In the Summer issue of Regulation, I suggest that the growing popularity of industrial policy (also called “industrial strategy”) all over the world is a return to Jean-Baptiste Colbert, the Finance Minister of Louis XIV in the 17th century. Industrial policy is not just an assemblage of political meddling acts—otherwise it would be everywhere in the history of mankind—but, as some experts define it, “government policies that explicitly target the transformation of the structure of economic activity in pursuit of some public goal.” In my article, I write (“Of Tariffs and Industrial Policy,” 48-2 [Summer 2025], pp. 7-8):
Considering government as it is, instead of what the interventionists dream it could be, reveals that coherent industrial policy is impossible. … The calls for industrial policy are essentially ideological. …
Industrial policy can be seen as the offspring of what Jean-Baptiste Colbert (1619–1683), a minister to King Louis XIV, tried to achieve. As described by economic historian Donald Coleman, Colbertism was “a systematic treatment of economic activities.” Colbert “used a variety of tools: subsidies, special tax, reductions or exemptions, protection against foreign imports,” etc. He encouraged exports and domestic manufacturing. He was a dirigiste mercantilist who believed his policies enriched the country and thus the king—even though they likely explain why France lagged far behind England when the Industrial Revolution got underway. …
[Industrial policy] is about the ideology that a coercive allocation of resources will produce the goods that politicians and bureaucrats think consumers should want. At best, it is a belief that political and bureaucratic processes will, by some magic, adapt to what consumers want better than market competition will.
At about the time Regulation hit the newsstands, actual and virtual, British Prime Minister Sir Keir Starmer announced a new attempt at industrial policy. He was proud, he said, “to launch a new industrial strategy for the nation today.” Contrary to the past ones, this one will be “robust, strategic, and unapologetically long-term.” It “meets the challenges or our era,” notably with a “10-year plan.” (Keir Starmer, “The Industrial Strategy Will Provide Certainty for Business,” Financial Times, June 23, 2025.)
The Economist wisely expresses some doubts. Referring to the government’s policy document, the magazine writes (“Britain’s Industrial Strategy Is Unlikely to Boost Its Economy,” July 24, 2025):
The sprawling document spans wildly different sectors and is jammed with “transformative” funds, hubs and accelerators. … Experience suggests some scepticism is in order.
Industrial policy and even more industrial strategy are attractive labels for an age-old illusion that politicians and bureaucrats can boost economic growth by deciding where resources should be allocated. One hope of many supporters, if not their goal, is that tax revenues and the state will grow. In the 1930s and 1940s, economists Ludwig von Mises and Friedrich Hayek showed how central planners cannot have the dispersed knowledge on supply and demand, costs and preferences, that would be necessary to guide the economy toward real prosperity as diverse individuals want it.
READER COMMENTS
steve
Jul 8 2025 at 2:02pm
Tariffs, as most commonly presented by the current admin, seem to me to be industrial policy. One of many reasons I am not optimistic about their outcome.
Query- There is substantial evidence, I believe, that govt support of research has had positive effects. That doesnt seem to me like industrial policy. Would that be true?
Steve
Pierre Lemieux
Jul 8 2025 at 3:14pm
Steve: If one accepts Juhász et al’s definition of “‘government policies that explicitly target the transformation of the structure of economic activity in pursuit of some public goal,” one would probably agree with your first paragraph.
It is less clear that government’s support of research would count as an industrial policy by itself. Note moreover that this support has generally been marred by boom-and-bust cycles (we do see the continuation with the current administration) and that its impact is not clear–especially since resources are limited and using them one way prevents their use in another way. (See my review of Michael Titlebaum’s book Falling Behind?
steve
Jul 10 2025 at 11:32am
Thanks Pierre. I think his reasoning is weak. Just because something happened or didnt 100 or 200 years ago in some other countries doesnt have much relevance to what goes on in the US. A number of people have analyzed what US govt has spent on research and looked at the products that resulted and the yields have looked pretty good. I agree with Jose that there are opportunity costs but especially as private entities have less interest in basic research I think it makes that hard to evaluate. What I would note that the US has had better economic growth than anyone else so maybe we have the best balance?
Steve
Pierre Lemieux
Jul 10 2025 at 11:47am
Steve: I was just going to qualify my first answer, and you were more rapid than I on the qualification trigger. If your first sentence is meant to characterize the policies of the current administration, you’re right: industrial policy implies some rational thinking (even if mistaken); intuitive gibberish does not count.
Pierre Lemieux
Jul 8 2025 at 10:31pm
Steve: I just read this and I though it contains some ideas that may be of interest: https://jamesgmartin.center/2025/07/trump-harvard-and-federal-research-funding/.
Jose Pablo
Jul 9 2025 at 8:52am
govt support of research has had positive effects
But one must ask: what is the counterfactual?
The resources allocated to such support are extracted from other parts of the economy. It is entirely plausible—indeed, I believe likely—that those resources would have been more productively employed in their original uses.
Craig
Jul 8 2025 at 2:59pm
“economists Ludwig von Mises and Friedrich Hayek showed how central planners cannot have the dispersed knowledge on supply and demand, costs and preferences, that would be necessary to guide the economy toward real prosperity as diverse individuals want it”
Economic calculation problem one of those things that I found particularly persuasive in college. My suspicion here though is that those supporters of industrial policy, both left and right these days, may begin to rely on AI to try to claim some ability to collect and utilize that dispersed knowledge.
Pierre Lemieux
Jul 8 2025 at 3:20pm
Craig: They might claim that, as you suggest, but I don’t think it changes Hayek’s argument. An AI bot has no local knowledge as participants in the economy have it, each in his own situation. Moreover, individuals have incentives to respond to prices; an AI bot doesn’t.
