Economic Theory

The business of government is not business

We seem to think that there is something special about manufacturing. Perhaps it is because its products are tangible. George Osborne has fallen into this trap more than once, most notably in his ‘march of the makers’ budget in 2011.

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.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

3 thoughts on “The business of government is not business”

  1. Posted 23/06/2014 at 13:31 | Permalink

    When it comes to assessing Germany’s performance you need to take into account their courageous shouldering of the economic problems of the former East Germany.
    There will always be elements of the population unsuited for various reasons for Labour mobility and advanced or high skill training. Nevertheless a civilised nation will encourage dignified employment and health for the whole population. Individual businesses are not able to take in that responsibility although can see it is in everyone’s interest. That keaves the government. That’s why we invented them.

  2. Posted 23/06/2014 at 13:45 | Permalink

    One of the problems is not so much that governments interfere, but that they keep chopping and changing. I have little sympathy with those who talk about a zombie Parliament. Give MPs and government ministers longer holidays, I say. Instead of yet another Criminal Justice Bill, or even more tweaking of our ultra-voluminous tax legislation, why not have a go at doing nothing? Of course there are improvements that many of us would like to see — cutting wasteful government spending for a start — but judging by recent experience many government changes turn out to be for the worse. I believe there are such things as No Smoking Days: could we not introduce No New Legislation Months? Maybe we could even get by with fewer than 630 Members of the House of Commons. I forget how many people nowadays turn up to Cabinet meetings — but I dare say it’s far too many. What about a War on Over-government, with a ‘War Cabinet’ of half a dozen people only?

  3. Posted 23/06/2014 at 22:06 | Permalink

    Reading Professor Booth’s essay is reminiscent of my pique when politicians — even Conservative ones — in either the U.K., the U.S., or the northern Dominion get behind microphones to boast of the number of jobs they have created. At worst, they have taken money from productive enterprises and given it to those which have yet to generate their own consumer demand (leaving aside the folly of growing bureaucracy); at best, they have made the way clear for entrepreneurs to creative their own successes. In this latter case, then, wouldn’t it be far better for the politician to say that he has defended the liberty of the citizen to make his own way, freed from the burdens of government oversight, over-regulation, and over-taxation?

    Reading Professor Myddelton’s comment reminded me of a phrase I came across long ago in The Office of Prime Minister by Robert Blake; the exact wording escapes me, but the gist of it was that there were two phases of British government: administrative government and legislative government. Myddelton (and I) would have thrived in the first — just remember the novels in which peers of the realm retired to their country estates in late spring and did not return to London until mid-Autumn, when the State ran itself in their absence since its responsibilities were so slight — which ended, according to A.J.P. Taylor in English History, 1914-1945 in August 1914 and the coming of the Great War and the inevitable growth of top-down government.

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