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Too much state intervention was a mistake in the past

My Times column on the Industrial Strategy:

Theresa May’s “modern industrial strategy”, launched today, must avoid the ignominious fate of its predecessors. One by one they failed. Diagnosis of Britain’s problems is not difficult; treatment is harder. How can a government close the productivity gap, improve our low investment levels, heal the north-south divide, overcome our habitual pattern of inventing but not exploiting new ideas, and create an economy that “works for everyone”?

I do not presume to know all the answers, but I trust that the prime minister and Greg Clark, her business secretary, have begun by learning a lesson from the history of industrial strategies, Labour and Conservative: top-down solutions will not work; bottom-up ones might.

Clement Attlee’s government of 1945 nationalised the commanding heights of the economy. The result was bloated and inefficient industries serving producers rather than consumers. Harold Macmillan’s government set up the National Economic Development Council. It was abolished in the 1990s after many years of irrelevance. Harold Wilson’s government wrote a National Plan to capitalise on the “white heat of the technological revolution”. Its legacy was subsidy-guzzling giants like British Leyland.

Edward Heath’s government promoted regional growth through tax incentives and development grants, but ended up subsidising coal, steel and motorcycle manufacture. James Callaghan’s government had the National Enterprise Board, which spent a fortune propping up moribund businesses.

Eventually, the pattern was noticed — an influential Institute of Economic Affairs pamphlet of the time was entitled “Picking Losers” — and Margaret Thatcher’s government rejected the idea of an industrial strategy. The Major and Blair governments largely continued this approach, not least because European Union laws ruled out state aid.

The lessons from abroad are no different. Japan’s Ministry of International Trade and Industry was widely credited with midwifing the country’s success in the 1960s-1980s. Yet it was nothing like as interventionist as some said, with low production costs and reduced trade barriers being more important. South Korea’s economic boom coincided with reduced intervention in industry and the freeing up of exchange rates and labour markets. India’s and Latin America’s import-substitution strategies were disastrous: producing stagnant monopolies, rather than national champions.

Winner-picking has a poor track record in technology as well as in business. France’s Minitel terminals looked like a triumph in the 1990s, but the system closed altogether in 2012. America panicked about keeping memory-chip manufacture onshore, while software and social media boomed unaided by the state. The EU’s attempt to create a rival high-definition television standard in 1995 through an industry consortium came to nothing. Remember how interactive television, telecommuting villages and virtual reality were going to be our economic saviours at various times? Mr Clark should be wary lest electric and autonomous vehicles turn into similar dead-ends.

It is true that heavy defence spending at Stanford University laid the groundwork for Silicon Valley and that funding from the Defense Advanced Research Projects Agency spawned what became the internet, but both were unintended by-products of Cold War cash. In the latter case, the government sat on its invention for three decades until it was effectively privatised in the 1990s with explosive results. Until 1989 the government forbade the use of what was then called the Arpanet for private or commercial purposes.


Arguably the strongest element of our industrial strategy is the decision to leave the EU. The mere act of voting to leave has lowered our overvalued exchange rate, to the benefit of the manufacturing north. Once we are out we will be free to find our comparative advantages in the world without the distorting effect of an external tariff barrier, and free to innovate without the overzealous distortion of the precautionary principle. In digital, financial technology and biotech, Britain is bursting with start-ups ready to expand.

So what should a modern industrial strategy contain? The government cannot avoid having a transport strategy, because decisions about runways, railways and roads are nationalised. So I trust that infrastructure — physical and digital — will feature strongly in today’s announcement. The unpredictable future success stories will all need it. We have already learnt that technical education is to feature, and a brave but necessary third element would be regionalisation — allowing different rules in different places: a free-trade zone on Teesside, for example.

Beyond that I hope Mrs May has the courage to “be negative”: to have a strategy of getting government out of the way of entrepreneurs, by removing the barriers to innovation, simplifying the tax system and streamlining the planning system. Remember what Adam Smith said: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”

One final history lesson. David Cameron’s government had a very dirigiste industrial policy, carried over from Gordon Brown and Tony Blair, in its approach to energy. The Cameron government continued to subsidise wind and solar power, on the assumption that gas prices could only rise, and that renewables would soon be competitive. Both assumptions proved false: gas is very cheap and renewables are still comparatively expensive.

Since 2002 we have added about £20 billion to electricity bills in order to pay for renewable subsidies. One third of that will have hit domestic bills directly, and the other two thirds indirectly through the cost of living and a downward pressure on rates of employment and wages. This is regressive, affecting low-income households more. Indeed, since it is mainly high-income households that invest in renewable energy development funds, put solar panels on their roofs and build wind farms on their land, the policy is actually robbing the poor to feed the rich.

Productivity is one of Britain’s problems, but in the vital energy sector policies are making things worse not better by forcing in technologies such as wind and solar that are of low productivity and whose intermittency harms the overall productivity of the electricity sector. That is dangerous. If we learn anything from the Industrial Revolution it is that improvements in energy sector productivity are the elixir of growth, while a massively over-capitalised system of low productivity, like the one we are now building, will lead to national poverty.


By Matt Ridley | Tagged:  rational-optimist  the-times