What is the role of the state in the economy? Should it direct industrial policy in a heavy-handed, dirigiste way, being deeply involved in state development and acting as a conduit for scarce resources of capital and labour?
Or should it step back, providing only the very lightest-of-touch interventions — possibly as little as essential market regulation and antitrust — while allowing the market free rein to allocate resources according to Adam Smith’s famous concept of “the invisible hand”?
The question of where on this continuum a state positions itself — from North Korean-style communism to libertarian free market fundamentalism — lies at the very heart of the study of the political economy. Of course, it is not only a two-dimensional model — on every point on the axis of state intervention there are countless variations of exactly what type and what stratagem of state intervention might precisely be applied in practice.
To debate the latest incarnations of industrial policy, some of the world’s best-known economists gathered last week at the New Economy Forum outside Berlin, in a conference entitled “Winning back the people — testing times for a new economic paradigm”. Participants such as Dani Rodrik, Branko Milanovic, Mariana Mazzucato, Thomas Piketty, Olivier Blanchard, Jean Pisani-Ferry and Barry Eichengreen could be considered the Taylor Swifts and Beyoncés of their field.
Dani Rodrik, of the Kennedy School of Governance at Harvard, was emphatic. “Six years ago, a conference like this would have been impossible. The agreement we now have on industrial policy, the lack of fundamental criticism … when I think about it, when I hear myself saying this out loud, I’m amazed.”
Clearly, since the days of the neoliberal Washington Consensus, there has been a massive shift in what is considered mainstream economics orthodoxy. Now, ideas that would have been considered “heterodox” are increasingly seen as essential for economic growth, preventing ever-spiralling inequality and maintaining social cohesion.
Why is this? There would seem to be three main explanations.
First was Covid, which was an exogenous global economic shock. It required previously unprecedented levels of state intervention, both with regard to setting social parameters for lockdowns and distancing, as well as direct economic shock therapy, to ensure the effects of the measures taken to slow the infection rate did not have permanently scarring effects on the economy.
Once such Rubicons of state intervention had been crossed and — in Europe and the US at least (inflationary side effects notwithstanding) — had been largely successful, then questions were asked as to why such state involvement could not become de rigueur.
Trickle-down economics
Second, it has become clear that trickle-down economics simply does not work. When starting from a point of an unequal distribution of resources, markets are perhaps more flawed than previously imagined as redistribution mechanisms.
Rather, left to their own devices, unregulated markets tend to result in capital “pooling” and accruing to an elite, who use the means and influences at their disposal to amass an ever greater share of societal wealth.
There can be little doubt that the unprecedently easy decade of monetary policy following the financial crisis inflated asset prices, meaning that those owners of capital — be it listed equities, property or arcane instruments such as crypto — became ever wealthier, while the lowest rung of the asset wealth ladder moved ever further away from those in debt or renters. Such inequality has not only had negative effects on productivity, but has had disastrous social effects, leading to the surge in right-wing populism seen across the West and more recently in South Africa.
Finally, many of the problems facing the world — chief among them climate change — are essentially failures of the market to adequately price environmentally damaging externalities — for example, carbon emissions. The only solutions are therefore joint ones, whereby governments coordinate policy to resolve these failings and make hitherto unimagined investments into green energy and sustainability.
With these points in mind, it has been interesting to review some of the lacerating criticism that SA’s Minister of Trade and Industry Ebrahim Patel has come in for since announcing his retirement two weeks ago. He has been branded a “slow-as-a-snail control freak”, a minister who “held private sector companies in contempt”, and one who was “corrupted … by his myopic ideological belief in communist central planning”.
While it is true that the sales of South Africa’s manufactured goods peaked in 2007 and have fallen by almost 15% since then, and almost every other major economic metric — from unemployment to GDP per capita and inequality — has worsened under his tenure, it surely cannot be said that his impact on the economy was wholly negative.
Many of the ideas he espoused from 2010 — a strong and involved competition authority, state-directed masterplans to drive key economic sectors and, perhaps most controversially, a very hands-on approach to managing mergers and acquisitions — have become economic orthodoxy in the EU and even the US under Bidenomics.
While his ideas were sound, it can be argued that his way of applying such economic principles — through dogged negotiations and a tendency towards micromanagement — could have been more deftly handled. Perhaps, too, he was simply ahead of his time.
Either way, let us hope that whatever the next government of South Africa looks like, it will continue to apply his sound principles of ensuring that the market functions for all, and not for some. Perhaps it can be said of Patel’s legacy that “the path to hell is paved with good intentions”. DM