Economics is my vocation but I do realise that sometimes economists get excited about coming to an old truth in a new, analytically rigorous way, leaving normal people wondering why it took us so long to figure that one out. So it is now with strategic industrial policy. This is one of the effects of the great financial crash on the realm of ideas. The notion that everything can be safely left to the market has been recognised as little more than a justification for deregulation that left the coast clear for rent-seeking activities. Economists have certainly not ditched their insistence on the centrality of markets as a mechanism for efficient allocation; rather, it’s the old ‘markets versus state’ dichotomy that is crumbling.

In the new approach, the intertwined roles of state and market are rooted in endogenous growth theory. Increasing returns and the importance of spillovers give the state a role in co-ordinating private sector activity. In yesterday’s post, I noted that Steven Johnson emphasises the state’s role in innovation in his book [amazon_link id=”0141033401″ target=”_blank” ]Where Good Ideas Come From[/amazon_link]. There are many examples of public funding delivering massive innovative returns, when combined with private sector investment. The University of Sussex economist Mariana Mazzucato has a Demos pamphlet on this theme, The Entrepreneurial State, well worth a read.

But of course to non-economists, not to mention many industrial economists, this would have seemed obvious even in the absence of modern growth theory. Michael Best’s terrific 2001 book, [amazon_link id=”0198297459″ target=”_blank” ]The New Competitive Advantage[/amazon_link], is one example – it takes a comparative look at US industry versus other nations including Japan. Another is an intriguing 1997 book, [amazon_link id=”0674962036″ target=”_blank” ]Worlds of Production[/amazon_link], by Michael Storper and Robert Salais, which has a very ‘non-Anglo Saxon’ perspective. I can only say that we have dived through a wormhole into a completely new intellectual universe. Well, many of us.

[amazon_image id=”0674962036″ link=”true” target=”_blank” size=”medium” ]Worlds of Production: The Action Frameworks of the Economy[/amazon_image]