Public Purpose

PUBLIC PURPOSE

INDUSTRIAL POLICY’S COMEBACK

AND GOVERNMENT’S ROLE IN SHARED PROSPERITY

made possible by a generous grant from

The William and Flora Hewlett Foundation

Editors-in-Chief Deborah Chasman & Joshua Cohen

Managing Editor and Arts Editor Adam McGee

Senior Editor Matt Lord

Engagement Editor Rosie Gillies

Manuscript and Production Editor Hannah Liberman

Contributing Editors Adom Getachew, Walter Johnson, Amy Kapczynski, Robin D. G. Kelley, & Lenore Palladino

Contributing Arts Editor Ed Pavlić & Ivelisse Rodriguez

Editorial Assistants Lauren Fadiman & Yiyun Tom Guan

Marketing and Development Manager Dan Manchon

Special Projects Manager María Clara Cobo

Finance Manager Anthony DeMusis III

Printer Sheridan PA

Board of Advisors Derek Schrier (Chair), Archon Fung, Deborah Fung, Alexandra Robert Gordon, Richard M. Locke, Jeff Mayersohn, Jennifer Moses, Scott Nielsen, Robert Pollin, Rob Reich, Hiram Samel, Kim Malone Scott

Interior Graphic Design Zak Jensen & Alex Camlin

Cover Design Alex Camlin

Public Purpose is Boston Review Forum 19 (46.3)

This book was developed in collaboration with American Affairs.

The lead forum essay from Mazzucato et al. is adapted from the research article Challenge-Driven Innovation Policy: Towards a New Policy Toolkit, published in the Journal of Industry, Competition and Trade in 2020.

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issn: 0734-2306 / isbn: 978-1-946511-65-2

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Contents

Cover

Title page

Copyright page

Editors’ Note

FORUM

Economic Policy with a Mission

FORUM RESPONSES

Hard Choices

Think Institutionally

State of Emergency

Experimentation Is Key

Steering Finance

Politics Matters

Follow the Market Failures

What About Workers?

Against Economic Nationalism

Final Response

FORUM

Making Prosperity Local

FORUM RESPONSES

Beyond Elite Innovation

Why Innovation Hubs Fail

Democratize the Digital Revolution

Detroit Points the Way

The Innovation Fantasy

Empty Promises

Decolonizing Innovation

Final Response

ESSAYS

Portrait of the United States as a Developing Country

Alexander Hamilton’s State-Focused Economy

The Circular Economy

Contributors

EDITORS’ NOTE

Deborah Chasman & Joshua Cohen

in the early 1980s, some observers concerned about the state of the U.S. economy thought that the remedy might be industrial policy—government-directed efforts to promote structural economic change through strategic investment. The idea went nowhere. In what became the standard dismissal, economist Charles Schultze wrote that the government should not try to determine the allocation of resources to individual firms and industries. We have enough real problems, he said, without creating new ones. The state, in short, could not match the market's miracles.

For decades, Schultze's criticism of industrial policy could simply be grabbed off the shelf because industrial policy was so deeply at odds with the reigning market fundamentalism. Frozen out of the corridors of domestic power in the United States, at odds with the global Washington Consensus, the idea became, as the International Monetary Fund put it in 2019, the policy that shall not be named.

In fall 2020, Boston Review and American Affairs convened a small conference about the possibility of a bipartisan revival of industrial policy. We did not anticipate that, just a few months later, industrial policy would be on the political table, as the conversation sped from Why is industrial policy such a bad idea? to How should it be done, and in service of what aims? This book reflects that sea change.

Leading off a forum, economist Mariana Mazzucato and colleagues lay out an industrial policy agenda organized around ambitious missions. As they see it, yesterday's industrial policy—supporting this or that firm or industry—is misguided. We must think in much bolder terms: to set ambitious goals, marshal resources and build new organizational capacities in service of those goals, measure progress in achieving them, and make sure that the state reaps some rewards for its efforts.

