Can and should the government make industrial policy?
What is an industrial strategy and what is the role of government in determining industrial strategy? Strategy for what? Strategy about what?
Should the government own industry? If so, what, when, where, how & why?
The role of government in industry is one the most contested and controversial areas of policy. Industrial policy has its vocal supporters as well as its vehement opponents. Who is right?
What is the role of the state in industry policy?
The role of industry policy seems to be an issue for debate when economies are performing poorly and/or failing to meet the needs of the people who participate in the markets which comprise the economy, especially the labour market, on which wages and salary earners rely. This time is no different.
After winding back (most) industry policy in the 1980s, since the lethargic economic performance that has followed the global financial crisis, it is back on the agenda.
Why should the state be any better now that it was in the 1980s at picking longer-term winners? Part of the argument in favour of industry policy is precisely that we did largely abandon it in the UK in the 1980s. As a result, the argument runs, the excesses that characterised the industrial control of the 1970s were defeated, but perhaps the pendulum has swung too far. Markets as presently favour capital by, in many cases, preventing collective or even representative bargaining.
But the state will be no better at picking winners than it has been in the past. what it can do is promote supervised sector collaboration on issues of sectoral interest, particularly around skills development, training and certification standards for training.
The finance sector
Is the financial sector really crucial to Britain’s prosperity? Or is that a convenient myth propagated by bankers, brokers, traders and underwriting syndicates? Unfortunately, the answer is yes to both questions.
The financialisation of business since the UK’s big bang in 1984 and related developments internationally is based on theories, on ideas. But that is not a bad think, merely an inevitable consequence of the development of ideas and permissive regulation. Nor is permissive regulation a problem, as long as it is realistic and reflects a sound understanding of reality in to the ideas behind the market and the regulation of that market alike.
It is the mismatch of reality of regulation and the reality of markets that has led to the problems. That is, the markets have run ahead of the regulatory response to the ideas on which they are based.
The solution is not to chain markets, although ‘Tobin taxes’ certainly warrant investigation. The problems are (i) that instantaneous algorithmic trading means that large position movement can occur to amplify mis-pricing and (ii) that UK regulation of the financial sector is an uneasy match between poor economics and poor politics. The poor economics is misundertanding the relationship between institutional arrangements and incentives at trader level; the poor politics is to insist on a punative approach to greed rather than an approach which acknowledges the inevitability of greed when dealing with money and responds to it realistically and forcefully when retail customers are deceived, misinformed or exploited.
We simply need to better financial regulation in which realism trumps bureaucracy.
Can industry policy be liberal?
The answer to that is simple and decisive: yes. And no.
Unpicking these responses rests on understanding what it is that we are talking about when we discuss industry policy. For some, it shoud be ruled out tout court as it is simply not the role of government. However, that is simply unrealistic. There will be some industries, realistically usually attached to defence materiel, that the government judges to be essential. In these sectors, support from government in one form or another may be unavoidable. In other sectors, such as energy, it may make sense to promote domestic industries because that is the only way to ensure the country will continue to be capable of doing what it needs to do given plausibly adverse international market conditions.
The key point is what is it that the government does to minimise distortions and what does that mean for management and governance going forward.
The first implication is inevitably on required rate of return. Industries in which companies are not exposed the gales of creative distruction must earn less to cover their implied cost of capital. Secondly, where the government is providing security to companies, the government must retain rights of corrective intervention.
So, again, yes. And no.
Oligopolistic collaboration, skill planning, Adam Smith & J.K. Galbraith
In The Wealth of Nations, Adam Smith wrote strongly against the monopolistic and oligopolistic interests of private capital, warning against allowing collaboration. Two centuriess later, economist Ken Galbraith described two types of economy: the planned economy and the unplanned economy.
His point was really to distinguish between price-taking producers and price-making producers; the difference being the ability to enforce a cost-related price into a market in which the supplier has dominance and one in which the supplier must accept a competitively-based price.
Galbraith’s empirically-based observation has not caught on in the economic world. Why not? Because it is unpopular and contradicts the orthodoxy of all markets being essentially competitive and government intervention being unwarranted.
The threat is as real, and more widely realised, than it was in Smith’s time. And the dilemma is as Galbraith describes it. Planned v. unplanned no longer reflects state v. private or regulated v. unregulated.
We are in times of almost unprecedented technological change without having addressed this central dilemma of distortionary power of capital concentration.
