Dot-Common Sense:
The Internet Economy Proves the Folly of "Industrial Policy"
Twin Cities Business Monthly, March 2000
By Mitchell B. Pearlstein

In reporting last January on AOL's plan to acquire Time Warner, a writer for the Wall Street Journal described the upscale marriage in this terrific way: A company that "isn't old enough to buy beer," and which is built on technologies that are only "little older, "essentially" swallowed a media conglomerate that took most of a century to construct."

Or, framing the union more broadly if less metaphorically, has there ever been clearer evidence of a market economy's dynamism? Think about it, for a nanosecond at least. Emerging out of a temporal nowhere, something called the "Internet" is the main propellant of the biggest business deal in all of history's eons We're talking about a technology so new that not just any vice president, but a sitting one, claims to have invented it.

Similarly, think about how it's impossible to watch television or listen to radio without being informed, seemingly by every other commercial, that a limitless array of products and services is available by simply punching in a "dot" followed by something called a "com."

Who could have predicted that some high-tech advertisers would take a pass on the 2000 Super Bowl, not because they couldn't afford the zillion dollars a minute, but because they feared that their messages would get lost in a flood of other lnternet ads? Who could have predicted, just a handful of years ago, such a radical new way of doing business?

Oh, I trust some people did predict such a new world. But save for some of the folks that Newt Gingrich used to hang out with when he was writing books and thinking unusually big and offbeat thoughts for a politician, I start from the premise that soothsayers have always been rare, both in and out of the civil service.

But in the same way it was only a few years ago that even the best and the brightest in government (as in virtually all other spheres) knew very little about what the final moments of the millennium would bring economically, it was the same number of years ago that many otherwise bright people readily assumed that America's best days had been relegated to its rear-view mirror.

Such skeptics often seemed to suggest, getting to the heart of the matter, that other nations were destined to occupy what had been our quite private driver's seat, with Japan heading the list of countries poised to take us for a spin -- and then to lunch.

Why Japan in particular? Well, one reason was that it had something called an "industrial policy," in which the wisdom and weight of its government and treasury could be mobilized on behalf of its most promising and strategic businesses. This approach, went the argument, would prove to be more successful than America's less centralized (i.e., freer) ways of doing things.

Given what was seen as this new truism of economic life -- ceaselessly described as a new "global economy" of unprecedented demands -- the skeptics lobbied for an industrial policy for the United States in which American resources might be deployed with something approaching Japanese style rationality and coherence. The names of some of these advocates are familiar, as a fair number served in key jobs in the earlier stages of the Clinton administration: scholars and activists such as Robert Reich, Laura D'Andrea Tyson, and Ira Magaziner What can be said of their theories and attempted practices? As witness the remarkable state of our nation's economy -- as opposed to the troubled state of Japan's for much of the past decade -- little more needs to be said than that they were wrong. Flat-out and big-money wrong.

But why, exactly, were they off base? Consider, if you will, a wonderful 1994 American Experiment paper that I just had reason to reread, "Who Won the Industrial Policy Debate," by Professor Ian Maitland of the Carlson School of Management at the University of Minnesota. Given events of the last half-dozen years -- not to mention the last few months -- his analysis rings truer than ever. Here's just one small slice, from a section acutely called "Patience is Not Always a Virtue":
"The fundamental factor that worked to the advantage of the American microelectronics industry (and to the disadvantage of its Japanese rivals) in the early 1990s was that advances in product technology refused to stand still." For example, after 20 years of development. Japan's HDTV system was only then coming to market -- "just as breakthroughs in digital television technology [were] making the Japanese analog approach obsolete."

For similar reasons, Maitland wrote, Japan's Ministry of International Trade and Industry was forced to abandon its fifth generation computer project "with little to show in the way of tangible results for all the taxpayers' money swallowed up by the program."

In a technological environment of daily miracles, there isn't a team of elected officials or bureaucrats anywhere capable of picking economic winners or losers. Only a free market can do that.

Or, if you will, rest assured that while Al Gore didn't really invent the Internet, neither did any politician in Tokyo.

-- Mitchell. Pearlstein is president of Center of the American Experiment, a conservative think tank in Minneapolis.