Gunnar Eliasson: Research Institute of Industrial Economics (IFN)
Abstract: This paper introduces an experimental economy with boundedly rational agents that compete with local, and largely incommunicable industrial knowledge, in an international market environment with more or less unbounded, commercial opportunities. Predictability of outcomes at the micro level is low, and increased specialization of industry exposes economic life of firms and whole nations to increased technological competition. Informational requirements in the experimental economy are such that targeted industrial policies, and especially the idea of targeted protection of individual firms for international competition should remain a classroom exercise. The workable industrial policy is much more diffuse and should be oriented towards maintaining (1) a viable and broad-based innovative activity, and (2) an institutional organization of the economy such that the consequent adjustment process caused by frequent errors is socially accepted. The competitive exposure that follows from specialization is most efficiently countered through promoting internationalization of domestic firms such that a broader portfolio of advanced specialized industrial knowledge can be created even in a small, industrial economy. Swedish manufacturing is in fact an excellent example of such a spreading of industrial risks, even though it has not really evolved as a consequence of deliberate policy.
36 pages, December 1986
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