The last word: Manufacturing and the broken model of laissez-faire capitalism

Posted on 7 Feb 2012
Will Stirling's last word - analysing the case for state-backed capitalism
Chinese lessons: say it sotto voce, but is it the right time to pick winners?

As the Davos intelligentsia chews over the value of pure capitalism, the UK should bury its pride about government intervention and reconsider picking winners.

European stagnation has planted UK politics in a particularly prickly conflict, pitting Tory-led austerity measures squarely against Labour’s call for more public spending to protect jobs. The Coalition has stuck to its guns on reducing the budget deficit – even though total government debt hit £1 trillion in the last week of January, Chancellor George Osborne is still likely to hit his borrowing target for the financial year of £127bn.

Debt reduction or stimulus?

It’s a devilishly tricky choice because both would be nice, especially for manufacturing. Reducing public debt keeps borrowing costs low, while more government funding of infrastructure projects like offshore wind farms and, most recently High Speed Rail 2, will feed engineering manufacturers work. This paradox poses a secondary question about the merits of government intervention and highlights the current debate zeitgeist about capitalism.

Ahead of the 2012 World Economic Forum (WEF) meeting in Davos, Microsoft founder Bill Gates said “the world is better off” because of capitalism. He told BBC Radio 4’s Today programme, “I think capitalism is a phenomenal system because it has generated so much innovation – the chance I had as a young boy to start Microsoft, to hire my friends.”

All very well, but before Davos, WEF founder Klaus Schwab said: “Capitalism in its current form no longer fits the world around us,” in reference to the looming apocalypse facing Europe if one, let alone two or more, countries default. As ‘The West’ – champions of class-A capitalism – shrinks in global dominance, stakeholders soul search about how emerging markets are able to achieve 9% growth within quite different economic and social frameworks.

Tom Lawton, head of manufacturing at BDO, spends a lot of time in Asia and is one who questions whether the UK approach to laissez-faire capitalism is now defunct as a modern model for manufacturing.

“One of the things I like about China is the focus by the state,” says Lawton. “There is an absolute focus and intention for things to happen in the way they want them to happen. Much of the funding that goes to the big state banks will be released to companies, including manufacturers, whom the state wants to receive it. They [the state] are directive on the regions and what they want them to manufacture – for example the Eastern seaboards are now more expensive, so the flow of lower value-add work is directed to the west of China, which alleviates low employment there.

“Some of this state direction – we might call it interference, they might call it model – is very interesting, because it has been so effective in creating this powerhouse” – Tom Lawton, Head of Manufacturing, BDO

He adds: “Some of this state direction – we might call it interference, they might call it model – is very interesting, because it has been so effective in creating this powerhouse. Without becoming a communist state, are there lessons that the UK can learn in applying some aspects of that framework?”

Tom refers to the oft lamented absence of a long term, sustainable framework for manufacturing growth in the UK. The Chinese model, of selective manufacturing support, is authoritarian and undemocratic but, in a world facing a second recession, it has been extremely effective. “How can we find a framework and make it last for 20 or 30-years, without being interrupted by political changes?” says Lawton. “We ought to have an industrial platform that has a lifespan that is a lot longer than the political lifespan.”

Is this possible? Look to Germany. Several manufacturing-centric policies, such as the more regional-focussed lending terms of the Sparkassen banking system, are enshrined and will be continued whichever political party comes to power, notwithstanding a few tweaks.

Capitalism has worked and raised living standards across the world. But pure, laissezfaire capitalism with no state intervention has not worked for UK manufacturing. As all countries look to making and trading things to pull them out of the mire, it’s time for intervention and a far more strategic approach to what and how the UK manufactures.