China's Emergence as a Superpower (till 2014)

[Fuchs]

This assumes A) that the state is better at picking winners than the private sector

No, that's entirely unrelated.

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.

It's questionable whether this "temporary" is really a good idea. in regard to industries which face foreign competition. Subsidies or another privileged status can make sense as permanent institution if they lead to the lesser evil.

That depends entirely on your tax system.

Not really. It's 40-60% for all developed countries. This automatic return plays a huge role in regard to arms purchases; it means a factor 2 preference for domestic suppliers. They're often effectively cheaper even if their price is substantially higher.

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?

I tell you that the vast majority of those workers will often end up unemployed or employed in such poor jobs that keeping them in their old job means a vastly higher productivity even before taking subsidies into account.
It makes no sense whatsoever on the macroeconomic scale to tolerate such a change.

How does the state address the underlying cause of the uncompetitiveness?

I don't care. I was pointing at an optimisation problem that's only visible if you're willing to look at issues on a case-by-case basis. Nobody will ever recognise such counter-intuitive details if he or she only applies general rules or even ideologies.
The optimisation problem does not require an answer to your question, in fact my remarks about the problem already reveal a decision model that leads to an optimal decision without any addressing of the underlying cause of competitiveness.
Shed off the blinders and forget this overemphasis on relative performance (competitiveness). In the end, absolute performance should not drop.

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.

That's wrong. Many industries are very mature and have next to nothing left to innovate. Moreover, some sectors are so much privileged (as oil in the U.S.) that even the worst management debacles don't keep the company from producing a huge profit.

Industries in mature economies that fail to compete with rising economies' industries don't do so because they're not innovating (often times the upstarts innovate nothing).
The typical reasons are rather
* a wage disadvantage that's outweighing transportation issues only until the rising economy has reached a better income level about a decade later
* subsidies and other privileges offered in the rising economy
* low profit in the mature economy (not the same as lack of competitiveness at all, for the foreign competitors who rise often do so with a string of losses; see South Korean shipyards). The low profit cuts the chance to finance necessary re-investments with outside capital.

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

In monopolies and oligopolies.

You misunderstood me, though. I was referring to the desirability of evolutionary selection, not to it itself.