Roger McKinney
Jul 9 2025 at 10:01am
Socialists in the 1940s and later thought econometrics would rescue socialism. The same problem afflicts AI as hindered econometrics, bad data or lack of data. AI can process vast amounts of data quickly. But the results depend on the quality of the data. Most is junk. AI has gained most in language processing because it can be trained on millions of books. The data for driving cars is at its fingertips. But economic data is sparse and not very good.
David Seltzer
Jul 8 2025 at 4:00pm
Pierre: It “meets the challenges or our era,” notably with a “10-year plan.” One might suggest Sir Kier read about the twelve Five-Year plans of the former Soviet Union. Just a suggestion.
Mactoul
Jul 8 2025 at 8:19pm
One would think that Net Zero and other Clean Energy initiatives that govts everywhere pursue meet the stated criterion.
Then should one appreciate the signal achievement of the Trump administration in partly rolling back the Green agenda.
Pierre Lemieux
Jul 8 2025 at 10:33pm
Mactoul: The blind leading the blind.
Robert EV
Jul 9 2025 at 12:43am
What an economic failure the Manhattan Project was.
Jose Pablo
Jul 9 2025 at 9:01am
It may well be the most consequential failure in human history: strategically irrelevant to the outcome of World War II (even counterproductive), yet unleashing a threat with the potential to annihilate humanity.
And in any case, claiming that government competence in waging war justifies its authority to decide how many and what kind of cars we should make is a breathtaking display of intellectual naïveté, if not outright folly.
Robert EV
Jul 9 2025 at 11:36am
For major powers the years following the invention of nuclear weapons was the most peaceful era in a long time. A large distinction when compared to the earlier WW1 – WW2 era. It helped bring in the final fall of the militaristic class in Japan and Europe.
Leaving that aside, I believe that consumers should be determining what they want to buy. Unfortunately that isn’t the case, it’s fad-chasing corporations that determine it. One reason that the average age of autos on the road is increasing is that they last longer, another is the cost, and yet a third is that a large chunk of the auto buying populace doesn’t want what the auto companies are bringing to the dealership floor. And that has to do with things like the lack of buttons, knobs, and shift sticks. Not about fuel efficiency.
Mactoul
Jul 8 2025 at 9:39pm
A plot of economic freedom index vs growth over past 30 years would be quite illustrative.
World’s fastest growing economy, Communist China, is industrial policy writ large.
Other fast growing Asian countries are no slouch at industrial policies.
While, the countries where industrial policy are in bad odor, the lagging behind in growth rate.
What might explain this?
Other than the fact that the implicit industrial policy adopted in the West ie the Green policy, is not conducive to growth.
Robert EV
Jul 9 2025 at 12:51am
Scott Sumner has a good blog post on China, titled “Capitalism with Chinese Characteristics: The Zhejiang model, 20 years later”
TL;DR (though it’s a good read), Zhejiang province has the third highest disposable income per capita, behind only the city provinces of Shanghai and Beijing (Zhejiang, while having some notable cities, is also significantly rural). Now granted it’s a coastal province, which also helps, but so are a number of other provinces that are distant runners-up to Zhejiang. To quote the article he quotes in his blog post:
Jose Pablo
Jul 9 2025 at 9:06am
The most explosive period of Chinese economic growth began in the early 1980s, precisely when the country started moving away from central planning.
Deng Xiaoping’s reforms opened the economy, decentralized decision-making, and allowed private enterprise and market-based capital allocation to flourish. The lifting of hundreds of millions out of poverty—an unprecedented transformation was driven not by state planning, but by unleashing market forces.
The return of industrial policy in recent years—exemplified by large-scale subsidies, forced technology transfers, and tighter state control—has coincided with a clear slowdown in growth, rising inefficiencies, and growing debt burdens.
If anything, China illustrates Pierre’s argument: its best economic outcomes came when the state stepped back, not when it took charge, AND they never learn the lesson.
Pierre Lemieux
Jul 9 2025 at 9:45am
Jose: To add to your point, it is also valid on a long horizon: see my post “Repeating a Historical Experience of Autarky?” See also “Making China Great Again.”
Mactoul
Jul 9 2025 at 8:48pm
Even in Deng era, China remained communist with plenty of state direction and low placement in economic freedom.
Or would you say that it is the direction of economic freedom that is important and not the actual degree?
Robert EV
Jul 9 2025 at 11:39am
Jose covers my point a lot better than I did, and expands on it, but can someone pull my reply out of the spam filter? I don’t even understand why it hit the spam filter, as there were no links in it.
Thomas L Hutcheson
Jul 8 2025 at 10:18pm
Is the conceit not more to produce resources the state can appropriate than what anyone thinks consumers want?
Pierre Lemieux
Jul 8 2025 at 10:35pm
Thomas: I am sure your question is relevant, but I don’t understand it.
Jose Pablo
Jul 9 2025 at 9:11am
Industrial policy always seems to attract those who believe in their own brilliance just enough to think central planning would work—if only they were in charge.
Sir Keir Starmer and the current U.S. administration appear to be the latest members of this enduring tradition.
Roger McKinney
Jul 9 2025 at 10:06am
If I remember correctly, Colbert’s motivation was to have France catch up to the rapidly growing Dutch economy. The Dutch had been clear that their growing wealth was due to freedom. Naturally, Colbert chose the opposite approach. I see politicians and business people stare at the success of others and choose to do the opposite. That’s a strange habit of humanity.