David Green is Chairman of Civitas.
Economic growth is well below the Government’s aspirations, and not least because it has failed to recognise that globalisation has reached its apogee.
That doctrine assumes that unfettered free trade is always beneficial to everyone. But many commentators can now see that some nations are not trading for the mutual benefit of all, but rather to achieve national aggrandisement – traditionally called mercantilism.
The main culprit is China. It subsidises exports and imposes import tariffs, contrary to WTO rules. It has state-owned monopolies, and state-owned banks that provide undisclosed corporate subsidies. There are no genuinely private companies in China; the paramount aim of the system is to keep power in the hands of a Communist Party that intends to increase Beijing’s military and economic dominance.
Enthusiasts for globalisation have forgotten what the founding father of economics, Adam Smith, said when faced with a similar situation in his own day. He argued that there were occasions when it was “advantageous to lay some burden upon foreign, for the encouragement of domestic industry”.
The most important was national defence, which in his day required sailors and ships. For this reason he favoured the navigation acts, which were calculated to take the shipping trade from the Dutch to weaken their economic strengt,h and consequently their naval power, at a time when Holland was the main military threat.
In 1667 a Dutch fleet had sailed up the River Medway to attack the naval dockyard at Chatham. Smith accepted the economic losses and contended that defence was “of much more importance than opulence” and consequently the acts of navigation were “the wisest of all the commercial regulations of England”.
For the same reason he supported subsidies for sailcloth and gunpowder, to avoid relying on foreign suppliers.
Conservative thinking is also constrained by the persistence of the myth that the Thatcher/Reagan era was allI about cutting taxes, de-regulation, and privatisation.
However, the ideas behind those transformative years were more subtle. Both leaders were patriots first and supported a market economy only as a means of improving the condition of their own people. It was Ronald Reagan, after all, who joked that economists were people who argue that what works in practice can’t possibly work in theory.
Moreover, he imposed “voluntary” import restraints on Japan in 1981, and under the Plaza Accord of 1985, Japanese currency manipulation was limited to force up the price of the yen to give American workers a fighting chance.
Likewise, Margaret Thatcher famously “batted for Britain”. She recognised that governments were in an economic contest and told Parliament in 1981 that every other country was helping companies – so why not the British Government:
“We have gained considerable contracts. The Government have operated behind private companies when we have been negotiating contracts overseas. We have achieved a very great measure of success.”
Nissan was attracted to Sunderland in 1984; By 1989 about 100 Japanese firms were employing 30,000 Britons.
Nor was she against using taxpayers’ money to support strategically important so-called lame ducks. British Steel was given £450 million in state aid in 1980, and it was not privatised until 1988. Again, Thatcher made her motives clear:
“We want the British Steel Corporation to be able to compete with any company in the world, on price, on quality, on delivery.”
Fortunately a new understanding is gradually emerging. Economic patriotism is not necessarily protectionist. We can take inspiration not only from Smith and Thatcher, but also from some of the leading lights of recent free-market thought.
Friedrich Hayek argued that government actions should not be seen automatically as interventions that distort. In The Constitution of Liberty, he set out to identify government actions that are compatible with a market economy; freedom of economic activity “meant freedom under the law, not the absence of government action”.
Hayek did not believe that government should “never concern itself with any economic matters”. Many government measures did not work, but he thought they should not automatically be rejected purely because they involved “government intervention”. He argued strongly that only governments could prevent monopoly and encourage competition.
However, the price mechanism should never be suppressed. Free pricing allows mutual adjustment to changing consumer tastes, the supply of raw materials and components, and changing technical advances.
Likewise, private property should be the norm because it promotes personal responsibility and enables us to resist concentrated political power. Individuals must be free to choose jobs and select goods and services, while organisations should be able to be start up and close down as needed.
A strategy for the UK could begin with three questions: are government policies making matters worse? Is an industry already successfully exporting? And is an existing industry ‘retainable’?
The most obvious example of making matters worse is the cost of energy, which is – almost entirely because of government policies – far higher in the UK than in our main rivals. As a result, we now import aluminium when we used to be exporters, and our steel industry has been brought to its knees.
