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The trouble with industrial policy is that isn’t really about industries, but companies – big companies. That’s where the political action is – as demonstrated by Pfizer’s recent bid for AstraZeneca.

In a superb article for the American Conservative, Derek Khanna argues that we are all missing the point. Instead of fussing over big established businesses, our focus should be on small, and especially new, companies:

“Start-ups have been the heart of America’s economic success story… Incredibly, almost all net new job creation comes from companies less than one year old. On average, existing businesses shed a net 1 million jobs a year, whereas new firms in their first year create an average of 3 million jobs per year. One sector has been leading the charge: the high-tech sector has been 23 percent more likely than other sectors of the economy to witness new-business formation—and the communications technology subsector has been 48 percent more likely.”

When they use their lobbying power to suppress innovation and competition, big established companies act as a break on growth and job creation:

“Incumbent industries have co-opted the legal and regulatory systems to go after their competitors, and both political parties have been complicit in this cronyism. Acceptance of these regulatory and legal barriers is a root cause of our abysmal ‘new normal’ of 2 percent annual GDP growth…

“Market entry by entrepreneurs is the disruptive force that spurs economic growth, even as it destroys the value of established companies. For new and more efficient market models to evolve and competition to be robust, companies that don’t innovate must die.”

Khanna gives various examples of the way that state regulation protects established companies from upstart competitors – one of them concerns Tesla Motors, a highly innovative company which we featured last week on the Deep End (and, no, we’re not angling for a free car):

“In many jurisdictions—including, embarrassingly for conservatives, Texas—government-imposed monopolies prohibit Tesla from selling cars directly to consumers, instead requiring Tesla to sell through traditional dealerships. In Texas, the law prevents anyone involved in selling new cars except a dealer from offering test drives, discussing price points, or even directing buyers to a website.”

As petty as these rules might seem, there’s nothing petty about their consequences:

“They force manufacturers to develop an automobile and invest millions of dollars of start-up capital in production capacity without knowing if dealers will even carry the vehicle—thus government creates a chicken-and-egg problem. These regulations protect the dealers’ monopoly rents on the market, ultimately creating a higher barrier to entry for new car manufacturers and in effect a tax of 6 to 9.3 percent upon the final price of every car in America…” 

Indeed, as Derek Khanna notes, “the last successful new car manufacturer to start up in the U.S. was Chrysler in 1925.”

On this side of the Atlantic we tend to think of America as the home of free enterprise. In fact, the US economy is staggering under an ever-increasing burden of licensing, copyright and patent law.

There is a legitimate purpose to each of these forms of regulation, but under the influence of lawyers and lobbyists they have been twisted into tools for crushing competition and undermining innovation.

The private sector establishment has various other tools at their disposal too – such as the clueless politicians who do so little to stand up for the public good. (The corporate hijacking of energy market reform in the UK serving as a prime example.)

Whatever the industrial sector – energy, finance, IT, transport, defence – there is no mistaking the widespread and pernicious influence of the lobbyists. There are those who would like to see them banned from the corridors of power. There is, however, a much better solution. In a government truly committed to the creation of a high-growth economy and a culture of permission-less innovation, ministers should actively seek out the representatives of biggest established companies. Then they should invite them in, ask them what they want – and do precisely the opposite.

24 comments for: Industrial policy should be about upsetting the private sector establishment

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