Steve Keen, a Post-Keynesian economist and author known for critiquing mainstream economic theories, discusses industrial policy's historical significance. He emphasizes how successful industrial nations, from Britain to China, relied on protectionist policies. Keen critiques the effectiveness of Trump's tariffs in rebuilding American industry, warning that simplistic solutions may lead to chaos. He also highlights the impact of globalization on trade dynamics, the complexities of public versus private debt, and the consequences of wasteful expenditures on sustainability.
Historical evidence shows that successful industrialization often relied on protectionist policies like tariffs before embracing free trade.
Tariff measures alone lack the comprehensive industrial strategies, such as workforce development, necessary for sustainable economic growth.
Increased tariffs can lead to significant cost hikes and market instability, undermining the goal of revitalizing American manufacturing.
Deep dives
Impact of Tariffs on Global Supply Chains
Imposing tariffs on imports can have a significantly magnified effect on overall prices, particularly within a global supply chain. For example, a 10% tariff on Chinese imports could effectively become a 50% increase by the time goods pass through various international suppliers. This situation results in higher costs for importers, causing them to reassess their ability to sell products profitably. The consequences of such increased expenditures may include business closures or a challenging shift towards domestic production, which is a complex and time-consuming process.
Historical Context of Tariffs and Industrial Policy
Historically, successful industrialization in various countries has often involved a protective tilt towards domestic industries, such as through tariffs. Many nations like the U.S., Germany, and Japan have engaged in protective measures to develop their manufacturing capabilities before transitioning to free trade once industrial strength was established. A notable theorist, Danny Rodrik, argues that this trend highlights that protection can effectively allow countries to catch up technologically with more advanced economies. This cycle of starting with protection and later embracing liberalization is a fundamental pattern observed throughout industrial history.
The Flaws in Neoclassical Economic Theories
David Ricardo’s contributions to free trade principles highlight some critical flaws in mainstream economic theories. He argued for specialization based on comparative advantages, suggesting that countries benefit from focusing on what they produce best, even if less efficiently. However, this perspective underestimates the importance of physical capital and the transition challenges between specialized industries, which can lead to technological obsolescence. The neoclassical emphasis on optimization overlooks the significant costs and complexities inherent in shifting production capabilities to accommodate free trade.
Industrial Policy versus Tariff Strategies
While protectionist tariffs may seem like a straightforward solution to revitalize domestic industries, they often lack the structured industrial policy needed for sustainable growth. The American example with tariffs fails to address the industrial strategic planning seen in countries like China, which leverages a combination of low tariffs and targeted industrial policies. Additionally, factors like education and workforce development are essential; without skilled labor capable of operating advanced manufacturing processes, tariffs alone cannot revitalize industry. Thus, a more nuanced, long-term view incorporating comprehensive industrial strategy is vital for addressing deindustrialization.
The Threat of Economic Chaos
The introduction of aggressive tariff policies can lead to substantial economic disorder rather than the intended revitalization of domestic manufacturing. Increasing production costs, coupled with a lack of workforce readiness to absorb these transitions, can result in significant market instability and business failures. The prediction of financial chaos in the wake of such trade policies reflects the intricate challenges of managing an economy transitioning from globalization back to localized production. As uncertainties grow, businesses may face further pressure to reduce output and consumption, leading to a potential downturn in economic activity.
This week, we talk industrial policy. Economist and author Steve Keen joins me to shine light on the present moment by exploring the historical use of tariffs and industrial policy in the development of industrial powers from Britain to China. In his usual style, Keen aims to dismantle the myths of free-market economics, explaining how virtually every successful industrial nation began with protectionist policies. With the US now engaged in a trade war with Canada and other nations under Trump's renewed tariffs, we examine whether such measures can effectively rebuild American industry without the comprehensive industrial policies that powered China's meteoric rise. Hint: Keen believes this simplistic tariff solutions may create more chaos than revival for America's industrial base.
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