Industrial policy has traditionally been conceived of as a strategic tool that nations use to gain “market share” in the context of international trade. Over the last five decades or so, the focus of industrial policy has also been on governments directing resources toward the corporate sector. In this essay, we depart from that standard approach by decentering the firm in favor of the Earth’s most treasured and productive resources—its people and the environments in which they live. We argue that the best and most just conception of industrial policy begins with a government strategically investing resources directly in its people and the environment. Rather than thinking of people as consumers to whom resources might be distributed as a charitable afterthought, we view them as productive agents. Investing in their human capacity—à la Amartya Sen’s human capabilities—not only should be a primary purpose of government in the first instance, but also turns out to generate positive externalities and productive macroeconomic multipliers that benefit the overall economy as well. Moreover, investment in healthy and renewable environmental assets is a necessary precursor to healthy and productive living, especially over time.
Industrial policy has returned to the policy discourse with intensity, but in practical terms, it never went away. Although we may not usually conceive of them as such, actions like deregulation, government outsourcing and privatization, corporate tax cuts, and outright corporate subsidies—all things that the U.S. government has continually engaged in since at least the 1980s under the neoliberal regime—amount to a strategic direction of resources to impact economic activity and outcomes, and hence a form of industrial policy. Indeed, an argument could be made that despite its rhetoric of small government, the Reagan Administration, with its deregulation, union-busting activities, and corporate tax cuts, represented a massive and active strategic shift in government resources (both political and economic) toward corporate interests and away from labor, with industrial and economic purposes in mind. Clearly, it is not an industrial-policy approach we endorse. Nonetheless, a case could be made that Reagan, in the general sense of redirecting public resources toward the corporate sector, ranks amongst the biggest architects of industrial policy of our time.
In an influential article in the Harvard Business Review, Robert Reich, who would later serve as labor secretary in the Clinton Administration, described industrial policy as a focus “on the most productive pattern of investment” and argued that it “favors business segments that promise to be strong international competitors while helping to develop the industrial infrastructure (highways, ports, sewers) and skilled work force needed to support those segments.” A recent article from the Council on Foreign Relations describes industrial policy as a set of “efforts to promote specific industries that the government has identified as critical for national security or economic competitiveness.” Meanwhile, Todd Tucker of the Roosevelt Institute writes that it is “any government policy that encourages resources to shift from one industry or sector into another, by changing input costs, output prices, or other regulatory treatment.”
Several factors are responsible for the resurgence of interest in industrial policy. Among them is the global COVID-19 pandemic, which has spotlighted the fragility of both our health and economic infrastructure, especially in dealing with and recovering from natural disasters such as pandemics. Second is the now widely acknowledged fact that neoliberalism has failed as a framework and has not been able to deliver economic prosperity and security for the vast majority of people, especially those who carry a subaltern social identity. A third factor is the effects of climate change, where there is an urgent need to adapt our physical infrastructure to make it more environmentally just and resilient. A fourth reason is the growing perception that the rise of China as an economic power poses a threat to U.S. hegemony.
What is common to the above definitions, aside from the focus on international “competitiveness,” is that industrial policy as traditionally conceptualized focuses on the government directing its strategic resources toward firms, which are presumed to be the main drivers of economic growth and dynamism that, from a supply-side neoliberal perspective, would trickle down and lift all of our proverbial boats. Our conception of industrial policy as investment in people and the environments in which they live expands the horizon of industrial policy in three ways. First, we move beyond the supply-side frame that centers the firm for strategic investment and assert that public investment should be directed toward people and places as productive elements of our society, with the expectation that this will generate economic dynamism from which firms will benefit, too. Our view is consistent with the historical experience of growth and distribution from government investments under the New Deal and Great Society and is juxtaposed against the era of neoliberal supply-side economics. An important report from the Economic Policy Institute, “The Productivity-Pay Gap,” illustrates that between 1948 and 1979, a period roughly coinciding with the public investment returns from the New Deal and Great Society, U.S. productivity more than doubled, rising 118.4 percent, while a typical worker’s compensation adjusted for inflation climbed nearly as quickly, increasing by 107.5 percent. In contrast, as industrial policy shifted toward deregulation, reduction in social safety nets, regressive taxation that favored affluent and corporate interests, and the privatization of public infrastructure, growth slowed down and worker compensation decoupled from productivity growth: In this period, from 1979 to 2019, productivity rose by 59.2 percent, while wages rose by only 13.7 percent.
Second, given the long history of public initiatives in general and industrial policy in particular that have privileged certain social identities, our conception of industrial policy requires that public investments be made in a manner that is intentionally inclusive of all social identity groups, especially since the most marginalized groups are often the ones whose productive capacities are most structurally impeded. For example, in the U.S. context, industrial policy should not be “race-neutral,” but rather at a minimum “race-conscious” (i.e., intentionally inclusive of all racial groups in its design, implementation, and management). And finally, rather than seeing industrial policy as a tool for settling scores in the international trade arena, we view it as a powerful force for fostering harmony and peace within and between nation-states—in other words, industrial policy affects not just economic policy, but foreign policy. In these three ways, industrial policy becomes not only a tool for promoting economic dynamism, but also an important mechanism for building morally just and inclusive economies across the world.
The foregoing argues that industrial policy—defined as investing public resources in people and the environments in which they live, as opposed to privileging firms—can be a potent force in driving economic dynamism and security. The New Deal created a large White middle class in the United States, while the Marshall Plan prevented the poverty and destitution of large swaths of Europeans. We will now examine the New Deal and the Marshall Plan as instances of positive implementation of industrial policy, while also highlighting the shortcomings of each in so far as inclusion is concerned. The last section of the essay calls for a twenty-first century round of investments on a scale that rivals these past examples of industrial policy but does so in a way that is inclusive of all identity groups.
