This episode explores the resurgence of industrial policy in the US and Australia. We critically analyze whether government interventions can truly shape industries or if they are doomed to repeat past mistakes, such as those experienced during the 1970s and with the Concorde project. The episode includes clips featuring Saxon Davidson from the Institute of Public Affairs and Eamonn Butler from the Adam Smith Institute.
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You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcast and Spotify.
What’s covered in EP243
- Introduction to Industrial policy and its potential consequences. (0:00)
- Budget, inflation, and economic policies in Australia. (8:34)
- Climate change policy and government incentives for renewable energy. (13:59)
- Australian economy, productivity, and government intervention. (19:44)
- UK’s economic struggles in the 1970s, including strikes. (29:41)
- The failure of the Concorde supersonic jet project. (35:59)
- Failures of activist industrial policy – e.g. in Australia’s car industry. (49:16)
Takeaways
- Revival of Industrial Policy: Governments in the US and Australia are reintroducing industrial policies to shape their economies, sparking debate among economists.
- Historical Lessons: The economic turmoil of the 1970s and failures such as the Concorde serve as cautionary tales against heavy government intervention in industry.
- Climate Policy Challenges: The push for renewable energy in Australia raises concerns about the rapid transition and its impact on the economy and energy grid reliability.
- Productivity Focus: Effective economic policies should enhance productivity through structural reforms rather than picking winners.
- Government’s Role: While there is a place for government to address market failures, extensive intervention often leads to inefficiencies and unintended consequences.
Links relevant to the conversation
Australian Taxpayers’ Alliance Budget Chat:
Gene’s CIS issues analysis paper on the Australian budget, co-authored with Robert Carling:
https://www.cis.org.au/publication/budget-fails-important-policy-tests/
Episode with Eamonn Butler on Thatcher:
Episode on Concorde:
https://economicsexplored.com/2022/03/20/concordes-economic-lessons-a-closer-look-ep131/
Previous episodes on Australia’s energy transition:
Australia’s Hydrogen Production and Critical Minerals Tax Incentives:
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Transcript: The Revival of Industrial Policy: Should Governments Pick Winners? – EP243
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Eamonn Butler 00:04
Mrs Thatcher realised that we couldn’t go on like that. She knew it would be painful and but she was determined enough that the country would go through that pain and it will come out better the other side, which it did.
Gene Tunny 00:23
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, and welcome to the show. Before we get started, I want to give a big shout out to our sponsor for this episode Lumo coffee Lumo is seriously healthy organic coffee that you don’t want to miss out on. You can use the promo code 10 explored in all caps to get 10% off. But hurry, it’s only for a limited time. Check out the details in the show notes. K. Now let’s get into the episode. Something I’ve been thinking a lot about lately is the revival of what’s called industrial policy. In the US, the Biden administration, it’s introduced the chips Act and the inflation Reduction Act. They’ve featured activist industrial policy measures designed to promote domestic microprocessor manufacturing and green industries. In Australia, the Federal Labour government has introduced a future made in Australia plan and that was highlighted in the latest federal budget which was handed down a few weeks ago by the Australian treasurer Jim Chalmers, as a former Treasury official, and indeed, as one who managed treasuries industry policy unit for a little while. I have some fairly strong views on industrial policy. So I thought it would be good to cover the rise of industrial policy or the revival of it on the show. So just to clarify industrial policy, that’s where the government tries to deliberately shape the structure, the industry mix of the economy. So forget about comparative advantage, the invisible hand, the government’s attitude is that the market is failing to give us the highly productive industries that we need. So that the government is going to pull the policy levers to change the industry mix. So that’s the idea and it’s going to use various tools at its disposal. It’s going to use tax policy, tax incentives, subsidies, regulations, etc, to bring about the industry mix that that it desires. Historically, I mean, one way of doing that was through protectionist measures, such as tariffs to, to protect domestic in industries, particularly so called infant industries, but tariffs have fallen out of favour. And increasingly, we’re seeing other types of measures used, so particularly tax incentives, they tend to be a feature of modern activist industrial policy. Now, all this sounds terrific in visionary speeches by politicians. But when you think about it a little, especially