Duncan’s Economic Blog

Industrial Policy: We’ve been here before

Posted in Uncategorized by duncanseconomicblog on July 27, 2010

I commented last week that the five contenders might be wise to start looking at the Wilson era, especially in light of the wide spread agreement in the Party that some form of industrial policy/growth policy will be both necessary for the economy and a crucial dividing line with the coalition.

Ed Miliband has argued that:

Reshaping our economy is not a project for one year or one term but is a long-term effort that we have to make.
It begins by deepening – not abandoning as the coalition is doing – the active industrial policy that Peter Mandelson led at the end of our time in government.
It is scandalous that the government have announced the abolition of Regional Development Agencies today, when it is clear that in many regions they have led the way in building the growth economies of the future.
I saw that in my time as climate change secretary working with One North East to bring jobs in offshore wind manufacturing to Tyneside, for example.
Our country should be building on the success of the RDAs and a more active industrial policy with a new approach to finance.
Business as usual says let’s sell our stake in the banks back to the private sector as quickly as possible.
But I would take the opportunity of the rationalisation of these stakes to create a new banking system which works to invest in the industries of the future and the small businesses that can be the centre of our communities.
This means creating a stronger regional dimension to our banking system, potentially keeping a public stake or remutualising part of the sector.

Whilst his brother has stated:

Creating an economy driven by innovation and imagination will not happen by chance. It needs serious investment.
New ideas need capital to generate jobs and wealth. I’ve said before in this leadership campaign, we need markets and capitalism to work far better for the people of my constituency in South Shields.
We have to address something that has been a problem for the UK economy for decades. This is the failure of our banks and businesses to consistently put money behind the most productive ideas and the most innovative practices.
Before the crash, too much money was sucked into an inflated property market or dodgy financial products – or was siphoned off for bloated fees and bonuses. The short term, speculative gains offered by the City of London deprived areas like this of the capital they needed to grow.
We do need to reform the banks to prevent another financial crisis. But we also need to take this opportunity to reform the banking system to help rebuild and rebalance our economy in the years ahead.
We need to get money flowing to the people, the companies and the workers with the best ideas and the best strategies to seize the opportunities of the modern economy.
Over many decades, our European neighbours have had a much better record on productive investment. This has created a weight around the ankles of the British economy.
To crack this problem, the government’s Banking Commission needs to address the question of how the British banking sector should be reformed to ensure it serves its proper role in allocating capital to drive growth and jobs – not just seek the quickest, speculative gain.
One option I think it should consider is the case for establishing a British Investment Bank to facilitate investment for vital infrastructure, to support good small businesses and to accelerate our transition to a low carbon economy.
As an example, a bank along these lines – owned by the public but controlled by an independent, commercially-orientated board tasked with delivering long term returns – would be ideally placed to provide loans to companies like Sheffield Forgemasters.

There is a strong Wilsonian overtone to all of this:

Thus by 1964 Labour had developed a large reformist agenda, which may be characterized as predominantly ‘quantitative’, in which the performance of industry would be transformed by greater inputs of investment and R and D, and these in turn facilitated by expansion in the size of enterprises. The DEA and the National Plan would provide the framework of stability to encourage investment, which would also be heavily subsidized; government would pay for much more R and D and switch much of it from military and ‘big science’ to commercially related projects: in addition, more labour would be trained and more of it diverted into productive industry. Total government spending on industry, particularly manufacturing, rose very sharply from 0.4 to 9.0 per cent of net output in that sector between 1964 and 1967.

Tomlinson, J (2004) ‘’The Labour party and the capitalist firm, c.1950-1970′, Historical Journal 47

The question is – why didn’t Wilson’s industrial modernisation agenda work? It’s one I’ll be returning to on this blog.But I would say that one major failing of industrial policy in the 1960s/70s was a focus on industry whilst the financial sector was  broadly left alone. Both Milibands appear to be taking financial reform seriously.

Whilst I’m on historical matters, this passage (from 1982) struck me as strangely accurate.

Thus, a pattern is emerging. Depressions in twentieth-century Britain have  typically appeared at the end of an extended period of sustained expansion. The  economic pressures are perceived first in the City which reacts by calling for  cuts in public spending and other measures to restore confidence in sterling.
Industry is also faced with the need to respond to market forces. The experience  of this century suggests that British industry will also press for retrenchment  by government even if the cost is the loss of some measure of State support for  industry and the weakening of the corporatist structures in which business  leaders had a considerable stake. Thus, by the time that depression begins to  hit employment (and changes in unemployment always follow changes in the  national income), there is a considerable climate of opinion which blames the  level of government spending and the level of wages (maintained in part by the  closeness of the unions to the centre of government) for many of the economic  problems. These opinions are exposed to an electorate which had become  accustomed to annual rises in real living standards. The frustrated expectations  among the mass of the population, which in other circumstances can be a  pre-condition to revolution, are channelled in the British case towards economic
liberalism and orthodox finance. During the three depressions of this century,  organized labour has been in no position to offer a challenge to this movement.  In the British context, therefore, ‘orthodoxy’ or ‘monetarism’ are the natural  policies of depression
Booth, A (1982) ‘Corporatism, capitalism and depression in twentieth-century
Britain’, The British Journal of Sociology 33 (2)

5 Responses

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  1. Tim Worstall said, on July 27, 2010 at 12:33 pm

    Yes, we have been here before. And what we’ve found is that having capital allocated by those who get their jobs by kissing babies is not a very effective or efficient method of allocating capital.

    You know, it would be like trying to increase the supply of low cost housing by knocking down 400,000 low cost houses. Just not something likely to aqchieve the desired aim, for all that John Prescott did start the Pathfinder program.

  2. Agog said, on July 27, 2010 at 6:25 pm

    Yes, the old ‘picking winners’ debate whereby government is always very bad about making these decisions whereas companies are always very good at doing the same thing. Of course in the real world it’s not as clear cut as that. See the work of Ha-Joon Chang for instance.

  3. gastro george said, on July 28, 2010 at 9:45 am

    Well, regarding the health of the country’s economy (rather than their own pockets), the City haven’t done such an efficient job in allocating capital.

    In fact you can look back to the 50s (and probably even further) to see that manufacturing industry in the UK has had a big tendency towards low investment – and therefore loss of markets in the long term. You only need to look at Germany and France to see that this is not an innate problem, but a systemic one. If they are capable of setting up a successful finance regime for manufacturing, then why can’t we?

  4. Andreas Paterson said, on July 28, 2010 at 11:15 am

    Worth pointing out here that France has a lower manufacturing as a proportion of GDP than the UK, so it’s not the best example. That said though it could certainly be argued that what manufacturing France does have is due to industrial intervention, especially the use of state owned industries.

  5. gastro george said, on July 28, 2010 at 1:48 pm

    There are several different models that could be chosen – France and Germany would be different ones.

    I find it ironic that the people like Tim (and Redwood) spend their time arguing that public investment is a problem because it “crowds out” private investment. Regarding manufacturing industry, the problem is more that the finance-sweating obsession of the City crowds out manufacturing investment.


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