The state and business

Leviathan Inc

Governments seem to have forgotten that picking industrial winners nearly always fails

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For some reason it's not often one sees an article on this great scourge of modern times. The article has pointed out some of the more obvious effects of government involvement, I believe there are a host of more insidious distortions as well.

We have recently observed in Canada an effort by Chinese state industries to take up very significant positions in commodity industries, especially the oil sands and potash. While this could be just a case of strategic investment and diversification of China's huge hoard of foreign exchange, I can't help thinking that the extent to which the Chinese lever these resources into more jobs and output means that they have no interest in achieving the maximum return from the sale of these products. It is not inconceivable to me that they would use their position to try to hold down the price of these products on the world market. While this might be good for world growth, we ( Canada) would be paying the bill. Since China is likewise investing in South America and Africa this theory seems to me to be possibly more than Yellow Peril-noia.

Separately from this, I used to work for Honeywell and United Technologies, where I observed that these companies were heavily involved in defence contracting. From time to time I had the opportunity to see the origins of many commercial products that were derived from military research. Commonly, the development formula went like this:

1) U.S. military provides a research and development contract for something directly or indirectly useful to them. Usually based on an estimated cost plus basis

2) Company eats up all available funds. ( Always) ( at least ) and completes contract, establishing several patents along the way

3) Company completes development of commercial products which incorporate patents paid for by the U.S. taxpayer or licenses other products to use the same patent. I remember very well Honeywell winning a patent infringement case against Minolta for $150 million dollars for auto focus technology which derived from proximity detonator work. This lawsuit was only the first and was launched against Minolta to establish their legal position before going after all the others. In this way, consumers all over the world get to pay for U.S. military research, and companies that call the land of free enterprise home came to dominate the commercial world for a century. Pretty slick, huh? You don't hear this stuff talked about at free trade talks.

At this point it might be too late for the U.S. and most of Europe, but really, the thing that should be done is this; realize that industrial death is a good and necessary thing ( stop subsidizing), taxes on corporations flow straight through to the consumer ( stop taxing corporations). Obviously this is a bit simplistic as in spite of government all over the world having sucked the marrow out of their economies, it was of course not enough to buy all the votes and love the poor little politicians required. Almost a modern morality tale, I think.



Nestle is a huge top down, control and command bureaucracy - ask anyone who works there

This idea was taken from real entrepreneurs and boosted by the Nestle marketing and distribution machine

Spaniard fbm

I have translated to you an email I received from a friend (businessman) about the last reform to “rationalize” the Solar Aids in Spain (2009-10-15). It illustrates very well the effects of aids and state direct intervention on economy:

“Lets see. As the investment needed to build Termo-solar plants (Electricity generated heating water with huge mirrors) is quite big, and profits come in the medium-long term, the government decided that help was needed but, how? Clarifying regulation? Reducing the red tape? Making investment attractive from a liberal POV? No. They retorted to direct (and directed) aids.

Where was one of the problems –for the government? That northern Catalan nationalists realized that, no matter how “directed” the aids were, and how loyal to “The State” their recipients may become, almost all the new plants were being built –O, surprise- where there are more sun. It is, in the south.

What an outrage! Aids are not evenly distributed through the Nations of the Nation!

So PSOE´s (Spanish´s Workers Socialist Party) the Spanish central government “decided” to pass a bill abrogating the previous aids - not only the requested ones, but also the already granted!. “Theirs” proposal: To evenly distribute the funds among regions for them (their politicians) to decide anew about the projects to aid.

The bill passed the lower chamber and, waiting to be ratified, it unleashed the panic. “Loyal” tycoons that had invested millions with the eyes fixed on the aids (Fools) had suddenly plants under construction with an uncertain future ahead. And even worst, the people that really wanted to invest had received a clear signal to flee from a sector that was becoming day by day a legal black hole, and a huge pork´s barrel.

What the clever nationalists had not taken into account was that almost all the supplies to build or repair the Termo-solar Plants comes from Catalonia. In a matter of days, requests of material had been cancelled, clients were closing, and money was vanishing.

The panic was so spectacular, that yesterday the same party that proposed the bill voted against it’s ratification.

I, as businessman and part in this affair, want to ask the government for help: Please, Do Nothing! Baby, it’s not to play! Don’t Touch!


Private companies will never spend enough on truly basic research, because the odds of coming up with something useful are so small, so that is one need for government participation. There are projects that are too risky or expensive or that require a high level of centralization in order to proceed, and government can help here as well. But government ownership, and worse, management, will never avoid the tendency for political considerations to override economic.