using economic logic, and when you consider the historical experience, you’ll realise that activist industrial policy isn’t a great idea, after all, which is that’s going to be the basic message of this episode. And to help demonstrate that, in this episode, I’m going to feature some clips from conversations that I’ve had on industrial policy. Some of the clips are from outside of the show. They’re, they’re from a conversation I had with my colleague, John Humphries, John is at the Australian taxpayers Alliance. And we occasionally do a live stream on YouTube and Facebook, where we talk about economic and budget issues. So I’ll feature some clips from that. And I’ll also feature a couple of clips from previous economic system explored episodes. And finally, I will wrap up with some of my thoughts on industrial policy. Okay, now, the first clip I want to play, it’s from that conversation that I had with John Humphries from Australian taxpayers Alliance. And we also had Saxon Davidson from the Institute of Public Affairs on the show. Now, the full conversation, we had the full budget chat, this was the day after the 2024 25 Australian federal budget. So it was around mid May 2024, the full conversation is on YouTube. And I’ll put a link in the show notes if you’d like to watch the whole thing. It’s, it’s a great conversation. Unfortunately, John’s audio was a bit a bit distorted at times because of internet connectivity issues. But it’s still a great, a great video to watch. And we had Senator Malcolm Roberts and also Senator Matt Canavan on as as guests for part of it. So definitely worth checking out. Now, because John’s audio was distorted, I couldn’t reply the bit that sets up this clip, that what John was saying in in it was that the Australian treasurer, Jim Chalmers, has adopted a Shi Jing ping model of the economy. So John being very provocative there. Now, at the same time, John says that the that’s the vision that the treasurer is setting out for the spending for that is largely going to occur in future budget year, so not the current budget year 2425. But beyond that, and so therefore, in John’s view, the current budget itself wasn’t particularly in this interesting. So with that context, let me play the clip.
John Humphreys 06:59
That’s me being a black pill. Maybe there’s a downer here. What am I missing?
Gene Tunny 07:07
Oh, look, I think you’re missing quite a lot. Yeah. I mean, I think this is quite a consequential budget. I mean, I wouldn’t be compare a job as to shooting pig or to whoever else you did, quite yet. I mean, maybe actly. I mean, I think we’re talking about the sort of post war, you know, semi socialist governments of that Li, et cetera, where they wanted to take over the commanding heights. And I think we’re going back towards that maybe not full on communist but, you know, certainly a greater role for government in the economy than we’ve seen. So I think this is where he’s really implementing it. And it’s also, you know, this is his big play. I mean, this is his big play for the leadership. If he pulls this off, he’s going to be seen as a political genius. I mean, he’s got this really clever way of are I so clever, I’m going to bring down CPI arithmetically. And, um, you know, hopefully that convinces Michelle Bullock to cut rates later in the year or just before the election. So look, he’s, he’s playing, he’s making a big play. This is his play for the leadership. I think he could be too clever by half for the reasons we’ve, you know, alluded to already. But yeah, I think this is a very consequential you know, it’s a stark break from the past from previous, even previous, you know, recent from the Rudd administration or from certainly from Paul Keating, it’s a big change.
John Humphreys 08:27
I just clarify that. Xi Jinping is a communist. I think he’s a different sort of non capitalist, but that’s a different issue. Sorry.
Saxon Davidson 08:34
I think I agree with Jane. I think this is a an outline, for the vision for the future of how Jim Chalmers or perhaps even Anthony Albanese views it, you know, where this is rethinking it. This was all in his essay that he wrote about 18 months ago. This is a rethinking capitalism and vision for the future. It’s no mistake, that when the future mate for Australia policy was announced that Albanese referenced the different models from overseas, you know, the IRA, the European Economic defence strategy. Same with the Japanese economic security idea, the SBR act, whereas the Japanese say it’s rethinking capitalism. It’s a new way of capitalism. And this is actually how Jim Chalmers views it as well. This is a vision for the future of budget. This is why it’s an interesting budget is I do have to leave soon, but I’ll leave it at that and say, it’s a instead of Wait, it’s a vision for the future. This is if you have to lose vision for the future.
John Humphreys 09:37
If you have to leave soon. I take that as not immediately. So one last question if you’ll indulge me his vision of the future, but why is it wrong? If we need all these investments, and the money is lack ing and we need to go in a direction? What’s wrong with this policy? The future made in Australia.
