China's Emergence as a Superpower (till 2014)

[Uboat509]

It depends.

For starters, you are usually completely wrong with your assertion.

Imagine a shipyard competing with South Koreans. Let's say South Koreans are 20% more competitive (in part due to subsidies).
Does it make sense to subsidize the shipyard by 20%?

Likely YES.

This assumes A) that the state is better at picking winners than the private sector and B) that competitiveness can be raised simply by throwing money at the problem. I am not saying that the state should never provide subsidies to young industries with potential (although the whole Solyndra debacle clearly illustrates the danger in that), but the key word is temporary.

Taxes and stuff mean that half of those 20% come back to government coffers (even without considering any service sector multipliers) within 12 months.

Now we're down to 10%.

That depends entirely on your tax system.

The alternative for the shipyard workers was to be unemployed, unemployment pay is probably something like 50%. Now we save a lot instead of having 20% losses.

That assumes that 100% will remain unemployed. Even allowing for that, how long do you continue to subsidize an uncompetitive business before the cost of subsidies becomes greater than the cost of paying temporary unemployment benefits? How does the state address the underlying cause of the uncompetitiveness?

I know that popular economics doesn't consider such second-order effects and prefers a more Darwinian approach, but the reality is messy. Millions of workers have no alternatives to speak of. One worker fired at a closing shipyard equals an increase of the structural unemployment by more than one person.

Modern economics most certainly does consider second order effects, which is why the auto industry was bailed out in the US. The overall losses to the economy from the loss of the auto industry would have been catastrophic but the bailouts were temporary and the industry was required to repay the cost as soon as it was back on its feet. It is not that modern economics prefers a Darwinian approach, it is simply that Darwin is inevitable. Industries that fail to innovate and remain competitive will eventually fail.

The Darwinian stuff only applies to some markets, it does not apply to old industries at all.

In which old industries do the markets not determine success or failure?