Industrial policy – the long and the short of it.

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I’ve been dipping into the proofs of a substantial book, Industrial Policy for the United States by Marc Fasteau and Ian Fletcher, due out in September. It will prove a significant resource for anybody interested in the issue. The book starts with the economic case for strategic government interventions in the supply side structure, arguments that have been gaining traction recently as the utlra-free marketism paradigm fades in the US and elsewhere. The authors focus particularly on increasing returns and technological innovation.They bring a certain zero sum mentality to the analysis – the US must win, other countries must lose – which I don’t share; the technological frontier is broad and granular. But the demolition of the idea that a ‘free’ market is the way to organise the economy at a time of significant structural change is spot on.

The second section explores brief country case studies (“Chapter 10, Britain: No Theory and Little Execution” puts it in a nutshell for the UK: “Britain has become a byword for ineffective industrial policy.”). These are for the most part short factual histories for readers who have no prior knowledge of the countries concerned, with an introductory commentary. The book is wholly US-focused.

The third section is a history of industrial policy in the US from colonial times and Hamilton onwards, while the fourth moves into the US innovation system. It paints a picture of government support for innovation as a de facto industrial policy even during periods when political rhetoric emphasised markets. And it describes the innovation system as the ultimate private-public partnership. The section argues the case for a shift to more active Federal government innovation programmes using both market-creating policies, innovations induced by regulatory requirements and a role for novel types of innovation organisation in the system – manufacturing institutes, for example.

The final two sections consist of industry case studies and regional case studies. In the former are the well-known semiconductor example, and also nanotechnology (“Is America Losing the Future?”, this one is titled. The regional examples are life sciences in Massachussetts and emiconductors in upstae New York.

The book ends with recommendations for the US. While welcoming the Biden policies, the CHIPS and the Inflation Reduction Act, the authors want more: “The challenge now is to maje industrial policy comprehensive, coherent, institutionalized, and a fixture of the policy consensus.” The US needs to focus on its most dynamic industries and develop them as oligopolies to enjoy economies of scale and the profitability for continuing innovation, they argue. They see a national security as well as an economic need for the US to stay at the frontier in multiple industries – just as the Cold War imperatives drove policy in the 1950s and 60s. The final chapter has a lengthy set of specific recommendations for different actors in the US political and industrial systems.

At 670 pages of text and 150 pages of notes and bibliography, has the obvious advantages and disadvantages of its sweep and scale – a superb place to start on any aspect of US industrial policy, but only a starting point for depth on any particular aspect. I found the parts I’ve read very interesting given my relative lack of knowledge about the institutional and historical details in the US. But I applaud the ambition and think the historical perspective suggests the authors are right in drawing a curtain on what – it turns out – is the aberrational period of policy free-marketism.Screenshot 2024-07-23 at 11.23.05

 

 

DIY electricity

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My student Aneesha gave me a book a few weeks ago before she headed off to do her PhD in energy systems at Berkeley, The Grid by Gretchen Bakke. OK, I thought, I’ll give it a try – but how well she knows me. I loved this book. It’s part history of how the electricity grid was built, part diagnosis of how it’s all going wrong, and part reflection about the net zero transition. What I loved about it was the way it links this fundamental infrastructure system to its social and cultural context.

I’ve always reckoned (eg around p 80 in here) that the provision of electricity is fundamentally social rather than technical, and the book illustrates that on every page. Who knew that Texas and Quebec have separate grids (in case they ever want to secede)? In a sign that the US is starting to become a failing state, it has”the highest number of outage minutes of any developed nation” – six hours a year compared with 11 minutes in Japan and even 51 minutes a year in Italy. Trees and squirrels account for much of this – or to put it another way, lack of maintenance.

Interestingly, the book pinpoints the separation of generation from transmission, and the arrival of wholesale electricity trading, as the start of the end. The margins in operating the grid itself are low, so maintenance got cut, while the arbitraging meant there was too much electricity trying to travel too far along the wires. Increasingly American companies, people and the military are setting up their own microgrids, including using renewables such as rooftop solar, and in the case of the military compost from kitchen waste and latrines. “They have all stopped expecting the state and the utilities to do their job.” Rugged individualism is the order of the day in getting stable access to electricity.

Highly recommended – I underlined something on pretty much every page. I’m thinking a lot about infrastructure these days. Thank you Aneesha!