Saxon Davidson 09:53
Well, because we’ve seen it before. This is you know, the 1970s protectionist policies have gone back to the few Chuck, like, we’ve seen it before it entered the era of stagflation. And then that’s why that’s how the great economic free thinkers emerged. In the 1980s, we’ve seen this happen before, we’ve seen this movie before. And when productivity is such a such a low in productivity growth is so low and private investment is so low in the economy. You know, as I said, before, rising tide lifts all boats, there are going to be plenty of Australians left behind in this new capitalist netzero future. And we know this, because, you know, no matter how many how much more green energy is brought into the market, or into the energy grid, how I mean, electricity bills are still up, power bills are still up, people are still suffering, this new vision is not a vision that is sustainable. And what actually concerns me more is the is the idea that, you know, after this election, we might be in the, we might be experiencing a very unstable government, which could actually bring forward these policies further to the left if they are in cohorts with the teals and the greens.
Gene Tunny 11:06
Okay, that was that was good stuff from Saxon. I particularly liked his point about the problems in the 1970s. And we’ll return to that soon. One thing I should clarify, in that clip is this point, might the point I was making about how I think Jim Chalmers has been too clever by half now, one of the features of the budget was this $300 electricity bill rebate that was being offered across Australia, and this is on top of some assistance that’s been provided by Well, the Queensland Government and possibly another, or maybe some other state governments will provide assistance. So Queensland Government’s providing the $1,000 rebate. And the idea is that these, these rebates or these subsidies for electricity, that’s going to reduce the the electricity bills of consumers, and it’s because of that it’s going to reduce CPI inflation. And, you know, this is a bit of a hatch. This is what I call that in the note I wrote for the Centre for independent studies with, with Rob Carlin that I’ll, I’ll quote from later. And I mean, it’s a bit of a trick. It’s not really doing anything to address underlying inflationary pressures. And I mean, this, you know, no, no economists have any credibility actually backed? What, what the government was doing here? I mean, I think, I think most economists, I mean, it well, we’re all sceptical, I mean, how, how is spending more money, the solution to inflation, it just doesn’t make any sense. So that’s what I was. I was referring to there. So you can check out that cis issues analysis paper on the budget, I’ll put a link in the show notes for more on that. Another point, I should note regarding what Saxon was saying there, and he was, you know, he I think he was alluding to, or referring to a conversation or point that Senator Malcolm Robertson had previously made, there’s this concern that in Australia where, you know, arguably, we’re pushing too fast in the direction of renewable energy. And that’s been driven by a lot of the policy measures that are really, you know, heavily pushing us in that direction. And, you know, I’m not saying I wouldn’t want to say that we shouldn’t respond to climate change. I do think climate change is, is something that we do need to respond to. But I think there is a legitimate debate, however, about how quickly we do that and what the right policy response is. Now, the way economists think about it, and this was certainly the view in Treasury when I was there is that we shouldn’t be picking winners are picking in particular, or favouring particular types of technology or trying to direct it. The, you know, the response or micromanage the response. What governments should be doing is to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality which is the idea of a carbon price. And you can do that in various well. I’ll come to In ways you can have an emissions trading scheme, you can, you can create a market, and then you have a carbon price that falls out of that or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions or co2 equivalent emissions. Now, you know that most economists would say that is the best way to do it, if you’re going to do something about it. And, you know, that’s sending the signal to the market, that there’s a cost to the environment of, of this pollution. And you leave it up to the industry to sort out the most cost effective way to reduce those emissions, you don’t go and, you know, actively promote particular solutions. And in in Australia, there’s a, there’s a growing concern that maybe we’ve been pushing too hard on renewables policy, measures and subsidies etc, have favoured renewables. And we’ve had, we’ve had to faster pace of development. And that’s creating issues for the reliability of the electricity grid. Now, I’ve talked about these issues with with previous guests. So I might put a link in the show notes, where I’ve I’ve covered that. So just just saying, I don’t want to be accused of being a denialist not caring about climate change, I recognise it is an issue. I’m just saying we need to think intelligently about how we respond to it. And in my view, we’re probably we’re probably not adopting the right measures. And certainly all of these new industrial policy or in measures, particularly some we’ve seen in this latest budget, where we’ve got these generous tax incentives for hydrogen production in critical minerals. Where the government is is, is saying, Well, we think these are the industries