The Genesis of Industrial Policy; T. DiLorenzo

So-called industrial policy was roundly criti cized by nearly all mainstream economists-liber als and conservatives alike-during the early and mid-1980s. There is wide agreement that this "halfway house" between central planning and a free market economy, as Friedrich Hayek described it, is fundamentally flawed: Govern mental planners cannot possibly possess the knowledge required for efficient resource alloca tion. Only the market and price system can effi ciently distill the massive information required. The idea that a group of government planners can imitate market resource allocation is what Hayek calls "the fatal conceit."1 Moreover, in a democracy, governmental eco nomic planning schemes are bound to be influ enced more by political than by economic criteria. A national industrial policy would subsidize only politically powerful businesses, industries, and Thomas J. DiLorenzo is the Scott L. Probasco, Jr. Pro fessor of Free Enterprise at The University of Tennessee at Chattanooga. This article is adapted from his book, Paved With Good Intentions: Economic Nationalism and American Industrial Policy (Cato Institute, 1990).

unions at the expense of diminishing overall eco nomic growth. Despite the avalanche of criticism, and the well known failures of all socialisticeconomic planning schemes, the philosophical and ideological roots of industrial policy run deep. Like the character "Jason" in the Friday the Thirteenthhorror films, the idea just never dies. Logic, reasoning, and evi dence don't seem to phase its adherents. They per sistently relabel and repackage the same hoary notions, hoping they will catch on if only they are repeated often enough. Consider the recent histo ry of the crusade for an interventionist industrial policy. In the mid-1970s economist Wassily Leontief convened an "Initiative Committee for National Economic Planning" which, fortunately, never got off the ground. The phrase "national economic planning" was just too reminiscent of the spectacle of "planned" economies in Eastern Europe, the Soviet Union, and elsewhere, and the American public wanted no part of it.

The industrial policy proponents went right back to the drawing board a1;ld focused on a series of new marketing strategies. As Ira Magaziner, a strong proponent of industrial policy, candidly revealed: "Some of us started raising concerns about the decline of America's industrial base back in 1977;the solutions were labeled industrial policy,which became dirty words. Well, the prob lem didn't go away, so the concept re-emerged as "industrial strategy." Then we talked about "com petitiveness policies" and, most recently, "indus try-led strategies." We've had four different names for what we should be doing without doing any thing."2 What'sin a Name? There are other euphemisms for industrial pol icy, such as "economic democracy," "investment economics," and Michael Dukakis's "strategy for industrial America," which he tried to sell to the electorate in 1988. More imaginative euphemisms for national eco nomic planning are sure to be invented in the future. Magaziner and Harvard's Robert Reich, among others, have recently published new books promoting the same industrial policy potions they began peddling over a decade ago, and there is strong support for some kind of industrial policy in the business community and the union movement.

Despite the wishes of freemarket economists, this issue is not likely to fade any time soon. Why the stubborn support for such a thoroughly discredited idea? One reason, I will argue, is that industrial policy proponents are largely oblivious to both economics and history. But if they had a better understanding of the doctrinal history of industrial policy,they might not be so enthusiastic about it. The origins of industrial policy are in an economic system that industrial policy proponents themselves would abhor-Fascism. Contemporary proponents of industrial policy advocate many of the same economic policies that prevailed in Italy and Germany in the 1920s and '30s.They do not condone the abolition of civiland political liberties, the fanatical hero worship, the anti-Semitism, the violence, and the many other evils associated with Fascism. They are simply unaware that: 1) Fascism was an economic as well as a political and social debacle; and 2) Fascist eco nomics was almost identical to so-called industrial policy.

