‘Industrial strategy’ is the kiss of death to progress

George Osborne, Michael Heseltine, and Vince Cable returned yesterday to lecture the Business Select Committee on why politicians like them should impose an ‘industrial strategy’ on the country from Whitehall. Could there be a better illustration of why central economic planning is a bad idea?

Who forecast twenty years ago that Google, Facebook, or Amazon would now be among the biggest companies in the world? Certainly not politicians or officials.

All three are the result of disruptive innovation – what the Austrian economist Joseph Schumpeter called ‘creative destruction’. They succeeded because they offered consumers something that superseded existing products on the market.

The process by which we become better off involves radical change. Few people see it coming – after all, most start-ups fail. But the driving force is always the same: consumer demand.

Which is why the idea of ‘industrial strategy’ – driven not by consumers but by ministers and mandarins – is absurd. Not just because government fails to spot future demand. But because it actively holds back progress, by artificially perpetuating the products of the present.

Take one of George’s signature white elephants: Hinkley Point. Even leaving aside the eye-wateringly high strike price – double the market rate – the project rests on a very shaky assumption: that nuclear technology will be an efficient way to produce energy when the plant opens in some ten years’ time. The long-term trend suggests solar power is the technology making big strides in efficiency, while nuclear is stagnating.

That’s not to say government should subsidise solar instead. It shouldn’t. Subsidy served to extinguish a company’s incentive to make a product that can successfully compete on the market. (Solyndra in the US was perhaps a case in point.)

The point is that even if preferential treatment of particular sectors or businesses didn’t create perverse incentives, it would still negatively distort the market. Instead of backing what will be big in twenty years, government tends to favour what’s fashionable now. Rather than foster disruptive innovation, it entrenches the status quo.

Osborne praised Cameron and May for committing to industrial strategy, which, he said, “was not always in the Conservative lexicon”. There’s good reason for that. The last Tory PM to prioritise industrial strategy was Ted Heath – and look how that worked out.

When governments try to micromanage markets, progress and prosperity suffer. If that’s what we’re likely to get from the new government, there’s all the more need for a libertarian alternative.