The relationship between governments and businesses is always changing. After 1945, many countries sought to re build society using fi�rms that were stateowned and managed. By the 1980s, faced with sclerosis in the West, the state retreated to become an umpire overseeing the rules for private fi�rms to compete in a global market—a lesson learned, in a fashion, by the communist bloc.
Now a new and turbulent phase is under way, as citizens demand action on problems, from social justice to the climate.
In response, governments are directing fi�rms to make society safer and fairer, but without controlling their shares or their boards. Instead of being the owner or umpire, the state has become the backseat driver.
This bossy business inter ventionism is wellintentioned.
But, ultimately, it is a mistake.
Signs of this approach are everywhere, as our special report explains.
President Joe Biden is pursuing an agenda of soft pro tectionism, industrial subsidies and righteous regulation, aimed at making the home of free markets safe for the middle classes.
In China Xi Jinping’s “Common Prosperity” crackdown is designed to curb the excesses of its freewheeling boom, and create a business scene that is more selfsuffi�cient, tame and obedient.
The European Union is drifting away from free mar kets to embrace industrial policy and “strategic autonomy”.
As the biggest economies pivot, so do mediumsized ones such as Britain, India and Mexico.
Crucially, in most de
mocracies, the lure of intervention is biparti san.
Few politicians fancy fi�ghting an election on a platform of open borders and free markets.
That is because many citizens fear that markets and their umpires are not up to the job.
The fi�nancial crisis and slow recovery amplifi�ed an
ger about inequality. Other concerns are more
recent.
The world’s ten biggest tech companies
are over twice as big as
they were fi�ve years ago and sometimes seem to behave as if they are above the law.
The geopolitical backdrop is a far cry from the 1990s, when the expansion of trade and democracy promised to go hand in hand, and from the cold war when the West and the Soviet Union had few business links.
Now the West and totalitarian China are rivals but economically intertwined. Gummedup supply chains are causing infl�ation, reinforcing the perception that globalisation is overextended.
And climate change is an ever more pressing threat.
Governments are redesigning global capitalism to deal with these fears. But few politicians or voters want to go back to full scale nationalisation.
Not even Mr Xi is keen to reconstruct an empire of iron and steel plants run by chainsmoking commis sars, while Mr Biden, despite his nostalgia for the 1960s, need only walk through America’s clogged West Coast ports to recall that public ownership can be shambolic.
At the same time the pandemic has seen governments experiment with new policies that were unimaginable in December 2019, from perhaps $5trn or more of handouts and guarantees for fi�rms to indicative guid ance on optimal spacing of customers in shopping aisles.
This opening of the interventionist mind is coalescing around policies that fall short of ownership.
One set of measures claims to enhance security, broadly defi�ned. The class of indus
tries in which government direction is legitimate on security grounds has expanded beyond defence to include energy and technology. In these areas governments are acting as de facto central planners, with research and development (r&d) spend ing to foster indigenous innovation and subsidies to redirect capital spending.
In semiconductors America has proposed a $52bn subsidy scheme, one reason why Intel’s investment is forecast to double compared with fi�ve years ago.
China is seek ing selfsuffi�ciency in semiconductors and Europe in batteries.
The defi�nition of what is seen as strategic may well expand further to include vaccines, medical ingredients and minerals, for example.
In the name of security, most big countries have tightened rules that screen incoming foreign investment. Amer ica’s mesh of punitive sanctions and technology export controls encompasses thousands of foreign individuals and fi�rms.
The other set of measures aims to enhance stakeholderism. Shareholders and consumers no longer have uncontested pri macy in the hierarchy of groups that fi�rms serve. Managers must weigh the welfare of other constituents more heavily, including staff�, suppliers and even competitors. The most visible part of this is voluntary, in the form of “esg” investing codes that score fi�rms for, say, protecting biodiversity, local people or their own workers.
But these wider obligations may become harder for
fi�rms to avoid.
In China Alibaba has pledged a $15bn “donation” to the Common Prosperity cause. In the West stakeholderism may be en forced through the bureaucracy.
Central banks and public pension funds may shun the securi ties of fi�rms judged to be antisocial. America’s antitrust agency, which once safeguarded con sumers alone, is mulling other aims such as helping small fi�rms.
The ambition to confront economic and social problems is admirable. And so far, outside China at least, bossier govern ment has not hurt business confi�dence.
America‘s main stock market index is over 40% higher than it was before the pandem ic, while capital spending by the world’s largest 500odd listed fi�rms is up by 11%. Yet, in the longer term, three dangers loom.
The fi�rst is that the state and business, faced by confl�icting aims, will fail to fi�nd the best tradeoff�s. A fossilfuel fi�rm obliged to preserve good labour relations and jobs may be reluctant to shrink, hurting the climate. An antitrust policy that helps hun dreds of thousands of small suppliers will hurt tens of millions of consumers who will end up paying higher prices.
Boycotting China for its humanrights abuses might deprive the West of cheap supplies of solar technologies. Businesses and regulators focused on a single sector are often illequipped to cope with these dilemmas, and lack the democratic legitimacy to do so.
Diminished effi�ciency and innovation is the second danger. Duplicating global supply chains is extraordinarily expensive: multinational fi�rms have $41trn of crossborder investments.
More pernicious in the long run is a weakening of competition. Firms that gorge on subsidies become fl�abby, whereas those that
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are protected from foreign competition are more likely to treat customers shabbily.
If you want to rein in Facebook, the most credible challenger is TikTok, from China (see Schumpeter).
An economy in which politicians and big business manage the fl�ow of subsidies according to orthodox thinking is not one in which entrepreneurs fl�ourish.
The last problem is cronyism, which ends up contaminating business and politics alike. Firms seek advantage by attempting to manipulate government: already in America the boundary is blurred, with more corporate meddling in the electoral process. Meanwhile politicians and offi�cials end up favouring particular fi�rms, having sunk money and their hopes into them. The urge
to intervene to soften every shock is habitforming.
In the past six weeks Britain, Germany and India have spent $7bn propping up two energy fi�rms and a telecoms operator whose problems have nothing to do with the pandemic.
This newspaper believes that the state should intervene to make markets work better, through, for example, carbon taxes to shift capital towards climatefriendly technologies; r&d to fund science that fi�rms will not; and a benefi�ts system that protects workers and the poor.
But the new style of bossy government goes far beyond this. Its adherents hope for prosperity, fairness and security.
They are more likely to end up with ineffi�ciency,
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