Sunday, February 03, 2008

Rewarding Mediocrity

Tim Harford, the undercover FT economist, recently wrote an article for Forbes with the same title as this post. Forbes magazine is a collection of glossy advertisements interspersed with the odd article defending the lifestyles of those who look at the glossy ads.

The article has some very good points. The basic argument is a Forbes-friendly line that government handouts are bad. That is what you would expect him to say. The main reason is because the handouts tend to go to the most mature, bloated, consolidated industries, not to the developing emergent industries that need the most encouragement. But this was not a simple regression-to-the-mean argument.

The subtle point is that because the most bloated industries are the most mature, they are already the most consolidated and have already built up the highest barriers to entry. However, whereas small startups in biotechnology may be the ones with the most potential for government kickstarts, there is less incentive for the individual entrepreneur to lobby for industry assistance. By contrast, in mature markets, industry assistance is almost inevitably targeted to those who organise the lobby.

All that does not necessarily justify the catastrophic destruction of "uneconomic" communities, as seemed to be deliberate policy in Thatcherite times. Neither does it necessarily eliminate the possibility of supporting key strategic interests to reduce unmanaged risk, for example to maintain basic self-sufficiency in basic foods to avoid being "held-hostage" by monopoly suppliers. Tim should have noted these mitigations. But the basic point remains, those who shout loudest for handouts may be those who least deserve them.

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