Wednesday, February 22, 2006

Industrial Policy

In and among other activities, I spent the weekend reading about industrial policy and strategic trade policy (the other major activity was understanding Krugman's very excellent 1981 article, "Intraindustry Specialization and the Gains from Trade"). What's really quite funny about reading these articles from the mid-1980s is how of the moment they are. Interest in strategic trade policy arose from the academic end because there happened to be some nice advances in academic modelling that let you think about market imperfections and international trade. While all that is well and good, an academic fashion does not a policy argument create. And the wide-spread interest in the policy implications of that research came about only because this was the 1980s and we all feared the spectre of Japan, and wondered how we would ever keep up with their marvelous economy, fueled by the genius of the MITI bureaucrats. The issue bubbled along into the first Clinton Administration, with Paul Krugman (a major player in the academic end of it) saying the theory had little practical significance and getting pissed off at Laura Tyson et al. And then....the second half of the 1990s came, and productivity took off in the US and it was apparent that Japan was stagnant. You don't hear much mention of strategic trade policy or industrial policy anymore, now do you?

And for good reason, I'd say. At least in the academic formulations, strategic trade theory is one of those odd theoretical curiosities that arise all the time in international trade, but which you'd be insane to base policy around (has any country tried to stop growth in the good they export in an industry in which they are dominant on the grounds of immiserizing growth? Don't think so.). It turns out that strategic trade policy in its pure form relies upon knowing precisely what the pay-offs of a game are, and also knowing which game your oponent is playing. For you have to subsidize your domestic oligopolist by enough to make them gain either greater market share than, or force out, a foreign competitor. And the simple confusion between the game being a prisonner's dilemma, or it being an oligopolist thing with either Bertrand or Cournot competition can cause you to subsidize by too much, or worse, too little (for then you gain nothing at all for your money).

Because the implicit world model that advocates of strategic trade policy have going for them is a very queer one. It seems odd to suppose that any one industry is so so beneficial to the country that the country must must have it (for, at best, that is what strategic trade theory will get you: one industry here or there). Any given industry is probably pretty dispensable. What matters a hell of a lot more is the agglomeration of businesses hanging around. Because that is where new jobs and ideas and growth will come from. Not any one industry, but the possibility of creating more. And that comes from all sorts of marvelous other government policies that, to list, would make me sound remarkably conservative. To advocate an industrial policy is to claim that we need to help businesses. And yet to do so by advocating creating all kinds of additional distortions is just odd.


Blogger Jason said...

You is a ho, Isaac

12:01 PM  

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