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At some point in the mid-80s, a group of us working on U.S.-Japan trade issues met with a MITI group.to discuss industrial policy. When the talks concluded, the head of their delegation summed up: “We have an industrial policy and won’t admit it; you have an industrial policy and don’t know it.”

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Sorry if this ends up being redundant to an informed audience. My hypothesis is that this has to do with the role of the petro-dollar. USD being the reserve currency, in that Saudi Arabia (up to recently) only sold oil in Dollars and the Seas were patrolled by the US Navy (see Jim Norman’s Oil Card). As a result all industrialized nations require oil for commerce and transportation. In order to purchase oil, a country requires a supply of Dollars, meaning a country needs to be able to import goods into the United States to find its supply. When traveling abroad I have noticed that domestic European goods cost more in Europe than they did in the USA. This was in the 1990’s.

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I guess the joke is on us... in that the representatives don’t know how the system really works...

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Jan 8, 2023·edited Jan 8, 2023

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Historically, industrial policy has worked out pretty well over the last few hundred years. It helps to have the whole package - research, startups, subsidies, universities, tariffs. It's not something one can do piecemeal.

The government doesn't have to pick the winners and losers. That's a job for the market. It doesn't matter if Tesla or Fisker wins or goes broke, as long as the technology is adopted and becomes a national asset. In ten years, if Tesla goes under, we will still have GM and Ford producing EVs, a network of charging infrastructure and a new generation of automotive engineers.

Ideally, the goal is to have the manufacturing done locally, but there is a lot of value to having the technology in and of itself. It means that others are going to flock to your universities. It means that others are going to buy from your companies and back your startups. If nothing else, anyone who wants the latest and best is going to have to deal with one of your institutions.

Other nations will definitely benefit from locally produced technologies. It's impossible to stop that, but it is possible to encourage and protect local competitors. Remember, this works two ways. It is quite possible to benefit from technologies developed elsewhere if one has the capacity to use them.

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Regarding, Slouching, I loved it. I discovered it in a book review from Foreign Affairs and felt that this is one I needed to read. I never thought about thinking of the long 20th century economic history through the lens of an Hegelian dialogue between Hayek and Polanyi, and then, Marx for the latter half of the century – free markets vs real-existing socialism. I find that the talents possessed by successful participants in the liberal market is that of arbitrage, efficiency, and adaptability. With these it can overcome any challenge it faces. Innovation, engineering, and resourcefulness is the engine that powers it to new markets. But as the above draft indicates what the liberal market lacks in far-sight, it counters with adaptability. The early portion of the long 20th century brought the Great Depression in which it could not overcome by finding new markets or expand existing ones. Karl Marx would have predicted a bourgeoise revolution. But Hayekian craftiness countered with Keynesian government sponsored social programs along with a new monetary policy, thus embarking it on a slow march to socialism that Marx did not foresee. But to the point as the draft indicates, government spending and action created new opportunities via R&D and invention (and other abilities not rewarded by the liberal market), beginning with Bell Lab’s transistor.

The Transistor - 1947 | History of Computer Communications

For certain, the US government will use public resources to defend and protect US and Allies’ public interests. But the accompanying distortions to the free market have come to the point in which the average American has become frustrated in his/her inability to understand the system. In our era we are now witnessing the transformation of the Republican Party, as lamented by many analysts. First it was the Tea Party. Now it is the Freedom Caucus. Grade school and secondary education needs a rewrite in the topics of politics and economics. The real economy and the real world do not work the way it was taught in school.

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It is interesting to do a retrospective review on paths not taken, and look at the predictions that were made to support that path.

First, we need to attach some humility about technological predictions. There was a time when because of the cost of mainframe computers, it was predicted that only large firms which could buy and use them would dominate their respective industries. Then came first the mini-computer, and then the desktop computer.

The same prediction for supercomputers and the arms race to subsidize development lest Japan dominate.

Second, we need to recognize that firms are multinational, not necessarily national, and that support in one place can be used to support jobs in another. So, we had a program in the '80s to support the US chip industry. We created a consortium called Semantech...which later included Korean firms as well as US chip manufacturers.

Third, we subsidize R&D at US universities. But, the results of the R&D are licensed to foreign firms as well as US firms, with no consideration given as to whether the firm will manufacture in the US or elsewhere. And, US universities are very poor at measuring the value of their licenses or getting follow on value follow on improvements.

Meanwhile, US college tuition, which also subsidizes research and development, indiectly supports local and multinational businesses. Again, university licensing seldom recaptures the value, and rarely uses the licensing revenue to reduce tuition.

Finally, it might be interesting to look at how countries use industrial policy to protect their own industry. It might be that the only beneficiary is the owner of that enterprise. Think US Steel. Have we seen innovation in markets where firms are protected not only from competition, but also from the innovation of others.

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One other example to add to the list. In the late 70's there was an almost enacted plan to support the shale oil mining industry. The US government would backstop domestic firms which would dig up green shale to mine it to make into shale oil to make American Energy Independent. The project would have also use tremendous amounts of water in areas now suffering drought. Missed a bullet. Innovation later with fracking would solve the problem, but that was not predicted at the time.

On retrospective reviews of technological predictions, I was planning to interview former Chief Economists at the FTC and the Assistant Economic advisors at the Antitrust Division on what technological predictions as to future competition and competitive paths turned out the way they would have predicted.

One interesting prediction involved ATT litigation and IBM antitrust litigation. ATT was prohibited from a 1956 consent decree from entering adjoining industries. With the ATT divestitutures, some thought that ATT would enter the computer industry...afterall, it is just 1's and 0's...and ATT was a potential competitor that could challenge IBM, whose monopolization was had been dismissed. Sure enough, after the ATT consent decree was lifted, ATT acquired NCR which was also in the computer space, and ran it into the ground. Fortunately, deregulation and the ATT consent decree and the rise of competitors in communications led us to where we are today, and also explains why Japan's dominant firm, Nippon NTT, stifled the development of its communications industry. We missed a bullet and Japan took one.

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To make it clear: The ATT settlement and vertical divestiture also terminated the 1956 ATT consent decree, enabling ATT to enter into other businesses. Vertical divestiture enabled unhampered cellular competition and created competition among the Baby Bells.

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Schultze's not picking the companies - at least at the startup stage - seems like an important point. Obama's investment program funded both Tesla and Fisker. Would we have chosen Tesla if we could have picked just one? Would we have kept throwing good money after bad had we chosen Fisker? It's only one example, but I think this is hard. (Not that Teslas are the goal. Usefully contributing companies at the technology margins of interest are what we should be aiming for.)

Maybe supporting R&D or strategic production at existing companies is a different problem. But can you do this at scale if you're not all-in on tariff walls? The latter create big issues, and we need to get more than hugely inefficient solutions to yesterday's problems in return.

And an industrial policy almost presumes a flexible labor market. Hamilton's factories would not have hummed without immigrants, without the "reserve army."

Not against an industrial policy. But worried.

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