Whether an industry is already exporting is not only to about whether exports could be increased, but guiding public investment.
Some upholders of naïve capitalism are quick to assert that governments can’t “pick winners”. But this argument misses the point.
Industrial policies have worked in countries such as Japan because governments let markets pick the winners in the first instance. Today we have heard of the successful Japanese companies, including Nissan, Toyota, Honda, and Subaru. But between 1945 and 1960 about 30 companies entered the Japanese domestic car market.
Only a few survived, chiefly because Japanese governments, believing that foreigners would not buy Japanese cars unless they were the best, offered targeted assistance only to companies that were good at exporting.
Retainability is more contestable. Economists assume that markets allocate capital to the most efficient producers.
However, there is now a significant literature showing that markets do not necessarily identify the least-cost producers; Ralph Gomory of the Alfred Sloan Foundation and Professor William Baumol of Princeton showed that, if there are economies of scale and high start-up costs, markets entrench the position of existing producers and deter rivals.
Consequently, the competitive advantage of some producers is not the result of being the most efficient producer but of having started early.
When these conditions apply, industries are capable of succeeding in many locations. Thus public policies should examine whether or not an existing industry is retainable, and whether further industries could be given the advantages of incumbency.
The huge investment subsidies offered by the Biden administration under the Inflation Reduction Act will have this effect; high start-up costs discourage new entrants.
Jeremy Hunt recently told the Telegraph that if we “turn our backs on free trade” it will be a disaster for the world economy. He should take the example of Thatcher, ever the pragmatist, who saw clearly that if other countries helped their companies then HM Government must also.
We can uphold the abstractions of naïve capitalism and face economic decline, or we can compete.
Not by subsidising any company that lobbies for government aid, but supporting only those that have already demonstrated their success. We can also focus public investment on sectors where high start-up costs reduce potential foreign rivals.
It’s time to look afresh at the arguments of Smith in favour of national security over GDP, and to renew our understanding of the economic patriotism of the Thatcher/Reagan years.
David Green is Chairman of Civitas.
Economic growth is well below the Government’s aspirations, and not least because it has failed to recognise that globalisation has reached its apogee.
That doctrine assumes that unfettered free trade is always beneficial to everyone. But many commentators can now see that some nations are not trading for the mutual benefit of all, but rather to achieve national aggrandisement – traditionally called mercantilism.
The main culprit is China. It subsidises exports and imposes import tariffs, contrary to WTO rules. It has state-owned monopolies, and state-owned banks that provide undisclosed corporate subsidies. There are no genuinely private companies in China; the paramount aim of the system is to keep power in the hands of a Communist Party that intends to increase Beijing’s military and economic dominance.
Enthusiasts for globalisation have forgotten what the founding father of economics, Adam Smith, said when faced with a similar situation in his own day. He argued that there were occasions when it was “advantageous to lay some burden upon foreign, for the encouragement of domestic industry”.
The most important was national defence, which in his day required sailors and ships. For this reason he favoured the navigation acts, which were calculated to take the shipping trade from the Dutch to weaken their economic strengt,h and consequently their naval power, at a time when Holland was the main military threat.
In 1667 a Dutch fleet had sailed up the River Medway to attack the naval dockyard at Chatham. Smith accepted the economic losses and contended that defence was “of much more importance than opulence” and consequently the acts of navigation were “the wisest of all the commercial regulations of England”.
For the same reason he supported subsidies for sailcloth and gunpowder, to avoid relying on foreign suppliers.
Conservative thinking is also constrained by the persistence of the myth that the Thatcher/Reagan era was allI about cutting taxes, de-regulation, and privatisation.
However, the ideas behind those transformative years were more subtle. Both leaders were patriots first and supported a market economy only as a means of improving the condition of their own people. It was Ronald Reagan, after all, who joked that economists were people who argue that what works in practice can’t possibly work in theory.
Moreover, he imposed “voluntary” import restraints on Japan in 1981, and under the Plaza Accord of 1985, Japanese currency manipulation was limited to force up the price of the yen to give American workers a fighting chance.
