Don't let the State do our investing for us

There’s a considerable body of opinion out there - ranging from the respectable and wrong, like Mariana Mazzucato, to the errors of the egregious Richard Murphy - which insists that the State should be doing our investing for us. After all, all those wise people collecting all the information government has to hand will be able to invest societal resources far better than any mere set of private incentives. Add in that government can borrow far more cheaply than the private sector and there we are, QED.

It has asked ministers to write off £1.3bn of debts, including £500m run up through a series of ill-fated commercial investments, arguing the sheer scale of Croydon’s crisis required an unprecedented financial bailout from the government.

Stripped of all complexity Croydon has borrowed at below market rates to invest. If you can borrow at below market rates then clearly you should be making more profit than those in the private sector who have to pay more. This is especially so in property - it’s a capital intensive business, your cost of capital is the major determinant of whether a project will be profitable or not. So, that special borrowing facility for local councils - who get to borrow from the Treasury at something like the interest rates the Treasury pays, not the private sector ones - should make substantial profits simply because of those low financing costs.

As with Warren Buffett say, whose insurance float (of $109 billion last time we looked) means that the cost of capital to Berkshire Hathaway is actually below the numbers the Feds borrow at.

Well, it’s an hypothesis and as with all such it needs to be tested against reality. That’s how science works. Further, when there’s a conflict between idea and the universe it is, always, the universe that wins - that’s also how science works.

Now we’ve got our test of the idea. It’s not true. Government does not invest better than the private sector. So, we should not use government to do our investing for us.

Once again a pretty little theory destroyed by an ugly fact. Which is, of course, the point of using markets at this level of intellectual abstraction. To find out whether those ivory tower theories survive that first contact with the market - as Moltke pointed out, they don’t.