Industrial Policy Round-Up #2

Its been a little over a week since the first industrial policy round-up, and new news in this go-round has come at a much slower pace—with the notable exception, of course, being the unexpected turns in the recent UK election, which has brought with it some surprising turns and uncertainties, particular where economic questions are concerned. But before diving into British affairs, I’d first like to look at a piece that has gotten significant traction in the past days: a response posed to Marco Rubio’s interventionist program for a “common good capitalism” by Kevin Williamson at the National Review.

National Review‘s legacy is built on its role in helping engender a major shift in American conservative thought, being the place where fusionism (the unification of social conservatism with economic liberalism) was articulated and advanced. It had become closely aligned with the Republican Party in the 1950s, and sought out cooperation in particular with the segments of the party that made up the so-called “anti-New Deal coalition”. The echoes of this encounter have persisted through the years, with NR consistently taking aim at programs that would bolster the government’s role in managing the country’s economic affairs—and Williamson’s piece closely conforms to the common tropes offered up by this tendency:

Rather than monkeying around with things that are beyond his kin and outside the credible operating capacity of the U.S. government, Senator Rubio should be seeing to some of the things that actually might make a difference. The U.S. government is on a catastrophic fiscal course that will, without reform, eventually result in a ruinous debt crisis the likes the world has never seen. (We’ve seen fiscal crises in Canada and Argentina, but the U.S. economy represents nearly a quarter of the world’s economic output). We have entitlement programs that are in need of reform, decaying and archaic infrastructure under federal purview, serious K-12 educational problems entangled with federal policy, a tax code in great need of simplification, a series of worldwide military engagements that have failed or are on the verge of failing, enormous deficits, an out-of-control presidency and administrative state, etc., all of it under the responsibility of a federal apparatus that cannot even produce an accurate account of how many programs it administers. Senator Rubio and his colleagues are like fast-food workers who haven’t yet mastered the drive-thru but demand a seat on the board of the company: They are not doing a very good job with the responsibilities they already have.

Williamson’s argument revolves around what we might call, from our position in a world draped in the language of complexity and systems, a stigmergic understanding of capitalist development: capitalism advances through the rough-and-tumble world of the market’s self-organizing powers, where innovation and growth bubble up from the webs and conflicts of innumerable self-interested actors. This stigmergic understand is the natural counterpart—and outgrowth from—the flat abstractions of neoclassical economics, where issues of class, structural determinations and, importantly, the state bear little to zero imprint on the operations of these actors. He raises an important point when he notes that government fiscal policy is dependent on the capture of profits and incomes in the form of taxes (which brings the limits of the state into sharp relief when confronted with the issue of profitability crisis rears its head), but otherwise the account remains reductionist and lopsided—especially when considered from the point of view of American economic history, which pursued a radically different pathway than its cousin across the pond, Britain.

Williamson writes that the “things that gave Detroit its critical advantages in the early 20th century were not things that could be planned in advance by super-intelligence philosopher-kings in the bureaucracies”. It’s true that the absolute outcomes of actions cannot be drafted in advance, but its equally true that efforts to provide the frame for critical advantages was part and parcel of the early American experience. The program for the promotion of manufacture drafted by Alexander Hamilton might have hit road blocks and been mired in political gridlock, but as historians like John Lauritz Larson have shown, the cultivation of ‘internal improvements’ and other business-promoting measures was abundant and common, not only at the federal but also state level. In the case of Detroit, that critical advantage that Williamson applauds emerged in large part due to what was at the time one of the largest mobilizations of labor, money and resources outside of wartime. This was, of course, the construction Erie Canal.

That industrial policy programs are related to either the acceleration or restoration of profitability rates goes without saying—though some of the ways this takes place are saying. In the case of internal improvements, like the American projects to develop canals and vital infrastructure, what is at stake is the reduction of turnover time. This is the unity of the time of production and exchange. At the outset of a given production cycle, the capitalist must invest in labor, raw materials and the like up front—investments which are compensated for by returns generated by the successful realization of profits. The quicker the turnover time, the quicker this realization, and it is through investments in transport and vital infrastructures that this time is shortened. For people like Hamilton, the successful profitability of business was linked directly to the political standing of the nation: the state benefits from maintaining a consistent rate of return. It’s only a small leap from here to the ‘risk-bearing state’ that I mentioned last week, where the state takes the lead in fronting the investments for high-cost, high-risk, big pay-off ventures that private business is reluctant to engage in. Because there is a dialectical relationship between profits and investments (profit rates determine investment behavior, quantities of investment capital impact the rate of profit), it’s clear here too that the interest of the state in continued profitability is playing a clear role.

