President Reagan believes passionately that the only good industrial policy is none at all -- that free market forces, not bureaucrats or national commissions, should decide the health and longevity of American industries. But a little-known controversy is proving that the President's ideological purity doesn't always work in Washington. Feuding bureaucrats and powerful interest groups are forcing Reagan to the altar of industrial policy, where he will have to marry government programs to two emerging groups of entrepreneurs.

Unlike the questions of farm subsidies and tariff protection, this controversy is entirely new: What price should the government charge to launch new business ventures into orbit aboard the space shuttle? Back in May 1983, Reagan declared unequivocally that the cosmos should become a vast and unfettered free market. The purpose of such federal programs as the shuttle, the President said, was only to promote commercialization of the stratosphere.

Technicians using the zero-gravity environment of space to make drugs, semiconductors, and biotechnology products would be the astronauts of the future, according to President Reagan. The government's role would be minimal: By fiscal 1989, the shuttle program, in keeping with Reagan's ideology, would run on a policy of "full-cost recovery," and prices charged for private payloads would reflect the National Aeronautics & Space Administration's actual costs. If a second group of entrepreneurs building private rockets could get materials into space for less than what the government charged, so much the better. Free competition would be good for everyone.

Two years later, the President's program is still sitting idly on the launchpad. The politics of space entrepreneurship are so treacherous that Reagan has done what he says he abhors: He has appointed a National Commission on Space to draft industrial policy. What happened? "We are becoming increasingly aware of the growing pains associated with defining the role of the private sector," admits Sen. Slade Gorton (R-Wash.), chairman of the Senate subcommittee that oversees space policy. "It is obvious that this role will not be defined overnight."

What Gorton means by "growing pains" is a bloody, behind-the-scenes lobbying battle between two new groups of entrepreneurs and two federal bureaucracies. The lines were drawn earlier this year, when free-market enthusiasts in the Office of Management and Budget tried to write President Reagan's 1989 full-cost recovery policy into the 1986 budget. The policy could have doubled shuttle-flight prices when they took effect at the end of the decade.

That was good news for the nascent private rocket companies, which can't compete against a subsidized shuttle. It was also good news for the Department of Transportation, which has a mandate to help get the rocket companies off the ground. But the proposal would have devastated the space-industrialization ventures, because they need low shuttle prices to make their projects attractive to investors. NASA, too, was opposed to full-cost pricing, because the agency feared that it would lose market share to the private launch companies, thus jeopardizing long-term funding for the shuttle.

The two sides battled to a draw in Washington. The brawl was so intense, however, that it paralyzed Administration decision making. While it was able to resolve such difficult issues as farm price supports and transportation subsidies, OMB had to omit future shuttle pricing when it sent the President's budget to Congress. That left it to Reagan himself to decide which of two groups of entrepreneurs -- materials processors or rocket companies -- more deserve the favor of the government. Understandably, the President balked. He solved his problem the Japanese way -- by appointing a national industrial-policy commission.

The President is likely to face similar dilemmas throughout his second term, as he attempts to strip away federal subsidies that have shaped large sectors of the economy. While he tries to resolve his space dilemma, Reagan may see that while "industrial policy" is anathema in theory, it is sometimes useful in the world of Washington realpolitik.