Shortly after taking power, our new coalition government decided to withdraw the previous government’s pre-election promise of a £80 million loan to Sheffield Forgemasters, a steelmaking company. On Newsnight, David Miliband called the decision “economic vandalism”. Paul Kenny, the general secretary of the CMB union, told The Times the same thing.
They have got things exactly the wrong way around. Making the loan would have been economic vandalism. To see why, consider my current predicament.
I have an idea for a business that I believe would provide its customers with a valuable service and employ five or six people. Alas, I need about £1 million to set it up, which I do not have. I plan to approach potential investors. If they choose not to invest, will they have committed economic vandalism? Obviously not. They have not damaged my property, nor done me any other wrong.
Suppose now that, frustrated by what I take to be their short-sighted refusal to fund my business, I get my computer wizard friend, Big Jim, to hack into their bank accounts and transfer £1 million to mine. Big Jim and I are surely the economic vandals here. Without consent, we have plundered other people’s property.
We have probably harmed society too. Those investors believed there were better uses for their money than investing in my business. My confiscation of their money benefits society only if I am right and the investors are wrong – only, that is, if there really is no more valuable alternative use of their money than investing in my business. But I am almost certainly wrong about this because, unlike the investors, I do not know what their alternatives are.
Yet what Jim and I might have done here (but didn’t, honest) is precisely what the government would do by lending to Sheffield Forgemasters. Forgemasters could not raise £80 million from voluntary investors, at least not on terms that suited them. So they got their mate Gordon Brown to take money from people who did not choose to make the loan – that is, taxpayers – and give it to Forgemasters.
Apart from the fact that when politicians do such things they are legal, there is no relevant difference between Brown’s conspiracy with Forgemasters and Big Jim’s with me. Like Jim and me, they deprive the investors (taxpayers) or any choice in the matter. And, like Jim and me, they have no idea if there are better uses for the money.
It is not surprising that politicians have given themselves the legal privilege to do what would land anyone else in prison. Such “investments” of “public money” are an excellent way of winning votes in marginal constituencies and rewarding party donors. But it is still scandalous.
The new government defends itself from the accusation of vandalism on the ground that they have cancelled only 12 of 200 such bungs. They are as confused as their critics. They have committed 188 acts of economic vandalism.
But.
What if Im a toymaker with a small factory and I try to get investors interesting in upgrading my plant – but all the big money is in foodstuffs from the continent right now?
So the investors choose to invest in a French Food Factory and make more money doing so. Meanwhile, back in toytown I can no longer compete with huge overseas toymakers and so must close shop – putting fifty professional toymakers out of work.
Ten years later foodstuffs aren’t as important and suddenly toys are all the rage again. Investors look around for a suitable investment, but now toytown UK is a dust-bowl full of alcoholics and six generations of professional toymakers have gotten used to living on benefits, have taken the only lucrative jobs there were left (in the public sector, as Neighbourhood Health Coordinators) or have moved to other countries who had more vision and kept their toy industry alive.
I subscribe to the view that markets are the greatest method of delivering prosperity and wealth ever devised. I accept that tampering with the markets delivers many of the problems with which we are beset. But. The situation is not, I believe, as clear-cut as purists suggest. It really is not always as simple as “the markets will provide the loan if its worth it.” And there is surely some value in keeping our selection of trades alive in order that, whatever the future brings, we are prepared.
So Mr Tierney believes investors should be compelled to invest in one firm but not in another? Who is the prophetic genius to be who can decide better than individual investors how to place their money? The investors may freely choose someone in whom they have confidence, but who else is qualified to chose for them? Governments of the past 150 years at least have shown no such talent, Let Mr Tierney work harder to sell the idea of investment in his toy factory to investors. If they turn him down maybe they are mistaken, but it is their own money they are mistaken with, or their own jobs they are risking if they work for an institution. As to living on benefits, fortunately that alternative is fading rapidly.
“Mr. Tierney” believes no such thing. What “Mr Tierney” believes is that ideas must be fully discussed and challenged if they are to be accepted.
Almost everything about free markets makes sense to me – but this is one that I hang on. We do not operate in a free market, we operate in a state-controlled and regulated market while other country competitors have fewer controls and regulations.
Consequently, it is not a level playing field. The usual free markets rules of competition and specialisation are skewed by this. Since we cannot change the playing field overnight how are we to keep skills, trades and businesses within our borders?
There are some trades that, once gone, take a great deal of work and investment to bring back. Right now, its tough for us to compete with China and their ilk in many arenas. If we have surrendered and just accepted we’ll specialise in consumption (sic) then fine – let the trades die.
If we believe we might be able to turn ourselves around, deregulate and loosen controls – then might it not be worth saving or assisting the sort of trades we’d need in the future when the playing field is level once more?
I’m not telling you how it should be. I’m just suggesting a concern and asking for comments that address that concern – rather than just snipe from the sidelines.
I think in effect you (Steve Tierney) are making an argument equivalent to Lancaster’s “Theory of the 2nd best” in conventional microeconomics – that in the face of mis-allocation in one area the optimal allocation of resources changes in others (with all the usual information and incentive issues that come trying to base policy on abstract theoretical microecnomics)
That said, regarding Forgemasters they had if I recall several offers of finance but – despite wanting to roughly double the size of the company – seemed to want to retain a dominant share of equity, which was largely owned by the senior management after a successful buyout.
If I understand it correctly – and only limited amount of information was public – the government was being asked to ensure that one specific individual retained control and could become personally significantly wealthier rather than share control and a have a larger share of the hoped for benefit go to other venture capitalists.
If the CEO wants to correct me I would delighted to be corrected, but that is what seemed to be the case based on whatI could find out at the time.