Introduction to Industrial Policy

Confronting the daunting economic challenges of the 21st century — from the existential threat of climate change to the specter of massive job losses to automation — will preoccupy the world’s governments and will require novel strategies. The coronavirus crisis has highlighted, on one hand, the brittleness and opacity of the supply chains that underpin globalization and, on the other, the awesome power of government to help in a crisis.

Against this backdrop, the notion of industrial policy (IP) — the government intervening in markets to promote particular industries and economic goals — has garnered bipartisan interest. The scope of interventions that fall under this umbrella is broad. Generally, however, an intervention can be considered industrial policy if the government strategically aids the firms or individuals engaged in a specific industry with the goal of improving the productivity of that industry, especially in comparison to global competitors.

The goal of this primer is to introduce IP — its rationale, examples of its implementation, and its political implications — as a legitimate and potentially useful policy lever. First, we explain the strong theoretical foundation for IP, discussing infant industries and the theory of learning by doing. Next, we survey some historical examples of IP, which empirical economists are only now beginning to rigorously evaluate. Finally, we consider the politics of government intervention in the economy and the consequences of its popularity.