PerilousParallels The "partnership" approach to national eco nomic planning is one of the hallmarks of industri al policy. A 1989 United Automobile Workers publication outlines the familiar proposal for "development of a National Strategic Planning Board, made up of representatives of government, labor, businesses, and others to set goals for Amer ican industrial development, as well as specific committees on which labor, government, and busi ness representatives would formulate plans for America's auto, steel, and other industries." This 227 plan would supposedly "get labor, management, and government together to bargain a direction for our economy and specific industries."3 Business support for industrial policy is typified by a report by the Center for National Policy enti tled, "Rebuilding American Competitiveness." The report was written by academicians, govern ment officials, and, businessmen such as Felix Rohatyn of Lazard Freres & Co., former Du Pont Chairman Irving Shapiro, and representatives of the Chrysler and Burroughs corporations, among others. It calls for a "new approach to industrial policy" that is "based on cooperation of govern ment with business and labor [emphasis in origi nal]." Such cooperation would be institutionalized by "an Industrial Development Board, composed of government, labor, and business leaders" who would "develop cooperative strategies to promote industrial growth."4 Then of course there are the intellectual sup porters of industrial policy,such as Robert Reich, Robert Solow,Lester Thurow, and Bennett Harri son of M.LT., Barry Bluestone of Boston Univer sity, and various others. These individuals are among a number of academicians associated with a Washington, D.C.-based organization called "Rebuild America" which advocates "public private partnerships among government, business and academia."5 But the idea of government/business partner ships is anything but new. It was in fact the heart of German and Italian economic policy during the 1920s and '30s. As the Italian Fascist Fausto Pit iglianiwrote in 1934,Italian Fascism grouped busi nesses and unions into "legally recognized syndi cates," the purpose of which was "to secure collaboration between the vadous categories of producers [i.e., employers and workers] in each particular trade. . . ."

The vehicle through which government, busi ness, and unions would "coordinate" their plans was a network of government economic planning agencies, which the Italian Fascists called "corpo rations." The corporations were organized indus try-wide and were intended to "secure permanent collaboration between employers and workers." These corporations were Mussolini'sversion of the tripartite commissions that contemporary indus trial policy proponents advocate. In Fascist Italy there was one National Council, which Fascist author Gaetano Salvemini claimed 228 THE FREEMAN. JUNE 1990 was established "to exercise very considerable influence upon the development of the means of production in the national economic life of Italy."6 Another Fascist apologist, Luigi Villari, wrote in 1932 that such business/government partnerships promoted "a spirit of national collaboration which would not be possible under any other system."7 The Italian National Council sounds nearly identi cal to the U.A.W.'s "National Strategic Planning Boards."

The National Socialist (Nazi) government in Germany established its own economic planning scheme that was very similar to the Italian system (and to contemporary industrial policyproposals). As described by historian Franz Neuman, there was a "National Economic Chamber," the duty of which was "to coordinate the territorial and the functional setup" of industry. This National Eco nomic Chamber was a federal overseer of numer 0us local chambers, similar to the Italian Fascist system. In a statement that could have been written by one of the contemporary American proponents of industrial policy, the German newspaper DeutscheVolkswirtexplained in 1933that the pur pose of these institutions was to "give private industry possibilitiesand tasks for far-reachingcol laboration."8 According to the Nazi National Eco nomic Minister, "Our task is the limited one of coordinating with the present idea of national gov ernment the organization of the enormous field of German business administration."9 As in the industrial policy literature, the words "coopera tion" and "collaboration" were used repeatedly by German and Italian Fascists.

The "Unityof Aim" Argument One of the most persistent arguments made by proponents of a national industrial policy goes something like this: We've already got industrial policies-regulation, direct subsidies, protection ism, credit subsidies, selective tax breaks for cer tain industries-but they are too ad hoc, overlap ping, piecemeal, and sometimes contradictory. What's needed is a more centralized or national industrial plan with clearly defined and fixed objectives. As Lester Thurow has written: "We already have industrial policies. . . . The only real ques tion is whether America has effective front-door industrial policiesin whichwe consciouslyattempt to design a strategy to give America a viable world class economy or whether we fail to recognize what we are doing and have backdoor industrial policies with a case-by-caseadoption. "10 Former Carter domestic policy adviser Stuart Eizenstat claimed that a national industrial policy would "be a more effective organization of what every President since George Washington has been doing in a piecemeal, uncoordinated way."l1 And the Center for National Policyclaimsthat "to argue that government should not have industrial policies is to ignore the fact that it does." What is lacking,says the Center, "are efforts to coordinate . . . all these different policies."12 Similar state ments are repeated over and over again in the industrial policy literature.

