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The writer is professor of public policy at the University of Cambridge and author of ‘Cogs and Monsters: What Economics is, and What it Should Be

Like flared trousers, platform heels, inflation and other 1970s phenomena, industrial policy is back in fashion. US president Joe Biden was the trendsetter, with the Inflation Reduction Act and the Chips Act. The EU mirrored this with more investment in chip manufacturing and, in February 2023, its Green Deal Industrial Plan. Many Asian economies had never given up on industrial policy of course. 

The UK government is holding out, however. It offers many “announceables” (as officials label bite-sized media-friendly policy initiatives) but no cohesive supply-side economic policy. Perhaps this is not surprising from a Conservative government whose prime minister and chancellor are admirers of Margaret Thatcher’s free market philosophy. But the one player not bothering to play the industrial policy game is going to lose.

In any case, the intellectual centre of gravity in the economics profession has been steadily shifting towards a more active approach to policy. The Thatcherite 1980s brought the heyday of economists’ belief that markets would ensure the most efficient use of economic resources and a reasonable distribution of the gains. Privatisation, contracting out, squeezing public spending and limiting the role of government were the order of the day.

In the mid-2020s, the limitations of this philosophy are all too apparent in crumbling infrastructure, uncompetitive markets, and failing public services and local government, as well as intolerable inequalities.

There is now widespread (though not universal) support in the economics profession for the alternative view that the government’s job is to take a strategic view of the economy and establish a policy framework to provide consistent rules within which the private sector can operate. 

Take, for example, the broad consensus about the need to move towards net zero. This requires a range of policies spanning investment in the electricity grid, provision of charging infrastructure for cars, technical standards, new building regulations, subsidies for heat pumps and insulation and more. There needs to be sufficient certainty about the next 25 years for the private sector to make the investments required to hit that target.

The market will deliver — if the government sets a consistent set of rules and does so with enough cross-party consent that those rules will not change. Businesses and citizens are being asked to make investment decisions over at least a twenty-year horizon, so the least the state can do is take a similarly long-term perspective. 

It is not just the climate and biodiversity crises that need policy consistency. The UK economy is not short of long-term strategic challenges. Some of them have even been government priorities during the Conservatives’ time in office. These include “levelling up” the country’s deep geographic inequalities, and improving the dismal productivity and investment performance that has seen the UK trailing other comparable economies for years. It is manifestly clear that this government’s policies have not worked — although possibly because they were never given enough time. 

The UK needs a different approach. The state and the market are partners, not opponents. A prospering economy needs good infrastructure, high quality and adequately funded health and education provision and a consistent view of private and public investment priorities. It needs governmental co-operation in place of departmental silos. And it needs decisions to be made at the appropriate level of government: officials are no better able to make decisions for Cornwall or Herefordshire from a new building in Darlington than they are from Whitehall. 

There is plenty of scope for political differences in such an approach, as every other advanced economy demonstrates. The UK’s core problem is that its government has no strategic capacity at the centre. 

The Treasury is the only entity in Whitehall potentially able to take a long-term view, yet its philosophy is Just Say No. It believes government interventions should only target market failures but demands that spending departments and agencies operate on commercial principles. It insists on “value for money” but wastes millions by forbidding flexibility in budgeting from year to year or across activities. It centralises most economic decisions — to no purpose. Reform is needed.

No doubt the US and EU will make some costly mistakes in their new industrial policies. But they will also give their private sectors some new opportunities and will boost regional growth and frontier technologies. Above all, they stand a chance of creating the shared sense of direction and optimism that is so essential for investment and growth.

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