of the future. I mean, they may well be but hydrogen, renewable hydrogen, that certainly you could say it’s an unproven technology, or commercially unproven, we’re not sure whether we will be able to develop a commercially viable hydrogen industry. And does it make sense for the government to have this tax incentive just for that industry to try to promote the growth of that industry, the movement of resources into that into that industry and away from sectors which actually could be more productive and which aren’t receiving the subsidy? That’s what I’d be wondering. And there has been a bit of criticism of, of this measure the particularly the hydrogen production incentive, because there are some and critical minerals to because there are some well known billionaires who will likely benefit from those measures. And one name that comes up is Andrew Twiggy, Forrest. And there’s been accusations that these tax incentives are millions, for billionaires. So there’s a really interesting debate going on about that at the moment. Right. Oh, I mean, one thing I should note is that those incentives are worth a lot of money. And I’ll put some links in the show notes regarding that. I mean, they’re talking about billions of dollars of subsidies. So check out the show notes for all of the details. Okay, now, let’s hear some more from Saxon about the budget and what he thinks it should have done rather than pursuing these industrial policies. And as you’re listening, just note that the ringing that you can hear that was a bell ringing in Parliament House in Canberra, that was telling members of the House of Representatives to get back to the chamber. So it’s on the audio, we can hear it, because one of the people on the call was Queensland Senator Malcolm Roberts, he joins us from his office in Parliament House and the bell was ringing in the background. So it’s very loud. He’s in the Senate, but he could still hear the bell. Right. Oh, let’s, let’s see this other clip.
Saxon Davidson 19:43
This budget is interesting because it actually lays bare the lack of a productivity agenda that the current government have, you cannot deal with inflation and the anaemic economic growth that we are currently suffering unless you have a productivity agenda because our rising tide lifts all boats. That is actually how you deal with the cost of living, not with handout how to hand out inflationary spending after inflationary spending, and the lack of productivity agenda is really laid out with this future, this protectionist future made in Australia policy. It is shovelling money out of, well, essentially shovelling money out of our other industries, to put to pick winners and to put into the production of solar panels and other subsidised green energy policies. Senator Roberts was correct that a lot of our productivity issues can be solved by removing a policy of net zero emissions by 2050. You know, this government repeatedly over regulates and overburdens our most productive industries that being mining agriculture, gas, coal, iron ore, and then get them to basically create these previous two surpluses about but they’re not structural surpluses, they’re actually we have entrenched deficits, which the government is hiding behind the political euphemism, unavoidable spending. Besides servicing the debt and national defence, I don’t believe there is actually ever such a thing as unavoidable spending. But I’ll leave it there because I know we’re short for time, but we can sort of Yeah, go on from there. Sex.
Gene Tunny 21:19
And can I ask about your productivity agenda? So you identified you think energy is one of those areas, you’re you’d be against all of these net zero emission policies to get to that target? Is there anything else that your productivity agenda? Well,
Saxon Davidson 21:35
I’d reverse a lot of the industrial relation laws that have been passed in the past couple of years, particularly because we actually got a worker shortage, we don’t actually, it is actually counterintuitive to make our labour laws more rigid than they currently are, especially when they were already rigid before this current government entered power in May 2022. For example, there are bountiful of red tape and tax laws that apply to Australians who wish to work but cannot, such as Australian veterans pensioners and students on the Youth Allowance. people receiving those benefits face a tax rate as high as 66% Starting July one thanks to the stage three tax cuts. And that’s because their their benefits and combined their combined benefits and income is is automatically bound to the lowest tax threshold. But also, if a pensioner for example, if they work a day and a half or minimum wage, they’re all of a sudden caught by a 50% taper rate to their benefits, which means they pay a start in July won a 66% effective marginal tax rate for working. This is why only 3% of pensioners are currently in the workforce. And there was no plan to address this in this current budget. When I play research looked at New Zealand and their equivalent tax system where pensioners are not accountable under the same tax rate. They actually pay a minimum tax rate of about 10.5%. Should they choose to work on their combined pension and their income. And this IRS had found that this was the major reason why, why they haven’t suffered a worker shortage crisis. Since COVID. Our worker shortage and productivity sort of solution is actually mass migration. And it simply hasn’t worked. We still have a worker shortage. And as Senator Roberts alluded to, we’re in a per capita recession. The slice of the pie is getting larger, but the slice of the pie is getting small.
