Minding America's Businesses.

AuthorNiskanen, William A.

My candidate for one of the most wrongheaded books of the last 50 years is the 1982 book by Ira Magaziner and Robert Reich, Minding America's Businesses. I chose this book not because the authors are evil or the book is awful but because the book promotes the profoundly pernicious view that the government can and should have a "rational" industrial policy to guide the allocation of labor and capital. Moreover, the authors are now in positions of substantial responsibility, Magaziner as the major architect of the Clinton health plan and Reich as secretary of labor, so there is reason for concern that they may have maintained this perspective.

As I mentioned, this book is wrongheaded but not awful. The authors were careful about the facts. The analysis was plausible to most people other than economists; the authors, for example, do not understand comparative advantage or the causes of inflation, but neither do most people. And the book provides a useful summary of our government's messy de facto industrial policy.

The conceptual case for industrial policy is that the returns to some investments are higher than the returns to the investor. The primary weakness of this case is that the government does not have either the information or the incentive to support these investments. The information necessary to identify a promising technology, product, or firm is decentralized and often contrary to the conventional wisdom. The characteristic incentives of government are to support old technologies, failing firms, and technological fads. Magaziner and Reich have...

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