Economists say ‘yes’ to industry policy (just not in Australia)

By Peter Roberts

Australian economists have long been seen by manufacturers as the enemy as, led by those staffing the Productivity Commission, they have vigorously fought against any form of activist industry policy by government.

The view is that policing backing even new industry such as green energy technologies, 3D printing or critical metals processing always leads to rent seeking and inefficiency is deeply held,

The PC continues this automatic rejection of such policy to this day, even though the high protection era of the 1970s and 1980s that spawned this economic orthodoxy have long since gone.

But while Australian economists cling on to their blinkers, the US and the EU have each committed hundreds of billions to backing strategic industries and leading economists globally are warming to industry policy.

A fascinating article on the Project Syndicate opinion website Industrial Policy is Back says there are dissenters, but “Harvard’s Dani Rodrik, the University of British Columbia’s Réka Juhász, and the University of Oxford’s Nathan Lane argue that mainstream economists’ ‘knee-jerk hostility’ to industrial policy is ‘increasingly outmoded.’

“In fact, new academic research ‘grounded in rigorous empirical methods’ has produced a ‘more nuanced and contextual understanding’ of industrial policy that ‘yields a generally more positive assessment’.”

In fact the article goes on to list a who’s who of the economic world – Columbia University’s Joseph E. Stiglitz, Stanford University’s Michael Spence and Mariana Mazzucato of University College London – and gives their supporting opinions in na series of lengthy articles.

One last taste of strengthening economist opinion backing industry policy: “Joseph E. Stiglitz does not need to be convinced. In his view, industrial policy is a ‘no-brainer’, and the Inflation Reduction Act – an industrial-policy package enacted by the United States last year – amounts to ‘making up for lost time’ after a ‘failed 40-year experiment with neoliberalism’. Beyond the implications for the US economy, the IRA’s adoption amounts to a long-overdue acknowledgement that the international rules of the game need to be rewritten.”

Really, the Productivity Commission needs to take note of this massive weight of opinion and pull itself into the modern world.

The Productivity Commission has new leadership so perhaps a rethink is underway along with a review promised by Treasurer Jim Chalmers – it is certainly long, long overdue.

Picture: Jim Chalmers