Controlling the Economy: Discourse and Reality

I must admit that the discussion by Mr Munchau of the recent developments in the ongoing debate about European competitiveness struck a chord with me. As I said previously, it wasn’t because I agree that “to think that Europe can force the hands of countries where vested interests block growth-promoting structural reforms is to forget the history of Brussels’ impotence outside areas where member states collectively accept its authority.”

No. What that article made me think of was that there is an intrinsic statism in the discourse of the EU as whole when it ascerts what is probably an inflated role in controlling the Economy. This very French policy making reflex is what itches me. Mr Verhofstadt, Delors and Prodi argue that “Central to this process would be aims to approximate both the retirement age and to develop a common corporate tax base. The same would be true of R&D investment levels, and wage to productivity ratios”. I agree with the first and second. Governments and their parliaments (whether you consider their EU equivalents as such or not) have the ability to pass laws to increase the retirement age and to create corporate taxation. One may argue about the desirability of any arbitrary level for such policy areas, but the fact is that they can directly and effectively affect it. The same is however not true for innovation and competitiveness. By institutional reforms, states can create environments which are more or less productive or prone to innovation. Different industries have different rates of return so that it is theoretically possible to imagine that a country could chose to specialise its economy in these fields so as to maximise its growth path. However, given that ex-ante we do not know the rate of growth of any industry nor what specific path is more efficient for that industry, we can’t know on what particular holographic technique to invest now, in order to dominate the market in the future. We can’t know for sure what financial asset will prove more profitable or more volatile. Therefore, innovation statism only makes theoretical sense, not practical. Of course, if the growth path can be known and if the state disposes of sufficient leverage and tools to coherse society into a certain, general growth path, than this is possible. But this is the case of China, India or Europe in the thirty years after WWII. Catching up is considerably easier than finding a new way forward.

There is, of course, a way for the state to work as a catalyst of innovation, by guaranteeing property rights, fomenting synergies between industries, managing market imperfections (common property rights, asymmetries of information, public goods, natural monopolies, etc), subsidising promising projects and through purchases. However, subsidising cannot be achieved because the state decides what is best and orders the private sector to achieve it. That is what France tried to do for decades until it eventually dropped it.  The state should subsidise private sector research that promises to be bring about increased returns, for existing efforts of the private sector. That is what most national governments do and it is what the EU does as well. However, as I mentioned states should also be able to feed innovation as customers. In that sense, this is my latest attempt to articulate an argument for EU military integration on the grounds of economic growth.

Ultimately, the fascinating thing for me is that the discourse of the EU is not particularly more statist than that of the USA, and its policies aren’t particularly more statist. If anything, given its lack of a military infrastructure, the EU is less able to guide the economy. In the end however it is understandable that politicians would lay claim to being able to steer the economy. Its almost a politically evolutionary imperative. The guy who campaigns on the grounds that he can and therefore will do something will win against the guy who recognises that limitats of his influence on the economy. As long as the discourse isn’t exactly matched by policy and decision making, I guess I’m not too bothered. People aren’t stupid and they remember the failures of the Soviet Union well enough to not argue for planned economies, and nor are European leaders.

For more on what governments can actually do, please tune in online for this (Video Here) talk at the IMF by a panel of luminaries. Other related debates here (click in the little cameras to see the videos).

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