Economic Theory

It’s pure hubris for politicians to think they can “rebalance” the economy

Theresa May is reviving the idea of interventionist industrial strategy, and wants to “rebalance” the economy. Many people are jumping on the bandwagon. They should jump right off again.

Even the more mature of today’s politicians were still in the school playground when these ideas last made waves. In the 1950s and 1960s, UK governments of left and right thought they knew what was best for the economy.

We had massive subsidies for the nuclear industry, early computers and the aircraft industry – Concorde, anybody? We had a laughably short-lived National Plan, an Industrial Reorganisation Corporation which completely messed up the motor industry, nationalisation of failing businesses and subsidies to half-baked worker-controlled enterprises. We had 30 years of puffed-up talking shops like the National Economic Development Council and its misbegotten “little Neddies”. None of these initiatives had much impact on the underlying growth rate of the UK economy, but they wasted lots of public money.

Today’s fans of government intervention find “market failures” everywhere: the term has been stripped of substantive content and now signifies anything critics don’t like about capitalism. Often the factual basis of their assertions – that inequality has increased dramatically in the UK, or that the pre-2008 banking system was largely unregulated – is wrong. Manufacturing is portrayed as virtually extinguished in this country, when its volume is little changed from 20 years ago.

I doubt interventionist policies can alter the balance of the economy between broad sectors, but why should we try? Britain’s 11 per cent of output produced by manufacturing is similar to other countries at a comparable level of development. In our daily lives we increasingly consume services rather than clunky goods, so why reverse the trend of decades? Our financial sector is larger than most, but this reflects comparative advantage rather than a distortion which government must rectify.

What is a twenty-first century industrial strategy supposed to look like? We are told it should not attempt to “pick winners” 1970s-style, but nevertheless government can apparently identify areas of likely importance in the future. Yesterday, Tory MP Alan Mak wrote in City A.M. of a Fourth Industrial Revolution embracing artificial intelligence, automation and hyper-connectivity. Others speak of nano-technology and genetic engineering. Exciting stuff, but what to do about it?

We have had several recent small-scale initiatives which chime with the “new industry” theme – the “High Value Manufacturing Catapult”, the Advanced Manufacturing Supply Chain Initiative, the Regional Growth Fund and so on. Are we just going to aim for more of the same, comparatively harmless if not obviously effective, or is the new strategy to be something rather more sweeping?

I worry that Brexit is being interpreted as an anti-globalisation gesture, justifying restrictions on migration of skilled labour and foreign takeovers of UK businesses. Protectionism is making a comeback as trade deals are increasingly questioned. Freed from EU restraints, siren voices are calling for support for our “strategic” steel industry: why should City bankers be bailed out and not Welsh steelworkers? Some suggest using public procurement to support British businesses. Jeremy Corbyn wants to see an end to deregulation of public services and rules allowing open access to the rail network.

Forget this. If we must revisit the past, let’s reinvigorate the liberalising direction of the 1990s. Over the last 20 years we have seen excessive regulation of business and employment in response to transient government priorities. We should liberalise energy, lowering costs to consumers and businesses. We should deregulate land use, boosting housebuilding and enabling productivity increases. We should restructure the crazy railway franchising system. We should cut back on occupational licensing which protects producers at the expense of consumers.

These and similar measures would raise output per head across the board, in such unfashionable areas as food manufacturing (still our largest manufacturing sector) or transport as well as biotechnology. There is much to do without hubristically trying to manipulate the “balance” of the economy.


This article was first published in City AM.

3 thoughts on “It’s pure hubris for politicians to think they can “rebalance” the economy”

  1. Posted 09/09/2016 at 12:04 | Permalink

    Interesting you celebrate the fact that Margaret Thatcher “rebalanced” the economy by massive Government intervention in coal, still, ships and cars for example, yet you claim economic action by Governments of any other stripe is entirely impotent. You claim that the catastrophic impact of the banking industry’s almost suicidal recklessness had nothing to do with the “light touch” regulation championed to such disastrous effect by the US Fed and Gordon Brown. I have rarely seen such an astounding example of intellectual doublethink.

  2. Posted 09/09/2016 at 15:00 | Permalink

    I don’t think I say quite what you think I say, but let that pass. Certainly the Thatcher/Major reforms altered the structure of the UK economy, notably by reducing the size of the public sector. But I don’t think Mrs Thatcher or anybody else was consciously aiming to alter the balance between private manufacturing production and private service production, which is what Mrs May seems to be suggesting.

    You might argue that the type of financial regulation pre-2008 was wrong, but there was certainly a lot of it. Whether the extra regulation imposed since then will be any more effective in the case of a major shock remains to be seen. You obviously have more faith in regulation than I do.

  3. Posted 13/09/2016 at 11:57 | Permalink

    De-regulating land-use would impact people’s quality of life. We are a small island, that is losing it’s much-loved countryside – particularly in the south-east and M4 corridor. Many of us do not see the point in concreting over yet more of the England so that we can accommodate more migrants. Is the “growth” that more housing (along with it’s subsequent transport & services development) brings worth having?

    Is GDP a measure worth having?

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