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Joining me today is economist Samuel Gregg, the President and Friedrich Hayek Chair in Economics and Economic History at the American Institute for Economic Research. He is the author of seventeen books, including The Next American Economy: Nation, State, and Markets in an Uncertain World, which will form the basis of our discussion today.

So, tell me about why you chose to write this book and why it is, perhaps unfortunately, more relevant today than ever?

In around 2016, the way that Americans thought about the nature of their economy started to shift. Since the early 1980s, America had moved back towards markets, free enterprise, and limited government, at least in principle. You could find people on the center left and the center right who were more or less on board with that vision. That changed, I think, in 2015 or 2016. People have emerged on the right and left who believe that the state should take a much more proactive role in economic life.

In the book, which came out in October 2022, I wanted to outline why this shift occurred. I wanted to outline some of the differences, the battle lines, if you like, between those of us who favor a free-market economy and those who favor state capitalism. And I also wanted to argue that it was time for free marketers to realize that we weren’t living in the 1980s or even the 1990s anymore. The tide had shifted, and we needed to adjust our message to the conditions that we find ourselves in today.

What is this state capitalism alternative that so many seem to be advocating for?

The way that I use it in the book, and I think this is a common use of the phrase now, is to describe an economy in which you have private property and markets, but also a state that tries to deliver economic outcomes that are substantially different than those that would emerge if markets were left to prevail.

State capitalism usually involves a large and extensive welfare state. It involves using regulation and the administrative state to put certain parameters and contours around the workings of markets in order to push consumers and producers, and particularly producers, in particular directions. So, while you still have markets, competition, and private property, the state goes far beyond anything that would have been envisaged, for example, by America’s founders. And I think if you look around America today, that’s exactly what we’re living in.

Now that you’ve described the idea of state capitalism, let’s dissect it a bit more. You have a chapter in the book titled “Why Protectionism Does Not Pay.” Why doesn’t it?

The classic arguments against protectionism go back to Adam Smith. His basic argument against tariffs was that they don’t create wealth; they just push production or economic activity in particular directions. The problem is that creates a hidden tax on consumers because the businesses that get charged the tariffs invariably pass the costs on to consumers.

Protectionism also encourages cronyism, by which I mean businesses getting close to government to try to ensure that tariffs are leveled against their competitors. It also shifts the balance of the economy away from consumer interests towards producer interests. The problem with that is, in the end, protectionism doesn’t serve producers very well either. It makes them lazy and uncompetitive, and rarely ever manages to maintain a particular industry in place. So, protectionism, despite the name, actually does enormous damage, both to consumers and, in the long term, to the producers that it’s ostensibly designed to protect.

What do you say to those who would argue that the world we live in today is very different from the world of Adam Smith? For example, we have new national security concerns that might justify tariffs.

Free traders and free marketers have always acknowledged that national security is a legitimate exception. Adam Smith says defense trumps opulence. At the same time, the single most important element for a country’s national security is the size and dynamism of its economy. That is what allowed the United States to defeat or outlast Nazi Germany, Imperial Japan, and the Soviet Union.

So, yes, there are genuine national security challenges, but they don’t justify shutting down the whole process of liberalizing trade with other countries. Reverting to protectionism will ultimately hurt our security more than it will help.

Let’s move on to industrial policy. What is the trouble with industrial policy, and why do you think it has so much continued appeal?

The basic problem with industrial policy is something classical liberals talk about all the time, which is, as F.A. Hayek called it, the knowledge problem.

Industrial policy assumes that governments can come up with a better allocation of resources than the market can. The problem is that even central banks and treasury departments, which are full of economists who have lots and lots of data at their disposal, cannot possibly know the best allocation of resources at any one point in time, and you need to know that information for industrial policy to work. So industrial policy cannot help but misallocate resources. Another problem with industrial policy is that it breeds cronyism. In case study after case study after case study, industrial policy is determined, not by some detached being discerning the best allocation of resources, but by the best and most influential lobbyists.

I think industrial policy remains attractive to people for two reasons. One is a sort of hubris about human intellect and how much you can know about the world. The second is that it panders to people’s desire for security. I think it’s very difficult for people to live their lives unless they have some degree of predictability and stability, and people think that industrial policy can provide their community or economic sector with that stability. But it can’t. Just like protectionism, industrial policy corrodes an industry’s competitiveness and can encourage laziness and a sense of entitlement among those who are being protected. In the long term, that results in greater instability and insecurity.

Many worry that, because so many manufacturing jobs have moved overseas, we need industrial policy to help those displaced workers. What would you say about that specific concern?

Well, there’s no question that the number of manufacturing jobs has fallen since the 1970s, but that has relatively little to do with outsourcing and a lot more to do with technological change. And that’s a good thing, because manufacturing in the 1950s relied very heavily on manual labor, which was exhausting and had a high risk of injury. Technology made the industry safer and more productive, and displaced workers gravitated to service sector jobs, which are generally safer, less physically demanding, and better-paid.

The other thing I would say is that many parts of the country that once had very big industrial manufacturing sectors have successfully transitioned towards something different. Pittsburgh and Grand Rapids are good examples. You can contrast those examples with places like Youngstown, Ohio or Detroit, Michigan, which, rather than adapting, tried to stay the same through protectionism. In other words, those towns and cities that opted to embrace change and work with the change have come out the other side quite well, while the places that opted not to change have effectively made themselves poorer and less competitive.

