All Commentary
Thursday, October 1, 1992

Head to Head: The Coming Economic Battle Among Japan, Europe, and America

The lessons of what made America great in the first place are lost on Lester Thurow.


1980, 1984, 1988, 1992. Right on schedule, industrial policy arises from the grave as a specter haunting the election. In April, for example, The New York Times Magazine published “Facing Up To Industrial Policy” by liberal syndicated economist Robert Kuttner.

Mr. Kuttner takes the Reagan and Bush administrations to task for supposedly avoiding industrial policy and relying on free markets. (Would that were the case!) With a swipe at Adam Smith, he writes that in the 1980s and early ‘90s Smith’s “invisible hand acted more like a sleight of hand, and major American industries began to crumble under an onslaught of cheap, high-quality imports.” He quotes, approvingly, the statement by one-time presidential candidate Paul Tsongas that Adam Smith is woefully out-of-date: “Adam Smith was a marvelous man, but he wouldn’t know a superconductor or memory chip if he tripped over one.”

Now comes Lester Thurow with yet another plug for industrial policy and still one more swipe at Adam Smith. Commenting on America during the Reagan and Bush administrations in his latest and well-written, scholarly looking work teeming with 487 citations, Dr. Thurow, Dean of MIT’s Sloan School of Management and author of such previous plugs for industrial policy as The Zero-Sum Solution, writes: “Too often, Adam Smith’s ‘invisible hand’ became the hand of a pickpocket. Free unfettered markets had a habit of discovering very profitable but nonproductive activities.”

To buttress his case against laissez faire policies, so clearly predatory in nature, Dean Thurow holds that unfettered capitalism betrays its tendency to drift into either monopoly or financial instability. For proof he points to the Dutch tulip mania, the South Sea Bubble, numerous nineteenth-century financial panics, the “robber barons” of yesteryear (neatly done in by the farsighted Sherman Antitrust Act of 1890), the 1929 stock market crash and ensuing Great Depression (brilliantly fixed up by the New Deal!).

No proof is provided for all these bald assertions and misperceptions. Monopoly is confused with bigness and fewness and is unrelated to freedom of entry. No allowance is made for the burden of heavy American government overhead including regulatory costs and the cost of defending Japan and Germany for almost five decades. Austrian or public choice business cycle theory and central bank proclivities toward credit expansion and debt monetization are ignored. Indeed, the entire counterproductive boomerang effect of government interventionism, such as government bank deposit insurance leading straight to the S & L crisis, gets short shrift. This is Lester Thurow’s article of faith: The state is our planner; we shall not want.

Thurow warns us: Our choice today is between producer economics (good) and consumer economics (bad), between communitarian capitalism (good) and individualistic capitalism (bad), between Germany’s “Das Volk” and Japan’s “Japan Inc.” (good) and the narrow-minded “I” of America (doubly bad). As humorist Dave Barry would say, I’m not making this up.

All this raises the question: Just what is industrial policy? It is of course today’s euphemism for government planning, i.e., more precisely, for what the French call indicative planning or dirigisme, for what I call soft socialism. Dean Thurow argues we must mount “an aggressive American effort” to counter Japanese and German national strategies “with American strategies” [read planning]. By design these strategies, while ill-defined here and subject to administrative change, would arm government bureaucrats with coercive powers and subvert shareholder and entrepreneurial rights. So goodbye to entrepreneurial insights and breakthroughs. Thurow, mesmerized by supposed Japanese and German planning proficiency, believes that Americans must fight fire with fire!

Instead of seeing government as the cause of our economic ills today, Dean Thurow blithely jettisons supposedly planless entrepreneurial capitalism, our great comparative advantage in international competition, and pleads for still greater government intervention in the economy. He excoriates takeover battles and corporate raiders, the “financial Vikings.” He would have shareholders hold their stock for five years before they qualify for full voting rights. Government and selected industrialists or their minions, fortified with joint government and corporate funding, would pick—i.e., subsidize—the “winners” in the global competition of tomorrow.

He thereby fails to see the fallacy of plan versus no plan, to see what Mises and Hayek long ago pointed out. Free markets mean decentralized planning by many persons—private uncoerced planning that, thanks to the price system and economic calculation, works for economic growth and human betterment the world over, wherever it is tried.

Despite vaunted German proficiency, The New York Times of May 26, 1992, reports that West German manufacturers are increasingly setting up new production plants abroad and that their location of choice is the United States. German executives complain about being saddled with “some uniquely national disadvantages, such as the world’s highest rate of corporate taxation and the highest industrial labor costs.” Thus does South Carolina land a new BMW assembly plant.

This lesson, the lessons of the demise of Euro-communism, of what made America great in the first place, is lost on Lester Thurow. He forgets that subsidies and state planning deplete savings and tax capital markets; that as planners distort our free market system in myriad ways, government-administered prices don’t clear the market and economies stall. His scheme, moreover, undermines individual liberty. Commenting on the Thatcher and Reagan administrations, he proclaims: “Empirical experimentation revealed that a return to ancient Anglo-Saxon virtues is not the answer.”

Head to Head is at once bad politics and sorry economics.

Dr. Peterson, an adjunct scholar at the Heritage Foundation, holds the Burrows T. and Mabel L. Lundy Chair of Business Philosophy at Campbell University, Buies Creek, North Carolina.


  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.