The business of government is not business
It is often argued that we cannot become rich by selling services – by cutting each other’s hair. But, we do become rich by doing what we are relatively best at and trading to buy other things that would otherwise cost us more. Most services (insurance, legal services, higher education, and so on) are traded across borders. In these areas, the UK excels and is able to sell high valued-added services and buy huge quantities of manufactured goods that would be much more costly to make here. The revenue from every Chinese MBA student who attends a UK university, for example, could be used to buy around 25,000 children’s teddy bears. Should we really stop our professors educating the world and have them stuff teddy bears? Manufacturing employment has declined in all rich countries in recent decades – that is one reason why they are rich.
Of course, those who propose an industrial strategy want the UK to move into high-value-added manufacturing. Maybe this is where the future lies. However, we should allow entrepreneurs and business people to decide: they are the right people to determine how to use the available labour and capital to best effect. There is no reason, a priori, why the UK should specialise in selling complex machine tools to Germany rather than sell legal services to German firms operating in Dubai that then facilitate trade in financial products.
Even if there were a manufacturing boom in Britain in the next decade, it would not make much difference to economic growth. Let’s suppose that manufacturing output doubled in 15 years – something that would be extraordinary in an advanced economy. This would only add 10 per cent to national income and yet policies that specifically favour manufacturing could hamper economic growth in general.
Instead of an industrial policy that promotes manufacturing, we need low taxes, light regulation and the best environment for entrepreneurs to determine how to invest. The future may lie in manufacturing; it may lie in the further expansion of services; or it may lie in a new sector yet to be dreamed of. However, governments are in a uniquely bad place to decide. In the 1970s, we pursued an industrial policy and protected manufacturing. We lagged behind all other major economies. Since the end of the 1970s, a policy of openness, free trade and lower levels of regulation in some sectors has enabled us to outperform Germany for most of the period.
Some sensible policies such as lower government spending, lower taxation and a reconsideration of ‘green’ energy policies may help manufacturing disproportionately. This is all well and good. But these policies should be followed because they are good in themselves. Having set the right general policy environment, we should then let businesses take business decisions.
This article was originally published by The House Magazine.