Again, such thinking is nearly identical to what was being said in Italy and Germany in the 1920s and '30s. Mussolini himself stated in 1934 that existing government intervention into the Italian economy was "too diverse, varied, contrasting. There has been disorganic intervention, case by case, as the need arises." Fascismwould supposed ly "remedy" this, wrote Mussolini, because it promised to "introduce order i~ the economic field" and direct the economy toward "certain fixed objectives."13 The whole purpose of the Italian economic planning apparatus, according to Pitigliani, was to giveindustry "unity of aim" and to "bring together under a single administration the productive forces of the nation. "14 Admiration for central planning, inother words, is one thing the industrial policy proponents have in common with early 20th-century Fascists. The InherentFailuresof IndustrialPollcy The essence of early 20th-century German and Italian industrial policy (and of contemporary industrial policy proposals) was for government, business, and unions to attempt to "collaborate to coordinate" the economy in the public interest.

Individual consumers, businesses, investors, and workers supposedly couldn't be relied upon to serve national rather than individual interests. "The function of private enterprise," wrote Pit igliani, "is assessed from the standpoint of public interest, and hence an owner or director of a busiTHE GENESIS OF INDUSTRIAL POLICY 229 Mussolini speaking in Central Italy, September 1934. ness undertaking is responsible before the State for his production policy."15 Fifty years later, the Center for National Policy similarly advocated an "Industrial Development Board" that would "identify sectors of the economy crucial to the national interest" and provide "public [i.e., tax payer] support as part of an overall development strategy."16 The theme of economic nationalism pervades both the industrial policy literature and the literature of Fascism. Despite the public interest rhetoric, business/ government collaboration in Germany and Italy constituted a mammoth conspiracy against the public. Business and government collaborated to milk the taxpayers for subsidies to big business and to establish a vast system of government sanctioned cartels. As a disenchanted Gaetano Salvemini wrote in 1936, although the Fascist "Charter of Labor says that private enterprise is responsible to the state . . . it is the state, Le.,the taxpayer, who has become responsible to private enterprise. In Fascist Italy the state pays for the blunders of private enterprise."

As long as business was good, wrote Salvemini, "profit remained to private initiative." Loss, how ever, "is public and social." Mussolini boasted in 1934 that "three-quarters of the Italian economic system, both industrial and agricultural, had been subsidized by government."17By subsidizing busi ness failure on such a grand scale, Italian Fascism guaranteed a failing economy. Such business/government collaboration also created a system of monopolies through nlassive regulation that could forbid the creation of new factories or the development of existing plants. As reported in The Economist on July 27,1935, the Italian "Corporative State only amounts to the establishment of a new and costly bureaucracy from which those industrialists who can spend the necessary amount, can obtain almost anythin~ they want, and put into practice the worst kind of monopolistic practices. . . ."18 There was also a "revolving door" between gov ernment and industry-the familiar practice of government bureaucrats dishing out subsidies to industry, and then retiring from government to take well-paying jobs in the industries they had previously been "regulating."

German industrial policy also glorified the notion of business/government collaboration, but it too was nothing but the most ordinary protec tionism. Regulations prohibited price cutting and established a system of government-sponsored monopolies, described by Hayek as "a sort of syn230 THE FREEMAN • JUNE 1990 dicalistor 'corporative'organizationofindustry,in whichcompetitionis more or less suppressedbut planning is left in the hands of the independent monopoliesof the separate industries."19 Govern ment/business collaboration, admitted a Nazi economist,"givesa cartel a power which it could not obtain on a voluntarybasis."20 LessonsofHistory One doesn't need to go as far back in historyas Mussolini'sItalyor NaziGermanyto observehow collaborationbetween government,business,and unions breeds corruption and monopolization. The recent HUD and.savingsand loan scandals are typical examples of the inherent failures of government/industry collaboration. In each instance,businessesand governmentofficialscol laboratedto benefitpersonallyat greatexpenseto the generaltaxpayingpublic.