But ambitious national policies can leave out lots of people and places. So we also feature a forum on economic development in our communities. Rejecting what he calls the specious attractions of Silicon Valley, political scientist Dan Breznitz looks to alternative models for fostering innovation to produce long-term, local, and, above all, inclusive prosperity.

A sure sign of a vibrant debate on a consequential topic is that people disagree. Respondents from across the political spectrum press for more details and offer some of their own: What goals? Who sets them? What are the cautionary tales of failure, and where are the relevant models of success? Together these contributions represent a decisive break from decades of market fundamentalism. In its place, they argue—with passion and a compelling sense of urgency—for putting public purpose at the center of our politics and policy.

FORUM

ECONOMIC

POLICY

WITH A

MISSION

Mariana Mazzucato, Rainer Kattel,

& Josh Ryan-Collins

when president joe biden campaigned last year under the slogan Build Back Better, he signaled a break with decades of economic thinking that prescribed a limited government role in the economy. As the New York Times put it, Biden's proposal to cut carbon emissions in half by 2030 is perhaps the greatest bet in recent American history on what economists call industrial policy, the idea that the government can steer the development of jobs and industries in the economy.

The United States is not alone. Countries throughout Europe and elsewhere are increasingly turning to the view that governments should use industrial policy to tackle grand challenges. Recognizing this trend, the International Monetary Fund issued a report in 2019 called The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy.

Why could this policy not be named? The short answer is that industrial policy was one of the many casualties of an international shift in economic policy that began in the 1980s and flourished under the administrations of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. The emergent sensibility—what we now call neoliberalism—was codified in 1989 in the Washington Consensus, which championed privatization, deregulation, and free trade. Along with these central pillars came an emphasis on low budget deficits, independent central banks focused on low inflation, and the liberalization of trade and foreign direct investment. This outlook was deeply confident in markets and deeply skeptical of government action, beyond the state's limited role in enforcing property rules and investing in education and defense. On the basis of an exhaustive review of the experience of developing economies during the last thirty years, the World Bank summed up in the early 1990s, attempts to guide resource allocation with nonmarket mechanisms have generally failed to improve economic performance.

Today it is precisely those market mechanisms that appear not to have delivered on their promise. An equally exhaustive review of the experience of several advanced economies during the last few decades—from the 2008 financial crisis, populist challenges to globalization, and vast increases in economic inequality to decaying infrastructure, climate change, and the broader pursuit of short-term profit at the expense of long-term investment—has badly tarnished the reputation of neoliberal market fundamentalism. Under this regime, modern capitalist markets have proven themselves unable to create an even distribution of wealth and income, ecological sustainability, affordable shelter and health care, and a sufficient number of high-quality middle-class jobs. Amidst this policy crisis, industrial policy is making a comeback, shaping high-level discussions at the intersection of trade policy and economic growth on subjects from artificial intelligence to climate change.

Yet how exactly industrial policy ought to be implemented remains very much an open question. Given that the U.S. government has been out of practice at industrial policy for four decades, some observers have called for a cautious, incremental approach. We think this is exactly the wrong strategy. Industrial policy should be ambitious in tackling the most serious challenges facing the world today. But precisely because many of these challenges are so expansive and open-ended, we also cannot simply return to the industrial policy of the postwar era, which tended to focus on more narrowly defined technological goals and specific sectors. We need a new vision, one that draws from the industrial policy of the past while responding to the unique conditions of the present.

That is exactly what we aim to sketch here. By undertaking well-defined missions, investing in a wide range of sectors, and nurturing new economic landscapes, policymakers can steer the overarching course of economic growth while leaving it to private enterprise to fill in the details. Indeed, a great deal of success is already being made in this direction, from Germany's impressive green energy transformation to Sweden's decarbonization of its food system.

