If anyone doesn't believe that theory guides interpretation of the "facts", then consider the latest from Joe Stiglitz, Creating a Learning Society. To anyone who has followed Stiglitz's career, none of the arguments are new. In essence he is making a typical Stiglitz-type market failure argument grounded in an argument for the positive spillover effects of technological innovation. Since the incentives are not aligned perfectly, private sector actors will underinvest in the things that produce technological innovation. As Stiglitz neatly summed it up in a recent Project Syndicate column:
Industrial policies – in which governments intervene in the allocation of resources among sectors or favor some technologies over others – can help “infant economies” learn. Learning may be more marked in some sectors (such as industrial manufacturing) than in others, and the benefits of that learning, including the institutional development required for success, may spill over to other economic activities.
Such policies, when adopted, have been frequent targets of criticism. Government, it is often said, should not be engaged in picking winners. The market is far better in making such judgments.
But the evidence on that is not as compelling as free-market advocates claim. America’s private sector was notoriously bad in allocating capital and managing risk in the years before the global financial crisis, while studies show that average returns to the economy from government research projects are actually higher than those from private-sector projects – especially because the government invests more heavily in important basic research. One only needs to think of the social benefits traceable to the research that led to the development of the Internet or the discovery of DNA.
But, putting such successes aside, the point of industrial policy is not to pick winners at all. Rather, successful industrial policies identify sources of positive externalities – sectors where learning might generate benefits elsewhere in the economy.
Viewing economic policies through the lens of learning provides a different perspective on many issues. The great economist Kenneth Arrow emphasized the importance of learning by doing. The only way to learn what is required for industrial growth, for example, is to have industry. And that may require either ensuring that one’s exchange rate is competitive or that certain industries have privileged access to credit – as a number of East Asian countries did as part of their remarkably successful development strategies.
Note how Stiglitz sets the terms of the debate -- it isn't about picking winners and losers, but about encouraging sectors where learning results in positive externalities that 'might' generate benefits throughout the economic system. This is how "we" become smarter, more efficient, and more innovative -- and "we" get that way through judicious governmental action.
Stiglitz's intellectual move to emphasize the utilization of knowledge and learning through time must be applauded, while his failure to confront the knowledge problems and poltical failure problems with industrial policy should be highlighted for the shortcomings in analysis that they are. A more robust political economy approach --- as I argued in my JEL review of Stiglitz's Whither Socialism? -- follows when the assumptions of benevolence and omniscience are rejected. In other words, when the knowledge problems that government planning [managing] of a dynamic and innovative economic system are acknowledged, and the reality of government failure whenever political decision making is substituted for market decision making is incorporated into the analysis.
So it is time to return to Don Lavoie's wonderful National Economic Planning: What is Left? to see how we should be thinking about the growth of knowledge in a free society (or as Hayek put it 'the creative power of a free civilization') and the problems in the politics of attempts to steer that growth of knowledge.
Stiglitz is indeed correct that "Viewing economic policies through the lens of learning provides a different perspective on many issues." It is just that the lessons he suggests we learn aren't the one's we should be learning from the comparative historical analysis of erring entrepreneurs and bumbling bureaucrats.