23 Things They Don't Tell You About Capitalism

The best-known example of government picking a loser because of the wrong goals and incentives is the Concorde project, jointly financed by the British and the French governments in the 1960s. Concorde certainly remains one of the most impressive feats of engineering in human history. I still remember seeing one of the most memorable advertising slogans I’ve ever encountered, on a British Airways billboard in New York – it urged people to ‘arrive before you leave’ by flying Concorde (it took around three hours to cross the Atlantic on a Concorde, while the time difference between New York and London is five hours). However, considering all the money spent on its development and the subsidies that the two governments had to give to British Airways and Air France even to buy the aircrafts, Concorde was a resounding business failure.

An even more outrageous example of a government picking a loser because it is divorced from market logic is the case of the Indonesian aircraft industry. The industry was started in the 1970s, when the country was one of the poorest in the world. This decision was made only because Dr Bacharuddin Habibie, number two to President Mohammed Suharto for over twenty years (and the country’s president for just over a year, after his fall), happened to be an aerospace engineer who had trained and worked in Germany.

But if all received economic theories and the evidence from other countries suggest that governments are likely to pick losers rather than winners, how could the Korean government succeed in picking so many winners?

One possible explanation is that Korea is an exception. For whatever reasons, Korean government officials were so exceptionally capable, the argument might run, that they could pick winners in a way that no one else could. But that must mean that we Koreans are the smartest people in history. As a good Korean, I would not mind an explanation that portrays us in such glorious light, but I doubt whether non-Koreans would be convinced by it (and they are right – see Thing 23).

Indeed, as I discuss in some detail elsewhere in the book (most notably, see Things 7 and 19), Korea is not the only country in which the government has had success in picking winners.[2] Other East Asian miracle economies did the same. The Korean strategy of picking winners, while involving more aggressive means, was copied from the one practised by the Japanese government. And the Taiwanese and Singaporean governments were no worse at the job than their Korean counterpart, although the policy tools they used were somewhat different.

More importantly, it isn’t just East Asian governments that have successfully picked winners. In the second half of the twentieth century, the governments of countries such as France, Finland, Norway and Austria shaped and directed industrial development with great success through protection, subsidies and investments by SOEs. Even while it pretends that it does not, the US government has picked most of the country’s industrial winners since the Second World War through massive support for research and development (R&D). The computer, semiconductors, aircraft, internet and biotechnology industries have all been developed thanks to subsidized R&D from the US government. Even in the nineteenth and early twentieth centuries, when government industrial policies were much less organized and effective than in the late twentieth century, virtually all of today’s rich countries used tariffs, subsidies, licensing, regulation and other policy measures to promote particular industries over others, with considerable degrees of success (see Thing 7).

If governments can and do pick winners with such regularity, sometimes with spectacular results, you may wonder whether there is something wrong with the dominant economic theory that says that it cannot be done. Yes, I would say that there are many things wrong with the theory.