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Robert Asselin: Refocusing the debate on industrial policy

Commentary

Noah Smith, an economist whose commentary I always find original and insightful, wrote a great commentary earlier this week on why China’s industrial policy has been mostly a flop. His main argument—which I very much agree with—is that throwing a lot of public money at firms is the wrong and ineffective way to do industrial policy. 

The current debate around—and the application of—modern industrial policy is a topical and consequential one. As far back as April 2020, in “A New North Star II“, Sean Speer and I argued the Washington Consensus that emerged in the 1980s—centered on “free” markets, liberal trade, and open capital markets—was going to be challenged in a significant way by growing geopolitical rivalries and an increasingly intangible economy. Three years later, the policy debate in most Western countries is now not about whether industrial strategies should be adopted or put forward, but how big these public investments should be.

To us, though, the issue was never about how much we should spend, but rather how we ought to spend. In a late 2021 paper, for instance, we argued for significant institutional reforms to Canada’s science and technology architecture including a new agency with a specialized staff and a high degree of autonomy so as to minimize the risks of bureaucratic inertia and political capture.  

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The urgency to for Canadian policymakers to adjust their thinking to these new economic and geopolitical realities has only been heightened. The passage of the Inflation Reduction Act and the CHIPS and Science Act in the U.S. last spring was a game-changer. With investments cumulating nearly USD $460 billion, it is, in constant dollars, almost double what the U.S. government spent in the 1960s on the entire Apollo space program. With the U.S. also in discussions with key allies to restrict semiconductors exports to certain markets, it’s clear just how much the new geopolitical rivalries are reshaping economic policymaking and the global trading system. Technological innovation and national security are now inextricably linked. 

In a recent Wall Street Journal op-ed, JP Morgan Chase & Co.’s Chairman and CEO Jamie Dimon—one of America’s strongest champions of free enterprise—wrote:

Global trade will necessarily be restructured so that we don’t rely on potential adversaries for critical goods and services. This will require more ‘industrial planning’ than America is used to—and we must ensure it is properly done and is not used for political purposes…Most developing countries would prefer to align economically with the West if we help them solve their problems. We should develop a new strategic and economic framework to make ourselves their partner of choice.

Dimon’s warning is prescient. It is an unfortunate reality that the historic philosophical debate on the role of the state in the economy is being used by some as a policy and political wedge. After all, markets and governments are not operating in two distinct parallel universes. The demarcation between state intervention and laissez-faire is rarely clear-cut. 

I would argue, for example, that an aggressive economic immigration strategy is a very effective industrial policy instrument. Talent nurtures innovation and innovation increases productivity. It’s a rising tide that lifts all boats. But very few would think about economic immigration as an obvious case of government overreach in a market-driven economy. Every country needs and has an immigration policy and its outcomes are a reflection of policy choices rather than spontaneous forces.

The debate on industrial policy is thus not about whether we need a lot of government intervention or no intervention at all. Instead, it should be about its effectiveness: that is how industrial strategies are designed and what policy instruments are used to achieve them

From my perspective, this is where governments fall short. 

The legitimate and valid arguments against industrial policy

1. Lack of clear objectives: Too often governments confuse industrial policy with the politics of “job creation” or “regional development” or any number of priorities that detract from core goals of innovation and productivity. Political capture is an obvious danger and politicians will often be tempted to promote industries of their liking and influence outcomes to their political favour.

Unless we set higher productivity and economic competitiveness as clear goals for an industrial policy, vague objectives are bound to yield underwhelming results. In a recent Public Policy Forum paper I argued that the modern application of science and technology is the new frontier of economic competitiveness and, as a consequence, Canada needs to urgently rethink its science and technology architecture. In a recent speech at MIT, U.S. Commerce Secretary Gina Raimondo presented a clear, concise, and comprehensive articulation of the American game plan that starkly defines its economic priorities:

We believe there are three families of technologies that will be of particular importance over the coming decade: first, computing-related technologies, including microelectronics, quantum information systems and artificial intelligence; second, biotechnologies and biomanufacturing; and third, clean energy technologies.

