Download [PDF]: Industrial Policy: New Wine in Old Bottles
Einstein reputedly said that you can’t solve problems with the same level of thinking that caused them in the first place. The political and economic establishments tasked to deal with problems, unfortunately, do so by intensifying the very forces that led to the crisis; as Ivan Illich put it, they “attempt to solve a crisis by escalation.” They do so because the current problems are a byproduct of the pursuit of institutional self-interest by the people who direct this society. So any “responsible” and “moderate” solution will, by definition, be one that can be implemented through the institutions those people run, without any fundamental structural changes; and any solution that directly addresses the structural causes of the problem will, by definition, be “extremist.” Sociologist C. Wright Mills’ memorable term for that mindset was “crackpot realism.”
The crackpot realists have been busy lately, feverishly promoting bailouts to preserve the “industrial infrastructure.” Their vision of how to restore “the economy,” naturally, amounts to a return to an economic “normalcy” defined by giant corporations and mass consumer society.
The problem is, the present model of industrial production is about as sustainable as the Titanic. It came into existence only through government policies to subsidize the operating costs and inefficiencies of big business, and a regulatory framework (including “intellectual property”) to protect it from competition. And that industrial model is hitting a wall, a systemic crisis, in which government will no longer have the resources to subsidize inputs at the level at which they are demanded.
The present industrial model, identified with GM’s Alfred Sloan and celebrated by Alfred Chandler, is based on enormous market areas and costly, product-specific machinery. The only way to keep the unit costs of such machinery down is large-batch production to utilize full capacity, and then worrying about making people buy it only afterward (commonly known as “supply-push distribution.” So Sloanist industry, under “Generally Accepted Accounting Principles,” produces goods to sell to inventory, regardless of whether there are orders for it or even of whether the product works, and has an astronomical recall rate. It follows a business model based on consumer credit and planned obsolescence to keep the wheels running. As Ralph Borsodi described it, the push distribution system required by Sloan-style mass production amounted to making water run uphill. The overall logic of the system is that instilled by hypnopaedic suggestion in Brave New World: “Ending is better than mending.” “The more stitches, the less riches.”
The state capitalist system has been plagued by chronic crises of overaccumulation and underconsumption since the crisis of the 1890s. These crises were the main force behind the growth of big government in the 20th century. The U.S. government pursued a policy of what William Appleman Williams called “Open Door Imperialism,” forcibly opening markets to provide American industry with an outlet for excess goods and capital. Domestically, government resorted to Keynesian policies of aggregate demand management and redistribution of purchasing power, in order to mitigate the problem of underconsumption. Government also directly purchased the corporate economy’s surplus output, as described by Paul Baran and Paul Sweezy. When these tendencies culminated in the Depression of the 1930s, American state capitalism was saved from its systemic crises only because the great powers blew up most of the industrial capital outside the U.S. The war also nationalized around half of U.S. productive capacity and created a permanent war economy that has helped to absorb surplus output ever since. In the postwar period, the U.S. government found new ways to absorb surplus capital and output: among them the government-financed building of the Interstate Highway System, the mass suburbanization associated with it, and the creation of entire new industries. The latter industries, created almost entirely through government-funded R&D during and after WWII, and/or whose existence was possible only through the action of government in guaranteeing a market for their product, included civilian jumbo jets, microelectronics, cybernetics, and the use of automated control systems for machine tools.
The cumulative effect of these policies postponed the day of reckoning and earned “consensus capitalism” a generation or so of extra life, until around 1970 or so when the rest of the world had rebuilt its plant and equipment. Since then neoliberalism, globalization, the creation of the tech sector, the housing bubble and intensified suburbanization, and the expansion of the FIRE economy (finance, insurance and real estate) have served as successive expedients to soak up surplus capital. 
It was after the collapse of the tech bubble that derivatives and securitization of debt really came into their own as surplus capital sponges. As Joshua Holland noted, in most recessions the financial sector contracted along with the rest of the economy; but after 2000 tech bust it just kept growing, ballooning up to ten percent of the economy. We can see now how that worked out.
The problem is, there was barely enough demand to keep the wheels running and absorb the full product of overbuilt Sloanist industry even when everyone maxed out their credit cards and tapped into their home equity to replace everything they owned every five years. And we’ll never see that kind of demand again. So there’s no getting around the fact that a major portion of existing plant and equipment will be rust in a few years.
