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Why I'm Excited About The Industrial Policy Renaissance
We will all benefit from what Biden and von der Leyen are doing
In March I wrote a piece for the New Statesman outlining the industrial policy turn in both the US and the EU. Drawing from development history, I tried to show why these changes amount to something profound and historic. What we call industrial policy today has its origins in the Renaissance and in Tudor England and its tried and tested success produces not just a more equally prosperous society internally but also greater national power in the world. One of the foundational texts of this historical line of thought is quite literally called Austria Supreme if it So Wishes: A Strategy for European Economic Supremacy, written in 1684 by Philipp von Hörnigk. This isn’t just a policy change like tinkering with the tax rate. Industrial policy - the use of state direction to build up national increasing returns activity and internal improvements - is the foundation for building up all other forms of power.
Before I go on, let me say that I had no great expectations for either of these leaders and I’ve always been somewhat Eurosceptic. That began to change around the time of the invasion of Ukraine when I really struggled to find any reliable sources of news and analysis and so I ended up developing new reading habits. One of those was to take a break from opinion and just read policy news every day. I did that every day for about a year. I wanted to know what concrete decisions were actually being made at the highest level. What I found totally surprised me. Free trade, austerity and neoliberalism were dead and the leaders in the EU and the US were both embracing the kind of policy ideas I had always dreamed of. Investment was pouring into research and development, not just industrial but also into things like cleaning the oceans and curing cancer (see Horizon Europe) and ambitious futuristic state led industrial strategies were being planned and funded.
Consider this, from the New Statesman piece:
The global return to industrial policy began with China’s Made In China 2025 plan, announced in 2015, and was followed by the EU’s Green Deal Investment Plan in 2020. Then the US responded with the 2022 Chips Act and the Inflation Reduction Act.
Faced with a competitor willing to use the full arsenal of state-directed economic national policies, the US, first under Donald Trump and then Joe Biden, has returned to economic nationalism. Biden is employing state-directed industrial development, protectionism, the subsidised reshoring of manufacturing and trade-war strategies more aggressively and effectively than Trump. The EU is following the same path, increasing state spending on research and development with projects like Horizon Europe, industrial development policy for the whole Union, as well as relaxing state-aid restrictions for national industry.
And now for the history lesson:
During the Renaissance, Italian city-states achieved great wealth and success. Thinkers tried to formulate theories as to the cause of the success of these states, and their subsequent decline. Giovanni Botero (1544-1617) argued that the wealth of cities were built by what we now call manufacturing or “value added” – creating additional value to raw materials through manufacturing more complex goods for export. From a prison in Naples, Antonio Serra wrote his A Short Treatise on the Wealth and Poverty of Nations (1613), in which he argued that the active encouragement of manufactured exports, not the exchange rate, was the cause of wealth and the solution to economic decline, first theorising what we now call the effect of “increasing returns” activity.
Tudor England had already taken these principles based on state-directed manufacturing and applied them on a large scale. England had once been a laggard importer of technology from the continent. Henry VII set England on its journey from relative poverty to a world-dominating industrial powerhouse when he started taxing raw wool and subsidising the manufacture of wool textiles for export. The repetition of this simple formula of discouraging simplicity and encouraging complexity was revolutionary in its effects. England’s resulting industrial take-off was so great that it eventually became a problem for the rest of the world, which not even Napoleon’s continental blockade between 1806 and 1814 could stop. How could any colony or independent nation compete with England’s head start when they were dependent upon England’s more advanced manufactured goods and locked into a raw materials economy? The Germans and the Americans later figured it out.
In fact, Adam Smith had warned America against protectionism and state policies to promote native industries, claiming that instead, free trade cosmopolitanism was the path to prosperity, writing in The Wealth of Nations (1776):
“Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufacturers, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.”
From Alexander Hamilton (1757-1804) to Henry Clay (1777-1852) to the more radical thinker Carey (Abraham Lincoln’s chief economic adviser), the devised American System employed tariffs to protect fledgling high-value native industries and a national investment bank for internal improvements in complementary infrastructure. By gaining currency and policy independence from Britain’s empire, disincentivising cash crops and raw material exports, while incentivising national industries through subsidies and protectionism, they constructed a national system so powerful that it would outgrow the British and all the others that came before it.
The strongest left-wing case against the EU was its fiscal conservatism and neoliberal undermining of state aid to industries. And yet a mixture of populist pressure and new geopolitical realities have now led the EU to champion centrally directed industrial and technological development policy. Although there are ongoing disagreements between member states, as part of the Green Deal Industrial Plan the EU has also started to permit individual member state aid to boost investments for a faster development of renewable energies, while pouring funds into development for the whole Union… This gives the world three vast economic and political unions: China, Europe and the US – each involved in a centralised, state-directed development race, with renewable technology at the forefront.
(As I mention in the piece, the green aspect of this industrial policy push does worry me somewhat because the technology is not yet good enough to be truly independent and yet I can also see the logic in thinking that the only way to make that leap into the truly renewable is to go all in with R&D funding and subsidies.)
Biden’s policies are already starting to work and we’re only seeing the beginning. Under von der Leyen the EU has also started spending big on ambitious industrial policy and research and development, albeit with a less perfect union, a less dominant global position and a smaller budget for subsidies. Straight forward policy news indicates that both powers are working together and cooperating in many ways though the media loves implying otherwise for some reason. (Add to that the AUKUS alliance and you’ve got a pretty formidable world power bloc but I won’t get into the military aspect here.) I notice that von der Leyen is also clamping down on hostile foreign meddling (e.g. within the NGO sector!) while building up Europol and Frontex. These are the actions of a leadership that is planning for the future. None of it is perfect, none of it is quite enough and all of it is open to criticism but for the first time in my life I feel that Western leaders are moving us in the right direction. I could be wrong but I’m betting on the industrial policy Renaissance working out and future historians looking back at this moment as a turning point, maybe even one of those “by the skin of our teeth” moments where we changed just in time.
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