The MIT School of Economics needs to give some remedial instruction to David Rotman, Editor of Technology Review. In a recent article, Capitalism Behaving Badly, he reviews Rethinking Capitalism,
A series of essays by authors including Joseph Stiglitz, an economist at Columbia University who won a Nobel Prize in 2001, and Mariana Mazzucato, a professor of the economics of innovation at the University of Sussex… Together, the essays provide a compelling argument that we need more coherent and deliberate strategic planning in tackling our economic problems, especially in finding more effective ways to reduce greenhouse-gas emissions…Maybe we should admit that markets are distorted by government and result in misallocation of resources. Whatever we admit, we should not pretend that the United States is a capitalist country. It is a corporatist economy where government decides for policy reasons to give money to favored industries. Mr. Rotman apparently favors ‘green’ industry as a major part of a command-and-control industrial policy.
[The book attempts] to counter the view that free markets inevitably lead to desirable outcomes and that freer markets are always better: the faith that “the ‘invisible hand’ of the market knows best.” In fact, she argues, we should admit that markets are created and shaped by government policies, including government support of innovation.
Rotman explains the failures of Solyndra, A123, Fisker, Navistar, Evergreen Solar and others, by arguing the wrong people were in charge, and they spent the money wrongly or stopped supplying it when more was needed, as if the politics were irrelevant and “some people” are not only above such things, but have nearly perfect appreciation of all market forces.
Mr. Rotman specifically addresses Solyndra:
Take, for example, the failure of the solar company Solyndra. It is often held up as the kind of thing that occurs when government picks winners. But, writes Rodrik, Solyndra failed largely because competing technologies got much cheaper. Such outcomes are not necessarily an indictment of industrial policies. The real problem, Rodrik argues: the U.S. Department of Energy loan guarantee program that supported the solar company had a mixed set of goals, from creating jobs to competing with China to helping fund new energy technologies. What’s more, it did not properly define procedures for evaluating the progress of potential loan recipients and, importantly, terminating support to those companies when appropriate. Instead, according to Rodrik, in the absence of such rules, money was lent to Solyndra for political reasons—President Obama and his administration used the company as a high-profile way to highlight its green-energy initiatives. Having singled out the solar company for praise, the administration was then reluctant to end its commitment…1-Competing technologies got cheaper. Failure to recognize that likelihood is not external to government decisions, it is central to why the government shouldn’t be making them, and most certainly counts as a failure of industrial policy.
The stimulus bill was well-intentioned, and the instinct to use government spending for a specific social goal, supporting the development of green energy, was laudable…
2-A mixed set of goals is likewise a failure of government policy. In this case, its execution of the “strategy,” if one should be so generous as to call such a mess strategic. Close enough for government work, I guess.
3-Slack control of money lent is also a clear failure of government execution of its confused and shortsighted planning.
4-Money was lent for political reasons. Duh.
This is not to be laid at the feet of capitalism, since it had no role in the matter.
Creating a rigorous industrial policy to encourage green technologies is no doubt a worthwhile objective. Economists and the lessons from efforts like the stimulus bill can teach us how to design such policies to be robust and effective…No, they have demonstrated again and again and again that they cannot. We do not learn from experience. We do not learn from Smith, Hayek, Bastiat, Sowell and Ricardo, et. al..
Mr. Rotman's actual agenda is clear. He wants more public/pirate partnerships for his pet cause, only better than the last ones. The pirates aren't capitalists, they are robber barons whose victims are taxpayers.
But won’t wise industrial policies also require wise politicians?No, there is no such thing as a "wise industrial policy" such a thing requires prescient politicians who have the ability to anticipate market changes, develop focused policies and implement them very efficiently. All while avoiding the opportunities for graft and corruption. Can you name such a politician?
Update Oct 25 11:40
How command-and-control industrial policy actually works:
Hillary Clinton’s campaign chairman met and corresponded on multiple occasions in his capacity as a top White House adviser with a previous employer seeking energy policies that it described as a potential “gold rush,” hacked emails and public records show.
John Podesta was a top White House energy policy official before joining the Clinton campaign last year. He previously served on the board of renewable energy investment firm Equilibrium Capital. He owned stock in the firm and drew $4,000 in annual “board fees.”
White House ethics rules bar employees from working on issues affecting former clients or employers for two years after taking their jobs. However, internal emails show that Podesta was in contact with Equilibrium within months of joining the White House as the company pursued a new energy efficiency financing model that would steer it significant revenue.