The peril in picking "national champions"

What is an economy? Is it an outcome -- or a process? A thing -- or a set of relationships? A machine -- or an ecosystem?

I ask, because people tend to think in metaphors: much wrong thinking about the economy begins as the wrong metaphor. When people talk about “building” an economy, for example, or when they refer to this or that industry as the “engine” of economic growth, they reveal an understanding of the economy as inanimate object, a thing to be crafted to their design, rather than the intersected ambitions and exertions of millions of their fellow citizens, each with his own designs in mind.

So it is with the “hollowing out” debate.... Those who bemoan the “loss of our family jewels” to foreigners have incorporated into that one passage three curious assumptions: that because a company changes hands it ceases to exist (“loss”), that the companies do not belong to their legal owners, past or present, but to some disembodied collective (“our”), and that they have a value beyond what they are worth to their shareholders, as measured by the price at which they are sold (“jewels”). These may be true in a poetic sense, but not an economic one, which is how they are usually presented.

And so, when the same people call for a policy of selective promotion of “national champions,” when they insist that certain “strategic” industries be declared off limits to foreigners, when they sigh that Canada has lost its pre-eminence in mining, or energy, or some other traditional industry, they are merely substituting their own preferences for those of the people who actually own these companies.

But what about those who merely suggest that Canada should aim, as a general policy, to create and nurture “global leaders,” giant companies in the first rank of their industry world-wide -- those, such as Roger Martin and Gord Nixon, dean of the Rotman School of Business and president of the Royal Bank respectively, whose provocative essay in Another Leading Paper I mentioned last time. Both would disavow any overt policy of forbidding foreign takeovers, or any explicit attempt to pick winners. Yet even in this more benign form, the same basic misconception is at work, with the inevitable policy consequences.

Indeed, what others would do directly they would do indirectly. Where others would prohibit foreign investment outright, they call for a policy of reciprocity, approving takeover applications only from companies whose home countries offer ours the same treatment, on the grounds that in “the real world” there is no “level playing field.” But this has it backwards. If there were some practical likelihood that “reciprocity” would lead to a reciprocal lowering of trade and investment barriers, there might be something to recommend it. But in the “real world,” that is almost never the case. It just becomes an excuse for inaction.

Their call for more stringent conditions on foreign takeovers, or for prohibiting those by state-owned firms, tend in the same direction, and for the same reason: because they have set out, as a first principle, that Canadian economic policy must be directed to developing global leaders. “We need to be building as many globally competitive firms ... as possible,” they write. “ It has to our No. 1 economic policy... We must have a sense of urgency.” The collectivism is perhaps unconscious, but it is there.

Obviously I have nothing against globally competitive firms. And indeed one should expect these to arise in a large and prosperous economy such as ours. It’s just not as clear to me that the causality runs the other way. Quick, name a dominant “global leader” from Iceland. Or Ireland. Or Austria. Yet all have higher standards of living than we do.

And that, surely, is what we should be aiming at. More than two centuries ago, Adam Smith offered the revolutionary idea that the proper objective of trade policy was not to earn gold for the treasury, but to increase the welfare of the people. To that end, he offered an equally scandalous prescription: that decisions on what to produce, and by which means, should be guided, not by the king’s ministers, but by the choices of consumers -- since, after all, consumption is the whole point of production.

I beg to propose something similar. Human ingenuity and compound interest being what they are, people will tend to combine their energies in ways that make them wealthier over time, if you a) let them, and b) force them. The first would suggest removing barriers to the acquisition of productive resources. So cut tax rates, and loosen controls on the movement of labour and capital, both within and across national boundaries. And the second?

You can have all the productive resources you like, but absent some spur to combine them in the most efficient way, people will tend to less efficient compromises. The spur is competition -- the more of it the better. You don’t want to promote global leaders, at the policy level, as if by some slow, careful process of accretion. You want to tear them down and rebuild them, over and over: Schumpeter's “creative destruction.”

And which sectors are the most protected from competition in this country? Those where national policy effectively prohibits foreign competition, either directly or through restrictions on ownership: telecoms, transportation, and financial services being the three biggest examples. Not surprisingly, some of Canada’s largest firms are found in these sectors, and as such might be considered candidates for “national champion” status. But their success comes at the expense of the rest of the economy.

A policy of prosperity, therefore, would suggest opening these sectors to the world. Whereas a policy of promoting “global leaders” would suggest the opposite.