Picking winners

We have been told for a week or two that Lord Mandelson has been compiling a list of UK companies that must not be allowed to go under during the recession.

The pressure will be on, with all sorts of special pleading,- not least size of workforce involved, for the government to rescue particular industries or companies. The Trade Unions are already protesting about job losses at the Royal Mail, which is now so inefficient that the only way to keep it in the public sector is to sell a large part of it outside!

The US Senate vetoed a bail-out for the dying US motor industry which had been cobbled together by President and Congress. Are we to expect something here? Is there anyone who could veto such schemes?

There are a number of reasons for thinking that in the absence of genuinely special reasons, the government should think long and hard about this, to ignore the siren voices of unions and bosses. It is very tempting to think that promoting some and allowing others to die is a part of the their "lever-pulling", god-given responsibility.

1) "If you give it to some, others will want it" is an argument in the political and not economic sphere, and such considerations will be at best short term fixes with possible long term disasters.

2) Governments generally are very poor at picking winners and losers. The decisions will be made by ministers, civil servants and advisers who have often not been within a mile of the real world, let alone run a company. The past is littered liberally with failures promoted by the government - British Leyland, for instances, and others that got away - linear motors and hover trains, to name one out of hundreds.

3) The market is a delicate instrument, with all sorts of unpredictable consequences. It is also cruel, bringing death and destruction when buyers decide they no longer want to buy that product or brand. There is a "creative destruction", and to try beat the market will prevent the marketing adjusting resources in the right way. There is a mechanism, a little like natural selection in biology, whereby the weak fail and have to be re-born in some other form, both human and other resources. This is why nationalised industries become ossified in virtually every case, as they are insulated from the creative destruction. Woolworths could have been saved, and we shall miss it, but it had clearly lost its way, and other people should now be entrusted with the resources involved.

This is not to say that the government should do nothing, merely that individual and specific intervention and interference will often do more harm than good in the long run. By all means conduct policies which will be of benefit to all, but may not be sufficient for some, but to act "like God", is really beyond the competence of government.

4) To the extent that finance is found to bail-out the industries or companies favoured by Mandy or others, there will less available for other industries and they may go to the wall, for political rather than economic reasons. The will be "crowded out".

5) Bailing out could cause a "moral hazard" to result. If failures are rewarded by government support, then reckless behaviour and carelessness are rewarded. This is not the message to send out in avery competitive international world.