Gene Tunny 23:38
Right? Oh, that’s more great stuff there from Saxon so well done Saxon. Saxon is definitely an Australian economist to look out for in the future. And I what I thought was good about that is I think, Saxon highlighting an area where New Zealand is doing something better than Australia. I think that’s, that’s very effective in an argument because nothing is going to annoy Australians more than hearing that New Zealand is doing something better than us. So given our friendly rivalry, I should say with our Kiwi cousins. Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 24:58
Now back to the show. So what I also like there is Saxons talking about productivity. And he’s emphasising that, well, we shouldn’t be trying to pick winners and, and, you know, have the government favouring one sector over the other. I mean, we should be looking at these more fundamental what we should be looking at what economists would call framework policies or structural policies. And this was always the view we had in, in Treasury. I mean, yeah, sure, you can have policies that price externalities or policies that promote something that is generally beneficial, such as innovation where there might be a market failure, which means you don’t get enough of it. But these policies should be economy wide, you shouldn’t be favouring one industry over the other, what you should be doing is getting the right economic framework policies in place. And so those are policies that promote competition, those are policies that that you know, promote a efficient or flexible labour market. So I mean, we want you know, we need some basic protections in the labour market, I mean, we don’t want people exploited, but at the same time, the more you regulate the labour market, the more difficult you make it, the more expensive you can make labour, particularly low skilled labour, and the more difficult it becomes, and, and particularly if we have all of these rules around, unfair dismissal, etc, it can make employers reluctant to, to hire workers. And I think, I think sextons Making some, some fair points there about the tax system. And the welfare system, we’ve got to be careful how we design those policies. I think that’s good stuff from Saxon, he’s pointing us in the direction of what we should be looking at when we’re thinking about how do we make our economy more productive. So very good. Now, recall from the previous clip, not that one, the one before that Saxon mentioned how we’d seen this movie before. So this movie of heavy government intervention, and Saxon mentioned the economic turmoil of the 1970s, and how that was related to the interventionist policies of governments. Now, that brought to mind a conversation that I had on the show in late 2020, with Amon Butler, co founder of the Adam Smith Institute. We talked about how Margaret Thatcher so the UK Prime Minister, how she came to power after the post war, UK socialist economic model broke down in the 1970s. So let me play you a clip from that episode for you. After I watched the season four of the crown, so the Netflix series on the royal family, and Gillian Anderson plays, Margaret Thatcher, the pm the Iron Lady, and I think her performance is amazing. She really, I think she nails the mannerisms of Margaret Thatcher and the voice. But the depiction of fascia seems a bit slanted or bias to me. It focuses on a lot on the social dislocation that the series suggests were was caused by her policies. People are unemployed and struggling. And it contrast that with well, that Thatcher and also the Queen, and they, it suggests that they’re detached from it all. And there’s this episode where Fagan who was the the unemployed man, I think he was who broke into Buckingham Palace and ended up speaking with a queen for 10 minutes, it paints a very sympathetic portrait of him, in contrast to Thatcher. So I wanted to speak with someone in the UK about just what the situation was like in Britain in the in the 70s. Would you be able to describe that, please, amen. So we can understand how Facha got into power. What What was she trying to, to address?