Likewise, Margaret Thatcher famously “batted for Britain”. She recognised that governments were in an economic contest and told Parliament in 1981 that every other country was helping companies – so why not the British Government:
“We have gained considerable contracts. The Government have operated behind private companies when we have been negotiating contracts overseas. We have achieved a very great measure of success.”
Nissan was attracted to Sunderland in 1984; By 1989 about 100 Japanese firms were employing 30,000 Britons.
Nor was she against using taxpayers’ money to support strategically important so-called lame ducks. British Steel was given £450 million in state aid in 1980, and it was not privatised until 1988. Again, Thatcher made her motives clear:
“We want the British Steel Corporation to be able to compete with any company in the world, on price, on quality, on delivery.”
Fortunately a new understanding is gradually emerging. Economic patriotism is not necessarily protectionist. We can take inspiration not only from Smith and Thatcher, but also from some of the leading lights of recent free-market thought.
Friedrich Hayek argued that government actions should not be seen automatically as interventions that distort. In The Constitution of Liberty, he set out to identify government actions that are compatible with a market economy; freedom of economic activity “meant freedom under the law, not the absence of government action”.
Hayek did not believe that government should “never concern itself with any economic matters”. Many government measures did not work, but he thought they should not automatically be rejected purely because they involved “government intervention”. He argued strongly that only governments could prevent monopoly and encourage competition.
However, the price mechanism should never be suppressed. Free pricing allows mutual adjustment to changing consumer tastes, the supply of raw materials and components, and changing technical advances.
Likewise, private property should be the norm because it promotes personal responsibility and enables us to resist concentrated political power. Individuals must be free to choose jobs and select goods and services, while organisations should be able to be start up and close down as needed.
A strategy for the UK could begin with three questions: are government policies making matters worse? Is an industry already successfully exporting? And is an existing industry ‘retainable’?
The most obvious example of making matters worse is the cost of energy, which is – almost entirely because of government policies – far higher in the UK than in our main rivals. As a result, we now import aluminium when we used to be exporters, and our steel industry has been brought to its knees.
Whether an industry is already exporting is not only to about whether exports could be increased, but guiding public investment.
Some upholders of naïve capitalism are quick to assert that governments can’t “pick winners”. But this argument misses the point.
Industrial policies have worked in countries such as Japan because governments let markets pick the winners in the first instance. Today we have heard of the successful Japanese companies, including Nissan, Toyota, Honda, and Subaru. But between 1945 and 1960 about 30 companies entered the Japanese domestic car market.
Only a few survived, chiefly because Japanese governments, believing that foreigners would not buy Japanese cars unless they were the best, offered targeted assistance only to companies that were good at exporting.
Retainability is more contestable. Economists assume that markets allocate capital to the most efficient producers.
However, there is now a significant literature showing that markets do not necessarily identify the least-cost producers; Ralph Gomory of the Alfred Sloan Foundation and Professor William Baumol of Princeton showed that, if there are economies of scale and high start-up costs, markets entrench the position of existing producers and deter rivals.
Consequently, the competitive advantage of some producers is not the result of being the most efficient producer but of having started early.
When these conditions apply, industries are capable of succeeding in many locations. Thus public policies should examine whether or not an existing industry is retainable, and whether further industries could be given the advantages of incumbency.
The huge investment subsidies offered by the Biden administration under the Inflation Reduction Act will have this effect; high start-up costs discourage new entrants.
Jeremy Hunt recently told the Telegraph that if we “turn our backs on free trade” it will be a disaster for the world economy. He should take the example of Thatcher, ever the pragmatist, who saw clearly that if other countries helped their companies then HM Government must also.
We can uphold the abstractions of naïve capitalism and face economic decline, or we can compete.
Not by subsidising any company that lobbies for government aid, but supporting only those that have already demonstrated their success. We can also focus public investment on sectors where high start-up costs reduce potential foreign rivals.
It’s time to look afresh at the arguments of Smith in favour of national security over GDP, and to renew our understanding of the economic patriotism of the Thatcher/Reagan years.