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Betting on Big Companies – en Vogue Again?

Spring / Summer 2010 Nez À Nez

Betting on Big Companies – en Vogue Again?

Proposition: National champions are good economic policy in the 21st century

William Watson is Associate Professor of Economics at McGill University, and writes regular columns for the National Post and the Ottawa Citizen (against): One silver lining to the economic crash of 2008 and the recession that followed is the widespread popular condemnation of the idea that banks and other financial institutions can be ‘too big to fail.’ Especially in the US, but in many other places too, populist anger at big firms laying claim to billions of dollars of taxpayer money is running deep and hot. That anger does not, unfortunately, eliminate the fact that some banks probably still are too big to fail. We have not yet figured out how to cauterize their connections with other banks in a way that would keep them from dragging the rest of the financial sector down with them if they go – though we are working on it. In the meantime, the idea that, if businesses err, they and their managers should pay the consequences, strikes me as a very healthy position to defend. Milton Friedman used to say that he could not see what was immoral about moral hazard: if people responded to perverse incentives in a way that maximized their outcomes – even as it minimized everyone else’s – who could really blame them? Maybe he was right. However, moral or not, the hazard that people running too-big-to-fail firms could do very unwise or venal things, and get away with them, remains. And the sudden surge in popular antagonism to that idea is wonderfully encouraging.

Still, there is another area where public thinking has not yet progressed enough. We may not buy the argument that firms are ‘too big to fail’ anymore. But too many of us are still dupes to the idea that firms are ‘too French’ or ‘too European’ (or Canadian or American) to fail. Too many of us are still stuck to the idea of national competitions and national champions in industrial policy. We have to beat the Chinese in industry X or Y or Z, and if we do not, we will quickly become as poor as the Haitians. In this view, economic growth is a zero-sum game played out by nation-states using the instruments of domestically-owned, -operated and -oriented firms. At his 1953 Senate hearings for confirmation as Secretary of Defense, General Motors CEO Charles Wilson may or may not have said, “What’s good for General Motors is good for America.” Liberal opinion has discredited that sort of corporatism for six decades now, even through the US government’s takeover of GM (so that what is bad for GM’s bottom line is now clearly bad for America’s). Yet the idea that American firms need to win the economic war against foreign firms if America’s economy is to thrive is pervasive. And, of course, this kind of economic nationalism is by no means an exclusively American phenomenon. Europe is wedded to Airbus. In your and my home country of Canada, we might now be willing to contemplate the failure of the Canadian Imperial Bank of Commerce (CIBC) or Banque Nationale, but Bombardier and Blackberry are still widely regarded as us. Their interests are our interests. Especially after the failure of Nortel, it is hard to believe that Canadian governments would let them fail.

In short, a firm that knows that it will not be allowed to fail is not going to make good decisions over a wide range of choices. It is hard to see how adopting that view of its leading corporations is going to do anything good for a country’s economy.

Jim Stanford is an economist with the Canadian Auto Workers, Canada’s largest private sector trade union (for): The far more fundamental lesson from the recent Great Recession is not the old moral hazard quandary about firms taking advantage of their protected status to make bad decisions. To the extent that this is even a real-world policy priority (as opposed to an interesting subject for economic theorizing), it is clearly as a consequence of the crash – not as its cause. No, the more central lesson from the past three years is that market signals cannot be trusted as a guide to efficient, productive economic decision-making. There is no doubt that markets are dynamic and responsive: when big profits are there for the making, markets will move mountains (quite literally, in the case of Canada’s tar sands industry) in order to cash in. But does that quest for profits enhance productivity and prosperity? Clearly, just because something is profitable does not mean that it is useful, efficient or socially beneficial. We experience that in little ways every day of our lives: those telephone sollicitors who interrupt dinner every night are doing something that is profitable, but otherwise annoying. And the global financial crisis showed that, at the macro level, too, profit-guided decisions, absent parental supervision, can and do lead to immensely wasteful, unproductive and destructive outcomes. The central cause of the financial meltdown was hardly that bankers and brokers became complacent because they knew that government would always bail them out. (Indeed, the certainty of the bailout was not at all clear in 2008, anyway.) Rather, the crisis happened because the lure of profits (and the pressure of competition) pushed the financiers to undertake actions that were immensely rewarding to them, but otherwise unproductive, immoral and economically destructive. And the overall policy lesson is certainly not that we should let private companies fail, no matter how big. (If we had followed that advice last year, we would all be wearing barrels today.) Instead, the overall policy lesson is that private markets, and the private firms that inhabit them, must be guided, constrained and pushed to act in more rational, lasting and socially beneficial ways.