Eamonn Butler 29:40
Well, I can I can describe that very easily because I wasn’t the only one. What am I? Well, two of my colleagues did exactly the same. In the mid 1970s, I joined the brain drain, because I went to America, because I thought there was no future in The UK that the trade unions were running country, people were seriously saying that it was going to end up nearer to an Eastern European country as they were there, rather than a Western European country. And a lot of us thought that there’s no point in sticking around here. And so a lot of us immigrated, large numbers of people simply left the country. And of course, large amounts of money left the country as well. But investors thought there’s no point in keeping your money in Britain. It’s a big world and your investments in Britain look dire. But I mean, in 1939, when Mrs. Thatcher took office, the state controlled everything. When you woke up in the morning, obviously, you wake up to or the BBC, which is a state organisation, of course, you still do. But you wake up to that on perhaps your alarm radio, which is powered by electricity, which was produced by the states, you go downstairs and you, you put your state produced egg into a state produce saucepan and you fill it with state produce water, and you will put it on your state produce gas oven, using state produced gas and so on, you would take your kids to the school in your state car or your state bus. And every part of your life was run by the state because they control all of the key industries, coal, shipbuilding, steel, transport, everything. And of course, the trouble is that when you give people monopolies, they abused them. And these were state monopolies and they were abused. And the the product was expensive, particularly for taxpayers who had to pay for all these things. And everything was run through the convenience of the workforce. And so the trade unions became exceedingly powerful. And of course, they had special legal privileges as well that had been granted them so they could, they could have wildcat strikes and secondary picketing, and nobody could do anything about it. If you pick it came around your your factory, there was nothing you could do, even if you weren’t involved in the dispute. So they they knew that they could bring the entire country to a halt. And, you know, they, during Mr. Sanchez time, they very nearly succeeded. But she realised that that had to be taken on that. People blame her for unemployment, particularly in the north of England where coal mines were closed down and steel mills close. But that wasn’t her fault. The problem was that we had wasted our time and energy and money on these industries decades before, that it was cheaper in 79, to load coal from take coal from Australia, and landed in Southampton than it was to pull it out of the mines in South Wales. It just made no economic sense at all. So Mrs. Thatcher realised that we couldn’t go on like that. And she knew it would be painful. And but she was determined enough that the country would go through that pain and it will come out better the other side, which it did, yes,
Gene Tunny 33:16
yes. So do you remember or were you in the States at the time the so called Winter of discontent, there’s a there’s a photo in this book, the commanding heights by Daniel Yergin, and a co author is a photo of Leicester Square. In the West End in London, it’s been used as a garbage tip, in this so called Winter of discontent. 1978 79. So before Margaret Thatcher was elected, was that because of the gobos, the garbageman were on strike, whether it just strikes across the country, before Thatcher got in.
Eamonn Butler 33:57
Everybody was on strike because the Labour government which lasted until the middle of 1979, realised that it had run out of money, and that it couldn’t keep on paying higher and higher wages to public sector workers, which was most of the workforce. And the Prime Minister James Callaghan famously said that at the Labour Party Conference, and there was an outrage that and so the trade unions, protesting that they weren’t getting pay rises, basically knew that they could bring the country to a halt so that they would put that pressure on the government in order to get higher wages and better conditions. And the government simply said, No, we can’t do that. There isn’t any money. So then, everybody went, I mean, that the whole public sector was was hit by strikes and it wasn’t just garbage in Leicester Square in the middle of London, which I remember very well. And in fact, I think we did a little report on, on how to get out of that crisis. And we use the same photograph of the garbage and rats running around in in the centre of the tourist centre of London, if you can believe that. And then went on Barrett. And there was a famous case where somebody was being transported to hospital over the Yorkshire Dales, in the snow. And the the ambulance drivers got a message that they were now on strike, they had to down tools. So this was he stopped out, make her way home. And it’s that sort of feeling. Business and so it was a winter of discontent. And it was it was a dire period. And I think that convinced the British public, we couldn’t go on like this, we actually had to, to do something else. And Mrs. Thatcher was clear in her vision that something needed to be done and, and so that’s why people voted for it.