Paul Marks

The Economist supported TARP (the biggest corporate bailout in history), it supported the "Stimulus" spending (the biggest slush fund in history), it even supported Obamacare.

All these measures were opposed by the vast majority of the people (most recently more than 70% of Missouri voters opposed Obamacare) - yet the Economist supported all of them (showing utter contrempt for both the free market and for democracy).

Now you make a big show of opposing corporate welfare "industrial policy".

Hypocricy, nauseating hypocricy.


Yes, government intervention as a rule is a bad thing but one must differentiate intervention with investment. Government investments in technology and research is the biggest contributor to the vast majority of major breakthrough in the scientific community in the modern era. Governments are really the only ones that can foot the massive bill on many of these issues. I bring this up in regard to the issue of government investment in renewable energy. This is not government intervention just as a matter of fiscal policy as we see far too often. This plays a strategic importance in the continued national growth.


Economist is so full of shit.

Acting like the free-market has not cost America jobs, stating it as a fact.

Wapners PC




"has turned his back on the laissez-faire approach of the past"

Of course, because it failed.


Well, you could argue it works for Germany, it works for China and it might have
been better for Britain not to sell or close off all its industrial assets.
Dear Economist, the Chicago Boy's economics don't work.
Wake up, its called redistribution of wealth.

@happyfish18 I agree

@Wapners PC: It failed because we had to bail all the big players out with our
money. If we would have not, 20 years of rearranging the deck chairs would have caused
the final deadlock

aidan clarke

The article title is true in more ways than one. The state is not bad because it is the state - it is bad because it is big, and because the failures and inefficiencies of big actors are felt systemwide. Look at the companies being bailed out during this crisis - they too are huge companies. The fact that they were privately owned did not help them - they were too complex and cumbersome to effectively innovate during the rich times and effectively firefight durning the lean. Their failure could also take out a lot of innocent smaller bystanders as collateral damage.

The correct response then is not to make them even bigger through the (big) state's intervention but to actively discourage the tendency to gradual centralisation that occurs during of stable, evolutionary growth. Big is ugly in the private sector for *exactly* the same reasons that big is ugly in the public sector. Some major infrastructure projects do need to be undertaken, of course, and quite a large amount of efficiency must unavoidably be sacrificed in order to undertake them, but in general activities and transactions (whether public or private) should take place at the lowest level possible.


I have a simpler formula for economic success:
a. Government should become a source of venture capital for small business, especially those small businesses that are shut off from the main funding sources. As a black man, I have a much smaller chance of landing VC capital than a white man with significantly less capability than me. Hence government should invest in small business, as this would spur growth
b. R&D. Frankly speaking, economic booms arise from DISRUPTIVE TECHNOLOGIES.. You have the agrarian revolution, the industrial revolution, the dot-com era, etc. The most recent expansion (after clinton left office -- clinton's expansion was due to the dot-com boom) was artificial...that is why things are now correcting to pre-"cheap real estate" days. There was no financial innovation involved, simply gimmickry..many profited, but a WHOLE LOT more were wiped out. The Iraq wars, Afghanistan and Homeland Security department artificially created is now being erased, as should be. All of this social networking BS provides no economic value add -- of what value is facebook, myspace, twitter? Hence government should invest in new Research grants to universities, funding startups (via grants) in these new technologies and sciences... of-course, all this funding should come with licensing that manner, the government recoups its investment via licensing or royalty fees. One key area is nano-technology. The US, having lost basic manufacturing, could now become the nano-tech hub of the world. Other areas include biotech and medical research.
c. Infrastructure (as you indicated). But it should be foward looking infrastructure-- not simply new roads or rail systems, but next generation roads and rail systems. It should be with a focus of significantly enhancing economic activity...
d. Education..face it, most students out of college are idiots. Majoring in sociology or poli-sci will not enhance the economy. Hence funding should go to engineering majors, science majors and the like. Forget the MBAs, the Lawyers, the MDs, they do nothing to innovate.. fund the true innovators...give students pursuing engineering degrees or science degrees FULL SCHOLARSHIPS..this will funnel more minds to those areas with greater success. Provide funding to the top tier schools in this area to enhance their offerings.
In order to effect this..take the silly little bureacrats out of the picture. They have the intelligence of a dead rock and hence will not understand these simple concepts. Establish a body, comprised of THINKING people with BRAINS. Let these people discern where the best possible expenditures would be and have them allocate the funds, regardless of what the "snake oil selling" politicians whine about.


