A commenter pointed me to this Dan Wang essay.
I think that technology ultimately progresses because of people and the deepening of the process knowledge they possess. I view the creation of new tools and IP as certifications that we’ve accumulated process knowledge. Instead of seeing tools and IP as the ultimate ends of technological progress, I’d like to view them as milestones in the training of better scientists, engineers, and technicians.
. . .The decline of industrial work makes it harder to accumulate process knowledge. If a state has lost most of its jobs for electrical engineers, civil engineers, or nuclear engineers, then fewer young people will enter into these fields. Technological development slows down, and it turns into a self-reinforcing cycle of decline.
I think that if you polled economists, you would find many who agree with all of the following.
1. Our manufacturing sector is definitely not too big.
2. Our financial sector is definitely not too small.
3. Industrial policy is a bad idea.
Odd that. Although I would be one of them.
The trouble is that 3 is not well defined.
For example, what if you polled those economists about (domestic) subsidy for R&D, education, and other human capital investments? Oh, well, that’s probably a “good idea”.
But part of Wang’s point is that all that stuff – perhaps the most important bits of it – goes on in industry, is part of the value of “going concerns” and conglomerations of sectoral expertise, in a way that is fragile and asymmetric: hard to build and preserve, but easy to lose. The future welfare of the nation depends on it, and most national governments have a keen appreciation for the reality of this issue.
Or another example could be asking those economists about the military. But again, the military is where a lot of high-risk R&D gets done with all kinds of unexpected incidental benefits downstream, and, in my judgment, is the nation’s number one creator of human capital from which the rest of the country’s employers benefit in a windfall manner without having to make additional investments.
I would would sense of the oddness by reframing number 3 like so:
3.a. There is some justifiable industrial policy, which, if handled by wise and good leaders, could greatly benefit the nation.
3.b. But there is a ton of just plain awful, destructive, or corrupt stuff that will abuse the existence of such a thing and pretend to go under the name of “industrial policy”, and will be completely harmful to our welfare and political equilibrium.
3.c. So, sometimes the bathwater is so toxic that you have to throw the baby out too, and it’s best not to open up that can of worms at all, to maintain a Chesterton’s Fence / Schelling Point buffer space between us and the devil’s temptations. Part of the problem is that we can’t even be honest about the difference between 3.a and 3.b, becuase even opening up to debate and trying to make judgment calls to determine whether proposals fit on this or that side of the line is destined to be corrupted by politics and doomed to failure. So better to maintain a noble lie that all industial policy is a bad idea.
The problem with this argument is that it doesn’t take the costs of throwing the baby out into account. When those costs are small, fine, but there are critical moments when that cost is extremely large or the risk of irreversible catastrophe is high, and the argument has no way to adjust its conclusion for those circumstances. In general, this is how bad ideas tend to outlast the context usefulness to deleterious effect, like Wile E. Coyote running off a cliff and not realizing until too late that he’s made a huge mistake.
Maybe the current tax code, Fed policy, and other regulations (like how 401Ks are structured) are de facto industrial policy favoring finance over manufacturing.
Likewise, having the dollar as the world’s reserve currency should favor finance whereas American-manufactured goods don’t have much natural advantage in being manufactured in America.
Interesting question:
Okay, how many economists still genuflect to the Phillip’s Curve?
John Cochrane, right-winger Chicago-Hoover, lately has been saying he doesn’t. He looks at 40 years of empirical observations, and says the Phillip’s Curve theory is not validated (almost the opposite, actually). The Phillip’s Curve makes a lot of sense to me. But I have to agree with Cochrane, in real life it just doesn’t work. The Fed still defaults to the Phillip’s Curve. So after 40 years of flopping, we see faith in the Phillip’s Curve is eroding, but it is still dominant.
Okay, think about it: There is no higher totem in the macroeconomic pantheon than “global free trade.”
The theory is strong. The cause right and just. It just has to work. Structural impediments and institutional frictions are rife but must be ignored—global free trade must work, and for Americans. There is not other point of view.
So, what empirical observations could be made in the next 10 years that could undermine US macroeconomists’ faith in “global free trade.” I submit no observations could shake the faith. No matter what happens in the next 10 years, there will faith in “global free trade.”
Here is a scenario not so far-fetched: Real living standards, or wages, double in the 10 years in mainland China, but stagnate in the US.
Of course, by some measures, this has happened in the last few decades anyway. By some measures, US wages have hardly budged since the 1970s, while rising rapidly in the Far East.
So, if China grows by 7% compounded annually for another 10 years, we could posit their wages or real living standards would double (their population is flat now).
But In the US wages are barely creeping up now. Another recession and we could see US wages about flat for another 10 years.
And another 10 years after that? No matter, US economists will genuflect to the “global free trade” totem regardless of empirical observations. See the Phillips Curve.
Add on: There is the mystery of development economics.
