Industrial policies are doomed to fail

Allister Heath
SLOWLY but surely, the British establishment is forgetting the lessons of the past 35 years. We have seen the return of high taxes, a softer approach to inflation, talk of wealth taxes (eerily similar to those supported by the Labour party in 1979), the rationalisation of envy and now even a comeback for economic nationalism.

On the day the UK economy was officially overtaken by Brazil’s – now the sixth largest in the world – it was hard to know what was most depressing: Ed Miliband’s call for an industrial policy based on “patriotism”, by which he seems to mean uselessly exhorting consumers to buy UK goods and using a state-backed bank to lend money to pet projects (the laughable example he cited was a windfarm maker in Scotland); or Vince Cable’s call for a more “ambitious” and “strategic” industrial policy. Both men have long specialised in attacking wealth creators and the financial services industry – a key source of jobs – so it was hard to take either of them seriously.

The real problem is that the “experts” advising politicians don’t have a clue about which industries will do well. Futurologists are inevitably wrong. Of course, technology is a growth area – but a few years ago it seemed flat screen TVs were the future and that the value added in mobile telephony was to be found in carrying calls, rather than producing handsets. That view turned out to be hopelessly incorrect. Fifteen years ago, everybody thought Microsoft-style software was where the money would remain and that whoever built the best browsers would control the web. Nobody predicted the return of Apple, or the rise of the smartphone, or social networks.

Attempts at directing resources always end in tears. Take the crucial decision by John Major and Tony Blair to massively increase the number of young people who go to university: that was a major strategic, industrial and social policy aimed at helping the UK succeed in a new, knowledge based globalised world. It was also an appalling failure because the supply of graduates has become too great for the number of graduate-level jobs, and because some universities are of too low quality. The result has been many a tragically shattered dream: the percentage of recent graduates employed in lower skilled jobs has risen from 26.7 per cent in 2001 to 35.9 per cent today. Had so many of the best and brightest graduates not left Britain, especially those with science degrees, the scale of under-employment would be even greater.

Top-down strategic decisions fail not merely because the future is inherently uncertain – but also because ideology and vote-buying are always the dominant imperative. Many of the UK’s most successful industries – such as supermarkets, accountancy firms, hedge funds, currency trading companies or private schools (which are rated higher than those of any other economy apart from New Zealand on the OECD’s league table) are politically incorrect or located in the “wrong” part of the country. They will never be backed under an industrial policy.

We need less hubris and more realism from governments. They must focus on the basics: an education system which delivers numeracy, literacy and knowledge for all; lower taxes; reduced public spending and red tape; more (privately-financed) infrastructure; a sound monetary policy that doesn’t fuel booms and busts; no bailouts or hidden subsidies – and trust the private sector to do the rest.
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