. The idea has figured prominently in Senator Elizabeth Warren’s policy proposals, blueprints for a Green New Deal and conferences on the future of conservatism. Even the International Monetary Fund, long a bastion of economic orthodoxy, recently put out a paper entitled “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy.”

This is good. But because the idea was relegated for decades to the margins of economic thinking, debates about industrial policy can still degenerate into declarations that government “can’t pick winners,” or vague references to the success of East Asian economies. To help foster a more productive conversation, here are some books and papers to get people thinking about industrial policy.

No. 1. “Concrete Economics: The Hamilton Approach to Economic Growth and Policy,” by Stephen S. Cohen and Brad DeLong.

This short, readable book is less about how to do industrial policy, and more about why to do it. Giving a variety of examples from U.S. history, Cohen and DeLong argue that supporting specific sectors and making specific promises is essential to gaining popular legitimacy and support for an economic policy program. People can only get behind a plan, they argue, if they have some concrete idea of how it’s going to improve their lives. Simply leaving economic development to the whims of the market, they say, will merely result in a bloated financial sector and popular disillusionment.

No. 2. “Industrial Policy for the Twenty-First Century,” by Dani Rodrik

In this paper, Rodrik, a Harvard University economist, offers a theory of why industrial policy works as a development strategy for poor countries. Instead of picking winning industries, Rodrik argues, successful countries subsidize exports, in order to figure out what they’re good at making. World markets act as a discovery tool, rewarding successful industries and punishing unproductive ones, and helping each country find its most efficient place in the global trading system.

No. 3. “How Asia Works,” by Joe Studwell

If you want to read about the recent history of successful industrial policies, this is the place to start. Drawing on a variety of sources, Studwell presents a unified vision of an East Asian development model that made Japan, South Korea and Taiwan rich, and is now helping to propel China’s economy. Some elements of the model -- for example, redistributing farmland from landlords to tenant farmers -- are only applicable to poor countries. But Studwell’s idea of “export discipline” -- pushing companies to enter world markets and forcing the liquidation of those that fail -- could conceivably be used in rich countries as well.

No. 4. “The Park Chung Hee Era: The Transformation of South Korea,” edited by Byung-Kook Kim and Ezra Vogel

This collection of essays details the astonishing 16-year rule of South Korean military dictator Park Chung-hee, a period of time when real per capita income almost quadrupled. Though Park was a repressive tyrant, his economic policies brought the country out of poverty faster than any in history. Park’s approach, which included hefty amounts of state planning, large government-supported conglomerates, targeting of strategic industries and export promotion, is perhaps the purest example of modern industrial policy at work.

No. 5. “Can Japan Compete?”, by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara

Written in 2000, this book offers a cautionary tale of how industrial policy can go awry, especially in developed countries. Business professors Porter, Takeuchi and Sakakibara show how Japan’s fabled Ministry of International Trade and Industry, which famously helped propel the country to the forefront of industries like auto manufacturing and machine tools, faltered in the 1980s and 1990s. In newer industries like electronics, old approaches failed, Japan lost competitiveness, and MITI’s reputation soured.

No. 6. “The Entrepreneurial State: Debunking Public vs. Private Sector Myths,” by Mariana Mazzucato

In this forceful book, which has been influential in the U.K., economist Mazzucato argues that most major technological breakthroughs have a significant amount of state backing. She shows that private companies such as Apple, though venerated for their innovation, actually harvest the fruits of a far-reaching process of government-supported research and development. Mazzucato argues that popular theories about the superiority of the private sector over government are misguided, and that only the public sector can bear the expense and shoulder the risk of big long-term projects.

No. 7. “Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream,” by Jonathan Gruber and Simon Johnson

Economists Gruber and Johnson don’t just theorize about the value of industrial policy -- they lay out a concrete plan. Drawing on the lessons of World War II and the Space Race, they propose a $100 billion annual increase in research and development spending in the U.S. Cognizant of the problem of economic activity concentrating in a handful of big-city technology hubs, they propose building large new research parks in economically languishing areas with lots of local talent and good quality of life. Each hub would focus on a promising area of scientific discovery, with the government putting in research funding and commercialization assistance, and extracting a return via public land ownership. It’s a bold plan, and a good one.

No. 8. “Our Towns: A 100,000-Mile Journey into the Heart of America,” by James and Deborah Fallows

Flying around the U.S. in a small airplane, the two veteran writers chronicle the stories of towns that have revived themselves after the triple shock of Rust Belt decline, Chinese competition and the Great Recession. By observing the common elements, they try to extract general lessons about the kinds of local industrial policies that cities can adopt to revive themselves. The prescriptions include a revitalized downtown, strong technical education, focus on a specific industry or set of industries, and -- most importantly -- close cooperation between local government, businesses, universities and nonprofits.

This reading list provides an introduction to the best modern thinking on the topic of industrial policy, but there is plenty more to read. Although the topic is understudied, there are a number of economics papers that examine individual cases of the success or failure of industrial policy, or offer theories about how it can work. There are also a number of other authors writing popular books in the area. But this reading list should provide a launching pad for anyone interested in this important and suddenly popular topic.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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