The crisis goes beyond the traditional problems of underconsumption and excess capacity that caused previous recessions, even in greatly intensified form. In the past, the state compensated for the falling rate of profit by subsidizing the inputs of big business and creating an artificial market for its surplus output. The corporate economy grew at least as much from extensive addition of inputs as from increased efficiency in its use of existing ones. And it directed a great deal of its productive capacity to selling goods to the state, for which there was no market demand.
But now, in addition to the crises of overaccumulation and underconsumption, the state is facing a crisis of inputs which limits its capacity to absorb costs in this manner. It’s a basic rule of economics that when you subsidize something, demand increases. The subsidized consumption of energy and transportation inputs led, as subsidies always do, to the exponential growth of demand, until the corporate economy’s demand for energy and transportation inputs has outstripped the state’s ability to subsidize them. And the state’s ability to increase energy inputs, in particular, has hit the wall of Peak Oil.
1 Ivan Illich, Tools for Conviviality (New York, Evanston, San Francisco, London: Harper & Row, 1973), p. 9.
2 The contrast between the Sloanist mass production model and the Emilia-Romagna model discussed below is the subject of Michael J. Piore and Charles F. Sabel, The Second Industrial Divide: Possibilities for Prosperity (New York: HarperCollins, 1984).
3 William H. Waddell and Norman Bodek. Rebirth of American Industry: A Study of Lean Management (Vancouver, WA: PCS Press, 2005).
4 Ralph Borsodi, The Distribution Age (New York and London: D. Appleton and Company, 1929), p. 110.
5 Although many libertarians reject overproduction as inconsistent with Say’s Law, Say’s Law is totally the irrelevant to a system that’s statist to its core. Overproduction is inherent in state capitalism, by its very logic. The state promotes excessive capital accumulation while simultaneously promoting the formation of cartels, leading to industry which cannot run at full capacity and dispose of its full product at cartel prices.
A good general discussion of these issues can be found in Joseph Stromberg, “The Role of State Monopoly Capitalism in the American Empire” Journal of Libertarian Studies Volume 15, no. 3 (Summer 2001) <http://www.mises.org/journals/jls/15_3/15_3_3.pdf>.
6 William Appleman Williams, The Contours of American History (Cleveland and New York: The World Publishing Company, 1961).
7 Paul Baran and Paul Sweezy, Monopoly Capitalism: An Essay in the American Economic and Social Order (New York: Monthly Review Press, 1966).
8 David F. Noble. America by Design: Science, Technology, and the Rise of Corporate Capitalism (New York: Alfred A. Knopf, 1977); Noble, Forces of Production: A Social History of Industrial Automation (New York: Alfred A. Knopf, 1984); Charles E. Nathanson, “The Militarization of the American Economy,” in David Horowitz, ed., Corporations and the Cold War (New York and London: Monthly Review Press, 1969); Frank Kofsky, Harry S. Truman and the War Scare of 1948 (New York: St. Martin’s Press, 1993).
9 Walden Bello, “A Primer on Wall Street Meltdown,” MR Zine, October 3, 2008 <http://mrzine.monthlyreview.org/bello031008.html>.
10 Joshua Holland, “Let the Banks Fail: Why a Few of the Financial Giants Should Crash,” Alternet, December 15, 2008 <http://www.alternet.org/workplace/112166/ let_the_banks_fail%3A_why_a_few_of_the_financial_giants_should_crash_/>.
11 Although oil prices are at historic lows at the time of this writing, this is fully consistent with the Peak Oil thesis. Peak Oil simply states that oil extraction has peaked or is about to do so. Since we’re pumping as much oil out of the ground as we ever will, and the rate of extraction will slowly and steadily decline, supply cannot increase in response to price. So price is determined entirely by fluctuations in demand–a phenomenon that our Georgist friends are familiar with in real estate. When demand rises to previous levels, price will spike even higher. And while prices may be extremely volatile, the spikes will become progressively higher over time. When oil spiked at $130/barrel last summer, the airlines were on the verge of shutting down a fifth of their routes and some truckers talked about simply abandoning their rigs on the shoulder and walking away. When fuel is over $12/gallon, as it likely will be in a few more years, air freight and trucking will likely be a thing of the past, and the limited capacity of railroads will be limited mainly to value-dense cargos that can’t be produced locally. Anything that can be produced locally, will be.