This core scepticism about the rationality of profit-guided decision-making provides the theoretical underpinning for what used to be called ‘industrial policy.’ (Today, I think that a better term is ‘sector development policy,’ since the kinds of industries that we are chasing now include high-tech and service sectors – not just big ‘smokestacks.’) There is no reason to believe that the profit-maximizing decisions of private investors and businesses will provide each country with a set of tradeable industries that delivers the broader benefits (productivity, innovative capacity, export success and income generation) that we need. That is why we need proactive, strategic efforts by government (in conjunction with the private sector and other sector stakeholders, like unions, universities and others) to prod, cajole, attract and protect especially desirable industries and firms. We should promote ‘national champions’ – key sectors, and key firms within those sectors. Not because they are Canadian or French or British – in fact, I am quite agnostic on whether the companies involved need to be Canadian-owned in Canada or French-owned in France. (Large Canadian-owned companies do a much better job than their foreign-owned equivalents at investing in research and development, technology and high-value management functions; but foreign-based companies that do the same things in Canada, from GM to Samsung, are also valuable and important.) We promote these sectors not because they are Canadian, but because they do things that other sectors do not: invest in innovation, penetrate foreign markets, generate higher productivity and pay higher incomes. Modern economic theories of international trade long ago abandoned the quaint idea that each country will export products corresponding to its natural, inherent ‘comparative advantage’ (textiles for the Brits, port for the Portuguese, and so on). Nowadays, in the high-value, innovative goods and services that are the Holy Grail of modern trade, international advantage is constructed on the strength of effective investment and innovation strategies. The countries that have done well in this battle are those (from Finland to Korea, Germany to China) that deliberately carve out national footholds in strategic, valuable industries, and support domestically-based, globally-oriented firms to climb those footholds. You and other like-minded economists have derided this strategy for ages as ‘picking winners.’ It turns out that private money managers cannot themselves pick winners. The Finns and Koreans have done a fine job of it, with enormous economic benefits to themselves.

In addition to the global financial crisis, there is another epochal historical development that provides important context for a debate about national champions and sector development strategies. With relatively little fanfare, Canada’s economic trajectory has been fundamentally altered in the last decade by a sharp regression in its industrial structure. After steadily progressing for decades away from reliance on natural resource extraction and export (the ‘staples’ pattern of development elucidated by the great Canadian economic historian Harold Innis), Canada is now rushing back to the future. Resource exports (especially petroleum, and particularly from Alberta’s tar sands) now dominate Canadian participation in world markets to a degree unseen since the 1970s. Canadian exports of virtually everything else, from manufactured goods to tradeable services to tourism, have all declined – partly from neglect, partly squeezed out by a petro-fuelled, overvalued currency. Ironically, the resource boom has actually resulted in a decline in Canada’s overall trade performance, measured by both the amount of Canadian exports (which plummeted from 47 percent of GDP in 2000 to 28 percent last year) and the trade balance (last year, Canada experienced its biggest current account deficit since 1993). The sure-thing super-profits generated by massive investments in tar sands are reshaping Canada’s national economy, its federation and, of course, its environment. But the long-run benefits of that shift are surely open to question. If Canada is to be more than a hewer of wood and scraper of tar, it will have to resist and reshape the tendencies of purely private decision-making. It must rebuild the capacity to deliberately shape its industrial and economic structure – first, by identifying valuable industries, and then by doing what it takes to build them in Canada.

