We zero in on the distinction between general versus targeted economic development efforts and argue that:

whether we are referring to federal, state, or local planning efforts—the more highly tar­geted development efforts typically involve many tradeoffs that are often not taken into consider­ation by industrial policy advocates. Downsides include government steering of public resources into unproductive endeavors, as well as more serious problems, such as cronyism and even corruption.

We also stress the need to more tightly define the term “industrial policy” to ensure rational evaluation is even possible. We argue that, “industrial policy has intentionality and directionality, which distinguishes it from science policy, innovation policy, and economic policy more generally.” We like the focus definition used by economist Nathaniel Lane, who defines industrial policy as “intentional political action meant to shift the industrial structure of an economy.”

Our report examines the so-called “Japan model” of industrial policy that was all the rage in intellectual circles a generation ago and then compares it to the Chinese and European industrial policy efforts of today, which many pundits claim that the US needs to mimic. We find problems with those models and argue that:

America’s goal should not be to “imitate China” or “copy its playbook” when it comes to targeted industrial policy and technological governance of AI and other high-tech sectors. Europe’s approach, although not as heavy-handed, is also not a good model. Not only would the Chinese and European approaches potentially undermine the permissionless innovation ethos that made America’s tech companies become global powerhouses, but expanded industrial policy efforts would entail massive state bets on risky ventures using taxpayer resources.

We discuss the public choice dynamics surrounding many industrial development efforts and note that, “what is often described as “industrial policy” is in reality nothing more than industrial politics.” We highlight how many of the largest industrial policy programs have been prone to highly inefficient contracting procedures and massive cost overruns. Sometimes outright corruption even becomes a problem with some of the largest programs. But that’s not the only cost. Sometimes, in their effort to promote specific industrial outputs or outcomes, government undermines the very innovation they hope to spur.

When governments repress the entrepreneurial spirit of their most innovative creators and companies, this is bound to have negative ramifications for long-term competitiveness and economic growth. Heavy-handed industrial policy schemes can contribute to this sort of repression as the state gains more levers of control over private companies.

We note how that has certainly been the case in the European Union, where “countries have adopted a highly precautionary regulatory model for new digital sectors that shuns risk-taking and focuses on maximizing other values at the expense of disruptive change. This approach has resulted in fewer national champions, and it has cost Europe in terms of global competitive advantage,” we note. We also highlight the long string of failed European industrial policy programs.

Ours is not a doctrinaire analysis; we take a pragmatic approach to the evaluation of industrial policy programs and proposals. Some of them may succeed based simply on the reality that “if government officials roll the proverbial industrial policy dice enough times, some bets are bound to pay off, at least indirectly.” But any serious analysis of these efforts, we argue, must fully weigh the trade-offs associated with the potential tax and compliance burdens associated with funding them to begin with.

But we admit that, “industrial policy will always be with us to some extent, given the sheer size of government and the many existing programs already devoted to economic development or high-tech initiatives.” Toward that end, we wrap up the paper with a variety of high-level recommendations about industrial policy. We highlight how:

The priority should be generalized economic development over targeted development efforts. The most important thing that policymakers can do to boost economic opportunities is to create a legal and regulatory environment that is conducive to entrepreneurship, investment, innovation, and free trade.  [. . . ] government should focus on setting the table for entrepreneurial activity instead of trying to determine everything on the plate. To put this differently, policymakers need to avoid the “fun stuff” and focus on “boring” issues that often get neglected.

We apply these insights to the ongoing debate over regional economic development and the specific effort currently underway at the federal level to encourage “regional innovation hubs,” as federal and state lawmakers look to create “the next Silicon Valley” elsewhere.

In terms of our nation’s overall investment in R&D, we note that “[t]he United States has the most vibrant venture capital (VC) market in the world, and this market helps support risky ventures without gambling with taxpayer dollars.” While some bemoan the fact that private enterprise provides the bulk of R&D expenditures in the US – and that amount is increasing relative to governmental sources – this is actually something that should be celebrated. The strength of private-funded R&D helps set the US apart and make investment markets nimbler and more responsive to real-world needs. Moreover, global unicorn growth in the US continues at a healthy clip. From 2010 to mid-2021, the US created 53 percent of global unicorns, compared with 20 percent for China. These facts are often overlook in industrial policy debates.

While our paper is comprehensive, admittedly, there are some things we leave out of the analysis or do not spend as much time discussing. For example, there is a never-ending debate about the relationship between national security and industrial policy that raises many hard questions. A nation needs military hardware to defend itself, and almost every program to provide weapons and military equipment in the US involve private contracting to get them. These are the biggest industrial policy programs at all, but we don’t spend a lot of time focus on them in our paper because that would have taken us far afield.

