Several prominent businessmen lately have been arduously promoting government programs to reindustrialize America. Felix Rohatyn advocated this most recently in The Post ["Reconstructing the Rfc," op-ed, June 20].
The idea, usually called an "industrial policy," is to have the federal government bring industry and labor together and guide them in rebuilding America's lost industrial greatness. It is intended to restore the ability of U.S. business to compete with foreign firms, stimulate employment, improve productivity and fight inflation. But Americans should beware, because an industrial policy will achieve none of these desired results. Rather, it will result in a cumbersome system of special privilege for favored interests, increased poverty and reduced liberty for the rest.
Rohatyn's distinctive recommendation is that the U.S. government resurrect the New Deal's Reconstruction Finance Corporation. He suggests that firms and municipalities in crisis, when their "failure would have a material impact on the country or a significant region," should be assisted by a professional, public agency insulated from the pressures of the legislative process.
Under Rohatyn's plan, this new RFC would assist such firms with loans and equity investments. This is necessary, he claims, because "private lenders . . . are not able to cope with needs of this magnitude." This point begs for an explanation: why aren't private lenders able to handle the job? After all, the wealth of the governments has first to be removed from the economy. It seems obvious that private lenders could take on this task if government were not absorbing so much capital.
But the objections to a new RFC and any industrial policy run deeper. Rohatyn does acknowledge some of them, such as the politicization of competitive markets. But then he casts them aside, as if merely listing them refutes them.
What should concern us is that the objections Rohatyn lists are mere symptoms of a more profound flaw in industrial policy: it will transform our economic system from a demand economy to a command economy. When government leaves the market alone, entrepreneurs use signals communicated by the price system to channel land, labor and capital to those uses that most closely accord with the demonstrated preferences of consumers. profit-and-loss is not only the test of success or failure in that activity; it is the entrepreneurs' inducement to be conscientious in responding to the demands of consumers.
Both consumers and producers and sovereign in the free market. But consumers are merciless toward unresponsive producers. Witness the thousands of entrepreneurs who go out of business every year.
Consumers make the system tick, and the source of this capacity is their freedom of choice. Without notice, they can and do deprive firms of needed revenues; they need no one's permission.
An industrial policy's anti-consumer nature is now revealed. When the government intervenes in the economy, the consumers' liberty is curbed, as is the entrepreneurs' ability to serve them. This is evident in the capital market. Investors decide where to put their capital by looking for profitable or potentially profitable firms. Firms earn profit by producing or marketing things that satisfy consumers' most urgent wants. If other words, consumers determine how much is invested and where.
An RFC would change that considerably. Consumers would lose their ability to have their way to the extent the RFC intervenes. If a firm is failing, it is either because too few consumers want the product it makes or because someone else makes it better or cheaper. Capital and labor will move from that firm to more productive points in the economy. But an RFC would have the power to overrule consumers by forcing them (via taxation) to invest in a company they have rejected.
Entrepreneurs learn of consumer preferences by watching the movement of relative prices. How will RFC moguls learn? The answer is they won't. Instead, they will presume to know what is best for "the country." In other words, formerly free American citizens will be required to subordinate their individual goals to the "national goals" selelcted for them by government officials and the anointed spokesmen' for business and labor.
This would represent a fundamental departure from the American liberal tradition of individual liberty. The tragedy is that it is unnecessary. Advocates of industrial policy appear to operate on the premise that Americans became stupid at some point: America lost its competitive spirit because all our entrepreneurs are incompetent, our workers unproductive, our consumers unwise. But that is no explanation of what is wrong with America.
What happened to America is that the system of incentives has been changed. The political process rewards failure and punishes success.
America doesn't need an RFC or an industrial policy. It needs economic freedom, because it is the only way to create prosperity and the good life as each person sees it for himself.