WW: I am actually with you in doubting that moral hazard caused the financial collapse. Everything that I read about the crisis on Wall Street suggests that the alpha males at the top of the doomed investment banks regarded a government bailout as a fate almost worse than bankruptcy. Their firms vaporizing beneath them stigmatize them among their peers. The idea that “We’ll try this risky play, and if it doesn’t work out, the government will come in and take us over, but in any case we’ll be alright” would have been anathema to them. As for greed, it is a constant among humans, and therefore has little explanatory power in these panics and manias. My own interpretation is that, in fact, most of the people riding these firms did not consciously take reckless risks. Their positions became dangerous either because the opacity of many of the new, computer-enabled products made them hard to read or, in most cases, because they thought that they had hedged their positions or successfully insured them with credit default swaps (which were, after all, a means of reducing firm risk) or, finally, because they made the at-the-time perfectly reasonable assumption that housing prices would not fall to half of their former value. Large-scale error by people who thought that they were taking all precautions against error strikes me as a much more interesting story than all the usual stuff about venality and excess, though no doubt there was also a breakdown in the lines of responsibility – and an increase in corruption and fraud – as rampant securitization obscured the relationship between borrower and ultimate lender.

But that is all essentially beside the point, which is not what caused the crash of 2008, but whether firms that emerge from essentially political processes to be national champions will do a good job of securing the benefits of economic growth. I cannot believe that they will. You say that market prices do not send useful signals and that, because private money managers cannot pick winners, governments can. I will go part of the way in your criticism of the market. Here at McGill, I teach a standard final-year course in public economics in which we work through all the usual arguments about market failure. In many instances – but I doubt most – market prices do not take into effect all of the consequences of an economic transaction. There can be ‘negative externalities’ when harmful spillovers occur, and ‘positive externalities’ when people who are not party to a transaction stand to benefit from it. In such cases, the usual remedy is to impose a tax to reflect the external cost imposed, or a subsidy to try to bring the external benefit into the transactors’ calculation. Maybe Canada’s Liberals were right in the last federal election. Maybe Canada should have a carbon tax that would discourage people from activities involving excessive carbon generation. Or maybe Canada should continue to subsidize research and development. Bill Gates became filthy rich by pursuing a career in research and development, but maybe the external benefit is so big that leaving such decisions to purely commercial considerations causes us to forego big external bonanzas. In other cases, of course, the market simply fails to provide some goods because everybody free-rides – though not always. For instance, I am reading Canadian Liberal leader Michael Ignatieff’s True Patriot Love, in which he tells the stories of his illustrious forbears, including William Grant, head of Upper Canada College, who, in 1914 at the age of 42, volunteered, like tens of thousands of other Canadians, to go off and fight the Great War. The state’s organizing capacity may have been required to provide that particular public good, but the state did not have to commandeer human resources. At least at the outset, there were few free-riders.

So neither of us argues that the prices that the market generates are perfect. But there are at least two good reasons for not ditching such prices entirely, which you seem to want to do. The first is that government failure may be as big a problem as market failure. As economists, I suspect that we will agree at least on the principles by which we would correct the prices that we see in the market. In the case of negative externalities, we would want the tax imposed on the market price to somehow reflect the external damage done. Estimating that damage is hard even in theory. However, in the real world, it runs the gauntlet of a political process. What value it ultimately takes will depend on whose oxen are gored, and on whose pockets are lined in the process; and also, of course, on how much influence each group has in the relevant political process, as well as upon the relevant bureaucracies and regulatory structures. You would be brave indeed to predict that the charge that does emerge will have anything to do with what an economist would regard as optimal. You do not set much store by the traditional economics of comparative advantage, but if a country like Canada does have a comparative advantage, it surely is in forestry and mining. And yet Canada provides subsidies in these industries that very often are greater than the profits that they actually generate. How can that possibly make sense? As a great man might have said, market pricing may be the worst possible form of pricing, except for all the rest. Prices are not perfect. But are they 90 percent right, as I believe, or 90 percent wrong, as you do? Ultimately, it probably is a matter of belief.

