Industrial Policy and Iraq

Joshua Holland are blaming the Bush administration for the failures of the Iraqi economy. First, Joshua Holland:

[T]he radical restructuring of Iraq’s political economy has received … little critical attention…. It was taken as a given that after knocking off Saddam, we’d rapidly privatize huge swaths of Iraq’s national companies, get rid of hundreds of thousands of civil servants, completely restructure the country’s tax and finance laws and throw Iraq’s economy wide open for foreign multinationals. …

Putting “free-markets” before what are recognized as “best practices” in post-conflict reconstruction had an immediate relationship with Iraq’s insurgency.

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Common sense should have dictated that, after the destruction of its infrastructure and the dismantling of its (brutal but stable) government, Iraq … needed jobs and basics like electricity, water and sewage systems, and it needed them quickly.

Mark Thoma chimes in:

I wonder if adherence to that ideology rather than adopting a top-down planned approach that kept formerly state-run enterprises open and running (and opened more if needed) from the start would have changed the subsequent course of events. Forget efficiency, there was plenty of time ahead to worry about that, just put people to work doing something, anything. There was plenty that needed to be done.

The authors are correct to criticize the Bush administration, however the fundamental flaw in each analysis is that the introduction of and a dogmatic adherence to free market philosophy is what doomed the Iraqi economy and led many civil servants to join the insurgency. In reality, it is a top-down social planning approach taken on by the administration that caused the economy to sputter. Holland, himself highlights Paul Bremer’s 100 Orders, specifically numbers 1 and 39 (firing Ba’ath party members; failing to give Iraqi businesses preference during reconstruction). Furthermore, the adminstration launched efforts to encourage American retailers to buy Iraqi products. This is hardly what I would call a free market approach.

The authors also succumb to a common oversight. As Frederic Bastiat famously wrote,

“Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.”*

Messengers Thoma and Holland fail to take account of what is not seen on more than one account.

Thoma and Holland, behind the veil of what is seen, conclude that had the adminstration should have kept the infrastructure in place. It is easy in hindsight to make this call, but it ignores what is unseen. Suppose the infrastructure had been maintained and that the United States “put people to work doing something, anything.” Would this have improved the economic circumstances in Iraq? Bastiat certainly wouldn’t believe so:

The great Napoleon, it is said, thought he was doing a very philanthropic work by causing ditches to be made and then filled up. He said, therefore, “What signifies the result? All we want is to see wealth spread among the laboring classes.”

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As a permanent, general, systematic measure, it is nothing else than a ruinous mystification, an impossibility, which shows a little excited labor which is seen, and hides a great deal of prevented labor, which is not seen.**

Policies of putting Iraqis to work simply so that the would have “something, anything” to do would likely have been a good short-term emotional solution, but as time passes by the uselessness of these government created jobs provides nothing of value to the economy. While the Bush administration’s plan may not have produced a desirable result, I am not convinced that the alternative proposed by Thoma and Holland would have been successful because top-down planning of any kind is the road to serfdom.

More than anything, the failures to stabilize and grow the Iraqi economy highlight the utter impossibility of nation-building. Free markets that come about through force and are riddled with government (whether domestic or foreign) interventionism are unlikely to succeed under any circumstances.

Is it likely that we would have seen better results if the U.S. had maintained the Iraqi infrastructure? Perhaps. Perhaps not. Unfortunately, the arrogant belief persists that we can mold and plan societies by imposing so-called free market or industrial policies.

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* Bastiat, Frederic. “That Which is Seen and That Which is Not Seen”. Bastiat Collection. Auburn, AL: Ludwig von Mises Institute, 2007, p. 1.

** Ibid, p. 17 – 18.