You have a chapter with a rather counterintuitive title: “Business Against the Market.” What do you mean by that?

There’s a common assumption that being in favor of the market is the same as being in favor of business. And I always say, no, businesses are participants in markets, they’re not markets themselves, and that’s an important distinction because the interests of a given business may not coincide with the interests of American consumers. Businesses, in many cases, don’t even particularly like markets. I know plenty of business leaders who like subsidies, are quite favorable towards tariffs, and resent competition. They don’t like having to constantly adapt to stay alive.

That is an excellent transition to part two of the book, “Markets in America.” You start out that section of the book with America as a creative nation. Tell me about that.

The classical economists of the Scottish Enlightenment, even into the 19th century, didn’t say much about things like entrepreneurship and economic creativity. I think it was assumed rather than talked about. But in the 20th century, people like Joseph Schumpeter, or, in more recent decades, Israel Kirzner, pointed out that the entrepreneur, and human creativity in general, is essential for a dynamic economy. Entrepreneurs are not just making big discoveries like the iPhone that fundamentally change the entire economy, but they also make piecemeal changes on an everyday basis that constantly animate the economy. If you took away creativity from the market, it would enter almost automatic stagnation.

I think it’s important for those of us who favor markets to talk more about creativity. It’s a distinctly human force. We are made to truck and barter, as Adam Smith said, and we’re also made to be creative. That, I think, is a very uplifting, very positive message. And of course, people on the other side of the debate tend to be rather suspicious of economic creativity because economic creativity creates disruption and change. It means you have to adapt.

Now tell me about America as a competitive nation.

As you can probably tell by my voice, I wasn’t born in the United States, so I come at this as someone who’s lived in America for a long time, but who has an outsider’s perspective. And Americans are very, very competitive people. They don’t see competition as bad or even distasteful. And that’s important because competition is not about destroying other people, it’s about adapting and changing so that you can do things faster or more efficiently or more creatively than other people.

Finally, you discuss America as a trading nation.

Well, again, Americans have been trading with the world since the very beginning of, and even before the Republic. We’ve never been a people that say trade begins and ends in the United States. At the same time, there’s also been immense debate about trade in the United States since the beginning. In the 19th century, the single issue that most divided Americans, apart from slavery, was tariffs. In the 1830s, we even had some states threatening to secede over tariffs, because they wanted to be able to freely trade with European countries.

One of the things about the United States that lots of external observers noticed from the very beginning is that America began as a commercial nation. It wasn’t a feudal society. Even mercantilism was not particularly strong in the American colonies compared to, say, continental Europe and Britain. When Alexis de Tocqueville came to America in the 1830s, he looked around and said, “Everyone is an entrepreneur.” So, commerce is part of our identity, of who we are as a people.

If we lose sight of that, I think the country is in big trouble. We’re not meant to be just another Western European social democracy. There are some Americans who want America to become like that, but that is not the vision that the founders had of the United States, and I don’t think it’s a vision that large numbers of Americans really want, because they understand that we would lose what makes us different from other countries.

Given current events, what do you foresee in terms of the future economic direction of the United States? Are we going to move closer to that ideal haven of freedom, or further away?

Well, the battle of ideas never ends. Even in the 1980s and 1990s, there were plenty of people expressing deep reservations about markets and limited government. The New Deal and Great Society programs still overhang a lot of American political culture and inform the assumptions that many Americans bring when they think about the economy.

What we’ve seen added since the mid-2010s is the addition of a nationalist populism, which is now the dominant force in the Republican Party. There are similar things happening on the political left as well, in the form of a class-oriented populism that feeds off the idea that any economic inequality is inherently wrong and needs to be corrected.

It’s interesting that you hear a lot of the same mythologies among both nationalist populists and left-wing populists. There’s the sense that blue-collar workers have done poorly as a result of economic liberalization, that manufacturing has been emptied out by trade, that we should be giving more benefits and welfare to particular segments of society rather than trying to wind these things back.

So, in addition to all the usual problems that we have when it comes to defending markets—the fact that arguments for markets are often counterintuitive, that markets are about the long-term rather than the short-term, that markets force us to face up to certain realities of the human condition—we also have this cross-party populist consensus, which is going to be very difficult to dislodge.

In the end, I think their policies will fail and inflict enormous harm, because they always do. Economic history is full of examples like this. But that doesn’t necessarily mean that we’ll move back in the direction of markets very quickly; the argument, “well, we didn’t do enough intervention,” will remain. That means that we need to keep making the same arguments, and we also need to find ways to get our arguments across to broader audiences because, like it or not, in a democracy like the United States, you have to win both the battle of ideas and the battle of public opinion.

I always try to end The Human Progress Podcast on a positive note.

What do you feel most hopeful about with regard to the future of the United States of America?

I’m very hopeful and inspired by the fact that we remain by far the world’s most entrepreneurial economy. Even despite all the regulation, despite Roosevelt, despite Johnson, despite all sorts of very bad policies, entrepreneurship continues to flourish in the United States. There’s something about American culture that inclines people to view entrepreneurship as a positive rather than a negative. And if you have a strong culture of entrepreneurship, then I think you’ve got a lot of room for hope.

It’s also amazing how resilient American capitalism is. It bounces back over and over and over again. It’s battered, and it’s still being punched around, but nonetheless, it keeps powering forward.