All About Industrial Policy

Today: The state taking charge really matters, especially from a European perspective. But it doesn’t work every time.

Credit: Dayne Topkin

The Agenda 👇

• Industrial policy gave us Silicon Valley

• We have it to thank for capitalism’s success

• There are mistakes you should avoid, however

• Industrial policy in the pandemic

• Industrial policy and economic development

• Contextual rationality matters

• Mariana Mazzucato: the founding mother of modern industrial policy

• Happy New Year! Looking forward to 2021 🎉

You don’t need to convince me that the state plays a critical role in fostering entrepreneurial ecosystems and determining the success of local champions. After all, I’m French 🇫🇷 (and French people are firm believers in the legitimacy of the state intervening in the economy, as I explained in France, As Revealed by its Elite, published in July 2020). I also know my Silicon Valley history and the role that the US federal government played in giving birth to it, as I wrote about in How Fred Terman Turned Stanford Into an Entrepreneurial Powerhouse (July 2020):

I love this anecdote by Steve Blank, as told in this excellent conference about his Secret History of Silicon Valley. One of his talks took place at Stanford University, in an amphitheatre that (appropriately) bears the name of Frederick Terman. Yet when Blank suggested a show of hands, asking who knew who Fred Terman was, nobody raised their hand 😮 (For reference, Terman (1900-1982) was dean of the School of Engineering at Stanford from 1944 to 1958 and university provost from 1955 to 1965.) Well, let’s say that Terman is no less than the founding father of Silicon Valley.

Beyond that, the history of capitalism (in no small part thanks to French historian Fernand Braudel) clearly shows the symbiotic relationship between capitalists and the state, as I explained in Capitalism and the Future of Nation States (December 2019):

Capitalism played an extraordinary role in progress. The increasing returns it generated through scale created an economic surplus that allowed, depending on the context, for lower prices for consumers, higher salaries for workers, and/or better returns for investors. It’s for this reason that both the right and the left have always encouraged capitalism in the West. It was necessary, of course, to curb its excesses, but it was always counted on to develop the economy. Case in point: Mariana Mazzucato doesn’t like when “leftist economists” like her are depicted as anti-capitalists. As she’s argued on Twitter, you can be both for capitalism and for more state intervention. Indeed, the most prosperous countries were always those where capitalists benefited, according to Braudel, from a certain “goodwill” on the part of the state. Or, as Dani Rodrik puts it, “capitalists need the state more than the state needs them”.

That being said, the idea that the state can play a decisive role in fostering entrepreneurial ecosystems doesn’t mean that any intervention by the state is a good thing. In fact, there are many cases in which the state contributes to destroying value. I covered it across several essays published recently:

• A “high-tech guy” as EU commissioner is no use for startups (October 2019—in Sifted, about France’s Thierry Breton being appointed to the EU commission) 

• The Problem With Taxpayer Money in Startups (December 2019) 

• Can Anyone Reshape the State? (January 2020—about Dominic Cummings, who recently resigned his position as Boris Johnson’s strategic advisor) 

• Does Every Country Need Their Own DARPA? (October 2020) 

• Infrastructure and Growth (December 2020) 

• Is investing in 'deeptech' a good move for Europe's VCs? (December 2020—in Sifted) 

The discussion around industrial policy (that is, the state supporting businesses) has obviously been nurtured by the pandemic and the fact that it has brought back the state as a legitimate player in taking charge when it comes to the economy. As early as March, I published What If We're at War?:

There are three things that only waging a war can bring about, and that together make a real difference:

• Alignment. When you’re at war, everyone is in sync, pursuing the same goal. It might not seem obvious at first, but even black market smugglers contribute to the war effort by mitigating one of its most adverse impact on civilians, the scarcity of essential goods.

• Polarization. Being at war makes it easy to divide the world in two: you’re either with us or you’re against us. Everyone standing in the way of whatever the war requires can be declared an enemy of the state. Wars remove institutional and political resistance to change.

• Infinite resources. When you’re at war, there’s no discussing the price. Because wars are a matter of life and death, it’s difficult to make the case for a cost/benefit analysis. You want to prevent profiteering, but you can definitely tolerate a LOT of waste.

