Gerard
Jackson
It
seems that the Tony Abbott administration has discovered its inner central
planner by approving a “competitiveness agenda” (code for industry policy)
that will use taxpayers’ money to fund those economic activities where
Australia has the greatest advantage, leading one to wonder why they would
need public funding if they are that strong. Picking winners always leads to
even greater political meddling in the economy and, if implemented, Abbott’s
proposal will be no different. His policy also envisages ‘cooperation’
between businesses, training colleges, universities and schools. Funny thing,
though, is that Mussolini had a similar vision: he called it corporatism.
When
dealing with economic ignorance it is always best to turn to history for
support because no matter how novel or stupid an economic policy may seem to
be you can bet your last dollar that someone somewhere in the past has
implemented or tried to implement a similar policy. I still recall the time
that well informed
opinion leaders preached that Japan’s rapid post-war economic success was the
fruit of far-seeing bureaucrats and politicians and not that of greedy short-sighted
businessmen.
According
to this thoroughly distorted 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. Therefore, if we
were to succeed we too would have to establish an MITI. It turns out that
this success story in technocratic planning was just another statist myth.
In
reality, the MITI had very little influence with Japanese industry. In
practice, therefore, Japanese firms only followed those MITI proposals with
which they agreed, silently ignoring those they considered 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. That’s right, folks: the farseeing
technocrats—those clever boys with their fancy degrees—at the MITI tried to
stop Sony from investing in transistors. These technocrats—the sort of people
that impress Liberal and Labor politicians alike—argued that the transistor
was too revolutionary and that the future still lay with the valve.
On the
other hand, the entrepreneurial driven but ’short-sighted’ Ibuka-san (co-founder
of 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.
Nevertheless,
Western admirers of the MITI’s supernatural ability to pick winners
frequently held up the Japanese car industry as one of MITI’s great success
stories. Yet this industry’s experience with the MITI closely mirrored Sony’s
experience.
The
only reason Honda, Toyota and Nissan are so successful is because they
strongly resisted MITI interference in their affairs. Until the late 1970s it
was orthodoxy at the MITI that Japan’s car companies could not successfully
compete against America’s big three. Driven by this belief, it even tried to
dissuade Honda from entering what it considered to be a fragmented and
overcrowded market. MITI’s visionaries had a plan that would have had the car
companies merge into a single global-company. Once again the entrepreneurial
spirit defeated MITI’s technocratic approach, thereby making the Japanese car
industry one of the country’s great industrial success stories.
While
the MITI was inadvertently trying 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.
Then
there were the 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”1.
The
MITI’s failures is just further proof that only the market can allocate
factors to the margin, that is, to where they will render the greatest
return. Professor Coase struck blow against those politicians and technocrats
who think they can pick economic winners when he pointed out that
…economic
planning is imposed on industry, while firms arise voluntarily because they
represent a more efficient method of organising production. In a competitive
system there is an ‘optimum’ amount of planning2.
The
collapse of communism graphically illustrated the failure of central
planning. But those who advocate industry policy protest that they only want
to promote and nurture economic successes and not engage in economic
planning. However, it matters not whether it be wholesale economic planning
by the state or whether it amounts to just ‘picking winners’ by conceited
politicians and their bureaucratic advisors there still lies behind it all
the fundamental belief that political direction of economic activities is
superior to the market process—and to hell with all the evidence to the
contrary. Adam Smith neatly summed up the mentality of these people with his
observation that the would-be planner seems
to
imagine that he can arrange the different members of a great society with as
much ease as the hand arranges the different pieces upon a chess-board. He
does not consider that the pieces upon the chess-board have no other
principle of motion besides that which the hand impresses upon them; but
that, in the great chess-board of human society, every single piece has a
principle of motion of its own, altogether different from that which the
legislature might choose to impress upon it. If those two principles coincide
and act in the same direction, the game of human society will go on easily
and harmoniously, and is very likely to be happy and successful. If they are
opposite or different, the game will go on miserably, and the society must be
at all times in the highest degree of disorder3.
Unfortunately
it is not enough to point to historical the evidence that supports the free
market argument, it also needs to be explained why market processes are
always superior to state planning whether it be total or piecemeal.
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. Now every member of the Austrian school of economics
understands that knowledge in this sense is subjective. This is why
entrepreneurship is the key factor in the market process.
Entrepreneurs
do not simply discover opportunities they create them. They reformulate the
knowledge they acquire and by doing so acquire knowledge that only they
possess. This means that even if an MITI were able to acquire all the market
data and objective technical knowledge that existed it would still be of no
avail because it would literally be impossible for it to acquire any of the
subjective knowledge that the market daily generates, processes, coordinates
and distributes4.
When
Sony, Honda et al. wisely ignored the ‘advice’ of MITI bureaucrats they were
acting in their capacity as entrepreneurs. Even though the MITI technocrats
had the same technical and economic data as did the entrepreneurs who created
these companies they were still totally incapable of processing the data and
by doing so creating new knowledge—the kind of knowledge that made these
companies world leaders and gave us the PC, digital engineering, compact
discs, VCRs, DVD players and recorders, mobile phones, internet software
companies, plasma and LED televisions, etc. As Hayek noted:
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 foresee5.
Entrepreneurs
are therefore forecasters: the efficient ones succeed in predicting the
future and by doing so coordinate production to meet consumer wants, even
though they themselves are not aware of this function. In doing so they are
performing the indispensable role of coordinating the subjective knowledge,
expectations and activities of millions of other producers and consumers.
Obviously, prices are the crucial element in the coordinating process. (As
already stressed, interpretation of data, including prices, is always
subjective, as are costs).
Does
anyone really think that some politician or bureaucrat can successfully pick
the future’s growth industries? That they are capable of collecting and
utilising the continuously changing dispersed knowledge that the market
processes? Did any politician or 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 quickly become
enormously rich. Perhaps Tony Abbott and his technocratic advisors would care
to provide the taxpayer with a list of all the winners they have already
picked. Fat chance.
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. Abbott’s policy is being attacked by the
right. What this demonstrates is the right’s total lack of self-awareness. If
Abbott embarks on a wasteful process of ‘picking winners’ it will be because
the right failed miserably to successfully argue the case for the free
market.
* * * * *
Note: In a 1920 paper titled Economic Calculation in a Socialist Commonwealth
Ludwig von Mises destroyed the case for socialism by explaining that
socialist economies must always collapse because without markets economic
calculation is impossible. The collapse of the Soviet union, the radical
change of course in China and the appalling conditions in North Korea and
Cuba confirmed Mises’ analysis.
Only a
cultist would fervidly deny irrefutable evidence that contradicts his
beliefs. To hold on to their beliefs these people must live in a state of
permanent denial. The result is socialist movements are now nothing but raw
power cults.
1Katsuro
Sakoh, Industrial Policy:The Super Myth
of Japan’s Super Success, Asian Studies Center Backgrounder,
No. 3 (July 13, 1982).
2The Firm, the Market and the Law,
University of Chicago Press, 1988).
3The Theory of Moral Sentiments,
Liberty Fund, 1981, p. 234)
4What
is not generally realised is that the entrepreneur is basically not an
innovator but a coordinator. It is this process, and only this process, that
can allocate factors to the margin. 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.
5The Constitution of Liberty, Chicago:
The University of Chicago Press, 1960, pp. 30-31
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