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.
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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