… is from page 410 of the 2014 collection, The Market and Other Orders (Bruce Caldwell, ed.), of some of F.A. Hayek’s essays on spontaneous-ordering forces; specifically, it’s from Hayek’s previously unpublished 1961 lecture at the University of Virginia “Economics and Technology,” which is the third of four lectures that Hayek delivered in UVA’s Newcomb Hall during the Spring 1961 semester; the title of this lecture series by Hayek is “A New Look at Economic Theory”:
Where we want to make use of more knowledge of particular concrete facts than can be concentrated within a single agency, where we want to utilize knowledge widely dispersed among many people, we can do this only by a decentralization of decisions combined with an impersonal mechanism of co-ordination such as the market provides.
DBx: Among the many individuals who are blind to this inescapable reality are proponents of run-of-the-mill protectionism as well as proponents of more extensive schemes of obstructing ordinary people’s buying and income-earning choices – more-extensive schemes cloaked with the comforting name “industrial policy.”
The foundational case against industrial policy is not that the outcomes that industrial-policy proponents desire are undesirable in comparison to the outcomes that emerge on free markets. Industrial-policy proponents desire faster economic growth and greater and more widespread economic well-being, broadly defined to include not just more goods and services for consumption but, also, better and more satisfying jobs, lovelier communities, and increased prospects for people to thrive as they choose. Who with any modicum of civility doesn’t desire these things? The problem is not only that industrial policy offers no hope of achieving these desirable outcomes, but also that the use of industrial policy makes these outcomes less likely.
It is simply impossible for human beings to use coercion to grab an arbitrarily large chunk of property rights over resources and then to allocate those resources in ways that will in the long-run result in a higher standard of living than would have been generated by leaving those resources in private hands to be allocated according to the rules of private property, contract, and tort, and by the resulting market prices that arise from economic exchange. Markets use more knowledge than can possibly be processed consciously by the human mind or by a committee of genius human minds aided by 31st-century information-processing techniques.
What industrial policy can achieve are superficial outcomes that can be falsely passed off to the general public as desirable. Industrial policy can result in more manufacturing jobs in the home country. It can raise the real wages of workers in a select number of firms. It can reduce the home-country’s trade deficit. It can ensure that buyers in the home country purchase no inputs or outputs of a certain description from foreigners. It can decrease the home-country’s “dependence” on foreign countries.
What industrial policy cannot do is to raise overall living standards. Each of the above “achievements” of industrial policy must come at a cost that exceeds its benefits. But because these costs are spread out while these benefits are concentrated, the costs are unseen and the benefits seen. Industrial-policy proponents can then pound their chests triumphantly. And their many victims, sadly, will think this chest-thumping to be justified.
In the above, in order to highlight what industrial policy cannot achieve, I describe the best that industrial policy can possibly achieve. Yet in practice industrial policy is likely to fail even on its own superficial terms. Many of the outcomes, such as those listed above, that industrial policy can achieve are ones that industrial policy as carried out in the real world by necessarily uninformed and politically biased human beings will fail to achieve.
Pictured above is UVA’s Newcomb Hall, where Hayek delivered the lecture from which the above quotation is taken.