A venture capitalist state?
Shuggy says the Labour party should be asking basic questions about what the role of the state should be. Here’s a thought, which I fear is awkward for left and right - that, in a post-crisis world, one role for the state is to provide a pre-condition for a healthy market economy.Put it this way. What can the state do better than private companies? Borrow money, that‘s what. Whereas the government is financing its deficit at near-record low interest rates, new and small firms are starved of finance*.This matters. In the day job, I suggest - following Eric Beinhocker - that the market operates a little like natural selection in biology, and financial constraints upon firms retard this process. This is because natural selection requires differentiation - of species in biology, of business plans in economics. But financial constraints reduce the degree of differentiation, by killing some business plans before they are born. And when banks and bosses decide which ideas are killed, it is not necessarily the worst ones which suffer. With fewer new ideas being born, the market cannot do its job so well - of selecting between good and bad businesses - simply because it has less material to work with. Enter the state. One of its roles should be to use its borrowing power to relive financial constraints upon firms. It could do this by using nationalized banks to lend more freely, or by establishing a state investment bank, as David Miliband has proposed.The point is simple. One legitimate role of the state is to act a little like a venture capitalist, helping new firms get started, and thus giving market forces - selection - more material to work upon. The state, then, can facilitate a healthy market economy.Now, there are two objections to this. One arises from public choice economics. The state will not act as an impartial midwife to new businesses, nor stand by and let some of its babies die, as market forces demand. Rather, it will favour some projects over others- such as “green” investments - and will give into pressure to protect jobs as some of its enterprises fail. And of course, incumbent firms will oppose this plan; the last thing they want is new rivals springing up; being the agent of big business, the state will kowtow to this demand. This raises a basic question. The state is traditionally seen as being like an African chief, demanding centralized control with which to dole out favours or penalties - in other words as the antithesis of the market. But is this a necessary feature of the state, or a bug? Is it possible to transform the state into a more market-friendly institution? What conditions - if any - must exist for this to be the case?The second objection is that such a scheme won’t work, because the lack of new business plans reflects not so much financial constraints as a dearth of investment opportunities.I sympathise with this view. But this entails a pessimism about whether capitalism can survive. If it is to do so, though, mightn’t there be a role for the state, to create one of the preconditions for a healthy market economy, namely the emergence of new ideas? After all, if the market economy is such a good idea (it is) shouldn't it be given more chance to do its work?* Anyone who thinks that the former is the cause of the latter should join John Redwood in the parallel universe he’s living in.