Balancing the economy: The hand of government or the invisible hand?

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Balancing the economy: The hand of government or the invisible hand?

Len Shackleton & Diego Zuluaga

21 December 2016

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UK’s current version of industrial strategy will do little to boost productivity

https://iea.org.uk/wp-content/uploads/2016/12/IEA-Balancing-the-economy_web.pdf

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Press release

Summary:

Despite its considerable strengths, the UK economy is seen as having
a number of problems, in particular productivity which lags behind
some competitors, low levels of investment and persistent regional
disparities. Following the referendum decision to leave the EU, there
is wide interest in developing a new industrial strategy.

The Prime Minister and others have spoken of ‘rebalancing’ the economy
away from what is said to be an excessive reliance on financial and
other service sectors. This is often taken to imply that manufacturing
should be specially favoured.

Manufacturing remains more important in the economy than is often
claimed, and the decline in its share of national output has been
exaggerated. All developed economies are experiencing a fall in the
relative share of manufacturing and the UK is not seriously out of line
with many comparable countries.

The UK has a growing comparative advantage in services which the
government should not attempt to frustrate by favouring manufacturing.

The past record of industrial policy in the UK is a catalogue of waste
and ineffectiveness. By the end of the 1970s it was widely accepted
that the strategy of attempting to pick winners and promoting national
champions was fundamentally flawed.

The international record is only slightly more encouraging. Previous
models such as France and Japan no longer provide a convincing
case for government intervention. More recent examples of apparently
successful industrial strategy, such as South Korea, seem to be more
ambiguous than their advocates suggest.

Much attention has been paid to the concept of ‘the entrepreneurial
state’, promoted by Professor Mariana Mazzucato. Her analysis
sees the state as having been a major contributor to such dynamic
innovations as the iPhone and the Internet, and argues that government
intervention is necessary to fund far-sighted schemes that are unlikely
to attract investment from venture capital.

Mazzucato’s analysis, however, misreads the contribution of
entrepreneurs such as Steve Jobs and is a retrospective rationalisation
of interventions which were never consciously planned. Her examples
do not provide any guide to future government policy.

While political pressures mean that the revival of interest in industrial
strategy is understandable, it is not clear that the sectorally-based
policies being suggested are fundamentally different from those
proposed in the past. Governments are still likely to be tempted to
intervene for narrowly political motives and it is still assumed that
governments possess insights which the private sector is denied.

The UK’s economy and its population would be better supported by a
revival of ‘horizontal’ rather than ‘sectoral’ strategy, concentrating on
boosting competition, relaxing planning controls, liberalising energy,
deregulating markets and promoting tax reform. The government should
also eschew protectionism and excessive restrictions on immigration.

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Len Shackleton

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

Diego Zuluaga

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.