2. Overreach and overregulation: Overshadowing market dynamism and entrepreneurial impulses harm economic outcomes. An economy that is overregulated is bound to be less competitive. As the Obama administration’s Strategy for American Innovation rightly noted:

The true choice in innovation is not between government and no government, but about the right type of government involvement in support of innovations. The private sector should lead on innovation, but in an era of fierce global competition, governments can and should play an important enabling role in supporting private-sector innovation initiatives.

Creating the right macroeconomic conditions conducive to capital formation is paramount. This includes the regulatory environment and tax policy.

3. Implementation and execution: At a time when we witness governments struggle to deliver the most basic services for citizens—renewing a passport, receiving health care, etc.—it is only fair to ask whether governments have to ability to formulate and deliver industrial strategies that can be effective. The design and implementation of policy instruments (such as tax incentives, R&D funding, and demand-side levers such as public procurement) requires a degree of sophistication and thoughtfulness. When the right structures and incentives are put in place, the evidence shows that success is possible

The shaky arguments against industrial policy

If some arguments against industrial policy are valid, others are easier to dismiss. 

1. The free-market argument: There is a somewhat romantic and prevailing view amongst certain economists, columnists, and policymakers that market fundamentalism—laissez-faire economics inspired by a caricature of Adam Smith’s “invisible hand”—is supreme. Under this ideological bent, free markets’ “efficiency” is everything we should aim for. The problem, of course, is we all know markets have never really been “free” and “efficient”, nor will they ever be in the future. In his BBC Reith Lectures in 2020, Mark Carney offered a powerful demonstration of how market fundamentalists have failed to recognize that the economy isn’t “deterministic.” As he astutely pointed out, in any given market competition is never perfect, and consumers and market players are not rational actors. Markets are always constrained and shaped by regulations, competition policy, or tax policy, and, yes, by trade and industrial policy. 

I underline this not to undermine the value of economic theory, but to infuse some pragmatism in the current conversation on industrial policy. To state the obvious, the idea that the market is always right is fundamentally flawed. If this was true, as Carney rightfully observed, it would have been easy to prevent the great financial crisis of 2008 that caused millions of Americans so much economic hardship.

2. Industrial policy is central planning of the economy (the China model): Another common criticism of industrial policy is that it consists of “central economic planning” and even amounts to essentially adopting the Chinese model in Canada and elsewhere. Yet in liberal capitalist economies, even if industrial policy is solving for market failures (e.g., climate change) or prioritizing national security issues (e.g., biomedicine or semiconductors) the ultimate investment, innovation and production is still being driven by the private sector. In China, by contrast, there is essentially no private sector in China. Everything is state driven. The comparison is absurd. 

3. Industrial policy equals “subsidies”: As I expressed up front, I agree giving subsidies to private firms is the wrong way to do industrial policy. But there is a certain intellectual laziness—or a fair amount of bad faith—by those who keep portraying industrial policy exclusively as “subsidies”. An equivalent assertion would be to say tariffs equate trade policy. It’s one (mostly negative) feature of trade policy but it’s not all of it. When I think about industrial policy and where it needs to go, I reflect on the immense economic successes of the Apollo Program, the ARPA model of funding breakthrough research in the United States, and the Fraunhofer institutes in Germany. I think about South Korea and what they did in advanced manufacturing or how the Netherlands, a country about half the size of New Brunswick, became an ag-food powerhouse.  

These are compelling models of public-private collaborations that have yielded significant productivity enhancement for national economies. Policy design and policy instruments matter a great deal. A May 2022 OECD paper on the effectiveness of certain policy instruments used in industrial strategies concluded that some are quite effective. 

4. Governments don’t know how to pick winners: It’s certainly true that they don’t at the firm level. But people adopting this line of argument miss the larger point: yes, the sectoral composition of an economy matters a great deal. 

As our economy suffers from a chronic lack of productivity and our trade deficit is in danger of becoming structural, the capacity of our economy to produce goods and services becomes paramount. Canada has become a services/real estate economy. We have lost significant manufacturing capacity since the 1970s. In 2020, for instance, residential investment represented 37.2 percent of gross fixed capital formation.

