27 February 2020

The Tories cannot afford to turn their back on basic economics


Government bureaucracies have no inherent tendency to allocate resources efficiently. The exchange of goods and services between one country and another generally raises real incomes in both. These propositions are not exactly startling insights. They are so obviously demonstrated by the history of, respectively, modern command economies and the international trading system as to be mere truisms. Or so I thought.

Since winning a thumping majority in December against a feeble opposition, the Conservatives have shown alarming disregard for economic reasoning. A party that has long prided itself on being attuned to business and on understanding the usefulness of market mechanisms has junked both in its pursuit of an anti-European obsession. If the government’s vision for Britain outside the EU is consistently pursued then it will do grave damage to the economy and, not least, the living standards of voters in formerly industrial heartlands who turned to the Tories for the first time.

Yet the message was brought home in an address this week by Andrew Neil to a conference of Make UK, the manufacturers’ organisation. Neil is a journalist, not a politician, but he’s a well-connected one and I’ve no doubt he’s characterised the government’s view correctly in saying that Boris Johnson is content to see the decline of complex cross-border supply chains after Brexit. “Those days,” said Neil, “are coming to an end.” Instead, the government sees industries such as 3-D printing and domestic sourcing as the future.

It’s as if the economic history of the 20th century never happened. The Prime Minister surely understands that 3-D printing and whatever other advanced manufacturing sectors he sees as the wave of the future still need raw materials and intermediate goods. He thinks manufacturers should get them here rather than from overseas.

Economists know this approach as import substitution, namely replacing all imports with domestic production. There is a sort of intuitive appeal to being patriotic and buying British but we know what the outcome will be. British living standards will be curtailed because industries’ costs will rise and scarce resources will be diverted to less productive uses.

An extreme case of this effect is China. Before its economic reforms began in 1979, China relied heavily on import substitution and in building up capital-intensive heavy manufacturing industry. Since abandoning that policy, China has grown at breakneck speed and now accounts for a quarter of world manufacturing output. It could have continued with its import substitution approach indefinitely, given its autocratic political system and vast internal market, but it chose to open itself to trade instead, with impressive results. There’s a big debate among China specialists on whether the country is now caught in a “middle-income” trap, but back in the 1970s under the weight of isolation combined with catastrophic experiments in collectivisation, it was a poor country.

Britain is an advanced industrial economy and a political democracy, but it’s of medium-size and it’s open. The idea, espoused by some free-market Brexiters, that Britain could be a force for global free trade outside the EU never made much sense, for it involved turning our backs not just on cross-border exchange free of tariffs but on a vast single market. But at least these Brexiters understood the mechanism by which international exchange boosts welfare. Free trade enables countries to specialise in what they produce and ensures that scarce capital goes to more efficient producers. Contrary to the universal belief of populist politicians of left and right, imports are a benefit not a cost.

As if the government’s trade strategy weren’t confused enough, its aim for an Australian-style immigration system, unveiled this week by Priti Patel, the home secretary, compounds the damage. The system will operate on points, with 70 points needed for an overseas citizen to be able to work in the UK, and with a requirement that they be able to speak English.

Australia has followed a points-based system in the past for two reasons. First, as a means of expanding (not stabilising) its population and second to improve its skills base. I doubt Ms Patel has looked at the record, because it hasn’t worked in the way envisaged. You’d have thought a Conservative politician might instinctively understand why: a government bureaucracy knows less about the needs of the economy than the unplanned interaction of individual economic agents. How would you allocate points for, say, a doctorate in German literature? There may be a job for the holder of one or there may not. Getting government involved in judging the commercial value of immigrants’ characteristics, and basing the system on some notion of what the economy needs, is state planning on a huge scale.

There will be costs to these policies. By constraining the free flow of goods, services, investment and labour across borders, they will make Britain poorer than it would otherwise be. Because Labour has for the last few years abandoned reason and even (on the anti-Semitism issue) decency, it’s hard to see where a credible challenge to the Conservatives will come from. Yet I doubt that the government’s current approach is a sustainable electoral strategy for the Tories.

To a younger generation that is already facing economic pressures through the high cost of housing and transport, that will have to retire later and will lose the benefits of free movement, the comforts of a blue passport are unlikely to suffice. The Conservatives risk sounding more and more like their disastrous election campaign of 2001 – shrill, nativist, hostile to needed reforms (such as the minimum wage), and railing against the modern world. They deserve to fail.

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Oliver Kamm writes for The Times