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Australian economy: the Labor Party and the unions put economic planning back on the drawing board
Gerard Jackson
Unions and the Australian labor Party have declared that economic planning is back on board, only they call it industry policy. Incredible as it might seem to an informed person some of them still think Japan’s rapid post-war recovery was the fruit of far-seeing bureaucrats and politicians and not that of greedy short-sighted businessmen.
According to this completely erroneous view of post-war Japanese economic history the development of Japanese industry had been guided by the MITI (Ministry of International Trade and Industry) which not only took a long term view of investment but also successfully picked industry winners.
About 10 years ago Simon Crean asserted that an industry policy would challenge “pure economics, the market forces argument”. Of course, claimed Crean, his policy will be different because it will “strategic intervention in the broadest definition of the words”. He then went on to blow a hole in his own case by admitting that in “a dynamic economy, the winners pick themselves.” But of course, they will still need help from governments “to get off the ground” and that is where Crean’s interventionist/statist policies would spring in to action.
However, industry policy still means picking winners. Crean unconsciously admitted this when he ticked off telecommunications, value-adding resource industries, information technologies, the agricultural services sector, etc, as potential winners. A moment’s thought (and I realise how painful that would be for most ‘journalists’ and politicians’) reveals that Crean’s list would leave very little outside of the government’s economic control.
Make no mistake: the essence of industry policy is not direction but control because you cannot direct industry without controlling it. Labor Party politicians and union hacks no more understand this fact anymore than they understand “pure economics”. Clearly Crean and his union mates have learnt nothing during the last 10 years.
To deal with these economic fantasies it is first necessary to expose the MITI myth. In reality, the MITI has no control and very little influence of Japanese industry. In practice, therefore, Japanese firms only follow those MITI proposals with which they agree, silently ignoring those they consider detrimental to their interests. In many instances, if the MITI’s proposals had been accepted by Japanese industry the consequences for the economy would have been severe.
Several examples will suffice: imagine what the situation would be today for the Japanese consumer electronics industry if the MITI two-year campaign to dissuade Sony from buying the manufacturing rights for transistors from Western Electric had been successful. The MITI’s bureaucrats, argued that the transistor was too revolutionary and decided that the future still lay with valves. On the other hand, the entrepreneurial driven but ’short-sighted’ Sony could see the electronic future and invested accordingly.
Without Sony’s determination and entrepreneurial foresight the Japanese consumer electronics industry would have been stunted if not stillborn. Sony is now a household name throughout the world while the MITI policy that would have killed off the company is, unfortunately, largely forgotten. Perversely, Western admirers of the mythical accomplishments of the MITI frequently hold up the Japanese car industry as one of its great success stories. Yet this industry’s experience of the MITI is similar to that of Sony’s.
The only reason Honda, Toyota and Nissan are so successful is because they strongly resisted MITI interference in their affairs. Until the late ‘70s it was orthodoxy at the MITI that Japan’s car companies could not successfully compete against America’s big three. Driven (no pun intended) by this belief, the MITI tried to force the car companies to form a global-company by merging.
With this view in mind it even tried to dissuade Honda from entering what it considered to be a fragmented and overcrowded market. Once again the entrepreneurial spirit defeated the technocratic approach of the MITI and the Japanese car industry became one of Japan’s great industrial successes.
While the MITI was inadvertently planning to abort Japan’s nascent car industry it was also trying to persuade Japanese investors to switch from cars to the steel and petrochemical industries. The astonishing worldwide success of Japanese car manufacturers is in stark contrast to the failure of the petrochemical and subsidised steel industries. The very industries that the MITI had targeted in preference to car manufacturing.
Let us not forget other MITI failures like shipbuilding and aerospace companies. Success stories like cement, glass and motor industries never really rated with the MITI and even occasionally found it resisting their development. No wonder the Japanese economist Katsuro Sakoh stated that Japan’s economic success is “based not on how much it [the Japanese government] did for the economy, but on how much it restrained itself from doing”.