Gene Tunny 36:07
Okay, so I think that’s a good reminder of why there was a change, of course, in in economic policy in the 1980s. In Britain, under Thatcher in the US under Reagan, and in Australia under Hawke and Keating, the old interventionist why that wasn’t working? Well, arguably, it never worked. We should remember that. We should remember that when we hear all of these growing calls for more government intervention for industrial policy in particular, which is the topic of this episode. Now, another clip, I want to play, it relates to one of the great failures of of industrial policies. I think there are many failures. There, there are too many to go through this episode. I mean, maybe I’ll come back. I mean, you know, I should probably mention, you could argue there are some successes, but I think the the failures are more numerous. And, and probably more likely, because if if something is commercial, if it’s economic to invest in, then the private sector is probably going to be undertaking it already. It’s going to be investing in it. So you have to argue that are there some market failure that’s preventing that and, I mean, you know, that can be that can be difficult to argue. So yeah, I mean, generally I’m very sceptical and I think the evidence is weighted toward the failures and one of the great failures of industrial policy was the Concorde. Supersonic aeroplane. So the Concorde supersonic aeroplane, as we know, it was an economic proposition. It, it flew for maybe, well, a few decades, it’s no longer flying. It just wasn’t commercial for either British Airways or, or Air France, I think it was. Now Concorde. It was developed in an era when there was a great belief that governments could shape the future of industry, particularly by encouraging r&d and the take up of technology. The UK Labour leader, later Prime Minister Harold Wilson, he gave what was by all accounts and electrifying speech in 1963, to the Labour Party Conference, about how his government would use the white heat of technology to transform Britain’s economy. It was a grand vision and Concord was an important part of that vision of that vision to transform Britain’s economy. So, you know, this was a vision that was you know, it started before Wilson, but, you know, there was almost a pre war Well, sorry, there was almost a post war consensus between the Conservatives and labour regarding the role of government, the role of government to steer the economy but Wilson really crystallised that, in that that famous speech of his and Concorde ends up being overseen by Wilson’s government for during the late the mid to late 60s. And and so I think it’s it really is an important part of that, of that vision of, of the white heat of technology, trends forming the economy. Okay, I spoke about Concord with my adept economics colleague Arturo Espinosa in a march 2022 episodes. So let’s take a listen to this clip. And if you want to learn more about Concord, then definitely check out this episode. But let’s hear the clip. We might chat about what Concorde is, I just want to make sure that if you’re listening, and you’re unfamiliar with Concorde, and I’m guessing you probably know a little bit about it, because it’s such an iconic aircraft, and it’s such a beautiful design really sleek and the delta wing. And that, that knows that. That it’s like a beak, isn’t it like the beak of a bird? I think they call it a droop nose, because it can, it can move around. So depending on what stage of the flight you are, it will either be in the rock than the standard position or it will drop down. So I think when they were coming into land, they would they would drop it down just to improve their visibility. So yeah, it’s got a it’s got an interesting nose there. And yes, it’s, as you mentioned, it’s supersonic. So it can travel faster than the speed of sound. And I think actually travel about two times the speed of sound. So at Mach two, so supersonic when I was chatting with Tim, I said, Oh, is it hypersonic? And now it’s not hypersonic. So Tim corrected me it was supersonic. So supersonic is faster than the speed of sound. And hypersonic is five times the speed of sound, at least I think there are some hypersonic missiles that have been developed that have that I’ve seen while I’ve seen in the news reports. Okay, so yeah, Concorde was it was a joint project, it was a joint venture in a way between the British and the French governments. And the name for it came from an agreement that they reached in the early 1960s, I think was a treaty was signed on 29th of November 1962. And so what you had was, this is something that came out of the 1950s. And you had both there were British and French companies that were investigating supersonic, air travel, and I think the Americans were looking at it too, but the British and French, they reached an agreement whereby there would be a joint project because there was a British company that was looking at it, the British Aircraft Corporation, and that was being funded by the British government. So they were providing funds for research and development by that British Aircraft Corporation. And there was also a French company, which was state owned sued aviation, which later became Aerospatiale. They were looking at it too. And so the two governments got together and decided to enter this joint venture for Concorde, whereby they would jointly develop this aircraft that shared the development costs. And they would also they would split the production of it across Britain and France, too, with a view to creating jobs and all that. So it was a British and French government project. And I mean, I would argue that this is a good example, that there’s there’s a few economic principles which come out of the whole Concorde experience. And we talked about the sunk cost fallacy. Well, the fact you should ignore sunk costs. One, one principle, or close to a principle, I would argue is that governments need to be very careful about going into business. I mean, governments really, governments really shouldn’t be picking winners or picking projects. They should be doing the core business of government, I mean, National Defence and the justice system and mean, arguably some assistance for health and education, rather than trying to develop a new supersonic aeroplane. I mean, when you’ve got governments making these decisions and funding r&d for this sort of thing. I mean, it’s, it’s probably more likely it’s not going to be a commercial proposition, and it’s going to be a waste of money. So that would be one thing. I would argue Do you have any, any thoughts on that tomorrow, of course,