In 1978the Carter Administrationimplemented a textbookexampleofthe partnershipapproachto industrialpolicy.It "cooperated" with the United Steelworkersunionandseveralsteelcompaniesto grant $265 millionin loan guaranteesto the com paniesthroughthe federalgovernment'sEconom ic Development Administration (EDA). The objective was supposedly to save 50,000jobs in fourcompanies.By1987allfourloanshad default ed, two of the companieshad gone bankrupt, and the two others had filed for bankruptcy.The tax payerswere out $265 millionand not a singlejob was "saved" in the steel industry. As of April 1989,55 percent of the EDP:s loan portfolio was delinquent, with hundreds of mil lionsof dollarsin bad loans.The EDP:s own staff admittedthat its loan programs"wouldhaveto be considereda failure" and are "an excellentexam ple of the folly inherent in industrial policypro grams."21 Trucking regulation by the Interstate Com merce Commission,whichcartelizedthe trucking industry, is another example of what one can expect from an interventionist industrial policy.

Trucking firms, the Teamsters, and government collaborated to construct barriers to entry in the trucking businessat great expense to consumers and potential competitors. Airline regulation by the CivilAeronauticsBoard was another example of an industrialpolicycartel. Protectionism is an example of business/ union/governmentcollaborationfor the purposeof organizing a price-fixingconspiracy against the public. As Adam Smith wrote in The Wealth of Nations, businessmenseldom meet, even for fun andentertainment,whenthe conversationdoesnot turn to some kindofconspiracyagainstthe public. Privatecartelsare notoriouslyunstable.Conse quently,monopolistshave alwaysfavored "coop eration" between business, government, and unions:Only the coercivepowersof the state can guaranteethe survivalofa privatelyorganizedcar tel. Thus, monopoly is all too often the result of government/industrypartnerships.

As the historicalrecordofinterventionistindus trial policiesbecomesclearer,I predictthe follow ingsyllogismwilldescribethe attitudesofindustri al policy proponents: Interventionist industrial policieshavebred monopoly,corruption,and eco nomic stagnationwhereverthey have been tried. Everyone knows this. Therefore, we need more industrial policy! Santayana's dictum that those who fail to learn the lessonsof historymay relive its mistakesis particularlyrelevantto the ongoing industrialpolicydebate. D 1. Friedrich Hayek, The Fatal Conceit(Chicago: University of ChicagoPress, 1988). 2. "Why Managers Need a Little Help from Washington,"Busi nessMonth,July 1989,p. 77. 3. "A UAW Action Agenda," U.A.W. Public Relations Dept., 8000E. Jefferson Avenue,Detroit, MI 48214. 4. RestoringAmericanCompetitiveness(Washington,D.C.: Cen ter for National Policy,1984),pp. 7, 8. 5. An Investment Economics for the Year 2000, p. 32. Rebuild America,201 MassachusettsAvenue,NE, Washington,DC 20002.

6. Fausto Pitigliani, The Italian CorporativeState (New York: Macmillan,1934),pp. 93,98,108. 7. Luigi Villari,"The Economicsof Fascism,"in his book, Bol shevism, Fascism, and Capitalism (New Haven: Yale University Press, 1932),p. 107. 8. Franz Neuman, Behemoth: The Structure and Practice of NationalSocialism(NewYork: Octagon Books, 1963),pp. 241, 359. 9. Cited in Robert A. Brady,The Spiritand Structureof German Fascism(NewYork:Howard Fertig, 1969),p. 105. 10. Lester Thurow,"The Case for IndustrialPolicies,"Center for National Policy,January 1984,p. 7. 11. Stuart Eizenstat, "Industrial Policy:Not If, But How," For tune,January 23,1984,p. 183. 12. RestoringAmerican Competitiveness,p. 10. 13. Benito Mussolini,Fascism:Doctrineand Institutions(Rome: Adrita Press,1935),p. 68; reprinted in New Yorkby Howard Fertig, Inc., 1968. 14. Pitigliani,p. 117. 15. Ibid.,p. x. 16. RestoringAmericanCompetitiveness,p. 13.

17. Gaetano Salvemini, Under the Axe of Fascism (New York: VikingPress,1936),p. 380. 18. The Economist(editorial),July 27,1935. 19. Friedrich Hayek, The Road to Serfdom (Chicago:University of ChicagoPress,1944),p. 41. 20. Cited in Neuman, p. 268. 21. Warren Brookes, "The Big Steel That Never Made It," WashingtonTimes,April 10, 1989.