Industrial Strategy

Lord Frost Excerpts

Thursday 1st February 2024 Lords Chamber

[Lord Frost (Con)]

My Lords, I congratulate my former Downing Street colleague, the noble Lord, Lord Rosenfield, on an excellent maiden speech. I thank the noble Lord, Lord Watson, for securing this debate today.

Perhaps not for the first time, I am a bit out of sync with the thrust of the debate in the Chamber so far. I am a little sceptical of industrial strategy. The case for it is that decision-making by Governments and officials produces a pattern of economic activity of industries that would be better than that which would otherwise develop in the market. Perhaps even less plausibly, it is that the industries that we must support for strategic reasons are also, by total coincidence, those that are better for growth too, even though we still cannot rely on the market to provide them. My simple question to all this is: says who? How do you know? Where does the Government get the information they need to shape the economy through tax, subsidy and—apparently soon—tariffs in the form of CBAMs?

Proponents of industrial strategy say that they know better than the market, but you cannot just say that; it has to be proved. That is literally impossible. The only reliable source of economic information in a market economy is prices, yet the proponents of industrial strategy say that market prices are wrong because the allocation of resources that the prices create is inferior to the one that their industrial policy would create. They cannot then use market prices of the future to justify the claim that their new industrial structure is better than the unknown alternative. You cannot have it both ways.

The second problem with industrial strategy is regulatory capture. We all know about that: it is the tendency for economic decision-making to be captured by Governments, who find it hard to admit failure, or firms that benefit from incumbent positions.

The final problem with industrial strategy is epistemological. Nobody knows the future. No one knows that “the industries of the future” actually are the industries of the future. Of course, if you spend enough money on them, they become the industries of the future—at least, if any competition can be squeezed out—but that does not mean that they were the best use of our resources. It is especially unlikely that they were if the outcomes are shaped by Governments spending other people’s money, rather than firms and entrepreneurs risking their own.

Of course, it is possible to make a case for industrial strategy on different grounds, such as by saying that we need, for example, a windmill industry for climate change reasons or a steel industry for national security reasons, and that although doing that is not the best use of resources and will harm growth, we must do it anyway. It would still fall foul of the inability to know the future, but at least we would be honest in debate.

To conclude, I commend the Government for their at least partial reluctance to go down the money-wasting road of industrial strategy. My policy proposal to the Minister is to end all the subsidies, use a bit of the money to buy for every Minister and official a copy of Hayek’s essay The Use of Knowledge in Society, and then sit back and let the market work.