Leaders 9T
he relationship between governments and businesses is
always changing. After 1945, many countries sought to re
build society using firms 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 firms 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 firms 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 selfsufficient, 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 fighting an election
on a platform of open borders and free markets.
That is because many citizens fear that mar
kets and their umpires are not up to the job. The
financial crisis and slow recovery amplified an
ger about inequality. Other concerns are more
recent. The world’s ten biggest tech companies
are over twice as big as they were five 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 inflation,
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 firms 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 defined. 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 five years ago. China is seek
ing selfsufficiency in semiconductors and Europe in batteries.
The definition 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 firms.
The other set of measures aims to enhance stakeholderism.
Shareholders and consumers no longer have uncontested pri
macy in the hierarchy of groups that firms 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
firms for, say, protecting biodiversity, local people or their own
workers. But these wider obligations may become harder for
firms 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 firms judged to be antisocial. America’s
antitrust agency, which once safeguarded con
sumers alone, is mulling other aims such as
helping small firms.
The ambition to confront economic and social problems is
admirable. And so far, outside China at least, bossier govern
ment has not hurt business confidence. 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
firms is up by 11%. Yet, in the longer term, three dangers loom.High stakes
The first is that the state and business, faced by conflicting aims,
will fail to find the best tradeoffs. A fossilfuel firm 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 efficiency and innovation is the second danger.
Duplicating global supply chains is extraordinarily expensive:
multinational firms have $41trn of crossborder investments.
More pernicious in the long run is a weakening of competition.
Firms that gorge on subsidies become flabby, whereas those thatState intervention is being transformed. That won’t make it any more effective Beware the bossy state