Nations develop, but almost never by embracing free trade. Throughout the Far East, there is heavy cooperation between government and “private” enterprise. Sheesh, Singapore is presented as an example of free markets, but even light research reveals Singapore is a state corporatist, crony capitalist nirvana. Singapore owns all the land (so what rents are charged?), provides capital to favored industries, charges a 7% sales tax on all imported goods and services, but not on exports. Singapore owns companies and owns investment pools. Singapore built an entire island to house a petrochemical industry. In Singapore, free markets and enterprise share the stage with powerful pro-business government.
But then, that is pretty much the story in the Far East. They are successful and they do not believe in in “global free trade.” Far East governments believe in manipulating and helping trade and commerce to benefit citizens (and probably elites).
So how many decades go by before we conclude the Far East model works better?
Singapore has a per capital GDP PPP 50% higher than that of the US.
Another curiosity: The US industries that can compete on the world stage are agriculture and aviation-armaments. Which is to say “federalized” industries that look something like Far East industries.
Actually, I think an industrial policy in the US would not work, due to politics.
But a 25% across-the-board tariff on all goods? Maybe not so crazy, given that the world subsidizes exports.
Last thought: The US builds the best pick-up trucks in the world. Why is that?
My read of the history of development economics is the same as yours. In practice, mercantilism has worked better than free trade for developing nations. Once again, theory and practice are the same in theory, but not in practice.
Also, I spent ~15 years in semiconductor tech startups. All of them had military funding. Not a coincidence – the military is an even larger “hidden” industrial policy than the tax code.
East Asian “mercantilism” has worked pretty well. Latin American, African, and non-East Asian mercantilism has a pretty awful record. Reminds me of the joke:
An east Asian transportation minister meets one of his African counterparts at a conference in his capital. He brings the African to his house, up on a hill and much nicer than he can afford on his government salary. “How do you do it?, asks the African. “See that,” says the minister, pointing to a 6-land highway in the distance across a landscape of farms and factories, “10% of that is mine.” (referring to kickbacks and payoffs).
A few years later, and the conference is in the African’s capital. He brings the east Asian minister to his house, also on a hill, and also much nicer than his salary could afford. “See that,” he says, looking out over some hardscrabble farms, grazing land, and a two-lane dirt road, “100% of that is mine.”
Gary is right about US industrial policy. We have massive industrial policy, it is just that we call it tax policy.
Two comments:
1) I’ve worked in the semiconductor industry (before the jobs went to China), and it’s full of weird little superstitions that may or may not be relevant. I can recall a billion-dollar factory that went months making only scrap on Thursday afternoons; it was eventually discovered that the tuna casserole served for lunch on Thursdays contained an amount of arsenic that was insignificant to humans but fatal to production. I knew another guy who wouldn’t run his process unless he used a green pen for recordkeeping; the process had worked well with green pens and nobody wanted to spend money on research to find out if it was a coincidence or not. Green pens were cheaper.
2) From an economist’s point of view, it doesn’t matter if China builds the machines and we do the marketing. From a soldier’s point of view, it matters a lot. There are many political/military questions where the U.S. and China have diverging interests, and they are likely to be resolved in China’s favor to our considerable disadvantage.
Technological development slows down, and it turns into a self-reinforcing cycle of decline.
The big problem with this statement is what if technological development is not slowing downing but speeding up? GDP could be going slowing down because:
1) Technological development is focused on cost savings not GDP growth.
2) Technological development is growing GDP but focused in China and India. They still growth rates over 5% so that is where all the gains are going.
3) GDP is function dependent a lot on population size and populations in developed world are stagnant so GDP is slowing down. Case in point Japan can’t grow total GDP at high rates even if GDP per capita is growing fast as population is declining.
Anyway, I am lost on why our nation should be growing manufacturing because these jobs pay is declining or stagnant. Why are investing in jobs with declining wages and employment totals? We don’t live in 1960 anymore.
I still say the biggest problem of the late 21st century is going to be the richer we are the less the average family can afford children.
My read is that technological improvement is slowing down, because of diminishing returns. A century ago, light bulbs were about 5 percent efficient. Fifty years ago, fluorescent bulbs were about 20 percent efficient. LED lamps are about 50 percent; there just isn’t nearly as much room for improvement as there used to be. Light bulbs are just an example; it’s true pretty much everywhere.
Continuation of line of thought of posts above (especially Handle’s)
Economists tend to optimize “for the whole” (increase average GDP for everybody) sorts of thinking.
But that’s not the sort of ideal world we live in.
While it may be that in an “ideal world” nobody would bother with industrial policy, and there would be global free trade, nobody would keep a large standing army, in the *real world*, where others have trade barriers and subsidies, others have industrial policy, and others have militaries, WE (the USA) must have some effective counter to them.