We have a short section on these issues that notes how “defense-related programs have also been prone to highly inefficient contracting procedures and massive cost overruns.” Many of these programs remain vital, however, and must find a way to make them more efficient and cost-effective. But there are still other issues related to national security and industrial policy that raise hard questions, including: export or import controls, trade restrictions, and more. These continue to be challenging issues and I personally hope to revisit some of them in upcoming essays.

With Congress still trying to finalize its mega industrial policy bill, our paper is relevant to the short-term debate over these issues. But our hope is that this paper offers a big-picture, long-term framework for thinking through the challenges associated with industrial policy issues both here and abroad.

Here is the outline of the paper and, again, you can find it at this link. (The report can also be found on SSRN & Research Gate).

1. Introduction: Definitional Challenges 5
2. Calls for Expanding Industrial Policy to Boost High-Tech Innovation 8
3. Some (Quickly Forgotten) Recent History 11
4. The Romantic View of Industrial Policy vs. Reality 15
5. The Challenge of Creating “National Champions”: Europe’s Failures 20
6. Adverse Effects of State-Led Promotion: The China Model Examined 23
7. Where Does Real Competitive Advantage Come From? 27
8. Industrial Policy Did Not Give Us the Internet and the iPhone 33
9. Evaluating Other Industrial Policy Efforts 39
10. Using Competitions and Prizes to Encourage Innovation More Efficiently 46
11. Conclusion: Generality Is Better Than Targeting

Additional Reading:

• Adam Thierer, “Industrial Policy Advocates Should Learn from Don Lavoie,” Discourse, November 5, 2021.
• Adam Thierer, “Government Planning and Spending Won’t Replicate Silicon Valley,” Discourse, August 18, 2021.
• Adam Thierer, “To Promote Tech Hubs Across the Country, Governments Should Focus on Improving the General Business Environment,” Discourse, September 9, 2021.
• Adam Thierer, “‘Japan Inc.’ and Other Tales of Industrial Policy Apocalypse,” Discourse, June 28, 2021.
• Adam Thierer, “Industrial Policy as ‘Casino Economics‘,” The Hill, July 12, 2021.
• Adam Thierer & Connor Haaland, “Should the U.S. Copy China’s Industrial Policy?” Discourse, March 11, 2021.
• Connor Haaland & Adam Thierer, “Can European-Style Industrial Policies Create Tech Supremacy?” Discourse, February 11, 2021.
• Matthew D. Mitchell and Adam Thierer, “Industrial Policy is a Very Old, New Idea,” Discourse, April 6, 2021.
• Adam Thierer, “On Defining ‘Industrial Policy,’” Technology Liberation Front, September 3, 2020.
• Adam Thierer, “Skeptical Takes on Expansive Industrial Policy Efforts,” Technology Liberation Front, ongoing series.

Economist Mariana Mazzucato has a full spread in the Wired UK humbling suggesting that she “has a plan to fix capitalism.” The plan is an outgrowth of her 2013 book The Entrepreneurial State , which contends that government involvement in research and development (R&D), loans, and other business subsidies are the true drivers of innovation, not the private sector. Her plan is simple: governments need to do better on funding innovation.  

It goes without saying that the government is massively involved in innovation and for good reason. Open any introductory economics text and you’re likely to see an argument for why. Private actors are short sighted and often fail to plan for the long term by investing in R&D that will lead to technological progress. Basic research also might lead to advances or products outside of the company’s niche. Knowing that they won’t be able to capture all of the gains from research, private entities will choose a lower level of investment than is optimal, leading to a market failure. Governments solve this market failure by allocating resources to expanding scientific and technological knowledge.    

While Mazzucato might be finding an audience with policy makers in the UK and doers in Silicon Valley, innovation economists are a little more wary of her state first theory of innovation. Here are some things worth considering when reading her work:

1. Innovation and invention are distinct concepts. Bringing a product to market (innovation) involves very different skill sets than ideation (invention). In the 1950s and 1960s, large companies were deeply involved in basic research, but today, businesses have shifted toward their competitive advantage, which lies in supply chain management, marketing, and customer acquisition. As I noted in 2014 of this change: “Increasingly, however, firms are becoming flexible assemblies, connecting skills, capacities, and funding from sources around the world. In this regard, US firms continue to dominate in business model and process innovation.”
2. A key chapter in this book dissected all of the patents that went into the iPhone. It is unclear if Mazzucato has a theory as to why Apple, not Nokia, RIM or Motorola, became the innovator in the smartphone space. All had access to the same government supported patents, but it was Apple that sparked the revolution. Apple practically commercialized an idea that had been out there for some time. 
3. Mazzucato’s work aims to bash the Great Man Theory of Innovation, which is needed, but puts in its place the Great State Theory of Innovation. As Artir explains in beautiful detail: “The State was one more actor, like IBM, Bell Labs, Sony, Goodenough, Brody, or Lechner.” 
4. Mazzucato chides companies for appropriating so much of the total value of government investment, but as William Nordhaus calculated, innovators only capture 2.2 percent of the total surplus . Consumers are the real beneficiaries.
5. Is Mazzucato sampling on the dependent variable ?     

