On Defining “Industrial Policy”

by on September 3, 2020 · 0 comments

In his debut essay for the new Agglomerations blog, my former colleague Caleb Watney, now Director of Innovation Policy for the Progressive Policy Institute, seeks to better define a few important terms, including: technology policy, innovation policy, and industrial policy. In the end, however, he decides to basically dispense with the term “industry policy” because, when it comes to defining these terms, “it is useful to have a limiting principle and it’s unclear what the limiting principle is for industrial policy.”

I sympathize. Debates about industrial policy are frustrating and unproductive when people cannot even agree to the parameters of sensible discussion. But I don’t think we need to dispense with the term altogether. We just need to define it somewhat more narrowly to make sure it remains useful.

First, let’s consider how this exact same issue played out three decades ago. In the 1980s, many articles and books featured raging debates about the proper scope of industrial policy. I spent my early years as a policy analyst devouring all these books and essays because I originally wanted to be a trade policy analyst. And in the late 1980s and early 1990s, you could not be a trade policy analyst without confronting industrial policy arguments.

This was the era of what some called “Japan, Inc.” and Japan-bashing. South Korea and Taiwan were also part of that discussion, but the primary focus was “the Japan Model” and whether it represented the optimal industrial policy for the modern economy. That “Japan Model” sounds much like what is heard today when pundits reference China and its industrial policy model: Generous (and highly targeted) R&D investments, government-led public-private consortia, industrial trade policies (a combination of export assistance plus restrictions on imports and foreign investment), and other forms of targeted government support for specific sectors or technological developments.

In the 1980s Japan’s economy started expanding rapidly and many Japanese multinationals began making major investments in US businesses and properties. The Japanese government played an active role in facilitating much of this. Suddenly, lots of people in the US were debating the wisdom of America falling in line and adopting its own industrial policy to counter Japan. Panic was in the air in academic and legislative circles. Lawmakers were literally smashing Japanese electronics with sledgehammers on the stairs of the US Capitol. Meanwhile, pundits were publishing a steady steam of pessimistic books with titles asking, Can America Compete?, while others suggested that the US was Trading Places with Japan.

THE COMING WAR WITH JAPAN | Kirkus Reviews

Japan-loathing probably reached its apex around 1991 or ’92 with the publication of the non-fiction book, The Coming War with Japan, and then Michael Crichton’s fictional book (and then adapted movie), Rising Sun.  Japan’s new economic model was going to steamroll US innovators and allow them to dominate the global economy for decades to come.

Three decades later, we know how all this played out. The US never went to war again with Japan. We just kept trading peacefully with them, thankfully. Meanwhile, the “Japan, Inc.” industrial policy model didn’t quite pan out the way they hoped (or that US pundits feared). In a 2007 report, Marcus Noland of the Peterson Institute for International Economics summarized Japan’s industrial policy results in bleak terms:

Japan faces significant challenges in encouraging innovation and entrepreneurship. Attempts to formally model past industrial policy interventions uniformly uncover little, if any, positive impact on productivity, growth, or welfare. The evidence indicates that most resource flows went to large, politically influential “backward” sectors, suggesting that political economy considerations may be central to the apparent ineffectiveness of Japanese industrial policy.

But I don’t want to get diverted into the specifics of why Japan’s industrial policy didn’t work. Rather, I just want to make the simple point that Japan definitely had an industrial policy that we can still evaluate today. We should not abandon all use of the term industrial policy because, once defined in a more focused fashion, it remains a useful concept worthy of serious academic study and deliberation.

Jump back to the mid-80s and flip through the individual contributions to this AEI book on The Politics of Industrial Policy. It features hot debates over the exact issue we’ve still trying to figure out today. Essays by Aaron Wildavsky, Thomas McCraw, and James Fallows generally argued for a broad conception of what industrial policy should include. Others such as economist Herbert Stein insisted upon a much narrower reading of the term.

Into that debate stepped economic historian Ellis W. Hawley with a wonderful essay on industrial policy efforts in the pre-New Deal era. Hawley began his essay with what I still regard as the best understanding of what “industry policy” really means in practice. Here is Hawley’s definition:

By industrial policy I mean a national policy aimed at developing or retrenching selected industries to achieve national economic goals. In this usage, I follow those who distinguish such a policy, both from policies aimed at making the macroeconomic environment more conducive to industrial development in general and from the totality of microeconomic interventions aimed at particular industries. To have an industrial policy, a nation must not only be intervening at the microeconomic level but also have a planning and coordinating mechanism through which the intervention is rationally related to national goals, a general pattern of microeconomic targets is decided upon, and particular industrial programs are worked out and implemented.

I think Hawley’s conception of industrial policy gets it just right. Crucially, he clearly distinguished industrial policy from “policy” more generally. And he also specifies the requirement that “a planning and coordinating mechanism” is necessary and that targets are established.

This is why I always thought it would have been better had we long ago agreed to use the term “industrial planning” as opposed to “industrial policy.” Alas, that was never the case, nonetheless targeted and directed efforts to plan for specific future industrial outputs and outcomes is at the heart of a proper understanding of industrial policy. These are the limiting principles that allow us to continue to use the term in a rational way.

Returning to Caleb Watney’s essay then, I would suggest that he is abandoning the term industrial policy much too quickly. Moreover, he is simply shifting this controversy over to concepts like “tech policy” and “innovation policy.” Even if we sunset the use of industrial policy in policy discussions, we’ll still encounter the exact same definitional debates whenever those other terms become the new catchphrases.

I also disagree with how Caleb plots these terms on a Venn diagram. He has almost everything touched in some way by “industrial policy,” including what he thinks of as “innovation policy,” which is just one of many bubbles inside the bigger one.

I want to suggest the opposite framing: A more narrowly-defined conception of industrial policy actually fits inside a larger “innovation policy” bubble. Innovation Policy then incorporates many of those other things that some people put in the industrial policy bucket. But even then, I’m not sure I would not include things like climate policy or pandemic policy as being inside that definition on a Venn diagram as I would other things, like trade policy and especially intellectual property policy.

Regardless of how we plot these things on Venn diagrams, I believe it is crucial that we adopt a far narrower understanding of industrial policy. If we cannot define it in such a fashion, then Caleb is right: the term really should be discarded altogether. But the problem is, it just won’t go away. Pundits and politicians will continue to use it regularly and, generally speaking, they will probably use it more along the lines of how I have defined it here. If we are going to have any sensible discussion about these things, we need to agree to a narrow reading of the term and stick with it. But I thank Caleb for expanding the discussion in a thought-provoking way. I encourage you to read his essay and continue the debate.

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