It was followed by several essays related to industrial policy during the pandemic, among which:

• Supporting Venture Capital During the Crisis (March 2020) 

• Should Startups Be Bailed Out? (April 2020) 

• Should the State Invest in Startups? (April 2020) 

Industrial policy is closely related to development economics, which I believe is one of the most relevant disciplines in these times of paradigm shift. I first wrote about it in Europe Is a Developing Economy (October 20219): 

You may be familiar with Joe Studwell’s How Asia Works. In this inspiring book, Studwell, an expert in everything Asia, reflects on the economic performance of eight East Asian nations over the 20th century—namely on how four have succeeded (that’s Japan, Taiwan, South Korea, and Mainland China) while four others have remained stuck in what economists call the “middle-income trap” (Malaysia, Indonesia, Thailand, and the Philippines). The book is Studwell’s framework for understanding what went right in the first four nations and what went wrong in the latter four.

Importantly, I think this playbook for tackling economic development can be applied to today’s Europe. It’s not because Europe is obviously similar to East Asia in the early 20th century. It was a different world back then and countries were confronted with different economic challenges. Still, with a bit of translation in terms of time and space, we Europeans can build upon the playbook found in How Asia Works. It only takes one thing: admitting that Europe has once again become a developing economy.

That was followed by various essays related to economic development and how the state can make a difference. Have a look:

• Marc Andreessen on Building Things (April 2020) 

• The Geography of Value Creation (October 2020) 

• Industrial Policy: China Gets It, We Don't (October 2020) 

• America As a Technological Champion (November 2020) 

• You're The Protectionist! (November 2020) 

There are many interesting precedents of industrial policies that have delivered, which I discussed in the following essays:

• What European startups can learn from the success of the fintechs (February 2020—in Sifted) 

• Who's Disrupting Whom at the Global Level? (June 2020—about Japan catching up in the 1980s) 

• Climate: Startups to the Rescue? (June 2020) 

When it comes to industrial policy, however, it’s a good thing to not be blinded by successful precedents. What really matters is the local context and the importance of designing a policy that fits it. I echoed Robyn Klingler-Vidra’s work on “contextual rationality” in my review of her book The Venture Capital State. Have a look at Building Up Venture Capital in Asia (March 2019):

Reverse engineering is not the same as replicating. And indeed that’s not what happened in the Asian countries covered in Robyn’s book. Instead of doing exactly the same as the Americans, those in charge in Taiwan, Hong Kong, and Singapore made the effort to adapt what they had devised to the local context. Having understood what made US venture capital thrive, they could abstract a framework and then apply it to the very different context of their own country.

It’s a difficult art, transposing a nexus of policies to a radically different context. I’m not sure European policymakers have what it takes to practice that art. But it should rank very high in our list of European priorities

Here are two other essays in which I discuss the fundamental differences between different domestic contexts:

• On Trains and Geography (October 2020) 

• Each Country Is Different (November 2020) 

It’s important to point out that industrial policy is about more than regulations. Have a look at the following:

• Big Tech, Meet Congress (August 2020) 

• Fewer Regulations in America? (October 2020) 

Very recently I made the case that the temporary context of low interest rates should prompt every government on the planet to explore opportunities on the industrial policy front. That was What to Make of Low Interest Rates (December 2020):

From an industrial policy perspective, a government should acknowledge that firms won’t respond to lower interest rates and capital becoming more abundant unless it uses this context as effectively financial repression: directing the cheap capital toward investments that eventually contribute to developing the local economy and supporting national champions.

🎧 If you want a broader discussion of what industrial policy is all about, why it matters, and how we can upgrade it in the Entrepreneurial Age, make sure to listen to my wife Laetitia discussing it all with famed economist Mariana Mazzucato: that’s in Reinventing the State w/ Mariana Mazzucato. The gig economy. Brexit. Silver Lake. Tony Hsieh and Las Vegas. (December 2020).

Finally, let me add two more personal essays that relate to this topic:

• Anyone Can Build an Entrepreneurial Ecosystem (July 2020) 

• Tony Hsieh's Other Legacy (December 2020) 

Happy New Year! Let’s reconnect next week in a normal setting. I look forward to fruitful conversations with you in 2021 🤗

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From Munich, Germany 🇩🇪

Nicolas