Canada Needs Industrial Policy That Lets The Market Say No

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Mark Carney’s industrial-policy agenda has reopened a debate Canada never really escaped: when should government build, finance or shape productive capacity, and when should it leave the result to markets? The proposed C$25 billion Canada Strong Fund makes the question concrete because Ottawa would borrow to capitalize an investment vehicle expected to take minority equity positions and earn commercial returns.

The interesting divide is not government versus markets. Canada already uses industrial policy through defence procurement, infrastructure, tax credits, housing programmes, energy policy and strategic trade measures. The more useful distinction is between government building an arena in which firms and technologies compete, and government progressively shifting public risk until a politically preferred project appears commercial.

Carney’s policy stack becomes much more revealing when the same test is applied to electricity, critical minerals, housing, LNG, carbon capture and the proposed west-coast oil pipeline. The full TFIE Strategy Briefing follows where public capacity creates option value, where portfolio logic can work and where project politics begin outrunning commercial proof.

Electricity transmission is close to the good end of the spectrum. A new line can serve mines, cities, factories, data centres, electric vehicles, heat pumps, storage and multiple forms of generation for decades. Government does not need to know in advance which particular company or technology will dominate. It can expand the arena, reduce coordination problems and let users compete for the capacity.

A single large project is a different proposition. A pipeline, LNG terminal or carbon-capture network may have strategic value, but its economics depend on a much narrower set of assumptions about construction cost, customers, long-term utilization, counterparties and regulation. Public involvement therefore requires much stronger evidence because the asset has less option value if the original thesis turns out to be wrong.

That distinction also changes how we should think about failure. Markets generate bankruptcies, obsolete plants, stranded investments and failed technologies continuously. We call much of that creative destruction. It makes little sense to demand that every public investment succeed while treating failed private investments as healthy experimentation. A serious industrial strategy should expect some losers. What it should not do is keep refinancing the same loser because cancellation has become politically embarrassing.

This is where Hayek remains useful even after rejecting the market-fundamentalist conclusions often drawn from him. His knowledge problem is real: officials cannot know all of the local, temporary and distributed information embedded in prices, customers and competing firms. That is a reason to design industrial policy around competition, reversible commitments and evidence, not a reason to pretend governments never choose strategic outcomes. Keynes supplies the other half of the problem: non-intervention is itself a policy choice when markets fail to provide infrastructure, resilience, affordable housing or investment during a collapse. Schumpeter adds that any genuine process of discovery will produce losers, so failed public investments are not automatically evidence that industrial policy itself has failed, just as the failures of innumerable public companies aren’t evidence that markets are a failure.

The Canada Strong Fund is potentially interesting because its proposed design recognizes some of this. Minority equity alongside private investors can expose taxpayers to upside as well as downside, and professional management can put commercial distance between ministers and individual investments. The real governance test will be whether the wider federal financing system can still say no when a project has become politically important.

That is the test that matters most for Canadian industrial policy now. Government can set strategic direction, build common infrastructure, price externalities and supply patient capital where public value is real. The credibility of the system depends on preserving competition after that intervention — and on retaining the ability to cancel projects when the commercial evidence does not arrive.

Read the full TFIE Strategy Briefing assessment for a reconciliation of Hayek, Keynes and Schumpeter, the seven-test framework and the detailed application to Carney’s industrial-policy stack.