Industry Policy

Industrial policy has three fundamental problems. First, policymakers know no more than private investors about which technologies are viable. If market actors decide not to invest in a particular technology, then policymakers should not override them by heavily subsidizing it. Second, policymakers in the political process tend to be worse than private investors at terminating unsuccessful projects in a timely manner. Third, there is a danger that politically influential and established companies will abuse industrial policy to gain privileges for themselves, at the expense of competitors, taxpayers, and consumers. State subsidies for European champions or a change in EU competition rules to facilitate large-scale mergers does not automatically promote innovation, but merely leads to arbitrary decisions and European haggling.

Does it follow that we should leave industrial policy alone and entrust industrial development entirely to the market? Certainly not. Industrial policy is important, and good industrial policy can have beneficial effects. But it should take into account economic contexts and past experience with industrial policy instruments. Above all, it should address the question of where market failures exist, even if it is by no means self-evident that state intervention can remedy efficiency problems in private markets.