Picking Losers: The Return of Britain’s Industrial Strategy Delusion

1An old delusion returns

The Business Secretary, Peter Kyle, has announced that the government will invest billions of pounds in British technology companies in return for equity stakes in those firms.^[1] The aim is to help these businesses grow — generating greater investment and more jobs in the UK, a healthy return for taxpayers, and a measure of public influence over how new technologies are developed and used.

Some of the Business Secretary’s ambitions are laudable. But sound economic theory and Britain’s own economic history both show why the strategy is ultimately misguided.

2The information problem, and the lobbying problem

The intellectual case for an industrial strategy rests on market-failure arguments: capital markets are myopic, positive externalities go unpriced, and strategic industries require a scale of finance that private capital cannot or will not provide. In theory, a far-sighted and benevolent government corrects these failures. In practice, it compounds them.

Hayek was, as so often, correct. The core problem with industrial strategy is one of information. Prices in a market economy aggregate the dispersed, tacit knowledge that no central authority can replicate. When politicians try to pick winners, they substitute bureaucratic judgement for the revealed preferences of millions of investors and consumers.

It introduces a second distortion, too — that of political economy. The firms that receive state backing are rarely those with the best commercial prospects. They are those with the most effective lobbying operations, the most unionised workforces, or those in the most electorally sensitive locations.

3The post-war record

It is not only economic theory that exposes the folly of politicians picking winners. Britain’s economic history is littered with illustrations.

The experiment with industrial strategy began in earnest after the Second World War. The Attlee government nationalised coal, steel, rail, electricity, gas and civil aviation in rapid succession, with part of the substantial Marshall Aid received from the United States helping to fund investment in the newly nationalised industries. The intellectual framework was coherent: these were either natural monopolies, or the commanding heights whose direction was deemed too important to leave to the market.

The results were discouraging. By 1960, productivity in the nationalised industries was growing at roughly half the rate of comparable private-sector industries in West Germany and France, and several had become increasingly dependent on subsidy and political protection. The National Coal Board, which took over 958 collieries employing 765,000 workers in 1947, was absorbing government subsidies of over £500 million a year (in 1980 prices) by the mid-1970s, while output per man-shift had barely recovered to pre-war levels.^[2] British Rail’s investment programme, despite receiving over £1.24 billion of public investment between 1955 and 1962 under the Modernisation Plan, produced a system that continued to run heavy deficits — prompting the Beeching Report’s damning assessment that a third of the network carried just 1 per cent of total traffic.^[3]

4An uncanny ability to pick losers

As the country moved into the mid-1960s and then the 1970s, successive governments pursued a more active industrial strategy, with a dedicated commitment to picking winners. They had an uncanny ability to pick losers.

The Industrial Reorganisation Corporation (IRC), established in 1966, was designed to engineer competitive ‘national champions’ through state-facilitated mergers. Its most infamous creation was British Leyland, formed in 1968 from the merger of Leyland Motors and British Motor Holdings. The new entity employed about 250,000 workers and held 40 per cent of domestic car production. Within eight years it was insolvent. Taxpayers were forced to come to its rescue and bail it out.^[4]

British Leyland was not an outlier. The National Enterprise Board (NEB), created by the Industry Act 1975 with a mandate to take stakes in strategically important companies, invested in Ferranti, Alfred Herbert (machine tools) and ICL (computers), among others.^[5] Alfred Herbert, once the world’s largest machine-tool maker, received repeated injections of NEB support before going into receivership in 1980. Ferranti’s government-backed semiconductor division ran persistent losses and required rescue after a severe cash-flow crisis in the mid-1970s, though it was subsequently restructured and returned to private ownership in 1980. ICL survived only through a combination of preferential public procurement and repeated capital injections — including £40 million in government loan assistance and a 25 per cent NEB stake — before being sold to Fujitsu in 1990.^[6]

The pattern is consistent with the soft budget constraint: once the state has committed equity to a firm, the political cost of allowing it to fail rises with each subsequent injection, creating a ratchet of escalating subsidy.

Successive governments set out to pick winners. They had an uncanny ability to pick losers.

5What actually worked

The contrast with sectors that remained primarily market-led is instructive. British pharmaceuticals, which received relatively little direct state equity intervention, produced globally competitive firms that generated substantial export earnings and genuine innovation. British financial services liberalised progressively from the 1970s, and London became one of the world’s most important financial centres. Or take technology itself, where the UK is already a world leader. These sectors succeeded not because of government direction, but largely in spite of its absence.

This is the importance of market discipline. Private capital is at risk, so its owners have powerful incentives to allocate it to productive uses, to monitor management, and to exit when performance deteriorates. Government equity faces none of these disciplines. Ministers cannot credibly commit to letting politically sensitive employers fail, so the threat of exit is never credible — and management accordingly faces weak incentives to improve.

6The American problem

There is a further risk. Attempting to pick winners would not only squander taxpayers’ money; it could also sour Britain’s relationship with the United States. The long-running Airbus–Boeing dispute between the US and the EU/UK illustrates the point starkly.^[7] Washington dislikes other governments subsidising their industries at the best of times. It most certainly dislikes it under the current administration. President Trump rightly sees the technology sector as the jewel in the crown of the US economy, and is unlikely to look kindly on a British government — already introducing a plethora of regulations that make life harder for US tech firms — subsidising its own technology industry. The end result could be a further deterioration of the Special Relationship: higher tariffs on key British goods, and restrictions on British firms providing services in the US. The EU, too, might object, or seek to use it as leverage in upcoming talks and negotiations.

7What to do instead

The Business Secretary’s commitment to helping the British technology sector thrive and make advances in AI is admirable. His methods are not. They will see taxpayers’ money gambled for what is likely to be very little return — or lost outright — while risking a souring of relations with our closest allies and trading partners.

If the government is serious about helping the UK technology sector, there is a great deal it can do. It should start by making it far easier for homes, offices, labs and data centres to be built in our towns and cities and in the areas around them. It should bring down energy bills by cutting the regulations that make building nuclear reactors so expensive, and by abandoning the frantic push towards Net Zero. It should scrap many of the provisions of the Online Safety Act. And it should reform the tax system to reward, rather than punish, the households and firms that invest in technology companies.

Peter Kyle is right to be both ambitious and concerned. The technology sector matters enormously to the UK, and ensuring the country is a world leader in AI is crucial to its future prosperity and security. But the government’s industrial strategy is doomed to fail. The way to make the technology industry thrive and flourish is to let it — through supply-side reform, not state equity.