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Governments Can, Do and Should ‘Pick Winners’

To grow our way back to prosperity we need an effective industrial policy

Governments are in competition with each other for the location of industry. A Government that fails to create attractive conditions is committing economic suicide. Yet, according toProsperity With Principles, just published by the independent think-tank Civitas, at a time when we need economic growth more than at any point since the war, policy makers in all parties are still paralysed by doctrinal non-interventionism.

From 1997 until very recently the Government has embraced non-interventionism with the enthusiasm of a cult – as if it wanted to be seen as ‘more free-market than thou’. In recent months it has begun to have second thoughts and now favours ‘industrial activism’. Nevertheless it has stood by while well over a million manufacturing jobs have disappeared.


The urgency of our economic predicament means that we need to re-think some of the policy assumptions taken for granted since the 1980s. Despite some welcome steps towards a much-needed industrial policy, Lord Mandelson complacently points out that the UK is still the sixth largest manufacturer and on a recent Newsnight programme he highlighted the fact that 25% of Britain’s goods exports were in ‘advanced manufacture’ whereas for the USA the proportion is only 22%. Such comparisons are merely comfort food for politicians. We should aim to be among the world’s top exporters. If Germany can be the second largest exporter of manufactured goods (after China) then so could we.

National rivalry – learning from overseas

Policy makers take it for granted that governments can’t ‘pick winners’. But many governments have done just that and continue to do so. Korea, Japan, Taiwan, Brazil and France all provide examples. But in Britain, formulaic non-interventionism gets in the way of pragmatic policy evaluation.

If a government invests in a particular sector the fear is that money will go to the businesses with good political connections rather than those with good commercial ideas. This long-recognised danger has been overcome by tying state support to objective measures of success that can’t easily be manipulated. Japan and South Korea, for example, linked support to export success. (pp. 14-15.)

The author of Prosperity With Principles, David Green, argues:

‘As the first country to industrialise and as one of the most prosperous nations in existence, we tend to see ourselves in a different light from developing nations. But the scale of industrial decline combined with the weakness of our public finances has made this attitude a luxury we can’t afford. We should not, therefore, be too proud to learn from nations that have enjoyed rapid growth in recent years.’ (p. 9.)

When protectionism is justified

Some foolish industrial policies have been followed, but there have also been successes. We should learn to distinguish between the two. Many free-market economists accept the need for infant-industry protection – new companies need some space to grow. But, the same reasoning should be applied to established companies that get into difficulties or face demanding transitions. (p. 29.) They too should be allowed space for recovery or adjustment. Rolls Royce had been nationalised in the 1970s and was supported with taxpayer’s funds in the Thatcher era until it was able to stand alone. In the 1970s the German Government gave temporary support to Volkswagen.

In their anxiety to uphold non-interventionism the Government has been more free-market than Mrs Thatcher, who was pragmatic in defending British companies, helping to win overseas orders and resisting foreign takeovers through ‘golden shares’. In the Major era, Michael Heseltine famously quipped that he would intervene before ‘breakfast, dinner and tea’ to help British companies.

Freedom is one of the highest human ideals; free trade is a mere policy strategy. Although free trade is sometimes confused with the ideal of liberty, the only important question is whether it achieves the economic results expected of it. As John Stuart Mill recognised, it is not an ideal but a theory about what works and fails in wealth creation. If theory does not work in practice, then try something else. (pp. 33-34.)

Adam Smith approved of limited protectionism

Perhaps surprisingly, Adam Smith favoured the navigation acts, which were calculated to take the shipping trade from the Dutch. Even though the navigation acts were the result of ‘national animosity’, Smith thought they were as wise ‘as if they had all been dictated by the most deliberate wisdom’. (p. 22.)

He also favoured retaliation when another country imposed duties on us. In such a case ‘revenge’ naturally dictated retaliation, leading to the imposition of like duties on them. Retaliation would be likely to encourage the repeal of foreign tariffs and the inevitable extra expense was justified in order to gain trade.

