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- Am I a Marxist?
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There I am getting the best massage of my life in a beautiful Thai style spa at my hotel in Anguilla (Caribbean) that for some reason also has a Turkish hammam. It’s many cultures coming together and then a question pops into my head:
“Am I a Marxist?”
This is a disturbing thought for a dedicated capitalist such as myself and wholly inappropriate given my surroundings. No one cares about your base and superstructure in the Islands over the New Year’s holiday. Why am I thinking about it?
I have a newsletter because I ask these kinds of questions at inappropriate times. It’s therapeutic.
Is Industrial Policy Warmed Over Marxism?
It’s important to question your beliefs from time to time and this was one of those moments for me. I’ve been preaching the need for the US to re-order the international trading system and to support selective industrial policy at home.
Of course this is blatant government intervention in the market. There are many risks in doing this. Government can be easily corrupted by rent seeking actors who want undeserved hands outs and other benefits. It can also distort what would be sensible decisions by the private sector. For example, if concentrating manufacturing for national security production makes the most sense, companies might incur more costs to distribute that investment across many states to curry favor with Congress.
We can just look at our medical system which is awash in government involvement. It’s clearly inefficient. We can also become France endlessly propping up failing national champions like Intel in semis or the various traditional American car companies. That keeps resources that could be better used elsewhere spinning their wheels at corporations with sick and terminal cultures. For example, if we pump money into saving Intels will we get fewer NVDIAs as a result?
Industrial policy is just another word for the state directing how resources are used and so it is Marxism in a sense. However, we’re not talking about eliminating the entire private sector here; just supporting a few key sectors, so I call it warmed over Marxism.
Many of my allies will claim that we can put protections and checks in place to prevent all the bad outcomes I listed above. In my view this is impossible. There is no perfect government program or bureaucrat that can resist all these temptations and navigate all these hazards. Given enough resources and time, things will inevitably go awry.
The Myth of the Enlightened Regulator
Much of this comes down to incentives. The free market system is full of inefficiency and wasted capital but it has strong correction mechanisms. If you do too much stupid stuff, you go out of business. The pricing signal does heavy work in a capitalist system telling capitalists where there is strong or weak demand. With a profit motivation, capitalists that thrive shift resources to fulfill the demands of the market as indicated by prices.
In a truly Marxist system it isn’t really clear who is allocating resources. Let’s go with the Leninist idea that an enlightened socialist vanguard will bureaucratically allocate resources. This is the myth of the enlightened regulator.
On the surface it makes sense that someone or some group of people can look over the whole system and figure out who needs what. In reality this is impossible. First, no one can gather all the data needed to make decisions in one place (even with AI).
Second, if you concentrate decision making in one place, that opens up pressure points that change the incentives of the decision maker. Regulators aren’t disciplined by profits so they are much more open to pressure from a Senator or an interest group offering a job or from an op ed in a paper that the regulators and their friends read, etc.
The most thoughtful of regulators will eventually be corrupted, blinded, or otherwise led astray. Oversight can help with some abuses but it too is fraught. What’s the motivation of the overseer? Some are motivated to see projects fail and others want to re-channel resources to their favored groups or projects.
To try to deal with some of these issues, the trend recently has been for Congress to over-specify programs. When you read that x program hasn’t allocated any dollars after y amount of time, it’s usually because there was a long process that the Administration had to go through to comply with the specifications in the law. This is on top of the already existing procurement and regulatory processes. There’s always a trade off between speed, efficiency, fraud prevention, and specificity of outcomes.
Why Not Go Libertarian?
After reading all that you’d think I’d forsake any industrial policy. If we are doomed to fail, why even try? I can think of a variety of reasons that persuade me to stick with my beliefs about industrial policy. It’s a tool. It isn’t perfect but in some cases it’s better than the alternative. Here are four use cases I think are legitimate:
If You Can’t Beat Them, Join Them: As a mostly open economy, the US can’t completely avoid industrial policy. If we don’t adopt our own, we are forced to adopt the policies of other countries. Our textile, solar, steel, aluminum, battery, auto and many other industries have been decimated by Chinese overcapacity.
Chinese overcapacity is enabled by Beijing’s policy rather than one made here. To modify Pericles’s quote about politics: Just because you’re not interested in industrial policy, doesn’t mean that industrial policy isn’t interested in you. In the case of blatant market manipulation, we need to respond or we will be swamped.
Market Failures: I’m generally suspicious of claims of market failure. Often it’s just an excuse for saying, “People won’t pay for the things I want.” But I do think it applies to industrial policy. Some investments like fundamental research create externalities as economists call them.
When an externality is positive, it means that someone else gets more or even all of the value from something you paid for. That tends to leave a bitter taste in your mouth. That’s a great place for government to intervene. It pays for positive externalities in fundamental research that benefit multiple players in society.
There are also public goods that everyone benefits from like roads and the internet. It can be hard to draw a line where public goods end and private goods should begin. However, I believe the US approach to public goods has created vast wealth and further innovation.
National Security/Production Capacity: It’s become increasingly clear that if an economy like China’s becomes large enough and focuses on subsidizing key sectors enough, that it can effectively deindustrialize its fellow nations. When this happens with textiles, you have a hard time justifying protecting that industry but what about cars? What about shipping? What about aircraft? What about semiconductors? Etc.
I find it hard to claim that a country that cannot manufacture industrial goods at scale can compete in large scale conflicts. The US won World War 2 because we had an industrial base that could mass produce aircraft, cars, and other real goods. Of course, we counted on advanced technology ever since to offset our lack of military production. We had nuclear weapons, then computers, then GPS, stealth, etc. That allowed us to allocate more of our economy to consumer goods while remaining secure.
I wouldn’t argue that the US needs to match Chinese industrial capacity to win. We can still use offsets like AI but China has proved adept at keeping pace and if we don’t hold some core sectors domestically, all the AI in the world can’t defeat actual hardware that blows things up when you’ve run out.
Hardware Innovation: In a related point, it’s hard to maintain an innovation lead in producing something that you have no experience producing it. You need to actually make stuff. In the US we’ve gotten good at things like semiconductor chip design but we can’t manufacture a cutting edge chip to save our lives (at least not now). We need to get our hands dirty in actual manufacturing to keep innovation going.
It is fraught to know where to draw the line between textiles that we don’t need and semiconductor manufacturing that we do need domestically. But lots of things are difficult in this world and we need to accept that we will get it wrong a lot of time.
What I’m calling for is an imperfect strategy. Political actors will exploit industrial policies to protect non-strategic goals. Just look at Biden’s order to block Nippon Steel’s acquisition of US steel. Nippon pledged to keep production in the US and the purchase was by a US ally. This doesn’t constitute a national security threat but rather union protectionism.
As we continue to re-shore manufacturing and support it through a variety of policies these kinds of examples will proliferate. In the end, I’ll be writing columns about the need to end these policies in 5-10 years. In the meantime, we need to focus on getting as much of what truly matters done. Real strategic domestic capability will come along with the waste and protectionism and that is essential.
Keep learning,
Alan
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