The Capitalist Podcast: The industrial policy illusion

Why the centre-right needs to beware of bad economics

Industrial policy is back in fashion. My guest this week thinks that’s a serious problem.

Prominent figures on the centre-right have started to argue that we need government intervention through industrial policy to deliver on our economic goals, rather than relying on free-market approaches.

But is the promise of industrial policy just an illusion? In this week’s episode of the CapX podcast I sat down with Samuel Gregg, President of the American Institute for Economic Research to discuss:

• Why some conservatives are embracing industrial policy

• Where free market advocates went wrong

• How only cutting over-regulation and tax can deliver for voters

• What today’s politicians can learn from Adam Smith

You’ll find links to watch or listen to the full episode below, as well as the full text of my guest’s recent article for CapX on the same topic.

Marc Sidwell
Editor, CapX

Watch on YouTube; listen on Apple Podcasts or Spotify.

Dear conservatives, industrial policy is a dead end

It’s no secret that the strong commitments to free markets that, at least rhetorically, marked many conservative parties from the 1980s until 2015, are no longer so robust. Full-throated support for free trade, for example, is hard to find in Donald Trump’s Republican Party.

Other Western centre-right parties have proved more resistant to protectionist sentiment. Yet influential voices across the Right in Britain are now insisting that we should take a fresh look at another form of interventionism: industrial policy. This is classically defined as government interventions into specific economic sectors to produce outcomes different to those that would otherwise have been delivered by markets. Some commentators have even suggested that Communist China provides us with a contemporary case study of industrial policy’s effectiveness.

Industrial policy is in fact already widespread in Western societies. State subsidies, special tax write-offs, outright capital grants and joint public-private enterprises are rife in developed economies. The differences are really about scale and form.

One reason why many governments have often been reluctant to acknowledge the degree to which they promote such practices are the well-documented economic and political problems associated with industrial policy.

Among other things, these include: 1) the fact that governments cannot know everything they would need to know if they were to design successful industrial policies; 2) the massive opportunity costs associated with diverting scarce resources to less productive economic sectors; 3) industrial policy’s inherently political nature and its consequent susceptibility to political machinations and rampant cronyism.

Then there is the reality that the world’s economies are littered with powerful examples of industrial policy failure. Japan was once considered the poster child for industrial policy success. In the 1980s, many American commentators insisted that unless the US imitated Japan’s extensive use of industrial policy, it risked being supplanted by Japan as the world’s economic superpower.

The irony is that from the early-1990s onwards, Japan started slipping into its ‘Lost Decades’ of stagnation, and there is little doubt that industrial policy played a leading part in facilitating that decline. Indeed, one of the most comprehensive studies of industrial policy’s long-term impact upon Japan concluded that it produced ‘little, if any positive impact on productivity, growth, or welfare’.

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This track record should cause conservatives to be more wary of industrial policy, including the current Chinese variety.

That China’s economy has grown spectacularly since 1979 is not in dispute. Equally true, however, is the damage that Beijing’s heavy turn to industrial policy since 2012 in the form of cash subsidies, tax benefits, credit subsidies, land subsidies and top-down coordination by the state is inflicting on that same economy.

As was underscored by a May 2026 analysis of Chinese industrial policy prepared for the US Chamber of Commerce, Beijing’s ‘industrial policy of everything’ is ‘compounding wasteful spending and inefficiency in the economy’. Massive public spending is also crowding out private sector investors. Another ominous development is how industrial policy in China is ‘steadily drifting’ towards bolstering ‘legacy and struggling sectors’, much as it did in Japan from the 1950s onwards.

Similar observations are made in a mid-2025 IMF study of Chinese industrial policy. It estimates that the misallocations stemming from industrial policy are reducing China’s annual total domestic aggregate factor productivity by about 1.2%.

Magnifying these problems is the way in which Beijing’s ‘everything industrial policy’ is resulting in overproduction of goods like EV cars, steel, cement, chemical fibres, aluminium products and solar panels. This forces Chinese companies to engage in unending price wars that undermine their domestic profitability, thereby making them even more reliant on the Chinese state.

Defenders of industrial policy invariably respond to such criticisms by pointing to apparent industrial policy successes. These range from specific examples like Taiwan’s semi-conductor industry to something as momentous as the East Asian economic miracle. But here too there are problems.

First, industrial policy advocates have enormous difficulty in establishing cause and effect. As a 1993 World Bank analysis of the East Asian economic miracle begrudgingly acknowledged, ‘It is very difficult to establish statistical links between growth and a specific intervention and even more difficult to establish causality. Because we cannot know what would have happened in the absence of a specific [industrial] policy, it is very difficult to test whether interventions increased growth rates.’

Second, closer examination of purportedly successful industrial policies invariably reveals a different story. For example, industrial policy played an at-best peripheral role in important economic developments such as the Internet’s emergence or Taiwan’s rise as the world’s premiere semiconductor producer.

Of course, if governments throw enough money at something, they will get some results. But the long-term damage in terms of opportunity costs, overproduction of goods for which there is weak demand, severe capital malinvestments and unbridled cronyism are there for all with eyes to see.

These economic truths underscore the folly of playing the industrial policy game. If British conservatives are serious about reversing their nation’s steady drift towards state capitalism and something akin to the economic misery of the 1970s, industrial policy is precisely the wrong way to go. The only ‘national champion’ Britain’s centre-right should be promoting is the force that has consistently delivered sustained prosperity: the creative and disciplined power of free markets.

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