Reality is seldom simple.
The science sector — Britain’s USP?
Firmly, no. That is a self-delusion. Britain leads the world in many areas of scientific research, but that is not the same thing. Similarly, Britain has an enviable track record of converting basic scientific research in to practical application. But seldom in to successful commercialisation and production. And Britain’s track record at sustaining leads in production is not encouraging either.
In short, in science, Britain has excellent universities. Its eduction sector is, at the top end, probably its greatest success story.
However, to lead the world sustainably in any sector requires three things in which Britain’s track record is mixed. The first is breakthrough research and development. The second commercialisation — both translational science and engineering as well as marketing-driven adaptation and production management. The third is global reach that is maintained by an ogoing pipeline of R&D conversion that maintains a technical lead of applications people need or want.
We need to get a lot better at translation and much more aggressive at robotic manufacturing. Human assembly lines are increasingly uneconomic in a world where people expect things to work as advertised first time and every timee.
Strategic industries — energy & steel
We need high-quality steel to build capable defence materiel. We cannot rely on potential adversaries as suppliers nor on allies that will prioritise their own demands when it matters.
We need energy for everything. But we also need to eliminate combustion of hydrocarbons for energy production.
Technology industries
We are at an historic point of inflection. The move from industrial mastery to technological mastery has now largely occurred. Britain is not a low-wage economy and those who, in the last two decades have strived to make it so through importation of cheap labour have created a mind-set of under-capitalisation that it will take at least a generation to reverse.
If Britain is to be at the forefont of any technology based industry, it must lead not only in the research laboratories of leading universities, but in the entire industry supply chain and service structure needed to bring it to market and to solve problems along the way.
The challenge Britan faces is not picking idustries that will win or technologies in which we can lead. It is converting these into products and services that consumers want and need that solve problems rather than creating or deferring them.
Any technology is only a source of productive economic growth if it solves practical problems, but hat is not what basic science does, even if leadership in basic science arises from solving problems. They are simple different types of problems, different challenges.
The problem we have is that the entire research sector is the in the thrall of research. it should be focused on proudcing cost-effective solutions to practical market problems.
What about motor venicle manufacturing?
The only British-owned car manufacturer still in existence is Morgan. And they use BMW engines. Britain has gove from a major car builder to a domestic assembly capability in two generations. There is no point in trying to protect a UK native car industry — such a thing does not exist.
What the car industry example demonstrates is the dynamic of industry rise and fall. And, for those looking to plan Britain’s industry map for the future, those lessons matter.
The first lesson is that quality and consistency matter. Britain made beautiful cars. But they had personality, which is not a desirable attribute in a machine.
The second lesson is that cost matters. In an age where industrial sectors must be competitive internationally, cost will also be a factor.
The third lesson is that design matters; not merely functionality but also aesthetics. Britain has made some of the world’s most beautful production vehicles. But is moved from classic elegance to contemporary design.
Vehicle manufacturing will surive in the UK for a long while; there is the population to sustain it. But is no longer a British industry even while ti remains a material employer.
Ensuring food security
Britain has become the end of far too many food supply chains and the beginning of too few. It is no longer true that we can only eat that which is grown in the UK. Fruit and vegetables from around the world populate our supermarkets and it is appropriate that they do so. However, we must also seek to cultivate (pun very much au point) secure supply in as many domestically-produced foods as we can. There are two reasons for this. The first is price stability. As recent events have shown, price volatility in transportation can have a significant effect on essential supplies. Secondly, the production of low value-added food stuffs which are then exported is self-defeating. David Ricardo described the economic phenomenon of comparative advantage almost two centuries ago. But that was before cheap and reliable globalised transportation, when the ratio of international to domestic trade was far lower. Comparative advantage still applies, but we must factor irisk to and n resilience in food supply and the emissions of trading commodities globally to the calculus on international trade.
The UK is highly, if not uniquely, exposed.
Managing capture in its various forms
Texts on capture. come in three forms: (i) within the debate about publicly provided services in the welfare literature and (ii) within the Stigler-type criticisms of the capture of the regulatory process by the regulated and (iii) capture of the political process by major corporate lobbyists and influencers and other significant donors (part of the basis of Galbraith’s distinction of the planning system).
