Industrial Policy and American Renewal

I NDUSTRIAL POLICY has turned out to be an idea with a brief career. In the summer of 1984, after Rhode Island's electorate voted 4-1 against a bond issue to give the state its own policy, Robert Reich observed that industrial policy is one of those rare ideas that has moved swiftly from obscurity to meaninglessness without any intervening period of coherence (Reich 1984, p. 32). This from perhaps its chief advocate. In the fall, the Reagan reelection sealed the issue, ruling out a U.S. policy for years to come. Still, the policy debate raised two central questions about economic change. (1) Why do older industries tend to show a retardation in output and employment growth? (2) Has industry aging eroded American competitiveness, so that the U.S. is in some sense losing the economic race? (Lester Thurow 1984). To get at answers to the two questions, this paper offers a review of what economists have had to say about industry aging, economic maturity, and market-generated renewal. Because the subject matter is so vast, it will prove useful to begin with a guide to the territory, a roadmap. I. Preliminaries