INTRODUCTION This chapter reviews the main approaches to industrial economics and policy which lead to different recommendations on industrial policy. It shows that the theoretical framework that emerges leads to a justification of industrial policy only on the basis of the existence of ‘failures’. Market failures justify public intervention in markets in the neoclassical paradigm; government failures justify the preference for no government intervention; systemic failures are what governments should address in formulating (essentially research and development and innovation) policies within evolutionary theories. These approaches are useful to point to specific problems in the economic system, but in our view they lead to an industrial policy consisting of a series of independent actions without a broad vision. Markets and institutions build up a system where economic institutions co-evolve with social and political institutions. The point is thus to provide the right gears and levers to guide the industrial development process towards more desirable paths, making it more likely that certain directions are taken. Our framework is therefore one of political economy in the sense of Robbins (1981). Our approach is holistic, with the idea that the properties of the industrial system cannot be explained by its component parts alone. As Aristotle put it, the whole is more than the sum of the parts. In this perspective, the analysis of production organisation is essential. Production organisation is determined by the firm’s characteristics, its internal and external environments, social and political institutions, the extent of the market, and product requirements. In turn,...
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