When we are talking about industrial policy, we are generally talking about commercial innovation; about trying to anticipate what goods and services people – indeed, people around the world – are going to be demanding in the next decade or two. In retrospect, the winners are ridiculously easy to pick. (Buy Xerox in 1952, as the old joke goes.) The problem is picking them in advance. You are a smart guy. I hope that I am a reasonably smart guy. Industry ministers around the world are usually reasonably smart men or women. Still, making bets on which investments are going to pay off commercially over the next 15 or 20 years is not a job that we should entrust to a committee of even our very smartest people. Rather than have politics try to establish a consensus about which industries need to backed, and which can be let go, we are much better off with a system where we all make our own bets using our own resources, playing our own hunches and following our own reasoning. And may the best bets win. To think that we can manage an anarchical and chaotic a process as economic innovation risks burdening the indispensable institution of government with a job that it cannot possibly do well.

JS: I do not recall ever suggesting that we should do away with the price system. So do not worry: Enver Hoxha’s Albania is not the model that I am advocating. (After all, his industrial policy was not too successful.)

Let us step away from the realm of hypothetical arguments about whether prices are 90 percent right or 90 percent wrong. For me, the issue is an empirical and pragmatic one. How is Canada performing in fostering innovative, dynamic, tradeable industries? These industries are crucial: in the language of your public economics class, their social benefits (including technology and knowledge spillovers, network and cluster effects, and trade balance benefits) exceed their private benefits. Asking the same question differently, what sort of industrial structure is going to typify Canada in the future, if we leave the tradeable sector to its ‘own devices’ – that is, with no industrial policy interventions by government? And is there capacity for achieving a better structure (informed by the experience of other countries, as well as by Canada’s own history)?

The empirical evidence suggests that Canada is doing worse and worse on this front. Canada’s innovation activity (proxied by research and development spending, but also encompassing many different, but harder-to-measure, dimensions of innovation) has always lagged behind other industrial countries. But Canada has gone even further backward since the popping of the dot-com bubble in 2000 – a process that has now culminated in the dismantling and sell-off to foreign investors of a former ‘national champion,’ Nortel). Business research and development spending has declined as a share of GDP – even as the global economy becomes more innovation-intensive every day. Canadian companies, for instance, invest half as much in research and development (as a share of GDP) as American firms – much less than the OECD average, and a small fraction of what is spent by countries like Finland, Korea and Sweden (all countries that are rapidly advanced in structural terms). This failure is reflected in parallel indicators of industrial decline: Canada’s lagging productivity growth (barely 1 percent per year since 1985, and even slower than that since 2005); Canada’s lagging machinery and equipment investment, compared with other leading economies; declining exports and a now-enormous trade deficit in manufactured goods; and the large net outflow of foreign direct investment (foreign firms are not coming to Canada, and Canadian firms are leaving). The flip-side of deindustrialization is Canada’s increasingly precarious reliance on the extraction and export of non-renewable resources – especially the tar sands – to pay its way in the world economy.

If you believe in the efficiency of private market signals, then you might not see anything wrong with this picture: businesses do not invest in research and development or innovation because, from their private perspective, it is not worth it. And if market forces push Canada into specializing in the scraping and refining of tar, then that must also – by definition – be because that is the thing at which Canada is most efficient. Not coincidentally, the other countries that have been energetically committed to a hands-off, laissez-faire approach to economic development (like the US and the UK) are the ones with the largest trade deficits (rooted in manufacturing), the fastest industrial decline, and the greatest social inequality. Contrast that with countries that have pursued active industrial policy, complete with special ‘favours’ to help national champion companies and sectors. From Scandinavia to Germany to East Asia, this ‘hands-on’ approach has outperformed the laissez faire approach by many measures: export penetration, productivity growth, innovation and social inclusion.

