A 'Good' Industrial Policy is Impossible: With an Application to AB5 and Contractors

Abstract

Capitalist systems have a built-in “industrial policy,” based on profits and losses as signals of the desirability of investment, sectoral growth, and also elimination of wasteful activities. But a recurrent theme of more dirigiste industrial policies is the need to “manage” industry through affirmative picking of winners and losers, and the use of taxes, subsidies, and highly calibrated regulation of price and output to direct the economy. The “Public Choice” argument that motivates a considerable part of the critique of activist industrial policies centers on problems of information (state actors have a knowledge problem, if they lack information on profit and loss) and incentive (state actors face crippling problems of political constraints, organized interests, and collective action). Surprisingly, a close reading of the historical literature advocating industrial plans baldly concedes the incentive problem, and is frankly focused on insulating bureaucrats from democratic forces. It is argued that a “good” industrial policy—one that embodies all the goals of an omniscient despot—is impossible in a democracy, because political incentives will cause actual policies to diverge from the ideal.

Keywords: industrial planning, market failure, public choice