In Potato Chips, Semiconductor Chips: Yes, there is a difference, Rob Atkinson makes a strong case for that not all sectors are equal when it comes to industrial policy. His main point is that some industries, such as semiconductor microprocessors (computer chips) can experience very rapid growth and reductions in cost, spark the development of related industries, and increase the productivity of other sectors of the economy. There are, in other words, certain sectors or productive capacities that are worth having in one’s economy and justify using public policy in order to cultivate. As Atkinson puts it: “In essence, spillover effects from computer chips make potato chip manufacturers more efficient. In addition, jobs producing computer chips have higher productivity and require a higher skill level and thus pay more than jobs producing potato chips.“

As for the trade deficit, by the time the pandemic hit, Canada had recorded 11 consecutive years of current account deficits. As David Dodge stated in a PPF paper: “The current account deficits can also be seen as the inevitable product of Canadians and their governments choosing to borrow to maintain a high level of private and public consumption rather than finding ways to generate national income through added production.”


The question then becomes: how best can a government support these types of advanced and more productive industries? I agree subsidies to firms is not the way to go. This is why focusing on how you translate public R&D into economic outputs must become a clear economic imperative.

Again, the examples of the Netherlands in ag-tech, Germany in advanced manufacturing, and the United States in defence and space in fostering industrial public-private R&D at scale and commercializing speak volumes. I have argued elsewhere that Canada needs, as a key component in an industrial strategy, a modern incarnation of what used to be corporate labs—where industrial research done in collaboration between governments, universities, and businesses led to real innovation at scale in the economy. 

In his new book, Slouching Towards Utopia, economic historian J. Bradford DeLong writes:

What changed after 1870 was that the most advanced North American economies had invented invention. They had invented not just textile machinery and railroads, but also the industrial lab and the forms of bureaucracy that gave rise to the large corporation. Thereafter, what was invented in the industrial research labs could be deployed at national or continental scale. Perhaps, most importantly, these economies discovered that there was a great deal of money to be made and satisfaction to be earned by not just inventing better ways of doing old things but inventing brand-new things.

A final point: democratic governments are bound to make decisions on what they believe is best for the voters they are elected to represent. Our parliament has passed net-zero legislation. We’ve effectively set a political economy goal that markets alone won’t solve for because of the uncertainty and the risks involved. One can argue, I suppose, that we shouldn’t set such political economy goals and that what we produce, buy, and sell should be left fully to market forces. But no economy in the world operates that way or has ever operated that way.

And so, from time to time, we are going to have political economy goals that go beyond what the market will produce on its own. In these instances, we need to think carefully about how to incentivize the market to do what is required for the public good. That will necessarily involve some form of industrial policy.

Deani Van Pelt: How one woman’s counterintuitive approach to learning is inspiring a new generation of educators

Commentary

An approach to K-12 education with a curriculum that pivots on the subject of history is a counterintuitive trend for our time, in which dismissing history seems to be a prized virtue. Yet the growth in this approach is exponential. And global. It’s happening in established schools, micro-schools, and home schools. Learning pods, private kindergartens, and tutorial cooperatives are getting in on it too. 

The charm of this approach to education, initially proposed by the British educator Charlotte Mason (1842-1923), is that it appears to understand children and offer them just what they need, in ways almost unparalleled by other educational approaches. 

Although hard to quantify the reach, for comparison, a google search in late 2022 of “Charlotte Mason” returned 79 million results while “Montessori” gave 131 million.“Montessori is a method of education that is based on self-directed activity, hands-on learning and collaborative play. In Montessori classrooms children make creative choices in their learning, while the classroom and the highly trained teacher offer age-appropriate activities to guide the process. Children work in groups and individually to discover and explore knowledge of the world and to develop their maximum potential.” https://montessori-nw.org/about-montessori-education It’s fair to say that today almost every home educator, certainly in a commonwealth country, would know Mason’s name. Alternatively, most school educators and parents in our times, although they might not yet know Mason, would certainly be somewhat familiar with Montessori’s name.

So, what is the attraction of a Charlotte Mason education? 

First, the discontent with the education on offer during the pandemic sent many parents and teachers on the hunt for an alternative approach to education where kids could come alive and take some ownership of their day-to-day schooling. During their search, many ran into Mason’s approach online but then found out it was being unfolded in local independent schools or home school programs. 