From the mid-1980s, Canada largely abandoned its former tradition of ‘meddling’ with markets to promote desired high-value industries. It has since then relied passively on its proximity to the US market, and the supposed special benefits provided by its membership in NAFTA, to shape the structure of its tradeable industries. It has allowed its few high-value success stories to slip through its fingers (as evidenced by the decline in its high-tech, automotive and pharmaceutical industries). My look at the international experience suggests that such passivity, which is intellectually rooted in a misplaced faith in the efficiency of private market signals, must be rethought. The state ought to get its hands dirty in trying to build the sorts of firms and industries that we know generate large, positive spillover effects to the rest of society.

WW: Let me quarrel with this idea of Canada as a laissez-faire paradise. When was it exactly that Canadian governments gave up trying to pick winning sectors or firms? I started studying industrial policy in the 1970s when the Science Council of Canada made exactly the arguments of your last three paragraphs – and the Economic Council of Canada pointed out that even then Canada had the most generous research and development subsidies in the world. Both Councils are now gone, but industrial policy lingers on. It is true that Canada has sold off its public corporations in a number of sectors – privatizing Air Canada, Canadian National Railways and the like. But when I get off my (not yet privatized) suburban train in the morning, I walk past a 40-story shining “Cité de l’Électronique” – testament to the Quebec government’s odd and luckily largely failed attempt to get Montreal’s electronics industry to ‘cluster’ in a single building (of all things!). Canadian governments are hardly shy in trotting out sectoral help for agriculture, mining, forestry, fishing, cinema, finance, high-tech of any and all kinds, oilsands and even, with the GM and Chrysler buyouts, cars. Now, an honest industrial-policy advocate who took a tough-minded look at things would probably conclude that, with China and India coming into their own, assembling cars really is not going to be an industry of the future for a high-wage country like Canada. Yet we’re willing to pump billions of dollars even into the auto sector. Is there any industry that Canadian governments will not help? Or have not helped? But is an industrial policy that helps all industries really an industrial policy? If our industrial policy bureaucracy is not making consequential decisions, and if they are handing out funds or protection to almost everyone who asks, why not fire the lot of them, force them to get real work in real industry, and simply cut corporate taxes by the amount that used to be spent on their salaries and support?

It is easy to understand why politicians are suckers for helping industry. Some are clearly thrilled to play investment banker with other people’s money. The industry ministers who get to travel the country and hand out checks to appreciative businesses certainly seem to enjoy their work. But even those who do not get to do the front-line philanthropy really do not want to have to say no to constituents asking for start-up money or, where the rubber really hits the political road, for continued employment in an industry that probably is not going to make it to the long-run. That is where government is really a problem. It is not that it cannot pick winners (though its incentives are all for picking successful incumbents rather than winners). If you believe Nassim Nicholas Taleb, author of Black Swans and Fooled by Randomness, nobody can pick winners. The virtue of the market, in these matters, is that it is ruthless: it really does let losers lose. Governments can come in and help losers with unemployment benefits and retraining, but the market on its own is not going to let failing companies or ideas survive – which is what you need in industrial policy.

Two other disagreements about your facts: First, the last 30 years have in fact been pretty good for Canada: per-capita consumption, with all forms of consumption included, is up from CDN $30,000 in 2005 dollars to CDN $50,000, according to Ottawa’s Centre for the Study of Living Standards. Second, inequality may well have risen over the same period in the US – essentially because the premium on higher education rose – but the US was hardly the laggard you suggest in industrial development: most analysts would say that it led the information technology revolution, largely because it had the world’s most active and ruthless market for innovation in such things.

