The point of industrial strategy is not to build a massive tech champion

“The British government has pledged to put the commercialization of scientific knowledge at the heart of its industrial policy. The move comes in an ambitious and wide-ranging series of initiatives announced last week, including a white paper on how science can enhance economic competitiveness.”

Stirring words, for exciting times. Modern technology is everywhere, and the internet revolutionises everything, from how we communicate to how we shop, as it destroys and transforms every other industry. As a result, the tech-heavy Nasdaq stock market is on a rip, creating scores of overnight billionaires.  

But the words above are over 20 years old, written before any of us had heard of Google, and many years before Facebook, Netflix or Tesla had even been born. They were written to herald the strategy of Peter Mandelson, then at the Department for Trade and Industry, to exploit the ‘knowledge economy’. They nevertheless bear a striking similarity to those used to trail the current government’s new industrial strategy, which this week we learn is to be “driven by science and technology”. 

Indeed, visions like Mandelson’s are a longstanding tradition in British economic policy making, long predating even Harold Wilson’s 'White Heat of Technology' speech of 1963. We are always on the cusp of some discontinuous change that government can catalyse by supporting the development and commercialisation of scientific advances.

As with all political clichés, there is a grain of truth to this. Economies grow not just by piling up ever more inputs – labour and capital – but by combining them more cleverly: through technology, in other words. However, science and technology are close, but not identical concepts. The containerisation revolution, the assembly line and the invention of the supermarket are economic breakthroughs but they did not require a Nobel-laureate moment of lab-based inspiration to produce. And most of the magic of technological advance comes not in that first spark of genius but in how it is disseminated through the economy, which usually requires good capitalist institutions. The Soviet Union produced a lot of science, but some far less scientifically endowed economies produced a heap more growth. Take any of the great transformative technologies – steam power, electricity, computing, the internal combustion engine – and the nationality of that first inventor is hard to tell from the next hundred years’ GDP statistics. 

Recently, mesmerised by the vertiginous growth of the US tech behemoths, a new tradition has arisen – the urge for the UK to create world-beating companies of gigantic value in the stock market. It was a regular lament of David Cameron’s that Britain had failed in not creating its own Google. Since then, it and others like Apple, Microsoft and Amazon have seen their equity value hit a trillion dollars, enjoying the explosive network effects that have accompanied the internet revolution. Inevitably, the aspiration that Britain should also be creating a trillion dollar company is percolating in Whitehall, and is even said to lie behind the ultra hard-line posture being adopted on state aid rules. Britain must be free to do whatever it takes to turn its billion-dollar ‘unicorns’ into world-straddling champions.

There are numerous problems with this idea.

The economic impact of a technology is not measured by the economic rent it gives the inventor

Technology transforms the world when it is widely adopted, across hosts of industries. The fortunes made in that technology are not the point. The extent to which electricity has changed industry, housing, communications and transport is not measured by how well General Electric has done in the stock market, nor does the performance of IBM provide a guide to the transformative power of the computer revolution. 

Moreover, sustainable equity value stems from an ability to capture and keep capturing profits for many years. Initially, such profits can come about because an idea is incredible and hard to copy. But over the longer term, the barriers to entry required to sustain such profits represent an impediment to broader economic growth. Competitive forces make profits uncertain but they are what disseminate a technology’s impact far and wide. Since it takes many years to create so much equity value, a UK government with an agenda to build a champion would almost certainly find itself facing serious competition policy dilemmas along the way.

Equity value is not economic achievement

The most accepted way of measuring a country’s economic progress is through the average real incomes of the people working there. For aspiring venture capitalists, a ten-times return on their investment may be the mark of success, but producing this has little relationship with the broader prosperity a politician should care for.

Compare the economies and major stock markets of the US, Germany and the UK since the turn of the century. All three countries enjoyed a roughly similar improvement in GDP per capita in that period – up about 26%, before the pandemic struck. Yet the US has created several hundred billion-dollar companies, the UK and Germany none at all. Perhaps the creation of a tech behemoth would have added lustre to the UK’s performance, but it is hard to see in the data.

The government’s tools are not the key to creating a tech champion

There is a well-regarded literature on the important role that the government can play in pursuing key industrial aims, such as Marianna Mazzucato’s The Entrepreneurial State. But the broad tools in the government’s hands – skills, infrastructure and technology funding, even the provision of seed finance – have little to do with the long-term challenge of building huge streams of secure future profit. Those require sustained brilliant execution by managers, operating in a competitive international market, continuously finding new ways of cutting costs, developing the business and insulating it from competition. Any original, state-supported piece of research and development that may seed the great future company is still just the seed.

Does it matter if the government quixotically aims at the wrong goal for its industrial strategy? I argue that it does. The government has promised to double R&D spending – to around £18 billion a year – which is astonishing at a time of Covid-battered public finances. This is going to be hard to sustain, and may not be repeated for decades. Aiming this arsenal at an equity jackpot risks not only wasting it, but allying it with a mindset that is actually inimical to growth: one that disregards the importance of competition, or fetishises invention over the much more salient, but duller, business of disseminating ideas far and wide. At the worst, it threatens to be inward-looking, at a time when we hardly need more inward-looking policies.

Peter Mandelson ultimately turned to the 'knowledge economy' not as a cover for more meddling but as a way to acknowledge the role of the free market in developing the fruits of technological revolution. It was meant to pave the way for a smarter kind of industrial policy that concentrated much more on creating the right environment for growth, and explicitly eschewed the business of picking winners. Instead, to the fore were ideas for boosting skills, free movement of people and ideas, and enhanced openness to foreign trade and overseas capital. There was nothing as clumsy as the creation of a tech champion in there. It would be a mistake now to unlearn all the lessons he appeared to have learned.