Finally, the turn of the state to industrial policy in times of crisis often entails ‘forcing’ investments where there are none, even if that goes against the interests of those holding onto to potential investment capital. Elements of this existed in the era of the New Deal, especially with the mid-1930s Revenue Acts that imposed wealth taxes on corporations and the country’s wealthiest individuals, though this side of the experiment has been overstated a bit (though important, we tend to forget that a major part of the New Deal was the encouraging of private investment, in manners akin to those I just described above). But it’s what is at the core of much of what is being discussed today, particularly in the form of the Green New Deal. Here, what is being proposed is that the state seizes the capital to become the investment apparatus itself, in order to funnel it towards productive, profitable—and hopefully ecologically sound—ventures.

When it comes to the ongoing discussion inside the Eurozone, it isn’t so much profitability itself, but questions of global political standing, that is taking point. This was touched on a bit in the last round-up, with the ongoing debates surrounding the EU’s perceived decline in the face of American and Chinese “technological supremacy”. Several reports have been issued by prominent European think-tanks, close to policy-making circles, that have reiterated this problem. One of these worth mentioning at length is a policy brief written by Kris Best titled “The Economics of European Sovereignty”. Best’s papers is published in the aegis of Jacques Delors Centre, the Berlin-based branch of the Jacques Delors Institute, a French think-tank committed to promoting an integrated and stable Europe (Delors, the founder of the institute, was Mitterand’s finance minister, president of the European commission and, notably, a proponent of European federalism)—and it is the preservation of the European Union, through both reinvigorating the continent economically and preventing governmental overeach, that is the goal.

First, a little background: in 2017, a deal was struck between the German firm Siemens and Franc’s Alstom to merge their railway businesses in order to create, in the words of a Reuters report, a “European champion”. The merger would have produced one of the strongest rail businesses in the world, one capable of overtaking the global railway supplier, China’s CRRC—but in February of 2019, the European Commission blocked the merger, citing worries over the impact it would have on innovation and consumer welfare. The result was an intensified debate over the merits of industrial policy and government intervention in the markets in general. In March, the Commission’s European Political Strategy Centre published a report titled “EU Industrial Policy After Siemens-Alstom” that opened with the observation that “[t]here is a palpable feeling that Europe risks being left behind unless urgent action is taken”. The urgent action came in the form of a recommendations comprehensive and multi-pronged approach, ranging from strengthening the World Trade Organization, expanding “trade defence instruments” (in short: protectionist measures to shore up domestic firms and markets against foreign competition), equalizing access to markets and, importantly, the promotion of “strategic investment” into “disruptive of breakthrough innovation”.

Best’s briefing takes cue from these debates; as she notes, the blocking of the merger “sparked a heat debate about whether EU competition policy is still in line with the realities of the new global economy. Those who supported the merger argue that the European Commission is preventing the creation of “European champions”, and that such things are necessary if the EU is going to continue to be competitive against China’s rising global influence. In response, the Commission has looked to reevaluating the Eurozone’s legal frameworks governing competition, with an eye towards cultivating a “long term strategy for Europe’s industrial future”. At the heart of this reevaluation is a series of questions posed by new technological developments—namely, artificial intelligence, big data platforms, and cybersecurity, as well as the significantly large role played by singular firms in making up the ‘infrastructure’ for this new economic environment.

In the proliferation of large-scale, surprisingly mutable information technology firms—what Nick Srnicek has described as platform capitalism—economic and technical power undergoes an intense concentration which leads them, inevitability, operate out of joint from the usual ‘laws’ of competition. But as market competition declines, competition between nations has been intensified, as countries and regions work with tandem with these economic giants. In the case of Europe, the lag is indeed palpable when one looks to the top twenty internet firms as sorted by market capitalization: they are all American and Chinese, with no European companies making the list.

