Industrial Policies Gain Support in the Academy

Last month, the Wall Street Journal published an attack on Joe Biden’s industrial policies arguing that Bidenomics “needs more…economic theory or research.” This theme has been picked up by numerous other media publications. Economist and former Treasury Secretary Larry Summers appeared on a Peterson Institute video to argue that restrictions on free trade, such as tariffs and industrial policies, could endanger low consumer prices—as if that were the only worthwhile goal of economic policy.

But outside of the spotlight there is a growing number of economists offering public support and economic research for industrial policies. Influential MIT economist David Autor wrote a letter in response to a critical article in The Economist that had labeled industrial policy a “delusion.” Autor defended industrial policy, arguing that avoiding it today would have “many risks, especially when our chief economic and strategic competitors are currently using it to great effect.” Two economists from Cambridge University’s Institute of Manufacturing wrote their own letter to The Economist pointing out that, “Manufacturing has been the primary driver of productivity growth in economies where it accounts for more than 20% of GDP.” The authors cited Singapore, Taiwan, South Korea, Germany, and China as recent examples.

Meanwhile in the United States, a small group of economists recently formed an Industrial Policy Group dedicated to economic research demonstrating that industrial policies have worked in various countries around the world. Their goal is to reverse what they refer to as “kneejerk opposition” from the U.S. academic community. “There is a generic and powerful case for industrial policy…industrial policy has typically shifted resources in the desired direction, often producing large long-term effects in the structure of economic activity,” they wrote in an article entitled The New Economics of Industrial Policy.

Their article identifies three types of industrial policies. The first type, targeting “infant industries” such as textiles and shipbuilding, is closely associated with the success of East Asian nations such as South Korea. The second type, government support for research and development that can be widely used by private sector firms, can be seen in U.S. policies like support for the space program in the 1960s and ARPA support for the precursors of the Internet in the 1980s. The third type are place-based policies targeting specific industries in specific cities or regions, such as America’s industrial buildup during World War II.

Tariffs and other forms of protection can play an important part in infant industry strategies. Industrial Policy Group co-founder Reka Juhasz published a paper in 2018, Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade, using 19th century data to show that Napoleon’s blockade of shipments from Britain stimulated the French cotton industry to adopt the latest cotton spinning techniques. What’s more, the growth of France’s cotton-spinning industry outlasted both the blockade and Napoleon. By 1887, the French cotton industry was five times larger than it had been in 1812, and was competitive enough to export significant volumes to other European markets.

Juhasz’s findings are similar to those of Frank Taussig, Harvard’s most famous professor of economics in the years before and after 1900 (when economics professors were not very famous or respected at all). In his Tariff History of the United States, Taussig wrote that U.S. manufacturing of cotton began with Jefferson’s embargo of 1807, was set back by the global depression of 1818-1819, and received a decisive boost after 1821 from economic recovery combined with an 1816 tariff. “The duties on cottons in the tariff of 1816 may be considered a judicious application of the principle of protection to young industries,”[1] wrote Taussig.

Taussig’s method of analysis is more descriptive, interweaving many historical factors and trends from early 19th century history, while Juhasz’s method is entirely statistical, to meet the requirements of modern academic economics. But the conclusions are the same. To support infant industries when a nation is competing against a dominant giant in the industry, protection is often required.

Growth vs. Efficiency

Long-term economic growth is, or should be, the most important goal of economics. Long-term economic growth is the reason why the U.S., which had a level of per-capita prosperity similar to Argentina in the mid-19th century, ended up as the richest and most powerful country in the world by 1945. It is the reason why Singapore, at a similar income level with Malaysia in 1960, is today the highest-income industrial country in the world while Malaysia still languishes in poverty.

Academic economics in the U.S. has pretty much lost interest in the economics of growth. A look at the requirements for an economics degree at leading U.S. universities shows that there are multiple requirements for statistics courses, but no requirements at all for courses in economic growth. The emphasis in most universities is on microeconomics, i.e. how highly competitive markets produce efficient outcomes at a single moment in time.

If you asked the average economics graduate why U.S. economic growth in the 21st century has been sub-normal and below that of many other countries, in most cases, they would shrug their shoulders. Along with the lack of interest in teaching growth economics goes a lack of progress in the field in U.S. universities. Paul Romer, a Nobel-winning growth economist wrote in a bitter and controversial article in 2015, “for the last two decades, growth theory has made no scientific progress.” The article, entitled Mathiness in the Theory of Economic Growth, continued Romer’s sustained campaign against the use of too much math in economics. He sees it as disguising the unreality of economic models, rendering the entire field of study irrelevant and counterproductive.

Even Dani Rodrik, Harvard professor of political economy and an outspoken critic of globalization for over a decade, often couches his critiques in terms of “market failure,” a phrase that means markets have deviated from the ideally efficient solution. In fact, markets can all be highly efficient, but growth can be low, as in an African country that is most efficient at producing cobalt or another mineral but remains desperately poor.

Economic growth is about a long-term strategy aimed at raising the growth rate and incomes of the average or median worker, even if there is a cost in short-term efficiency. In the early 19th century, the U.S. and France each realized that keeping out low-priced (highly efficient) British cotton goods was an essential step to building successful domestic industries.

When the Wall Street Journal’s Greg Ip claimed that economic “theory and research” does not support industrial policy, he ought to have added that the reason is that the near-monolithic academic community has effectively ignored issues of national economic growth for decades. Instead, Ip quoted Harvard professor Gordon Hansen saying that economists will “run away” from industrial policy because it introduces “welfare-reducing distortions.” The phrase “welfare-reducing” is economist jargon for efficiency-reducing. But Hansen, who is an ally of Rodrik and a critic of globalization, supports industrial policies himself. He was distancing himself from the idea that industrial policies don’t work, and implicitly criticizing the near-religious devotion of academic economics to short-term efficiency.

Stealthily and quietly, pro-growth anti-globalization views are gaining adherents in the economics profession, as more economists recognize that the globalization recipes of the last 30 years have not worked. There is a growing view within the profession that recognition of this failure is coming. One sign of it would be a Nobel Prize in economics to Rodrik for his boldly unconventional views, or to MIT’s David Autor, lead author of the “China Shock” series of papers.

Today, the U.S. needs to acknowledge that some form of defensive strategy against China and other low-priced exporting nations is essential to rebuilding U.S. industry and prosperity.  The next 100 years of prosperity are more valuable than short-term efficiency.



[1] Taussig, Frank, The Tariff History of the United States, G.P. Putnam’s and Sons, 1888, pg. 35.


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