Most mainstream economists go to great lengths to ignore the impact of politics on economic decisions. If anything, they malign the negative impact of political decisions that otherwise deny the glory and truth of economic “laws.” Vivid imaginations indeed!

Sensible people know better. When looking at the current state of industrial policy, they realize that both domestic and international politics play a role in creating the conditions for industrial policy. While domestic politics may be the easier to understand of the two, international relations (IR) is probably why anyone cares about industrial policy at all in the Western world. But what’s the proof?

If we look at the post-Trump era of industrial politics in advanced industrial countries specifically, we can see that a more activist and explicitly enunciated role for the state has been caused by the mishandling of the China situation. Unorthodox IR thinkers like John Mearsheimer predicted through his theory of offensive realism that a rising China would threaten US hegemony, both militarily and economically. And while I do not support US hegemony of any kind, the blissful and childish optimism liberal internationalism has created a situation where a potential threat to the West produces a large proportion of the stuff we need to live. It didn’t have to be this way.

When the US and the USSR were faced with a very similar conundrum during the post-war era, they chose another route. The Soviets turned down access to the Marshall Plan, and decided to go it their own. While this sowed the seeds for the eventual economic destruction of the USSR, it did actually do the US some good. Realizing that a successful US economy would be an important symbol of the “superiority” of US-style capitalism, combined with the living memory of the catastrophic Great Depression, the post-war era had very active industrial policies across all advanced economies, including the US. One needs only look at US programs/policies to support venture capital and innovation (Bush’s “Science: The Endless Frontier” document, etc.) to see the active role of the State in infant industries and other parts of the economy.

And ironically, this aligned closely (but not fully) with the vision laid out by Keynes in his General Theory. Trade was managed, rather than free. Coordination was stronger than now on many things, most obviously, currency policy. Hot money was shunned. Financialization was kept in check (kind of). Tariffs and other policies were reduced through the GATT, but with enough room for countries to experiment and advance their own national industrial interests within the team of the “West.” In other words, the Cold War created an environment where capitalism had to succeed, and policy makers realized that the State had to played a role to some extent.

Contrast that to now. Beginning in the 1970s and accelerated by Reagan/Thatcher, the neoliberal era has been a wonder for GDP growth, and a blunder for everything else. The lack of strategic planning and risk analysis allowed for the mass transfer of industrial capacity to China starting in the Deng era, and only paused due to the tariff policies of Trump. Biden has done the most to move industrial policy out of the shadows in a more coherent way. But it is the threat of entanglement with China, given the divergence in geopolitical issues (South China Sea, Taiwan, Russia, Ukraine) that has likely had the greatest impact on the rise of industrial policy.

Given that competition with China is not going anywhere anytime soon, it seems like the current geopolitical environment will allow for more and more countries to experiment with their own variation of industrial policy. While I do not relish a new Cold War with China, I also will not look a gift horse in the mouth.