There is a lot more out there if you want to read up. For starters, I would check out:

• Artir’s “ Mazzucato and the iPhone (II): The myth of the Entrepreneurial State ” 
• The National Research Council’s “ Funding a Revolution Government Support for Computing Research (1999) ”
• Alberto Mingardi’s “ A Critique of Mazzucato’s Entrepreneurial State ”
• Peter Klein’s “ Government Spending on “Innovation”: The True Cost Is Higher Than You Think ” 
• Stian Westlake’s “ Interrogating the entrepreneurial state ”

http://penny-arcade.com/comic/2008/9/26/

Speaking of snakes, I am just returned from a camping trip along the Appalachian trail in the Michaux Forest, quite out of wireless reception range. Several days’ heavy rain had washed the forest clean, left the moss glowing green and the mushrooms, salamanders, crayfish, and frogs quite content. There one combats the same problems confronted by earlier settlers–mice (and the snakes they attract), staying dry and tolerably warm, the production of decent meals, and keeping small children from wandering off into the woods. Why do some people enjoy briefly returning to this world? Despite being one of those people, I can’t say. Now I am back and my day is easy and comfortable (comparatively), with time to spare contemplating the meta-structures of finance, property, and capital. Let’s all hope these structures are not nearly as fragile as our confidence in them, which, judging from the tone of remarks at last week’s ITIF conference on innovation, has fallen quite low.

In particular, the dominant concern seemed to be involve U.S. competitiveness in the face of developments in India and China, low growth in jobs and real wages, and so on. One commentator described the last ten years of liberalized trade as an experiment in moving jobs overseas in the hope that consumers would reap considerable benefits, which he seemed to think had not come about. While every event needs a little pessimism, this particular low mood seemed to have spread to nearly everyone. (Intellectuals seem to be as susceptible to mass psychology effects as anyone else, if anything perhaps more so, because they live in their heads). I would not have been surprised if the attendees had spontaneously all broken into tears (oh, all right, I would have been).

ITIF’s policy proposals for the next administration suffered somewhat from being embedded in this glum context. Nonetheless, there are some good ideas there. In order of merit, the best ideas include:

1. Letting foreign grad students in the sciences and tech fields get green cards.

2. Let companies expense IT investments in the first year.

3. Significantly expand the R&D tax credit (overall tax reform and reductions would be preferable, but that isn’t happening, so this is a third best).

4. Establish a federal office of Information CIO. Not, I hope, to inform what goes on in the private sector, but to follow it, on the off chance that systems and records might be kept so that we might begin to understand how leviathan actually works (or doesn’t work), or even do something about improving it.

Next come ideas that I would count as worth pondering further, with the caveat that one might do more than good:

5. Reform the Patent System. What a can of worms that is…

6. Implement an Innovation-based National Trade Policy. ITIF seems to be supporting more aggressive WTO actions against nations that do not do such a good job of IP enforcement, for example. I think attention to this policy issue makes sense, but until the U.S. winds down agricultural subsidies and pressures Europe to do the same, we had better be wary of starting a more punitive trend. Better to focus on coming up with blueprints for better low-cost enforcement, carrots rather than sticks. Our own enforcement methods are rather archaic, at that.

And a few ideas that are not so good. However much I have benefited from Rob Atkinson’s sense over the years, I am skeptical that we should:

7. Create a national innovation foundation.

OR

8. Implement a national broadband policy by a) adding broadband to universal service coverage (even if reverse auctions are established) b) funding joint federal-state initiatives or c) initiate educational programs on how to use broadband. The idea of making more spectrum available, though, is good sense. (See, for example, a recent paper of mine at http://www.ipi.org/, “Should the U.S. Favor a Free Nationwide Wireless Network Provider.”

Overall, one ought not denigrate the contribution that innovation has made to the economy. But micro-tinkering with federal policy in support of innvation in the technical sense is less likely to yield real growth than a) figuring out how to address problems with the federal budget without increases in taxes b) looking to innovate public institutions so that they do not cause more problems than they solve c) avoiding disastrous commitments to entitlements and d) seeing the opportunity and promise in the growth of India and China (as speaker Kathleen Wallman alone pointed out). Otherwise we go the way of Europe, which has all the national plans, policies, and foundation conceivable, and where they are holding conferences at which speakers ponder why their own innovation is lagging behind that of the United States. Yes, tax rates do matter. And it is not, and never will be, a good thing for the United States to try to return to policies that leave more hungry children in Calcutta.