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That’s Not How It Works

Summary:
Here’s a letter to someone who “increasingly sympathize[s] with the case for industrial policy”: Mr. Kiner: Thanks for your e-mail. You write that there’s a “clean answer” to my question of how government officials charged with implementing industrial policy will get the knowledge they need to allocate resources in ways superior to the allocations brought about by free markets. This answer, you say, is to “observe what industries have high percentages of high paying jobs, and expand those.” I’m afraid that this approach won’t work. The reasons are several, but here’s one that’s key: An important reason for high pay is unusually great scarcity of particular kinds of workers relative to the demand for the goods or services those workers produce. If government artificially expands the

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Here’s a letter to someone who “increasingly sympathize[s] with the case for industrial policy”:

Mr. Kiner:

Thanks for your e-mail.

You write that there’s a “clean answer” to my question of how government officials charged with implementing industrial policy will get the knowledge they need to allocate resources in ways superior to the allocations brought about by free markets. This answer, you say, is to “observe what industries have high percentages of high paying jobs, and expand those.”

I’m afraid that this approach won’t work. The reasons are several, but here’s one that’s key: An important reason for high pay is unusually great scarcity of particular kinds of workers relative to the demand for the goods or services those workers produce. If government artificially expands the number of such jobs, there’s no guarantee of a supply of workers sufficiently skilled to fill those new jobs. And even if such a supply of workers does exist, the additional production will push the prices of those workers’ outputs lower, and in turn reduce their wages. 

A government that followed your advice would, upon observing that the average wage of players in the National Basketball Association is very high, commence to subsidizing the creation of hundreds of additional professional basketball teams. But obviously the players – that is, the workers – employed by these new teams would never be as productive as are the players currently in the NBA. And so the market wages of workers drawn into these jobs through the machinations of government wouldn’t be anywhere near as high as are the wages now paid to LeBron James and other current players. 

The same logic that applies to a government-engineered expansion of the professional-sports industry applies, if perhaps less vividly, to a government-engineered expansion of any other industry you care to name.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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