Everything has changed (except the abiding faith of industrial-strategy enthusiasts)

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There are, it has been said, two kinds of writing about economics. The first is the work of academic economists – rigorous, methodical, incremental – in which a set of assumptions about the relationship between certain economic variables are expressed as equations, which when solved simultaneously yield certain conclusions, which are then tested against reality using statistical regression analysis.

The second are the popular bestsellers, “airport books,” most often written by non-economists, in which it is declared that everything the first group has spent the past two centuries analyzing and testing, that is to say most of economics, is wrong. This second group relies less on analytical rigour than sweeping assertions, colourful anecdotes and impressive-sounding buzzwords, all in support of the proposition that Everything Has Changed – that the conditions in which the laws of economics might once have held no longer apply.

The first and greatest example in this mould was Keynes, whose assault on classical economics – or rather, a version thereof, unrecognizable to most classical economists – was to transfix the world for decades, notwithstanding either the rarefied conditions necessary for his prescriptions to hold (a closed economy, for starters) or the striking absence of examples of their success.

There followed a series of attempts to replicate Keynes’s triumph. John Kenneth Galbraith sold millions of books in the 1950s and 1960s arguing that large corporations, by means of advertising and other techniques of consumer manipulation, had made themselves impervious to market forces. Most of those corporations no longer exist. (Of the companies listed on the Fortune 500 in 1955, just 52 were still there in 2019.)

Similar books have appeared since then arguing some variant on the Everything Has Changed theme. In the 1970s it was the energy crisis, shortly before it was replaced by the energy glut. In the 1980s it was the inevitable rise of Japan, just in time for its decades-long slump. The diagnoses may vary, but the cure is always the same: industrial planning, industrial policy, industrial strategy, call it what you will.

The latest entry in this genre is a report titled A New North Star, or rather New North Star II, by the team of Robert Asselin, a political scientist and policy adviser to Liberal governments, and Sean Speer, a historian and adviser to Stephen Harper’s Conservative government. The original North Star, published by the Public Policy Forum last year, argued everything had changed because of the emergence of the “intangibles economy” – an economy of “thoughts rather than things."

A year later, everything has changed again. To the original “intangibles” argument, North Star II (co-authored by CIBC Capital Markets senior economist Royce Mendes) adds the displacement of the international liberal order by the struggle for supremacy between the United States and China and rising economic nationalism generally, especially with the advent of – and one suspects a bit of hasty rewriting here – the global pandemic crisis. These developments, the authors claim, only enhance the case made in the first study, though they are barely mentioned in it.

Indeed, where North Star I largely confined itself to a clutch of relatively harmless proposals for improving Canadian “competitiveness,” such as tax reform and internal free trade (“we recognize that something is anew,” they write, but “we are humble in our prescriptive abilities”), the second is a more full-throated call for industrial strategy, albeit in “modernized” form: less “picking winners,” more “facilitating the innovation continuum” and “leveraging human capital.” And yet, for all its insistent new-newness, there is a strong whiff of déjà vu to the whole thing.

Industrial-policy advocates in the 1990s used to support their case with a lot of hand-waving about “globalization” and the “borderless world.” In a world of footloose international capital and globalized production, they argued, it was essential to use the levers of public policy to “create comparative advantage” and nurture “national champions.”

Now globalization is collapsing and national borders are back in vogue – and industrial strategy is even more essential. And yet the arguments are for the most part unchanged. “Intangibles” is not a new idea – remember the “knowledge economy”? – nor does it offer the revolutionary insight claimed: Even in the old “tangible” economy, value has never consisted simply in physical things, as such, but in the thought that went into them. The oil has been in the ground since the earth cooled, but it wasn’t worth a nickel till someone figured out how to use it, and someone else figured out how to extract it.

What differentiates the digital economy is less its intangibility than its tendency to monopoly: the ability to expand output at zero marginal cost, combined with “network effects,” can confer an enormous “first-mover advantage.” But whereas old-school monopolies such as railways were difficult to dislodge, digital monopolies can dissipate as quickly as they arise, yesterday’s disruptors becoming today’s disruptees. Not so long ago, Microsoft was feared and hated for its monopoly. Who fears it today?

That the pace of change has accelerated rather makes the case against industrial strategy than for it: Governments are if anything less able to predict trends in the new world than they were in the old, and just as vulnerable to regulatory capture. Why try, then? Boiled down, the authors’ arguments amount to two.

One, everybody else does it. “Other countries,” they write, are “shifting from a laissez-faire approach to a national interest-driven model focused on key sectors and technologies.” Even supposing that were true, if other countries are doing it then there is no first-mover advantage to us – unless we happen to hit on a sector no one else thinks of, and unless it happens to be the next big thing.

And two, we do it, too, only without “intending” to. “We are already spending billions annually on industrial programs” – a 2018 paper published by the University of Calgary’s School of Public Policy, in fact, estimates that the federal government spends roughly $14-billion a year on business subsidies – "and enacting policies that give preference to certain market outcomes over others.” Have these been a success? If so, then why the need for a new strategy?

It is a testament to the power of faith that this litany of failure is held out, not as an argument to scrap the existing pile of subsidies, but to add to them. Not everything, it seems, has changed.

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