Arturo Espinoza Bocangel 44:37
and that there is an interesting point. So in order to see what is the real scope of the government, right, definitely the government should focus on other issues that are more relevant for people instead of promoting this kind of embarrassment that as we We have seen is worth a failure in terms of economic business perspective, right. So, I think,
Gene Tunny 45:11
yeah, I mean, it’s the sort of thing I mean, it could have, who knows? I mean, maybe, maybe if things weren’t right, and the oil price didn’t increase three or four times over what it was previously, after 1973. Maybe the the economics of the whole project would have been better. And it could have been, it could have been more of a mass proposition. I think the mass market proposition, I think the problem that they ended up having was that it became a real niche product. It was really only wealthy people, pop stars and, you know, CEOs of Fortune 500 companies who could actually afford to fly on Concorde. As we can talk about LIDAR. I mean, I think tickets ended up being about in today’s dollars, I mean, I think over 10,000 US dollars, really, I mean, expensive tickets. Yeah. And so you really have to have a you really have to have deep pockets either don’t you have to be someone who really doesn’t care how much they’re spending, or it’s just absolutely time critical that you need to get from New York, New York to London or the other way or Paris to New York, you need to get there in three hours or so. It was a good fly incredibly quickly. Now, I think the figures I’ve seen is that, so this thing’s flying it basically two times the speed of sound, whereas a Boeing 747 flies at point eight four times the speed of sound, so it’s not supersonic. So it can fly about to the Boeing 747 can fly about 900 kilometres an hour, whereas the Concorde could fly at 2172 kilometres an hour. So just incredible. And it’s 60,000 feet too, so Wouldn’t that be amazing to have been to have been up that high? And so it really ended up just becoming a transport option for the rich and famous in a way. And I mean, one example of that, Have you have you heard the story about the Live Aid concert and Phil Collins, how he used Concorde to fly from the Live Aid concert in London at Wembley Stadium. And so he performed at Wembley, and then he hopped on the Concorde. He got a chopper from Wembley to Heathrow Airport, and helped on the Concorde and then got the Concorde. The JFK, and then he ended up getting it was. It’s pretty, it’s a huge logistical job. Where is it? Yeah. And he took a British Airways Concorde flight to New York City before taking another helicopter to Philadelphia, just so he could perform at at the stadium and in Philadelphia, which I think might have might have been JFK Stadium in Philadelphia. That was in 1985, July 1985. So the big Live Aid concert for I think it was to raise funds for to help address or alleviate the suffering of people in famine in Ethiopia, if I remember correctly. So yeah, that’s one of the famous examples of the use of the Concorde. Que so, yes. The Concorde. I mean, it was such a beautiful aeroplane, but just didn’t stack up. Unfortunately. I mean, maybe one day we will have commercial supersonic travel. That would be amazing. But it didn’t work out. For for the Concorde. Right. Oh, to wrap up, I would like to first quote from that issues analysis paper for the Centre for independent studies that I talked about before. This is a paper I wrote with Robert Carlin. And in that paper, we wrote that activist industrial policy has chalked up numerous failures in history, including a domestic car industry that ultimately was unviable despite decades of tariff protection and billions of assistance with his embrace of activist industry policy. chamas is ignoring history lessons, both here and overseas. So yep. I was referring to the car industry in Australia, which is was, you know, Australia was proud of its current history. And we produced some great cars at times, particularly in the 1970s. And there was, you know, there was a great rivalry between Ford and Holden, at that was featured in the famous race at Mount Panorama in Bathurst. But alas, we just the policy settings weren’t the right policy settings. And we didn’t get a sustainable car industry, we had a car industry that could only be viable with with government support, and ultimately, even the government support that was being provided was insufficient to keep the industry going. So we don’t have any of the major car manufacturers here in Australia anymore. So that’s, that’s a lesson about, you know, the challenges of industrial policy, just how well, if you’ve listened to this episode, you will understand that I don’t think it’s a good idea at all. I’ll end with another quote. And it’s from no less than authority, then Adam Smith, walk a lot of passages in Adam Smith’s writings, this one is still fresh. It’s one of my favourites. And it’s one that I think that everyone in political office, they should ponder it every time that they consider some new intervention in the economy. So this is what Adam Smith wrote over 250 years ago. Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things. All governments which thought this natural course which force things into another channel, or which endeavour to arrest the progress of society at a particular point, unnatural and to support themselves are obliged to be oppressive, and tyrannical. That’s brilliant, isn’t it? I imagine that economists will still be quoting Adam Smith in 250 years time, and will have accumulated many more examples of the failures of activist industrial policy. Although I should be hopeful that economists will eventually win the argument against politicians with their grand visions of transforming the economy. I live in hope rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and later writing. Thanks for listening. I hope you can join me again next week.
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