Moreover, foreign competition should ‘never be introduced suddenly, but slowly, gradually, and after a very long warning’. (p. 23.) And he favoured a ‘considerable tax’ on exports of raw wool, which he felt would give a ‘sufficient advantage’ to British manufacturers compared with foreign rivals. (p. 24.)

Business as a vocation

Maximisation of shareholder value is a shallow mockery of the ideal of free enterprise. Our institutions should encourage businesses to be owned by people who plan to develop a long-standing structure for providing goods and services. Warren Buffett, one of the most successful investors of all time, famously gives three instructions to the chief executive officers of his numerous businesses. They are to run their companies as if (1) they are the sole owner; (2) it is the only asset they hold; and (3) they can never sell or merge it for 100 years. (p. x.)

According to David Green: ‘Business leadership should be a vocation, not a relentless search for the best return on capital to the exclusion of all other human responsibilities.’ (p. x.)

Misunderstanding the ideal of freedom

It’s not about imposing markets ‘as the crow flies’

‘Our heritage of liberalism differs from the formulaic non-interventionism that has distorted our understanding in recent years. A free society is a free people with a state committed to personal freedom; not a group of people without a state or with only a tiny government. Freedom is a contrivance of politics, not a spontaneous state of affairs.’
(p. 7.)

‘Freedom has been confused with doctrinal non-interventionism, a general hostility to government action that still pervades discussion even when it is formally renounced. While adhering to liberal principles, nations should adopt the policies that work for them. There is more than one liberal path to prosperity.’ (p. xi.)

Legitimate patriotism

There is a tendency to confuse all patriotism with aggressive nationalism. It is perfectly possibly to be legitimately patriotic, to refrain from nationalistic animosity, and yet unashamedly to pursue our national interests in a spirit compatible with international reciprocity.

‘Increased wealth would enable us to trade with others on mutually agreed terms. It is not a ‘beggar-my-neighbour’ policy. To be in a position to trade with others, people have to be prosperous enough to buy products in the first place… Today China is pursuing a one-sided strategy of national advantage at the expense of others. Trade should not be a kind of non-violent struggle for national supremacy. Its essence is mutual advantage and no nation should press its advantages too hard.’ (p. 27.)

We can learn from Keynes. He did not want large scale or general protection and nor did he want a strategy of national self-sufficiency, but he did believe that we were well-adapted as a nation to make cars and steel and should not allow short-term fluctuations to bring whole industries down. (p. 26.)

Foreign takeovers should be restricted

At a time when the Government has allowed a foreign company to take over our steel industry and now to ‘mothball’ the Redcar steel plant, policy makers should heed Keynes’ words. Corus claims that Redcar makes the wrong kind of steel, but that is not the point. If it were owned by a British company it would be investing in steel products for which there is a market. Instead its investment is going into new plants in the Netherlands and India.

Until the 2002 Enterprise Act the Secretary of State could make an order to prevent an action that ‘harmed the economic interests of consumers’. A power to protect the public interest when dealing with foreign takeovers now urgently needs to be restored.

There are some legitimate reasons for questioning foreign takeovers. Sometimes the intention may be to reduce competition from a British rival. In some cases a new owner may put the national interest of his own homeland above the interests of British workers. The head office may move overseas and valuable service contracts lost. Foreign owners are also more likely to close their British branch in a downturn. Often takeovers are funded by debt which is loaded onto the books of the acquired company, adding to its costs and making it more difficult for it to compete. Meanwhile, the private-equity buyer has re-sold the company and moved on.

To pretend that every takeover is well-intentioned and economically beneficial is naive. As one of our most distinguished economic commentators has noted, the modern era has seen the ‘the triumph of the global over the local, of the speculator over the manager, and the financier over the producer’.

Notes for Editors

i. Prosperity With Principles: Some Policies for Economic Growth by David G. Green is published by Civitas.


ii.For more information ring: David Green, Director of Civitas on:

Work: 020 7799 6677

iii. Civitas is an independent think tank. It receives no state funding and has no links to any political party.

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