JS: You may wish that Canada were still more laissez-faire in its approach to industrial policy issues. But surely there is no quarrel over the fact that we have been heading quickly in that direction since the heyday of industrial policy activism in the 1970s. Here is one illustrative aggregate indicator: the decline of business subsidies. They are not the only tools of industrial policy (nor even the most important), but they are one that can be measured easily. Business subsidies from all levels of government declined from a peak of 3 percent of GDP in the late 1970s, to 1 percent by the turn of the century. That is a two-thirds cutback. Even in 2009, amid all of the active support given to banks, auto companies and others, that measure ticked upward only marginally, to 1.15 percent – hardly an indication of encroachment by the state on the domain of private enterprise. (Of course, how to account for last year’s corporate aid is tricky; most of those loans will not show up as an actual transfer to business unless and until they are written off – which now looks like it will not happen.) By other indicators, too, from the size of state-owned corporations (down by close to half since the late 1970s) to the number (and influence) of the minions working away at Industry Canada, it is clear that active industrial policy has been largely jettisoned in favour of a market-driven, free-trade-compliant passivity. Last year’s crisis (and the active government response) may mark a turning point (which is why we are having this debate!), but there has been no major about-face yet.

The logic goes like this: get the conditions right (lower taxes, good infrastructure, openness to trade, skilled workers and so on), and private business will enthusiastically show up. They will then make all the decisions about what to do next. It is a kind of “Field of Dreams” development strategy. The problem is that we have built a very business-friendly stadium. But do we have the right players on the field? Responding rationally to the market signals that they have been given, the private sector has geared up rapidly to dig stuff out of the ground beneath our feet (with near-certain mega-profits from tar sands extraction leading the parade). Virtually all other tradeable goods and services production, including most manufacturing, tourism and tradeable services, have been declining for years (since market signals indicate that they are not as profitable, and hence by implication not useful or efficient). The result is shrinking engagement with world markets (perversely, exports as a share of Canada’s GDP have plummeted from 46 percent in 2000 to below 28 percent last summer), a growing trade deficit and shockingly poor productivity performance. With jobs in high-productivity tradeable sectors drying up, the default employment for a growing share of the workforce is in non-tradeable services (with lower-than-average productivity and lower-than-average incomes).

This may not be incompatible with temporary increases in consumption, at least in some quarters. As Bill points out, real Canadian consumption has expanded, as at least some of the proceeds from the resource boom of the 2000s (including terms of trade improvements) trickled down into the domestic economy. But I hesitate to conclude that this is the ultimate marker of economic progress. (America consumed a lot, too, over the last decade, but that hardly meant that their economy was healthy, did it?) What happens when resource prices fall? When reserves are exhausted? When Canadians decide that the environmental costs of tar sands extraction are too large? That is when we will want a broader basket of tradeable exports to fall back on – hopefully including innovative, technology-intensive, high-value goods and services sectors. But those industries do not show up here automatically (no matter how business-friendly our macro environment), and they certainly do not reflect anything remotely resembling ‘comparative advantage.’ Global experience shows that success in industries like these has to be deliberately constructed, by hook and by crook, using everything in the industrial policy toolbox (subsidies, procurement, strategic trade policy, support for specific firms, outright public ownership, active commercialization of science and more). Not every intervention pays off. The Finns and Koreans have had their failures, as well as successes. But their productivity is growing, their innovation performance is stellar, and their exports are flying off the shelves. None of those is true of Canada.

WW: I’m not sure which data you’re drawing on, but ‘business subsidies’ usually include payments to Crown corporations, crop insurance payments to farmers – even, if memory serves, the annual grant to the Canadian Broadcasting Corporation (CBC) – so I am glad that that number is down big-time. Canadian governments have, by and large, stopped running oil companies, airlines and railways. There was no need for them to be doing so. It is great that they have got out, and my bet is that productivity is up sharply in those industries as a result. But governments in general show few signs of abandoning sectoral tinkering.

