Diversification and picking winners

Following the concerns about botulism and Fonterra, there have been increasing calls for New Zealand to be “diversified” or even for the NZ government to “pick winners”.  Gareth Kiernan touches on these ideas, and why we should be careful with them here.  A choice quote:

Although economic diversity is useful in terms of limiting the volatility of GDP growth, it needs to be remembered that “picking winners” is generally a costly and futile exercise – politicians will usually be worse than entrepreneurs at where to invest resources, and are worse at letting poor performers go.

Remember, it is folly to look at the failures of markets and entrepreneurs without recognising the failures of institutions and government (as a large institution) as well.  In that context, aiming to help out certain firms looks more like taking risk off businesses and putting it on the taxpayer – a shift that hardly seems fair.

What do you think?

  • Luc Hansen

    I would say that citing instances of state failure to imply the state should never try ‘picking winners’ is as flawed as if the same reasoning was applied to private enterprise. The taxpayer pays either way, whether through payment of tax or through purchasing products and (hopefully) adding to private profits. I suppose one could raise the voluntary/involuntary argument, but this is largely a matter of semantics eg how ‘voluntary’ is it to buy a car in Auckland when the basic problem is lack of public transport infrastructure? And it is glaringly obvious that only the government can step in and provide this (and even a PPP couldn’t happen without the P for public).

    By coincidence, I picked up the latest New Scientist for reading while my daughter was running riot in the playground and found an article, “State of Innovation” where ‘State’ is government, extolling the success of governments in, exactly, picking winners (and no doubt its fair share of losers, too!).

    A notable quote: “Every technology that makes the iphone a smartphone owes its vision and funding to the state”.

    The author of the article, Mariana Mazzucato, has a book newly out, ‘The Entrepreneurial State: Debunking public vs private sector myths’. It has just landed in the new books shelf at Massey so it’ll be arriving to me very soon! It should make interesting reading.

    • Indeed, sounds like interesting stuff.

      Taking off my Infometrics hat and putting on my TVHE hat I would say that I always view the issue as one of “who bears risk”. In that context I think the fact we are often talking about taking risk off the people investing and placing it on the shoulders of the taxpayer is something we need to be more conscious about – and something which in turn increases the “burden of proof” of govt intervention. Only focusing on either success or failure, instead of ex-ante incentives, is not the way I like to think of things either 🙂

    • Miguel Sanchez

      My take on this is that by talking about “picking winners” we’re letting the pro-government camp frame the debate. The fact is that markets can’t pick winners either; what they do well is allow entrepreneurs to try several variations on the same theme, and let the interplay between buyers and sellers sort out which variations catch on and which ones fade away. The big question for industrial policy is not whether the government can identify winners, or whether it’s willing to cull losers, but whether it’s willing to expose its favoured businesses to the threat of competition.

      The problem I find with that New Scientist article (which is at http://www.newscientist.com/article/mg21929310.200-state-of-innovation-busting-the-privatesector-myth.html#.UiWxVNaN2Pw) is that innovation is only one stage of the process. Google is a success not because the government gave it some money to write an algorithm, but because they were able to gain a following in a crowded market. (I’d argue that their real innovation was in not blasting users with endless flashing banner ads. Seriously, does anyone remember what search engines looked like before Google?) On the other hand, Nokia (which the article bizarrely cites as a positive example) spent billions more than anyone else on innovation, much of it fruitful – they basically invented the iPad ten years earlier. But they failed to bring those innovations to market, and now in the space of a few years they’ve gone from national champion to a carcass being picked clean.

      • “The big question for industrial policy is not whether the government can
        identify winners, or whether it’s willing to cull losers, but whether
        it’s willing to expose its favoured businesses to the threat of
        competition.”

        Tis a good point. This was indeed the basis for a lot of the changes post-Muldoon.

        I am also uncomfortable with the idea of socialising risk, but the unwillingness to allow competition and to use the size and scope of government to do that is a biggie.