J. K. Galbraith. Industrial policy is a nostalgic rosy dream

 

"At a "summit" in Berlin, leading centre-left economists announced a "new consensus" on industrial policy.

 

Their joint declaration was released by Columbia University economic historian Adam Tooze, who described it as "remarkable both for its broad agreement on the principles of economic and industrial policy and for incorporating those principles into an assessment of current political and geopolitical risks." . The declaration states that there are two types of risk. These are "real risks" such as climate change, "intolerable inequality" and "major global conflicts". 

 

The second category, we are told, stems from "decades of unchecked globalisation, over-reliance on self-regulating markets and austerity that have reduced governments' ability to respond effectively to such crises".

 

The group made several recommendations: "reorient our policies" from "primarily supporting economic efficiency" to focusing on "common prosperity and safe, quality jobs"; "develop an industrial policy [...] that supports new industries and directs innovation to create wealth for the many"; shift industrial policy away from subsidies and towards innovation; "revise climate policy" through carbon pricing and infrastructure investment; avoid austerity by "investing in an effective innovation state"; etc.

 

Consensus among economists – even well-meaning and progressive ones – is a dangerous thing. Consensus is inherently the enemy of consistency and logic. Ordinary people are angry. Many of them grew up fed the promise of a middle-class democracy based on stable industrial jobs, but are now slaving away in an uncertain free-market economy. They are ruled by oligarchs, looked down upon by privileged urban professionals, and economists are the worst of them all.

 

How did this happen? It might be convenient to blame China, but the origins of this story should be sought in the 20th century at the end of the split in the US Democratic Party. This set the stage for President Ronald Reagan and Fed Chairman Paul Volcker to destroy US manufacturing and its associated unions, and then, under Clinton, for the rise of financial corporations and big tech.

 

 The presidency of George W. Bush oversaw further militarization aimed at consolidating US global power and control over raw materials, particularly oil. The US economy, along with Europe, began to rely on banks, bombs, bases and information technology. Profits and losses aside, not one new manufacturing job has been created in America in 40 years.

 

To quell public anger, my friends are calling for innovation to create wealth for "the many" and address climate change while reducing market concentration and power. However, it is because of innovation that market power is concentrated. The goal is always to increase the welfare of innovators and those who fund them, and to achieve more with fewer people and less cost. This is how our technology oligarchs emerged - B. Gates, J. Bezos, M. Zuckerberg, E. Musk, P. Thiel, L. Ellison. Otherwise we would never have heard of them.

 

Of course, it is noble to seek a solution to the problems of climate change. However, the inconvenient and disturbing facts of reality cannot be ignored. One of them is the Jevons paradox, which states that greater energy efficiency leads to the discovery of new ways of using energy, so energy consumption increases. Just look at how much electricity is consumed by cryptocurrency mining and AI models.

 

Second, large renewable energy projects require large mines (which are energy-guzzling), massive new infrastructure (also energy-intensive), and – to be profitable – low, stable capital costs incompatible with high interest rates. It is not for nothing that yesterday's popular projects are reduced in scale or abandoned altogether.

 

Third, a crucial problem is the non-existent link between climate change investment and the well-being of the larger population today or even in the near future. Will it reduce utility bills, taxes or interest rates? No, it will not decrease. Will there be new products made in China that were not available before due to high tariffs? Of course not. The only way to distribute the economic benefits of innovation to the "many" is to give to the state the entire process.

 

This requires state capacity, which the Berlin meeting attenders acknowledge has been "drained" by 40 years of neoliberal neglect and rapacity. The sad reality is that today's proponents of industrial policy are often the same people who first floated the idea more than 40 years ago, trying to save the Democrats from the Reagan economy. At least it seemed plausible then.

 

 But now, as before, they seem unwilling to take on the banks, war-industrial contractors, or tech tycoons that now rule the West.

And huge new political forces are filling the vacuum left by neoliberal policies in America and Europe. Given the damage done, there may be no way to quell the anger that drives those "dangerous populists" to power. Unfortunately, trying to revive outdated ideas will hardly help.

 

Commentary by James K. Galbraith, economist and co-author of the forthcoming book Entropy Economics: The Living Basis of Value and Production."