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Private revolutions

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Yuan Yang’s Private Revolutions: Coming of Age in New China is quietly revelatory. One of the new intake of Labour MPs, the author was born in China, moved to the UK at age 4, and returned to China as an adult when working as a journalist for the FT. The book is a history of four women of her generation who became friends and contacts during that period. It’s a gripping read as the women have extraordinary stories. It’s also a powerful reminder of how much the country has changed within a generation – a rapid transformation that can’t help but have had an impact on people’s psyches. The word ‘revolution’ is not hyperbole. It reminded me a bit of a 1986 book I read decades ago by John Hooper about Spain, in which he pointed out the pyschological impact on young men from conservative villages of going to work as waiters or similar in the new resorts of hte Costa Brava. So I warmly recommend Private Revolutions, a fascinating read and a different perspective on a country we will have to learn more about in the years ahead.

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Always and everywhere a political phenomenon

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I was quite excited about Carola Binder’s Shock Values: Prices and Inflation in American Democracy, as I expected something similar to Thomas Stapleford’s (2009) The Cost of Living in America. It isn’t about price indices, however, but about monetary policy and inflation. Macroeconomics is so much not my area that I feel unable to comment on the argument of the book, except to wholeheartedly agree that inflation is always and everywhere a political phenomenon. I’ve written (in my forthcoming book, The Measure of Progress) about the scarring experience of the late 1970s inflation for my working class family.

Anyway, Shock Values is a very readable monetary history of the United States, from the Revolutionary era to the 2020s. The theme throughout is the question of the political legitimacy of prevailing monetary arrangements, particularly the role of the state in aiming to stabilise prices. As the final chapter notes, the current episode of inflation has combined with broader US political instability and the arrival of crypto to raise new questions about that legitimacy – the book borrow’s Paul Tucker’s concept of legitimacy as set out in his book Unelected Power.

I knew less about the early (19th century) period and so particularly enjoyed that; perhaps I was the only audience member to leave Hamilton wishing there had been more about the formation of the first federal banking system. The sections on wartime price controls are also very interesting. If you’re already steeped in monetary history there might not be much new in the book, but I found it an excellent overview and it didn’t seem to be ideological – politely ignoring MMT and casting justifiably measured doubt on crypto assets.

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Valuing the future

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Discounting the Future: The Ascendancy of a Political Technology by Liliana Doganova is an interesting read. I don’t entirely agree with its perspective, which is that the concept of discounted cash flow or net present value is inherently damaging to the future; but I do think it’s valuable to understand that it is not a technical tool but an inherently normative one – or political, if you prefer. The book is part of a literature that criticises ‘assetization’ – generally used as a synonym for financialization – and identifies the performativity of certain economic concepts. This is a valuable and thought provoking literature, drawing attention to some dysfunctions of ‘free-market’ practices in policy and business.One of these is certainly the spread of CBA-type analyses as practiced in policy and business decisons.

As Doganova writes here, there is an inherent contradiction. On the one hand, “Discounting literallty devalues the future and gives priority to the present, inducing short-termism.” On the other hand, “discounting could also be analyzed in exactly the opposite terms, as futurism as opposed to presentism, because it posits the future as the ultimate source of rewards in the present.” She adds, “The future is a political domain.”

The first part of the book discusses theoretical debates about the selection of the discount rate and the use of discounting, including the wrangling among economists after the publication of the Stern Review. The later chapters give three historical examples, 19th century forestry, the introduction of discounted cash flow analysis in US corporations in the 1960s and 70s, and venture capital investment in biopharma recently. The interesting examples illustrate a clear shift from a focus on purpose (eg healthy woodlands, or sustained engineering success in manufacturing) to a focus on financial returns. She writes of the corporate use, “The troubling consequence of the use of discounting was that companies were turning down investments.” I’d like to think of a way to test this empirically.

However, the book conflates the practice of discounting or CBA with the inherent analytical possibilities of conceptualising the economy as a process through time involving investment in assets that subsequently provide a period-by-period return. I see this as an essential step forward from flow-based metrics of success (GDP growth or current year profits). Without a balance sheet, it is impossible to evaluate sustainability. My challenge to the contributors to this literature criticising ‘assetization’ is what alternatives there are if we are to transition to a sustainable economic model.

Thinking specifically about discounting, Doganova concentrates on the selection of a discount rate – and indeed companies select a ludicrously high hurdle rate very often. But the technique involves other normative choices. One is the discounting formula – one could use hyperbolic rather than exponential discounting, which favours the more distant future. And above all there is the question of the prices at which the benefits (and costs) are evaluated; the book assumes it has to be market prices, but shadow prices are needed for social cost benefit analysis.

So while I agree that the tool is not technocratic but embeds values, choices about consuming resources now or in the future will always involve an implicit cost benefit analysis. Better to make it explicit, recognising the specific normative decisions involved. Anyway, loads of interesting detail in the book and it made me think, always welcome!

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