The New Deal
The New Deal was a set of public policies implemented during and after the Great Depression largely to counteract the unprecedented collapse in aggregate demand and the increase in unemployment that followed the 1929 stock market crash. Signature New Deal policies such as the National Housing Act of 1934, the Social Security Act of 1935, and the G.I. Bill of 1944 transferred ample resources (hundreds of billions in today’s dollars) to people, all the while treating them as productive agents rather than mere recipients of charity. The U.S. economy recovered from the Great Depression in no small part thanks to these policies. In this way, the New Deal is an example of industrial policy in the sense that we use the term, because it involved the strategic investment of public resources in people and the environments in which they lived.
Unfortunately, the New Deal’s effect on the distribution of social and economic outcomes was not race-neutral. The historian Ira Katznelson has detailed the ways in which New Deal policies—in their design, management, and implementation—advantaged White people. For example, the National Housing Act of 1934, which gave rise to more affordable mortgages, in large part explains the existence of a White, asset-owning middle class. Facilitated by the federal government and coupled with the National Housing Act were the racist practices of redlining and restrictive covenants, which allowed for discriminatory discretion at the local level as to who, based on race, could access homeownership through favorable, low-interest, long-term mortgages. It is hardly contested that today’s racial homeownership gap in many cities is largely due to the long-term effects of redlining, restrictive covenants, and several other discriminatory practices.
The Marshall Plan
At the end of the Second World War, Europe lay in ruins. Its industrial base had been decimated and its population was living in poverty and facing famine. Then-Secretary of State George Marshall delivered a speech at Harvard University in 1947 in which he called for a substantial investment in rebuilding Western Europe. Subsequently, in 1948, President Harry Truman got through Congress the Economic Cooperation Act, which facilitated the expenditure of $13 billion over four years to aid the reconstruction of Europe. This unprecedented sum would today amount to nearly $170 billion, and at the time was the equivalent of about 2 percent of the national GDP.
The Marshall Plan was highly successful in rebuilding Western Europe by increasing its agriculture and industrial base. The economists Barry Eichengreen and Marc Uzan, in a highly cited evaluation of the program, found that “the Marshall Plan’s economic effects had a significant impact on Europe’s recovery from World War II. The recipients of large amounts of Marshall aid recovered significantly faster than other industrial countries.” The aspect of this investment that made it people- and place-centric was the physical and human public infrastructure that it seeded. The historian Michael Hogan details how the plan directed investments toward rebuilding public infrastructure (transportation, electricity, and communications) and toward agriculture and public works programs intended to absorb large numbers of unemployed workers.
The Marshall Plan and other similar infrastructure investments that followed in many ways saved Europe from the kind of poverty, despair, and desperation that contributed to the conflict from which the continent had just emerged. However, much like the New Deal, the Marshall Plan was not inclusive, in this case in its treatment of nation-states. Resources were directed only toward White Western European nations, while Black and Brown Asian and African nations, also victims of the destruction of the Second World War, were excluded. Many countries in the global South, then under the yoke of colonialism, had fought on the side of the U.S. and Allied forces, with many lives lost in the process. Their economies were also devastated by the war and the depression that preceded it, due to the slowdown in demand for export commodities. The fate of the global South could well have been different had the Marshall Plan been extended to include its people. As yet, no other part of the world has received this kind of largely unconditional public infrastructure aid at the scale of the Marshall Plan.
Centering People and the Environment
In determining how to direct public resources with the purpose of promoting economic and industrial activity (i.e., industrial policy), one should, first and foremost, begin with the simple but fundamental questions of “What is the purpose of an economy?” and “What is the government’s role in achieving that purpose?” We define the purpose of an economy as promoting our productive capacities, advancing tranquility and human flourishing, and enabling people to be self-determining in righteous ways. Governments have a responsibility to set the rules and steward public resources to achieve these goals.
A document that provides a framework for creating this kind of economy is the Universal Declaration of Human Rights, which was adopted by the United Nations 75 years ago this coming December. The declaration was emphatic in its recognition of the five inseparable categories of rights that together uphold human dignity: political, civil, social, cultural, and economic rights. The declaration, coming out of the atrocities of the Second World War and the economic destabilization that preceded it, was meant to promote human flourishing and tranquility at a time when despair within and among nation-states was ubiquitous. Over time, economic rights are the one category that seem to have lost momentum. But the Marshall Plan and the policies of the New Deal and Great Society demonstrate what realizing the ambitions set out in the declaration would look like, especially as they relate to making investments in people and places.
Starting in the 1970s with the neoliberal “revolution” and the narrowing of the understanding of human rights to only political and civil rights, and rights pertaining to the protection of property, industrial policy began to focus on firms and on a zero-sum, winner-take-all nation-state competition in the international sphere. This type of industrial policy is antithetical to shared human flourishing and leaves us vulnerable to an economic context of fear, despair, and growing inequality both within and across nation-states—the very situation that the Universal Declaration of Human Rights sought to address in the first place.
In the end, our industrial policy needs to promote an economy that centers people and the environment (i.e., a human rights economy), and these investments need to be made permanent and intentionally inclusive of all racial, ethnic, and social identity groups in their design, implementation, and management. Otherwise, we fail in answering those two fundamental questions with which we should always begin: “What is the purpose of an economy?” and “What is the government’s role in achieving that purpose?”