We must deal with capture in each of the instances in which it arises. Often based on the sociological premises of Loyalty, Exit and Voice (Hirschmann, 1970), capture in the welfare or utility sense relates to over-consumption of socially-provided services relative to need afforded by a mix of education, expectation and assertion (voice).
The critique by George Stigler of the propensity for influence of the dominant mindsets, methodologies or simply organisational imperialism and ‘revolving doors’ in regulatory agencies by major corporate and technocratic participants form the sectors they regulate is telling and readily observable.
Capture in the sense of Galbraith’s planned economy is not a function of desire or intent but of effectiveness. Galbraith states (1973):
❝ The differences between the planning and the market systems do not lie in the desire to escape the constraints of the market and to effect control over the economic environment. It is in the instruments by which these are accomplished and the success with which they are attained. ❞
Adam Smith had mentioned similar proclivities among buisness owners two hundred years earlier.
Understanding how best to address these vaious instantions of capture is complex. Clearly each different problem type has a different solution set. But the result is the same: misallocation.
The traditional intpretation of market failure (Bator, 1958) is also challenged by Galbraith’s assessment (although Bator addresses the issue directly). This is the most pernicious form of capture Indeed, it is major corporations who are often the most ardent supporters of laisser faire.
Dealing with this dilemma is one of the central controversies of modern economics.
Can industry policy solve the UK ‘productivity puzzle’?
Not as it is currently structured, No. Because the UK’s producivity puzzle is not an industry problem. It is a competence problem and an attitude problem.
UK managers simply are not as well trained as their European or American competitors. Management is considered a rank, not a service vocation. Clear and conclusive reseach shows that UK managers are not as technically adept nor as orgainisationally effective as their counterparts elsewhere. There are complex reasons behind these problems.
It remains a pervasive perception that more senior people are the leaders in their functional areas. In the UK, that means taking credit for the work performed in their functional areas, rather than ensuring the best technical skills are brought to bear to anticipate problems and to develop solutions and to encourage adaptation and collaboration with other functions and diciplines in the organisation. Instead, the UK path is more focused on in-role credentialisation and role movement.
The fundamental question that the productivity puzzle poses is why this occurs and how to break it down. The clear and concise answer to this, like so many others in the UK is merit based on capability and performance through the elimination of capture and privilege.
Galbraithian corporate planning v. state planning: What’s the difference?
In the 1940s, a highly consequential debate arose between leading economists on the issue of central planning in an economy. The debate occurred between the eminent Austrian economist Ludwig von Mises, his former assistant Friedrich Hayek (then at LSE) and Hayek’s LSE colleague, Lionel Robbins, and on the other side the Polish and pro-Soviet Oskar Lange and Abba Lerner, a Russian emigré aand student of Hayek at LSE, and later Otto Neurath, an Austrian-born professor at Heidelberg. The timing of the debate meant that it occurred within the context of highly-centralised planning during the Second World War.
There has subsequently been considerable debate about which side ‘won.’ The opinion one holds on the question of the outcome is likely to be driven by one’s views on planning more generally or the extent of one’s social democratic sympathies.
However, the 1940s debate scarcely settled the issue. As the extent of the government’s extraordinary interventions in to the UK economy during WWII gradually and only partially wound down. (in part courtesy of the landmark Beveridge Report published in 1942), mainstream economics increasingly settled closer to the Mises/Hayek position. But he Canadian-American economist, Ken Galbraith, was never content to be mainstream. By the 1960s, Galbraith’s New Industrial State identifed persuasively that planning was a crucial feature both of government and of a few thousand major corporations “that make up the central institutional amalgam of the United States economy. It is with these corporations that the institutional power resides.” (Ciscel, 1984) Galbraith distinguishes between the planning system, of which those firms are part, and the market system covering (in 1973) the other “twelve million or so firms in the economy.” (Galbraith, 1973)
We must distinguish clearly between planning OF the economy in the socialist calculation debate (of the 1940s) and planning IN the economy as described by Galbraith. Galbraith’s argument is altogether different.
As Galbraith subsequently pointed out “the planning system does not conform to the neoclassical view of the economy — that its firms are (sic) passive in response to the market or the state.” He notes that the implications of this are “mainly . . . a matter of breaking with accustomed or stereotyped thought.”
Galbraith’s critique is not hard to ignore; indeed, that has been the dominant response of economists — that his work is somehow beyond the neoclassical pale. But it does reflect an uncomfrotable reality which raises serious questions about the utility of the dominant economic heterodoxy.