And “industrial policy” can take a huge number of forms – for example is the PRC’s oft mentioned propensity to ignore intellectual property rights an industrial policy? If not what kind of policy is it? It’s not secret that Airbus is heavily supported by Euro governments – in that context is it really credible to claim that the US shouldn’t have some kind of policy to support USA aircraft makers?
It’s not about 3a (wise) or 3b (corrupt) industrial policy – it’s that given other nation states have them (via one route or another) we (the USA) will surely have to have some reply, and “no policy at all” isn’t a credible one.
Further –
It’s wonderful to imagine a world in which nation-state pissing matches (ranging from tariffs to war) in fact disappeared, perhaps taking most of the oppressive capacities of the nation-state with them.
But my current conjecture is that powerful selection functions, on the scale of evolution/natural-selection, mean this will never be so.
Mancur Olson, chums, Mancur Olson.
Dan Wang doesn’t reference Olson’s work and that vitiates his essay.
We’re locked into all sorts of bad policies bcause nearly each one makes some group relatively better off, and concentrated interests beat diffuse ones. Some of the bad policies actually destroy the groups which originally sought them, but our thicket of bad policies is too tangled to be thinned by the mere death of a few groups– like dried-up blackberry canes woven through thick brush, obsolete bad policies still excoriate and impede everyone else even when they no longer serve anyone– reforming such policies, like brush-clearing, would require cutting through other bad policies which still have major beneficiaries, so it just isn’t done.
The progress of the disease varies from one country to another. The USA is deindustrializing not just because of short-term capitalist greed for cheap labor (though that is a big factor) but also because protectionist (regulatory) policies for many industries both make existing producers uncompetitive in ordinary (price, efficiency) terms and prevent the entry of new domestic competitors. The market’s response is to just import substitute goods from more efficient foreign producers. The USA producers eventually go under from lack of sales, but during their decline they are even more fiercely protective (citing their own decline as a reason to limit entry into their sector), ensuring that even bankrupt domestic producers will not be supplanted by more efficient domestic entrants. The usual coda to this scorched-earth but doomed-anyway retreat is the sale of domestic brands and trademarks to triumphant foreign competitors.
I agree that Mancur Olson is relevant, and I’d say Samo Burja is also worth reading here. The US as an empire, and most of its component sub-empires, is past the expansion stage. Since the center of power (“high”, in Burja’s terminology) can’t buy the cooperation of its major nominal subordinates (“mid”) by distributing the spoils of victory, we’re seeing a lot of mid-mid infighting. High-low alliances (aka populism) are another strong strategy at this stage. But often high is forced to pay off mid factions from its own resources (for example, by privatization), which leaves the empire weaker and more fractious as a whole. If that continues, succession will seem like a better and better option to mid-tier players going forward.
https://www.lesswrong.com/posts/ZFtLNDeTHRdeLgQDS/empire-theory-part-i-competitive-landscape
https://www.lesswrong.com/posts/dbkvLmtYpyRAAmLaM/empire-theory-part-ii-power-dynamics
This comment had some nice phrasing.
Especially good was
“We’re locked into all sorts of bad policies because nearly each one makes some group relatively better off, and concentrated interests beat diffuse ones.”
I think I would say that we see this even in inner city retailing / grocery stores. That would be another post–but we can generalize the industrial policy discussion into a broader analytical theme.
We now have such a framework of laws and policies that certain things are harder to do generally, and almost impossible in certain places. We got to the point where many grocery stores couldn’t operate in the inner city. It doesn’t look like the same discussion as “industrial policy” because it takes a minute to view grocery stores generally moving to the suburbs as the same phenomenon as factories leaving the country.
Part of that is the same. Sorry if this analytical point fails on careful inspection–it could be too many cups of coffee.
Tops and Wegmans mostly moved out of the city of Rochester–new business models like Price Rite eventually moved in. “Hardened” layout, restricted hours, different packaging and product selection.
Currently the inner city grocery stores in Rochester NY seem to mostly be “Arab Stores.” The stores that 30 or 40 years ago were run by…Jews, Italians, Poles, old Germans, old Irish, etc are often now “Arab Stores.”
I think it’s not just ethnic specialization strictly speaking but the tax environment, labor laws, legal environment, liability structure favors those with a certain temperament, enough children or dependent relatives, willingness accept low imputed wages and to live in back of the shop or upstairs/around the corner.
Methinks in micro-theory part of this is called “the truncation problem,” where you pass a law and think things are better, but actually what you’ve done is “truncated” the thin tail of exchanges at the margin that would have been made without the law.
Retail–you just drive exchanges to other places–to the suburbs, to online, etc. Probably there aren’t as many dynamic effects.
Industrial–you drive certain things out of the country and prevent other things from starting in your country at all–to the point where the supply of engineers dries up and all the specialist skills go away or the practitioners move elsewhere.
Sorry–some of this is tangential–but not all of it. I have “exit option” and “truncation problem” in the back of my mind while writing it.