This is a worrying situation for European policymakers, as the collision of these firms on the world market operate as indices for the growing tensions between the US and China. As Best summarizes,

China in particular views the rapidly-evolving field of digital technology, and especially the rise of artificial intelligence, as an opportunity to further its own development. In its Made in China 2025 strategy, China targets digital tech as a strategic area for industrial policy and aims to become a global leader in high-tech manufacturing by 2049. Under this strategy, China is channelling significant public and private investment into its industrial giants and aims to reduce its state of current tech interdependence with the US by supporting indigenous tech development. The US, meanwhile, is attempting to disentangle itself from the Chinese tech industry – for example, by implementing stricter controls on foreign investment in the US, blacklisting Chinese tech firms (including Huawei), and considering restrictions on American tech exports to China. This decoupling between the US and Chinese tech industries carries the medium- to long-term risk of splitting the global economy into two distinct ‘technospheres’, each with its own products and standards. In this respect, the risk for Europe is being caught in between these two spheres and constantly being pulled to one side or the other.

Best, however, rejects the notion that Eurozone policy should be picking individual firms to serve as “champions”, and warns that overhauling laws governing competition would not only negatively impact consumers, but ultimately disincentivize innovative behavior. Instead, “[i]ndustrial policy should… aim to encourage innovation and thereby support economic growth” by situating it in a highly competitive environment. She reinforces this position by turning to a previous study published this year by the Jacques Delor Centre that argued that industrial policy works best when it is married to market competition (this paper, titled “Beyond Industrial Policy: New Growth for Europe”, is worth checking out!). Despite this guardedness, Best’s understanding of a renewed competitive framework would not be a simple reiteration of old frameworks. Reinforcing large, champion-like firms should be the agenda, though a distinction must be made between “predatory acquisitions” and “mergers that improve efficiency and deliver benefits to consumers”. Likewise, Best suggests that people recognize that information technology platforms do indeed lend themselves to a “winner takes all” state of affairs, making the “superstar firms” something of a structural inevitability.

Best’s briefing resonates with “Europe’s Third Way in Cyberspace”, a recent report from Annegret Bendiek and Martin Schallbruch of the German Stiftung Wissenschaft und Politik (the SWP, the EU’s premier think-tank for international affairs). I find the language in this title to be both interesting and telling: classically, ‘third way’ was a term developed to describe center-left and social democratic parties that had turned away from socialist and even Keynesian types of policy perscriptions towards a ‘humanist’ or ‘social’ form of capitalism. It had its origins in the idea, advanced by the Ordoliberal intellectuals and put into practice by German Christian Democrats, of a “social market economy”, a blend of free market capitalism with a welfare state and renewed focus on the legal aspects of economic life (i.e. ensuring balanced and fair competition and the like). By the 1980s the third way had become prominent across Western Europe, and was the motor of the social democrat embrace of so-called ‘neoliberalism’—though it must be said this iteration of neoliberalism was counterposed to the sort of economic revolution being led in the US and UK by Reagan and Thatcher, respectively. In both of these countries the third way would be realized by President Clinton’s realignment of the Democratic Party and Tony Blair’s ‘New Labour’, though this would be a rather idiosyncratic form determined by the laissez-faire, anti-welfare politics that preceded them.

For the SWP authors, the new third way refers to a path between American capitalism, typified by ‘Silicon Valley libertarianism’, and Chinese state capitalism. It is at once a new future (a break with the current state of things), a defense manuever (maintaining European independence, interdependence and competitiveness), and an act of preservation (retaining the ‘essential’ aspects of the EU experiment). Bendiek and Schallbruch write that

“Regulation, competition and industrial policy must relate to cybersecurity and and cyber foreign policy. The key question will be whether or how the EU can successfully strengthen digital sovereignty whilst preserving its liberal democratic traditions in the digital space and ensure the necessary strategic interdependence with other regions of the world.

They see a “conflict of values” emerging on the near horizon. For some time now, information technology has been seen as a neutral—even neutralizing—force. It’s a hangover from the tech boom of the 90s, which perceived global information flows as a great leveller, something capable of smoothing out the rough edges of the world order and of breaking down every sort of barrier between nations, cultures, markets, so on and so forth. Tech led, so the prophecy went, and governments followed, and where both were heading was a transnational world whose governmental architecture would be less “formal Greek” and more “Frank Gehry” (to quote Hillary Clinton). But, as the SWP authors point out, this line of thought has obscured the deep connection between tech and great power politics. It’s impossible to attribute to information technology as a simply neutral position when, for example, the dominant tech firms work closely with the US government state surveillance apparatus. Likewise, the ongoing cold conflict between the US and China, with firms like Huawei taking center stage, should give these technologist determinists room for pause:

The US administration views Huawei not only as a market participant but, at the same time, as a Trojan horse from an unfriendly government…

The conflict over Huawei marks a break with the purely market-based logic of global trade relations and expedites a growing digital mercantilism. Many see converging markets as no longer simply an opportunity to improve prosperity, but also as a danger to self-determination and public safety. They argue that digital products are suitable for undermining value systems and subverting governmental control through technical backdoors. Terms such as “technological sovereignty” and “economic vulnerability” or “weaponized interdependence” are an indication and legitimation of the growing willingness to restrict innovation and competition when it comes to digital products and services.

