The five rationales are presented as co-equal but the political reality has collapsed the hierarchy. Every major industrial policy being implemented right now, CHIPS Act, EU Critical Raw Materials Act, China's dual circulation, is justified primarily through national security. Not market failure. Not coordination. Not infant industry. Security.
That matters because security rationales face no natural limiting principle. A market failure argument has a built-in boundary: fix the externality and the justification expires. A security argument doesn't expire because the threat environment never fully resolves. Once industrial policy is justified through security, the question "when do we stop?" has no answer. The state never voluntarily relinquishes a capability it has declared strategic. So the five rationales don't just accumulate as the piece suggests. One of them is eating the other four, and the one that's winning is the one with no off switch.
Excellent overview. I’m not sure where exactly it would fit in your framework, but another element of industrial policy is the decision about which sectors are and are not appropriately served by “markets” at all — natural monopolies for instance being always inappropriate for privatization.
I would observe also that claims not to be exerting industrial policy are actually just cover for abdicating responsibility to the financial sector; which is to say that there is never NOT an industrial policy, despite claims to the contrary. So beware those who claim otherwise …
Grateful for your writing, Jostein! So clear, cogent, and important to correct common misperceptions.
Thanks, Andrew, I hope you're doing well!
The five rationales are presented as co-equal but the political reality has collapsed the hierarchy. Every major industrial policy being implemented right now, CHIPS Act, EU Critical Raw Materials Act, China's dual circulation, is justified primarily through national security. Not market failure. Not coordination. Not infant industry. Security.
That matters because security rationales face no natural limiting principle. A market failure argument has a built-in boundary: fix the externality and the justification expires. A security argument doesn't expire because the threat environment never fully resolves. Once industrial policy is justified through security, the question "when do we stop?" has no answer. The state never voluntarily relinquishes a capability it has declared strategic. So the five rationales don't just accumulate as the piece suggests. One of them is eating the other four, and the one that's winning is the one with no off switch.
Very interesting thank you!
Excellent overview. I’m not sure where exactly it would fit in your framework, but another element of industrial policy is the decision about which sectors are and are not appropriately served by “markets” at all — natural monopolies for instance being always inappropriate for privatization.
I would observe also that claims not to be exerting industrial policy are actually just cover for abdicating responsibility to the financial sector; which is to say that there is never NOT an industrial policy, despite claims to the contrary. So beware those who claim otherwise …