Industrial policy and the new knowledge problem

by Henry Farrell on April 13, 2023

This post is a memo that I just presented at a workshop organized at the EUI by Kate McNamara, Frederic Merand and Catherine Hoeffler. Some of its key ideas were articulated in an informal discussion with Bill Janeway, Margaret Levi, Suresh Naidu, Dani Rodrik and Gabriel Zucman a couple of weeks back. None of them are at all to blame (I’ve benefited greatly from their various comments, suggestions and disagreements but probably not nearly so much as I should have).

In this brief and very informal memo, I argue that the “knowledge problem” critique of industrial policy has itself become a problem for knowledge. For decades, economists have argued that state policy makers lack the requisite knowledge to intervene appropriately in the economy. Accordingly, decisions over investments and innovation ought be taken by market actors. Now, the “market knows best” paradigm is in disrepair. It isn’t just that “hyperglobalization” has devoured its own preconditions, so that it is increasingly unsustainable. It is also that some goals of modern industrial policy are in principle impossible to solve through purely market mechanisms. To the extent, for example, that economics and national security have become interwoven, investment and innovation decisions involve tradeoffs that market actors are poorly equipped to resolve. There are good reasons why Adam Smith did not want to see defense policy handled through the market’s division of labor. [click to continue…]