If Picking Winners Were Easy, ...
Can the public sector deliver growth if we have more active management?
Capital Thinking · Issue #826 · View online
Industrial Policy
Can the public sector deliver growth if we have more active management?
Allison Schrager | Known Unknowns:
More than 10 years ago, when I was at The Economist, a famous investor/philanthropist came to lunch. The world was still reeling from the financial crisis, and he remarked that he thought this proved that the Chinese had a better model.
He argued the government’s heavy hand in markets meant that its citizens didn’t have to suffer the downturns that we did. (I should note that he was only making an economic argument—he was not defending their behavior on human rights.)
I summoned all of my neoclassical training and argued that their growth came from opening themselves up to the global economy and adopting existing technology that ultimately had made their labor force (and they had quite a large labor force) more productive.
But the jury is still out regarding whether their model can produce new innovation, which is the only way that rich countries can lead and grow. And you can’t have growth without risk.
The cost of the creativity and innovation that make the world better is sometimes in the form of recessions, financial crises, or innovations that aren’t great or else aren’t used property. But he didn’t buy it.
I was reminded about this conversation while watching Biden’s address about his new infrastructure plan. He spoke a lot about China, and how this massive infrastructure push/buy American policy was necessary in order to compete with them.
Now, while I think a little nationalism can be good for morale, his view on the global economy as zero sum was disturbing.
Normally I wouldn’t be too concerned, because this is how politicians talk, and we might need some nationalism to bring the country together. But the contents and philosophy behind this plan disturbs me, because there are shades of Chinese industrial policy embedded in it.
Obviously we’re not fully embracing their model—not even close. But there’s certainly an enthusiasm for their brand of industrial policy, as well as a belief that we need more of it in order to compete with them. And it’s not just Democrats.
Industrial policy has become all the rage lately on the right, too. But there’s no getting around the fact that innovation is messy.
Some people lose their jobs or businesses, and sometimes the biggest gains go to people who we don’t like. Sometimes we make bad investments, and sometimes the innovations that change the world happen by accident or aren’t what we expected.
It’s tempting to think that it will be less messy if the government manages this process. And maybe it will, but that comes at a cost, because less risk means less growth.
Innovation is hard, and it’s risky by nature. And it seems that we’ve adopted a mindset that if the government is the primary innovator, then the risk goes away.But that’s not true.
The risk just goes somewhere else, and the difference is that the people making the risky choices don’t bear the cost. And that’s important to note.
Facing downside risk from an investment gone wrong is both how we make good choices and also how innovation thrives. Accurate prices are what allow innovators to test the market and see what works, and then move quickly in response.
Of course, there are examples of successful government-sponsored innovation, either through direct investment or through subsidies, like Operation Warp Speed or space travel.
But obvious good investments are unusual. If picking winners were easy, no one would ever lose money.
Allison Schrager
Photo credit: Chris Liverani on Unsplash