What is meant by "industrial policy," and what are its strengths and weaknesses?

Expert Answers
kipling2448 eNotes educator| Certified Educator

Industrial policy” refers to the role a national government plays in determining how a nation’s resources are used for the good of the country. Prior to the Great Depression, the prevailing economic model in the United States was based upon the laissez faire principle of minimal government involvement in the marketplace. With the massive unemployment that resulted from the October 1929 crash of the stock market and the onset of the depression, President Franklyn Roosevelt and his allies Congress injected the federal government into the marketplace at an unprecedented level. Passage of the National Industrial Recovery Act (NIRA) of 1933 was the result. NIRA, a major component of the New Deal economic policy intended to lift the country out the depression, and influenced how American businesses were permitted to operate with regard to the use of resources and how competition was to be managed. In addition, the Act sanctioned the establishment of labor unions.

Since the passage of NIRA, debates regarding the role of the federal government in setting industrial policy have raged almost continuously. Free market capitalism dictates that market forces alone should determine how American industry operates, but such dictates may not serve the national interest. In 1950, with the American defense industry that had mushroomed in support of the military requirements for waging World War II now in danger of disappearing altogether, and with the war in Korea suddenly and massively underway, Congress passed the Defense Production Act (DPA), which authorized the federal government to essentially take control of certain industries for the purpose of ensuring the weapons and support systems required by the armed forces would be produced in the numbers needed to support the war effort. The DPA remains U.S. law today.

Beyond the requirements of national security, many elected officials and academics argue that the United States should engage in a greater level of industrial policy in order to remain economically competitive internationally. With autocratic governments using capitalistic principles, but without permitting political freedom, to build up their domestic industries and, consequently, competing with the United States for market share(referring here mainly to China), some have argued that allowing markets alone to influence the course American industry takes has proven inadequate for remaining competitive. The economic crisis of 2008, with the collapse of certain major industrial sectors (e.g., banking and financial services, automotive), required massive governmental intervention, thereby refuting certain tenets of free market principles and moving the federal government once again in the direction of setting industrial policy.

Whether the federal government should directly influence the direction American industry takes is and will remain a highly contentious issue among economists and politicians. It will not go away as long as crises develop that illuminate major discrepancies between the direction American industry has moved and the direction in which it needs to turn in order to resolve those crises.