The Mansion House speech in October 2024 covered some big ideas.

The general theme was that through asset consolidation, and some government direction on how those assets are invested, that "growth", "innovation", and a more “dynamic" and “competitive" economy can be achieved.

Admirable aims, but are they achievable?

The main problem is the misunderstanding around how wealth is created and the negative consequences of artificially stimulating economic activity.

Could these well laid plans could come back to haunt Labour? Let’s look at how…

1.          The National Wealth Fund and The British Growth Partnership are to be tasked with "crowding in" private sector investment to certain projects by providing subsidies or guarantees. However, “crowding in” is a myth because ultimately society has access to certain resources (e.g. people, time, commodities) which if used for one project can’t be used for another project. Therefore, whilst we can see the new government-built bridge, we can’t see the building that would have otherwise been built with the same resources. This was described by Frederic Bastiat in 1850 in his essay “That which is seen, and that which is unseen”.

2.          Lots of consolidation is planned for the LGPS and DC trusts which assumes that bigger is better and that the government can plan investment better. Whilst the government can sometimes get lucky, the complexity of our society and economy means that it’s impossible to successfully centrally plan for any significant length of time. This is because in a free-market economy prices emerge from voluntary exchanges between buyers and sellers. These prices contain information about supply and demand, resource scarcity, and consumer preferences. These price signals are critical to enable entrepreneurs to plan what goods and services to produce/provide in anticipation of them being bought by the consumer.

However, where the government directs (i.e. forces with no direct personal cost) investment decisions there are no voluntary prices determined. There is therefore no reliable price information for the government or anyone else to efficiently plan the allocation of the available resources. An example of this is the wine lakes and butter mountains in the 1970s created by European Union subsidies/intervention at the time, and elsewhere in the economy there would have been shortages where those resources could otherwise have been more productively used. This problem was described in Ludwig von Mises’ article "Economic Calculation in the Socialist Commonwealth" in 1920.

3.          Many of the planned actions could loosen capital restrictions for banks/businesses as there seems to be pressure on various government agencies to target “growth”. But this will be misdirected temporary growth achieved by increasing the amount of money in the economy and encouraging artificial risk taking. This intention to (mis)allocate resources is highlighted through references to a "partnership with the industry", "a more proactive approach to working with investors to ensure that capital is directed to the UK's biggest growth opportunities", and "a ten-year [centrally planned] infrastructure strategy". So, the economy could look healthy on the surface until the gap between how resources have been allocated and consumers’ underlying preferences for how those resources should be allocated becomes unsustainable. That’s when the boom turns into a bust, unwinding (and wasting) those misallocated resources and causing pain to those who were tricked into making bad decisions by reading the artificial price signals. There is much more depth to the Austrian Business Cycle Theory that was originally developed by Mises and Hayek in the 1920s.

4.          The fragile complexity of creating wealth is often underestimated. An illustrative essay was written by Leonard Read in 1958: "I, Pencil". It explains that no one person or company can make a modern pencil from basic resources, and it needs a complex supply chain to make “just” a pencil (e.g. wood, paint, graphite, metal, rubber, glue) plus the indirect supply chain that makes the tools to create those components (e.g the saw that cuts down the tree and the transport to bring the components together). This essay urges humility from central planners who can’t make a pencil but claim to be able to improve a much more complex society through top-down decision-making.

There were lots of nice sounding words in Rachel Reeves’ Mansion House speech, but the most likely outcome is an artificial boom followed by the inevitable bust - wasted resources meaning that living standards will be lower than they would otherwise be and hurting the poorest in society the most. In other words, it’s arguably bad for both the environment and society. So, maybe we should be asking: if ESG investors should boycott government bonds and projects?

Sam Roberts – Director of Investment Consulting at Cartwright