With the new Prime Minister, Theresa May, indicating that she is in favour of an industrial policy all sorts of people are having palpitations of excitement at what this means. And we have to agree that we're all in favour of an industrial policy too. The discussion therefore centres on what the policy should be, something where we feel that many aren't really thinking hard enough:
Reform of finance is vital, to boost investment and to rebalance the economy towards manufacturing and exports and disadvantaged regions of the UK.
Quite why we've got to have more manufacturing isn't explained. Manufacturing output peaked in the middle 00s, true, but it's only a whisker off its peak now. Manufacturing employment has fallen through the floor, quite true, but that's because of automation, not a lack of manufacturing being done. What has really happened is that services have grown faster than manufacturing - manufacturing thus declines as a portion of the economy but not, really, in size itself.
And other than the case of Germany that portion which is manufacturing in the UK economy is entirely in line with other similarly advanced economies in Europe and around the world.
That emphasis on exports also looks a little odd. Back when we had fixed exchange rates "Export or die" was true (even if it should have read "Export or the government will have to devalue which is is most embarrassing") but with floating rates it simply isn't. We're not about to not export ourselves into a sterling crisis simply because with floating rates we can't have one.
Sure, we know what the real logic behind this is. Unions are good, manufacturing has lots of unions, thus there should be more manufacturing around. Which is a rather conservative way to build an industrial strategy if you ask us.
We would agree with this:
But this requires a shift of focus, from the quantity of finance to its quality. Long-term, strategic and “patient” capital is needed.
OK. So how do we do that? Equity of course. The net present value of an equity investment is, by definition, the net present value of the future income stream. Thus that value, at any one time, reflects the view of that value out to perpetuity. It's difficult to think of any form of financing more long term than that.
Policymaking over the past half-century has relied on a narrow school of economic thought, dominated by a simplistic idea of “markets” and “market failures”, of “competition” and “shareholder value”. May’s new agenda will need to draw on a much richer palette.
Ahhh, that's not what they mean, is it?
We're not averse, as we say, to at least the discussion of an industrial strategy or policy. But we would rather insist that if we're going to do that then we've got to sit down and think through the underlying assumptions being made. And that's the part that everyone with their own little list isn't doing.
Equity capital is long term, patient, capital. Manufacturing is nothing special and Britain's share of it is pretty normal for a modern economy. That this isn't what the industrial strategists are saying is what is wrong with an industrial strategy, not the idea of having one in the first place.
Our own such policy, or strategy, would be to free the economy from many of the shackles which bind it and then see what it is that Britain and Britons can do where we have a comparative advantage. All the other things, exports, the balance of payments, employment, wages and so on will be cured once that is divined. And it is only market processes red in tooth and claw that can do that divining for us.
Fewer bureaucrats, lower taxation, that's how we'll actually find out.