Wednesday, 25 March 2009

A spectre is haunting Europe

There is a spectre haunting Europe and it is the spectre of industrial policy. Some of the more ambitious dirigiste aims of President Sarkozy have been tamed by the European Commission, but there is no doubt that interventionism is back in town. I even heard someone argue the other day that the market is finished as a form of social organisation.

Whether politicians and bureaucrats can make better decisions is far from proven: rather the contrary. Those of us who studied industrial policy in the 1970s came to the conclusion that it was a highly dysfunctional form of policy for the following principal reasons:

1. It enables multinational companies to play one country off against another to extract funds (which is why we need an EU state aids policy).
2. It is very difficult to demonstrate 'additionality', i.e. that the additional funds made available lead to investment that would not otherwise occur.
3. It is very difficult for politicians and bureaucrats to pick winners (or 'losers')
4. Often decisions are made on electoral grounds, e.g., the sensitivity of a particular constituency or region.
5. Often investments were replicated in different parts of the country for political reasons when there was no good economic case: steel and aluminium provide good examples.
6. Large companies were generally favoured over smaller countries.
7. Industrial structures were ossified, particularly in terms of over capacity.

The political pressures to 'save jobs' are nevertheless enormous which is why it was encouraging last week to hear Lord Mandelson say that government (or the taxpayer) is not a huge bail out fund.

Capitalism has recurrent crises, but they also have a purgative effect, producing a leaner and fitter economy. In this respect I await one of the first books by a leading political economy academic on the global financial crisis. The Spectre at the Feast by Professor Andrew Gamble FBA of Cambridge University will appear from Palgrave-Macmillan in the next couple of months. Gamble

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