A "Good" Industrial Policy Is Impossible: With an Application to AB5 and Contractors
![handle is hein.journals/jecoplcy17 and id is 531 raw text is: 2022]
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A GOOD INDUSTRIAL POLICY IS IMPOSSIBLE: WITH
AN APPLICATION TO AB5 AND CONTRACTORS
Michael Munger
Duke University
INTRODUCTION
Industrial policy in capitalism is automatic and self-correcting,
animated by the logic of profit and loss.' But the market failure2 rationale
for government direction of resources and provision of goods and services
rests on the claim that the profit test cannot provide public goods, discipline
natural monopolies, solve problems of asymmetric information, or
internalize social externalities. Progressive political operatives would go
much further, arguing that the direction of the economy requires a hand on
the tiller, with the conscious and intentional direction of investment to
ensure that growth occurs in the areas of maximum social benefit and
efficiency.3
I Marshall and Marshall is the earliest, clearest mathematically complete argument for this
position. In a competitive system, profits should be transitory, but the signal given by profits (or losses,
which should also be transitory) is essential for the system to function effectively. See MARY P.
MARSHALL AND ALFRED MARSHALL, THE ECONOMICS OF INDUSTRY, (MacMillan & Co. ed. 1881).
Mises argued not only that profit and loss was the best industrial policy, but that no other politically
selected policy was even feasible. See LUDWIG VON MISES, Profit and Loss in PLANNING FOR FREEDOM
(Libertarian Press ed. 1952); see also Walter Block et al., No Policy is Good Policy: A Radical Proposal
for U.S. Industrial Policy, 17 GLENDALE LAW REV. 47 (1999). Smith and Cannan sought to give moral
authorization to profit, and commercial society, precisely so the system could carry out this function. See
ADAM SMITH AND EDWIN CANNAN, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF
NATIONS (Ixia Press ed. 2019) (1776).
2 For foundations, see generally A.C. PIGOU, THE ECONOMICS OF WELFARE 331 (4th ed. 1932);
Francis M. Bator, The Anatomy of a Market Failure, 72 THE QUARTERLY J. ECON. 351, 357 (1958). For
modern syntheses, see A. W. Brian Simpson, Coase v. Pigou Reexamined, 25 J. LEGAL STUDIES 53
(1996); J. O. LEDYARD, Market Failure in THE NEW PALGRAVE DICTIONARY OF ECONOMICS (S. N.
Durlauf & L. E. Blume eds., 2nd ed. 2008); Roger E. Backhouse & Steven G. Medema, Economists and
the Analysis of Government Failure: Fallacies in the Chicago and Virginia Interpretations of Cambridge
Welfare Economics, 36 CAMBRIDGE J. ECON. 981, 982 (2012) (quoting James M. Buchanan, Politics,
Policy, and the Pigovian Margins, 29 ECONOMICA 17 (1962)); lain Marciano and Steven G. Medema,
Market Failure in Context, 47 HISTORY OF POLITICAL ECONOMY 1 (2015).
3 Describing in detail the enthusiasm for industrial plans in the Roosevelt administration. See IRA
C. MAGAZINER AND ROBERT B. REICH, MINDING AMERICA'S BUSINESS (Harcourt, Brace, and Jovanovic
ed. 1982); see generally A. BADGER, FDR: THE FIRST HUNDRED DAYS, (Hill and Wang ed. 2008); AMITY
SHLAES, THE FORGOTTEN MAN: A NEW HISTORY OF THE GREAT DEPRESSION, (Harper ed. 2008).](ViewImageLocal?handle=hein.journals/jecoplcy17&div=25&collection=&method=preview&ext=.png&size=3)
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A "Good" Industrial Policy Is Impossible: With an Application to AB5 and Contractors
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