In short, it’s an approach that recognizes kids are hungry and curious, that they welcome exposure to (and mastery of) new things and experiences, and that they flourish when joy is a feature of their learning. The approach begins with the understanding that children are born persons ready to learn and grow with minds requiring nutrition even as the body does. The curriculum, from the beginning, is broad, putting kids in touch with nature, poetry, art, music, handicrafts, folktales, and legends, and the emphasis is relational, putting the child in relation with people from the past, the present, and the future.

And what better way to do so than through story? Her approach stimulates the emotions by creating attachment with characters from other times and places facing and overcoming challenges and a child’s interest is peaked and learning is secured, particularly when the student is asked to retell or narrate back the story or the reading. Language and oracy are enhanced and self-agency developed, as the story and the knowledge reproduced are assimilated to become the child’s own, nourishing their intellectual appetites and furnishing their minds with images and role models to which they will return when faced with decisions throughout the challenges and opportunities of their own lives.

Indeed, a Charlotte Mason education is characterized by encounters with the historical, literary, and scientific traditions through living books—pleasingly illustrated stories and histories told through literature marked by a literary voice. Textbooks take a back seat and living books take priority of place in every home or school classroom. A Book of Centuries is kept as each student records, year by year, the ideas, people, and events they encounter. The child’s education is also characterized by hours spent out-of-doors in close acquaintance with nature through nature journalling and the recording of first sightings in spring of plants and birds. In fact, a child in Mason’s program would come to know all living plants, birds, insects, and animals within a mile radius of where the classroom was located.

The uptake in popularity in our day is a fitting tribute to its founder, who died in 1923 and whose centenary is being recognized in many events and publications this year.

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In the winter of 1886, Mason, an experienced educator at the time, first articulated her educational philosophy in a tremendously successful lecture series. Soon, she was the author of six books on education, the founder of a teacher college, an education journal, a curriculum, and a union for parents. At the time of her death in 1923, thousands of students across the globe including over 100 schools in the U.K. educated according to her approach.Although the explicit popularity of Mason’s ideas waned in the mid-20th century, according to Daily Herald journalist of the day, Amy Landreth, there were still over 6000 students worldwide and at least 60 schools in the U.K. following Mason’s design for education in 1965. One commentator at the time stated that “there is hardly a Girls’ School in the country that has not been directly or indirectly affected by her teaching.”In Memoriam, 1923, p. 50

“Mason showed us how happiness might permeate our classrooms, how there might be joy in learning, joy which grew from the team spirit in the classroom,” one teacher commented in 1923. Charlotte Mason reminded us in 1904, in her volume titled School Education, that “the question is not,—how much does the youth know? when he has finished his education—but how much does he care? and about how many orders of things does he care? In fact, how large is the room in which he finds his feet set? and, therefore, how full is the life he has before him?”

And if a broad curriculum filled with arts, humanities, science, and even religion that pivots on history sounds somehow as though it might prioritize the history of one culture over another, consider Mason’s words from 1911: 

High intellectual attainments, amazing mechanical works rest with the persons of any nation. Therefore, we need not be surprised at the achievements of nations in the far past, or in remote countries which have not had what we consider our great advantages. This concept, of the mystery of a person, is very wholesome and necessary for us in these days; if we even attempted to realize it we should not blunder as we do in our efforts at social reform, at education, at international relations…the mystery of a person is indeed divine, and the extraordinary fascination of history lies in the fact that this divine mystery continually surprises us in unexpected places…we attempt to define a person, the most commonplace person we know, but he will not submit to bounds; some unexpected beauty of nature breaks out; we find he is not what we thought, and begin to suspect that every person exceeds our power of measurement.

Chomondeley, 1960, The Story of Charlotte Mason, p. 221

We shouldn’t be surprised, perhaps, that in our time when many are suffering from (or even prioritizing) historical amnesia, a whole counter-movement would be arising that is willing to take the risk of believing in our children and knowing that they have what it takes to encounter their heritage of stories of the past, stories from distant places including the future, and will be able to sift through to find the beauty and the good—the ennobling—and make it their own. Our job is to provide the environment and the atmosphere where this is possible. 

Turns out, this might be a good year to join in with others in remembering one of history’s most influential philosophers of educationOne of the top 27 of all time among the likes of Socrates, John Dewey, Maria Montessori, and Lev Vygotsky, according to one University of Sheffield expert. and exploring what else she might have to teach us about how to teach others.