23 Things They Don't Tell You About Capitalism

By doing this, I am not trying to blind you to cases of government failure. I have already mentioned the series of castles in the desert built in many developing countries in the 1960s and 70s, including Indonesia’s aircraft industry. However, it is more than that. Government attempts to pick winners have failed even in countries that are famous for being good at it, such as Japan, France or Korea. I’ve already mentioned the French government’s ill-fated foray into Concorde. In the 1960s, the Japanese government tried in vain to arrange a takeover of Honda, which it considered to be too small and weak, by Nissan, but it later turned out that Honda was a much more successful firm than Nissan. The Korean government tried to promote the aluminium-smelting industry in the late 1970s, only to see the industry whacked by a massive increase in energy prices, which account for a particularly high proportion of aluminium production costs. And they are just the most prominent examples.

However, in the same way that the success stories do not allow us to support governments picking winners under all circumstances, the failures, however many there are, do not invalidate all government attempts to pick winners.

When you think about it, it is natural that governments fail in picking winners. It is in the very nature of risk-taking entrepreneurial decisions in this uncertain world that they often fail. After all, private sector firms try to pick winners all the time, by betting on uncertain technologies and entering activities that others think are hopeless, and often fail. Indeed, in exactly the same way that even those governments that have the best track records at picking winners do not pick winners all the time, even the most successful firms do not make the right decisions all the time – just think about Microsoft’s disastrous Windows Vista operating system (with which I am very unhappily writing this book) and Nokia’s embarrassing failure with the N-Gage phone/ game console.

The question is not then whether governments can pick winners, as they obviously can, but how to improve their ‘batting average’. And contrary to popular perception, governmental batting averages can be quite dramatically improved, if there is sufficient political will. The countries that are frequently associated with success in picking winners prove the point. The Taiwanese miracle was engineered by the Nationalist Party government, which had been a byword for corruption and incompetence until it was forced to move to Taiwan after losing the Chinese mainland to the Communists in 1949. The Korean government in the 1950s was famously inept at economic management, so much so that the country was described as a bottomless pit by USAID, the US government aid agency. In the late nineteenth and early twentieth centuries, the French government was famous for its unwillingness and inability to pick winners, but it became the champion of picking winners in Europe after the Second World War.

The reality is that winners are being picked all the time both by the government and by the private sector, but the most successful ones tend to be done in joint efforts between the two. In all types of winner-picking – private, public, joint – there are successes and failures, sometimes spectacular ones. If we remain blinded by the free-market ideology that tells us only winner-picking by the private sector can succeed, we will end up ignoring a huge range of possibilities for economic development through public leadership or public–private joint efforts.

Thing 13 Making rich people richer doesn’t make the rest of us richer

What they tell you

We have to create wealth before we can share it out. Like it or not, it is the rich people who are going to invest and create jobs. The rich are vital to both spotting market opportunities and exploiting them. In many countries, the politics of envy and populist policies of the past have put restrictions on wealth creation by imposing high taxes on the rich. This has to stop. It may sound harsh, but in the long run poor people can become richer only by making the rich even richer. When you give the rich a bigger slice of the pie, the slices of the others may become smaller in the short run, but the poor will enjoy bigger slices in absolute terms in the long run, because the pie will get bigger.

What they don’t tell you