In this environment, the striving for a preservation of European “digital sovereignty” becomes paramount. To achieve this end, Bendiek and Schallbruch lay out a means of three planks: “(1) maintaining and enhancing global competitiveness, (2) rules on competition that are as fair as possible (3) investment in digital infrastructures”.

Moving west from Brussels to the UK, itself on the verge of finalizing its exit from the EU, and we find a similar set of concerns at play. The events massive—and for many, surprising—defeat of Labour by Boris Johnson’s Conservatives needs little repeating here, though it might be worth keeping in mind that the question of Brexit was a major determining factor in how that critical vote played out. What will the UK look like outside of the EU? It’s hard to say at this point, but there are already rumbles of a large-scale restructuring of the British government. The Times (shout out to Thom once again for drawing this to my attention) reports that Johnson “has drawn up plans for to run a ‘revolutionary government’ that will see ministers sacked, Whitehall departments abolished and civil servants replaced by experts in a bid to ‘reshape’ the economy”. FT goes even more in-depth:

Mr Johnson now wants to create a powerful new business department — absorbing the international trade department — to secure inward investment for the UK’s poorer regions and strike trade deals across the world, according to officials briefed on his proposals. Rishi Sunak, Treasury chief secretary, is seen in Whitehall as a potential head of the new economic super-ministry, which might also take responsibility for broadband and artificial intelligence from the Department for Digital, Culture, Media and Sport.

Officials confirmed that Mr Johnson was looking to recreate an energy and climate change department — as first reported in the Sunday Times — because of the political imperative of tackling global warming.

Much of this comes from Johnson’s chief adviser, Dominic Cummings, whose own political outlook contains a fascinating mixture of populist sentiment and technocratic imperative (for more on the tangled relationship of these two forces, I refer the interested reader to my post “Technocracy and Populism”). In a 2017 blog post he lauded ARPA, the Department of Defense R&D hub that worked to promote a wide range of innovations, most slated primarily for military use but with significant bleed-through into civilian applications (see: the internet, but also information technology more generally). Cummings writes that the successes of ARPA “runs contrary to how free market think tanks and pundits describe technological development. The impetus for most of this development came from government funding, not markets”. For this reason, he continues, “[a]s we ponder the future of the UK-EU relationship shaped amid the farce of modern Whitehall, we should think hard about the ARPA/PARC example: how a small group of people can make a huge breakthrough with little money but the right structure, the right ways of thinking, and the right motives”.

This need for a British ‘innovation think-tank’ was reiterated in a recent speech by the Queen, and was the subject of series of documents obtained by the New Scientist. As they report, these documents

show that the proposed new agency would back researchers working in any new and emerging fields with a high risk of failure and where the outcomes are uncertain.

“Our proposal is that a new body, offering academics longer term funding (spanning at least 10 years) to tackle significant societal challenges – problems or opportunities – could help do this and strengthen the UK’s global reputation,” officials write in a discussion paper on a UK ARPA.

The agency would be a plank of the UK’s aspiration to become a “science superpower”, they add.

The Department for Business, Energy and Industrial Strategy (BEIS) invited academics to a meeting at 10 Downing Street on 25 September to discuss plans for the agency. Cummings was present at the meeting, people who attended told New Scientist.

Business minister Andrea Leadsom and science minister Chris Skidmore also attended, though the list of academics at the meeting is redacted, as are many of the documents released by BEIS under the FOI request.

The mooted agency wouldn’t have set areas of research focus, but existing UK work on quantum computing and molecular biology are cited as examples of the sort of research that could be funded. The emphasis is placed on long-term funding, up to 15 years, for basic research that is “far from the market” and has a higher risk of failure.

That’s all for this week! (oh, and I’m always looking for more stuff to add for future round-ups—and I’m particularly interested in keeping better track of the goings-on in the developing world. So feel free to drop me a line in the comments here, or you can always DM me on twitter).