The Static Fallacy

One of the arguments used by those urging some sort of industrial policy is that this country's "basic industries" are going down the tubes. The United States cannot remain a first-rate country, it is argued, unless it possesses a large, robust auto industry, steel industry, shipbuilding industry, etc.

Which industries are defined as "basic," of course, depends on which union chief or corporate magnate is making the speech. But aside from being arbitrary, there's a more fundamental problem with the whole idea of basic industries. Those who use the term seem to view the present configuration of industry and society as if it had always been that way and (implicitly) always should be.

But one only has to take a look around to see the fallacy in this idea. Entirely new industries have grown up to produce goods that no one could even imagine 20 years ago—personal computers, portable telephones, car stereos, solar panels, video games. New service industries like overnight package delivery, direct broadcast satellite TV, and video stores were unknown in the 1950s, as well. At the same time, other products and services have passed into history—when was the last time you saw a mechanical adding machine, a mimeograph machine, or a hamburger-stand carhop?

The essential point is that the world is not a static place. A free-market, capitalist economy is a dynamic process of trial-and-error innovation and entrepreneurship. Motivated by the hope of making money, people who think they have a better idea burn the midnight oil perfecting it, then go out and try to convince venture capitalists to back it. The ultimate test, of course, is whether the new product of service meets anyone's needs. And that can only be determined in the rough and tumble of the competitive marketplace. Every year tens of thousands of new businesses start up—and tens of thousands fail to pass muster with consumers.

The idea of "basic industries" is that certain products or companies should be exempted from this dynamic process, because they are somehow "too important" to be left to the free play of supply and demand. Where that would lead in practice is easy to project, by observing the hopelessly inefficient automobile, coal, railroad, and steel industries of Great Britain—all of which were nationalized on exactly those grounds.

The idea of basic industries is but a short step removed from Karl Marx's concept of "the means of production." Socialists of all stripes have used this phrase, referring to whatever set of industries happened to exist at the time. Had the means of production been nationalized in 1867, the year Das Kapital first appeared, there would have been no automobile industry, no aviation industry, no aluminum industry—and certainly no computer industry—to nationalize. The question to ask socialists is whether, had socialism triumphed in 1867, there would ever have been an auto industry, an aviation industry, or a computer industry. With the "means of production" taken care of, and the profit motive extinguished, who would have risked their (nonexistent) fortunes and devoted 20 years of personal struggle to create aircraft or computers or Xerox machines?

In China the socialist revolution occurred in 1949. That's why the "means of production" in China still include steam locomotive factories. Tom Brokaw's revealing two-hour NBC documentary in December showed classrooms of uniformed six-year-olds in a steam locomotive factory town singing songs in praise of steam locomotives. Apparently, these children can expect nothing more than to spend their entire working lives building steam locomotives there.

The same sort of static fallacy—viewing the world as if it had always been as it is today and always will (or should) be—shows up also in debates on national defense. Last summer, Michael Klare of the Institute for Policy Studies published in the Nation a long attack on the idea of high-tech conventional weapons as an alternative to tactical nuclear weapons for defending NATO's European members. Klare's ultimate point was that developing such weapons would be a waste of time and money, because "the Russians would certainly respond by deploying similar arms, thereby further endangering NATO's defenses.…"

A similar objection is raised by those opposing development of antiballistic missiles and other forms of defense against nuclear attack. Advocates of strategic stability tend to see the world in frozen terms of ICBMs and SLBMs and don't want anything to upset their neat, tidy models. Deployment of space-based defenses, they argue, would only force the Soviets to respond in kind, thereby setting off another costly round in the arms race.

What this static view ignores is the reality of technological breakthroughs. Breakthroughs can and do occur in defense technology, just as they occur in civilian life. And a genuine breakthrough may take a great many years and untold billions for the Soviets to "duplicate"—if they can do so at all. This point is especially relevant in comparing the burden that defense spending imposes on the US and Soviet economies. While defense spending consumes about 6 percent of US GNP, it devours nearly 16 percent of Soviet GNP. And even with that, the Soviets are just now approaching what many defense analysts consider rough parity with US forces. To blithely assume that the Soviets could afford to match a major US breakthrough is totally unwarranted.

In the long run, a centralized, socialist state is almost certain to fail in a contest with a capitalist, free-market society. A dynamic, free economy will out-innovate and out-produce a static, nationalized "means of production." Capitalism will win because reality is on its side—the reality of change and innovation and progress. Against a society based on this dynamic process, no static system can hope to prevail.