I totally agreed the three approaches that the author recommended--- the efficient business environment, the investment in research and infrastructure and the incentive prizes. However, these approaches take long time and bigger investment. Facing to the struggling economy and the crisis, the states must adopt quick policy to rally citizen’s confidence in a short time. Citizen’s confidence is more important in current situation. If the citizen and the companies believe the economy will get better, they will invest more, consume more and create more jobs. And the intervening in individual industries and companies actually is not a bad choice since the great success in the emerging market gives us hope. After the failures of free market and greedy private companies, what else could make us to believe in? The state intervention is the only choice.

The past failures in interventions can’t prove the future failures since the situation is totally different now, such as business environment, the infrastructure and the people. No same river in the world. The rich countries have different development stages from the emerging markets. So the privatization in emerging markets may be a good choice while the state intervention is more preferred.

So why not we give the governments some confidence and some time? The Leviathan may evolve into the lovely dolphin after the ugly infant period?


As far as I know, the US space station and shuttle program have introduced dozens of products into the private sector, such as original, highly valuable adhesives, sealants, gaskets, rubbers and foams, ceramic-metal alloys, and on and on and on. Micro-gravity manufacturing alone is a hugely innovative and useful field. The ROI of the space program is cost-recovery rather than profit, but to label it as 'the state's new meddling in business', or 'industrial policy doesn't work', seems an exaggeration of the reality.

The trouble with these essays on how terrible government are at business is that they never show the reader any numbers to back up their claims. Most of the company startups in the private and public sector fail, we all know that. For instance, if we look at the simple percentage of new private sector companies that fail in one year, and compare that to the percentage of government endeavors that fail, what is the difference between those two numbers? We can assume that figure would be fairly important as evidence of the inferiority of the public sector, so why do all these theoretical opinion columns never give the number?

Anonymous in America






The comment in the article about the Minitel system and the internet is quite ironic, because the internet itself would not have existed without government intervention. The internet was started as a defense program (ARPANET) in the 1960s. The late Vernon W. Ruttan, a professsor at the University of Minnesota, wrote an interesting book in 2006 ("Is War Necessary for Economic Growth?") in which he points out that government intervention has been crucial in many sectors: aerospace, information technology, nuclear energy, etc.

Furthermore, Minitel was not a failure, it was quite a popular telecommunications service in France in the 1980s and was ahead of its time. French consumers were able to communicate and order goods and services "online", well before the internet and the world wide web took off in the 1990s.

I think the editors at The Economist should be a little bit more nuanced and cling on a little less to their laissez-faire ideology.

Alan McCrindle

The bigger and ignored picture is that free market capitalism is a long term failure - it is built on an unsustainable mathematical model that leads eventually to the situation we see now. Many countries are trapped in recessions that they will find impossible to escape from unless their debts are reduced by hyperinflation or debt forgiveness.

In our model of capitalism economic growth is dependant on the formation of new debt. And due to factors such as productivity growth economies need to growth their GDP by more than 2.5. to 4% p.a. to avoid unemployment rising.


1. More than one dollar of new debt is required to generate one new dollar of GDP, and

2. The amount of new debt to generate each additional dollar of GDP has increased from around $1.2 to more than $6 (and the latest figures from the US Federal Reserve now indicate that each new dollar of debt in now destroying GDP) .

What is ignored in this article is the role that Western Industrial Policy has played in the role of the rise of China and the like. Our choice to reduce import tariffs made their export industries possible and it also led to the destruction of manufacturing in the countries that reduced tariffs.

In the west we compensated for the destruction of our manufacturing industry with the rise of the financial economy and the illusion that asset price inflation that followed was sustainable income and could go on for ever. Alas we are now stuck with falling asset prices and the debt to boot. Even interest rates of half a percent are too high to allow for the resumption of new private debt at the rates required for economic growth.

The hidden costs of the deregulation of the 1980's is only now really surfacing in Europe and the USA. The politicians and citizens of these countries are now facing the reality that their standard of living is going to have to drop substantially - but they are in denial and also ignorant of their plight.

My guess is that as the reality of this drop in wealth and status filters through we will see a rise in fascism / nationalism like we did during the last global depression. The three E's the Niall Ferguson identified as the precursors of wars are all present and rising - Empire Collapse (the USA), Economic variability and Ethnicity.

My opinion is that China is another Japan but on steroids. It is running up massive debts and asset price inflation is rampant.


Yes Government is not in business to run business. It was not. It was forced to enter or bail out giants. These were failing because of greed, mismanagement and all the wrong things which should not have been done. Oil spill was not caused by a Government Giant enterprise. It was private one.
Unfortunately people including journals like Economist also look towards Governments to take action and then complain of Government interference or ownership.


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