Only the market can allocate factors to the margin; that is, to where they will render the greatest return. Political intervention in the form of directing investment to areas favoured by governments and bureaucrats, even for the best of reasons, will result in lower returns. Therefore, we should expect countries with the most active “industrial policies” to have the most inefficient factor allocations. And this is exactly what we find.
Capital, land and labour (the latter also includes entrepreneurship) are quite often highly specialised. Therefore if they are directed by political edict and not market processes the result will be a misallocation of resources made visible by falling returns. Thus it should be clear that TFP in Singapore fell not because she simply added capital to the ‘capital stock’ but because state intervention has imposed factor combinations that that have led to an inefficient use of capital.
We find exactly the same phenomenon in the US. A few years ago the McKinsey Global Institute found that though Germany had 13 per cent more capital than the US, its capital productivity was only 35 per cent less. The situation was similar for Japan. Even though Japan has 22 per cent more capital than the US its productivity was only 63 per cent of the US level. There is no riddle here. The difference between the Japanese economy and the US can only be put down to regulations and protection.
The truth is that “industrial policies” have always failed. Central planning, for example, is nothing more than “industry policy” taken to its logical conclusion. The collapse of communism graphically illustrates the failure of such policies. Behind the idea of economic planning by the state, whether total, piecemeal, ad hoc or what, lies the fundamental belief that state direction is superior to the market process, despite all the evidence being to the contrary. Nevertheless, it is not enough to point to the evidence in support of the market; it also needs to be explained why market processes will always be superior to state planning.
The market is a dynamic, spontaneous process. By spontaneous, it is meant that it is not the product of some conscious design. It is, in fact, a complex coordinating process whose knowledge, as Hayek stressed , is impossible to collect in its totality. There is no way any organisation or individual could gather, let alone organise, all the subjective knowledge that the market daily generates, processes, coordinates and distributes. At the heart of this process is entrepreneurship. (What is not generally realised is that the entrepreneur is basically not a innovator but a coordinator). It is this process, and only this process, that can allocate factors to the margin.
When Sony, Honda et al. ignored the ‘advice’ of MITI bureaucrats they were acting as entrepreneurs. Even though the MITI might have had the same data as these companies, it could not and interpret it and so coordinate it because this process is purely subjective. The costs, signals, incentives, expectations, market conditions and data faced daily by an entrepreneur are always different from those faced by a bureaucrat.
Even if one could find two entrepreneurs in an identical market situation and sharing the same information their costs and thus incentives would be different. For example, to the bureaucrat costs are objective, a certain sum of money — but to the market decision-maker costs are always displaced values.
It follows that entrepreneurs are really trying to predict the future and thus coordinate production to meet consumer wants, even thought they are not aware of this process. In doing so they are also coordinating the dispersed knowledge, expectations and activities of millions other producers and consumers. Obviously, prices are the vital element in the coordinating process. But as already stressed, interpretation of data, including prices, is always subjective, as are costs.
Does anyone really think that some politician, union activist or favoured bureaucrat can successfully pick the future’s growth industries? That they are capable of collecting and utilising the constantly changing dispersed knowledge that the market processes? Did any politician or any bureaucrat predict the Internet? Did any bureaucrat predict the success of the PC or the enormous potential of digital technology?
Anyone with such remarkable foresight would be immensely rich. But I don’t see the Creans of this world putting their money where their ambitions are. But they are always ready to raid taxpayers’ wallets to fund their own pet projects. So where did the PC, digital engineering, compact discs, VCRs, DVD players and recorders, mobile phones, internet software companies, etc, come from? Hayek gave the answer:
It is through the mutually adjusted efforts of many people that more knowledge is utilised that any one individual possesses or than is possible to synthesise intellectually; and it is through such utilisation of dispersed knowledge that achievements are made possible greater than any single mind can foresee.
Whenever the public hears a Crean or some incompetent CEO call for an ‘industry policy’ it should immediately look to its own financial interest and keep an iron grip on its wallet — while it can.
I have always tried to stress the fact that savings fuel an economy while entrepreneurship drives it. What the Australian economy does not need is direction by arrogant, ignorant politicians and their equally ignorant allies in the media and even the boardroom.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 14 August 2006