23 Things They Don't Tell You About Capitalism

First of all, the theory implicitly assumes that those who are closest to the situation will have the best information and thus make the best decision. This may sound plausible but, if proximity to the situation guaranteed a better decision, no business would ever make a wrong decision. Sometimes being too close to the situation can actually make it more, rather than less, difficult to see the situation objectively. This is why there are so many business decisions that the decision-makers themselves believe to be works of genius that others view with scepticism, if not downright contempt. For example, in 2000, AOL, the internet company, acquired Time Warner media group. Despite the deep scepticism of many outsiders, Steve Case, AOL’s then chairman, called it a ‘historic merger’ that would transform ‘the landscape of media and the internet’. Subsequently the merger turned out to be a spectacular failure, prompting Jerry Levin, the Time Warner chief at the time of the merger, to admit in January 2010 that it was ‘the worst deal of the century’.

Of course, by saying that we cannot necessarily assume a government’s decision concerning a firm will be worse than a decision by the firm itself, I am not denying the importance of having good information. However, insofar as such information is needed for its industrial policy, the government can make sure that it has such information. And indeed, the governments that have been more successful at picking winners tend to have more effective channels of information exchange with the business sector.

One obvious way for a government to ensure that it has good business information is to set up an SOE and run the business itself. Countries such as Singapore, France, Austria, Norway and Finland relied heavily on this solution. Second, a government can legally require that firms in industries that receive state support regularly report on some key aspects of their businesses. The Korean government did this very thoroughly in the 1970s, when it was providing a lot of financial support for several new industries, such as shipbuilding, steel and electronics. Yet another method is to rely on informal networks between government officials and business elites so that the officials develop a good understanding of business situations, although an exclusive reliance on this channel can lead to excessive ‘clubbiness’ or downright corruption. The French policy network, built around the graduates of ENA (École Nationale d’Administration), is the most famous example of this, showing both its positive and negative sides. Somewhere in between the two extremes of legal requirement and personal networks, the Japanese have developed the ‘deliberation councils’, where government officials and business leaders regularly exchange information through formal channels, in the presence of third-party observers from academia and the media.

Moreover, dominant economic theory fails to recognize that there could be a clash between business interests and national interests. Even though businessmen may generally (but not necessarily, as I argued above) know their own affairs better than government officials and therefore be able to make decisions that best serve their companies’ interests, there is no guarantee that their decisions are going to be good for the national economy. So, for example, when it wanted to enter the textile industry in the 1960s, the managers of LG were doing the right thing for their company, but in pushing them to enter the electric cable industry, which enabled LG to become an electronics company, the Korean government was serving Korea’s national interest – and LG’s interest in the long run – better. In other words, the government picking winners may hurt some business interests but it may produce a better outcome from a social point of view (see Thing 18).

Winners are being picked all the time

So far, I have listed many successful examples of government picking winners and explained why the free-market theory that denies the very possibility of government picking winners is full of holes.