Definition
Industrial Policy refers to government efforts to “pick winners” by subsidizing specific businesses, industries, or technologies deemed strategic for the national interest. Historical evidence (The “Boulevard of Broken Dreams”) suggests these efforts frequently lead to capital destruction rather than innovation.
Why It Matters
When governments try to “play venture capitalist” with taxpayer money, they often end up subsidizing the past rather than inventing the future. Understanding these failures is critical for protecting a nation’s wealth from being drained by political vanity projects and ensuring that resources flow to the most innovative and efficient uses—not just the most politically connected ones.
Core Concepts
- The Knowledge Problem in Planning: Politicians and bureaucrats lack the local, tacit knowledge of entrepreneurs and the real-time feedback of market prices. They cannot “know” the future of technology better than the sum of all market participants.
- Picking Losers: “Governments are bad at picking winners, but losers are good at picking governments.” Subsidies often flow to stagnant, politically-connected firms (“Zombie companies”) rather than lean innovators.
- Welfare Entrepreneurs: Individuals who specialize in filling out grant applications and using political buzzwords rather than creating products for consumers.
- Incentive Distortion: Subsidies encourage firms to expand even when it is irrational (capital destruction) because they are paid to grow, not to be productive.