This framework—what we call a mission-oriented approach to industrial policy—rejects many of the basic premises of market fundamentalism, especially its extremely limited vision for government. At the same time, it recognizes the risks, both political and economic, of excessively top-down planning by an overbearing state. Charting a course between these extremes, mission-oriented industrial policy instead uses government action to incentivize economic activity in the direction of ambitious social goals—whether reducing inequality, fostering sustainable development, or arresting climate catastrophe. If we are to solve such problems, the last four decades have shown, we must embrace an active role for government in creating and shaping new markets—not just in regulating them or intervening when they fail.

if firms are confident about future technological and market opportunities, they will invest and seek to innovate; conversely, if they are not confident, they will not invest. Any industrial strategy should therefore aim to stimulate demand and increase business expectations about where future growth opportunities might lie.

Market fundamentalism rejected these ideas. Founded instead on neoclassical economic theory, this approach emphasizes that individuals pursuing their self-interest in competitive markets yield efficient outcomes. According to this view, government action should be limited to correcting isolated market failures that result in inefficiencies. The causes of such failures, according to neoclassical theory, include information asymmetries; transaction costs and frictions to smooth exchange; noncompetitive markets (monopolies, for example); externalities, whereby an activity harms another agent not directly connected with the market transaction (as when carbon emissions from cheap gas in a rich country cause climate change and economic dislocation in a poor country); and coordination and information failures hampering investment (say, in the absence of information about profitability of investments in green energy).

Neoclassical economic theory was also applied to governments in the field of public choice theory. The people involved in policymaking and policy execution—voters, bureaucrats, politicians—were modeled, like economic actors, as self-interested rather than public-spirited. This led to a conception of public organizations as engaging in bureau-maximizing behavior, whereby departments and agencies look after their own survival rather than the common good. Even when there are clear examples of inefficiencies due to market failure, government intervention may not deliver a more efficient outcome—indeed, the self-seeking behavior of elected officials and bureaucrats might lead to government failure, a cure even worse than the disease.

This perspective—emphasizing a limited role for government in response to market failures while at the same time warning about the risks of government failure—came to dominate industrial and innovation policy debates in late 1980s. This orientation did allow for some government activity, but of a limited nature. Certain elements of innovation policy, in particular early-stage research and development, can be considered public goods, and thus a case could be made for government stepping in where markets failed to provide for them. Most governments invest in basic science, for example, as there are no market incentives for private firms to do so. Intervention further downstream in the innovation chain has been more contentious. Should the government invest in applied research, or should that be left to private firms? The market and government failure perspective takes the latter view, based on the claim that the private sector is the more efficient innovator in bringing goods to market. From this perspective, private firms possess greater entrepreneurial capacity under the pressure created by competition. By contrast, the state is viewed as risk-averse and in danger of creating government failure if it becomes too involved by picking winners—that is, by supporting specific firms, technologies, or sectors.

As a result of these views, the industrial and innovation policies of the past have largely been horizontal rather than vertical. Instead of articulating system-wide missions and fostering the economy-wide learning required for their achievement, the role of the state has been confined to leveling the playing field for commercial actors—mostly through supply-side inputs such as better skills or the removal of market frictions—and then getting out of the way. At the macroeconomic level, the market failure approach to industrial policy limits the role of the state to stabilization—mitigating the impact of the business cycle—and remains neutral about which markets are being created. Governments have accepted externally imposed rules-based frameworks limiting discretionary interventions. Fiscal policy is constrained by the discipline of tight budget deficit targets, and central banks are limited by tight mandates oriented toward price stability above and beyond other goals and are operationally independent of governments and thus not susceptible to political capture.

The financial and pandemic crises of the last fifteen years and escalation of the climate and environmental emergency make it clear that such an approach is not enough. We need a different approach to policymaking: a mission-oriented framework that focuses government action on solving fundamental challenges rather than waiting for the solution to trickle down through competitive market forces. Such an alternative approach is built around four key principles that take inspiration from Karl Polanyi's description of the embeddedness of the economy in society and culture, weaving together the private sector, the state, and civil society in a collective effort to serve the public good.

First, the state should do far more than passively react to market failures. It should play an active role in creating and shaping markets in the direction