I prefer to think of the correct strategy as ‘rink of dreams’ (even if my beloved Montreal Canadiens have been jolted out of their own Cup dream for this season). You provide a hospitable environment for businesses, entrepreneurs and high-skilled workers. The latter includes competitive rates of taxation, liveable cities and, yes, efficient public services provided at reasonable cost and without chronic interruption by strikes. (Many skilled workers – though I suspect fewer entrepreneurs – probably do prefer your mix of public and private goods to mine.) And you make clear by constant repetition that people who come up with good ideas and get filthy rich as a result are esteemed in your society – something in respect of which Canada has not been doing a very good job. But, apart from that, you stay as neutral as possible with respect to what exactly these people are going to be doing. Needless to say, if the world price of the rocks and goop that you are sitting on quadruples, you would think very hard indeed before declining to dig them up and sell them.

Twenty years ago, the Internet was still barely a gleam in Al Gore’s eye. Since then, it has thrown the commercial world upside down, and twisted it inside out in ways that very few, if any of us, imagined back then. Tell me what the big products of 2030 will be. And do not just give me a consensus list of what people are saying will be The Next Big Thing. Such lists from 1990 look ridiculous now. Then tell me how a minister of industry will identify the likely winning products, back their development and also, in a very political country with very political regional divisions, drop those that end up being losers. Government has very important things to do in our society. (Yes, you read that right.) Asking it to plan post-industrial development is sending it on a fool’s errand that in the long-run will only discredit it. I am surprised that a person as fond of government as you would put it at risk in this way.

JS: Data on business subsidies comes from the sector flow of funds accounts in the Statistics Canada national income system. As you say, it might not catch everything under the ‘aid-to-business’ umbrella, but it would certainly include those transfers to your beloved CBC. And actually, productivity in the oil industry is down – way down. This is partly due to old-fashioned Ricardian effects (the easy-to-reach oil has long been pumped dry), and partly due to the helter-skelter rush hour in Northern Alberta that is the product of the private-sector stampede to dig the stuff out as fast as possible. That flagging productivity in resource extraction is a major factor behind Canada’s near-zero productivity growth since 2005. If we allocate more and more resources to a sector with declining productivity (but humongous profits), then, indeed, national productivity will go nowhere.

Funny that you should mention the Internet. Paul Baran, a scientist at the government-funded Rand Institute, invented the core concept of package switching – which underpins the web – in the 1960s. A few years later, the Pentagon took it over through the Advanced Research Projects Agency (ARPA), financing construction of the first network, which was called APRANET at first. (The Americans always talk laissez-faire, but they have their own tools of active industrial policy – the Pentagon chief among them.) Publicly funded universities were the first major adopter. The rest is history – but government intervention, not just in pure research and development, but also in its real-world application and commercialization, was essential to the story. No private firm has the up-front cash, the foresight, and the long time horizons required to facilitate innovation on this scale. And the goal is hardly to magically predict the ‘next big thing’ – which is patently a straw man. The goal is to make sure that whatever the next big thing is, Canada gets a healthy piece of it.  That takes more than laying out the red carpet with business-friendly policies.

Your stirring restatement of the logic of trickle-down economics (‘let people get filthy rich, and then give them your esteem for it’) is charming – so straight-faced. Canada has done a great job at helping people get rich. Canada has five times its per-capita share of the world’s billionaires (24 by Forbes’ latest count). And we have cut their taxes substantially. If letting people get rich and keep their money were the key to success, then Canada would be rising in the world’s rankings – not falling. But the issue is not whether or not to let people get rich. (There are billionaires in Sweden, Korea, Netherlands, and Finland, too.) It is a question of what they get rich doing. With an active strategy to promote strategic firms in innovative, high-value industries, they will get rich doing things that offer more benefits for the rest of us: through innovation, productivity, and trade success, rather than financial speculation or resource extraction.


William Watson is Associate Professor of Economics at McGill University, and writes regular columns for the National Post and the Ottawa Citizen.

Jim Stanford is an economist with the Canadian Auto Workers, Canada’s largest private sector trade union. He is the author of Paper Boom (1999) and Economics for Everyone (2008).

(Illustration: Stuart Briers)

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