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



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

  • 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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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.

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.