Lecture 24a: State and Economy concluded
What’s wrong with picking winners.
At the end of last Thursday’s lecture, I was
saying that the developmental state was first credited and then discredited in practice, first by
achieving the highest rates of economic growth in the world in the 1970s and 1980s, and then, in
the case of Japan, by entering a prolonged period of stagnation, and in the case of Korea, by
having to be bailed out by the IMF in 1998 to the tune of $44 billion. Moreover, as we discussed
in the Friday sections, the developmental state is imagined to be the economy under the guidance
of a chess master who is able to understand the development of industry on a world scale, and to
allocate resources in order to achieve strategic supremacy. In practice, however, and particularly
in pluralistic societies like the United States, nurturing industries is not at all a matter of grand
strategy, but is more like having politically well-connected favored children, who receive or fail
to receive benefits as a matter of the more or less haphazard outcome of political gamesmanship.
But, that aside, let’s think about the developmental state from the theoretical point of
view. As Luttwak says, the idea behind the developmental state is that the government picks
winners, deciding which are the key industries and then arranging matters so that those industries
succeed. What’s wrong with that?
Several things. One is that picking winners assumes the government knows how to do
that. Sometimes it does and sometimes it doesn’t, and when it doesn’t it makes big mistakes.
Ten years ago, the coming thing in television was HDTV. There were two basic ways to go,
analog and digital. The Japanese government for some reason put its chips on the analog format;
this was the wrong way to go, and Japanese manufacturers lost the edge in HDTV. Without
central direction, some Japanese manufacturers would have gone one way and others the other,
and some would have succeeded. As it was, they all went one way, and as it happened that was
the wrong way. Central direction really means putting your eggs in one basket, and if it’s the
wrong basket that’s too bad. Lack of central direction means eggs in different baskets.
There’s another problem with central direction, namely uneven development. When you
pick winners you’re also picking non-winners, industries that don’t get special treatment. The
most basic fact about economics is that there’s a limited supply of everything, of labor, of talent,