Future of Conservatism Series, Part VI: Seeing the World as It Is

Sean Speer and Sam Duncan
May 16, 2020
What does conservatism do, above all? It works. In the great debate about whether Canada’s federal Conservative Party should be defined by libertarians, populists, free traders, Harperites or Red Tories (new or old-style), it bears keeping in mind that Conservatives above all need to craft a party that, if elected, can make the country work. Sean Speer and Sam Duncan argue that the world has changed beneath our feet, so much that the post-Cold War order itself is fading into history. If Canada is to thrive and grow, our nation must adapt, and if they are to lead the way, Conservatives must eschew dogma and see the world as it really is.

Future of Conservatism Series, Part VI: Seeing the World as It Is

Sean Speer and Sam Duncan
May 16, 2020
What does conservatism do, above all? It works. In the great debate about whether Canada’s federal Conservative Party should be defined by libertarians, populists, free traders, Harperites or Red Tories (new or old-style), it bears keeping in mind that Conservatives above all need to craft a party that, if elected, can make the country work. Sean Speer and Sam Duncan argue that the world has changed beneath our feet, so much that the post-Cold War order itself is fading into history. If Canada is to thrive and grow, our nation must adapt, and if they are to lead the way, Conservatives must eschew dogma and see the world as it really is.
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Last year a major conference of conservative intellectuals and public figures including J.D. Vance, Peter Thiel, and Tucker Carlson generated considerable buzz in Washington. Characterized as an intra-discussion about the so-called “crisis of conservatism”, the conference featured heterodox thinking on culture, foreign policy, nationalism, and various other topics. One of the most unconventional areas though was economic policy. Two thirds of the attendees affirmed the resolution: “America needs an industrial policy.”

The post-Cold War global order is dying, likely to be replaced by a winner-take-all world.

 The basic premise here is that the United States should pursue a new, more activist economic programme that places a greater emphasis on the interrelationship between economics and geopolitics and the importance of cultivating key strategic sectors and industrial capacities. This is obviously a far cry from the free-market orthodoxy that conservatives have broadly subscribed to (though not necessarily faithfully implemented) for the better part of 30 years. But there is evidence that its intellectual and political resonance is growing. And the Covid-19 pandemic has only reinforced and accelerated this trend in conservative policy thinking.  

Prominent Republican senators Josh Hawley (Missouri), Marco Rubio (Florida), and Tom Cotton (Arkansas) have become the political leaders of this movement. Public intellectuals such as Oren Cass, Michael Lind, and Samuel Hammond (who is Canadian) have contributed the theoretical and empirical foundations. There is a strong likelihood that this perspective will persist irrespective of whether President Trump wins re-election.

Why is industrial policy gaining renewed interest? What does it mean for Canada? And how should Canadian conservatives think about it?

Advocates of a new industrial strategy: (top l-r) Republican senators Josh Hawley (Missouri), Marco Rubio (Florida), and Tom Cotton (Arkansas) and (bottom l-r) foundational intellects Oren Cass, Michael Lind, and Samuel Hammond.
Advocates of a new industrial strategy: (top l-r) Republican senators Josh Hawley (Missouri), Marco Rubio (Florida), and Tom Cotton (Arkansas) and (bottom l-r) foundational intellects Oren Cass, Michael Lind, and Samuel Hammond.

The case for a new form of industrial strategy is increasingly justified due to the confluence of two recent developments. One is the rise of the intangibles economy, driven by intellectual property, data, and software, which has unique features and characteristics that distinguish it from what one might call the production economy. The other is the heightened geopolitical competition between the United States and China. The intensifying interplay of these two vast (and conceptually unrelated) trends – between technology and geopolitics – amounts to a renewal of political economy. Lind has called it “the return of geo-economics.”

This is placing strains on conventional economic policymaking, which is based on the post-Cold War order of open markets, global cooperation and dispute resolution through liberal international institutions. This view increasingly fails to fully account for the “winner-take-all” character of intangibles capital and the extent to which it is reinforcing geopolitical rivalry. There is a good case that conservatives need to adjust their economic policy framework accordingly.

The same goes for Canada. The case may even be stronger here due to our smaller market size and greater vulnerability to the U.S.-China rivalry and how it manifests itself in supply chain disruption, market access challenges, and economic nationalism more generally. A new industrial strategy for Canada as it is conceived and advanced here would not mean a surrender to dirigisme. It is above all an expression of economic realism. It is a recognition that Canada will need to cultivate scale in certain strategic sectors and technologies if it is to compete in the new geo-economic environment. 

And, in our view, it ought to be something that Conservatives (and conservatives) champion as part of a renewed programme for economic growth and opportunity in our country. It is tailor-made for a Conservative Party leadership candidate to make the animating idea of his or her leadership campaign and, following that, central to the party’s effort to differentiate itself from the other parties in a federal election campaign, and ultimately to inform and shape a pro-growth governing agenda.

Conservative Realism 

Realism is part of the conservative DNA. Conservatism has always been at its core a rejection of abstraction and utopianism in favour of the practical and the prudent. Russell Kirk famously described it as the “negation of ideology.” 

Conservatism is best understood as a political persuasion that aims to see the world as it is rather than a universalized theory to which the world is expected to conform. It is instead the accumulation of historical wisdom about human nature, the limits of perfectibility, and so on, that can be applied in practical ways to new circumstances or conditions. One might describe it as a “living tradition” that is refined, adjusted, and reshaped for a particular moment or place. 

This emphasis on practicality and particularism is what our old boss, former Prime Minister Stephen Harper, had in mind when he observed that “Conservatism is successful over time because conservatism works.” He was conveying that conservatism is ultimately about applying collected insights and principles to emerging issues. The principles are fixed but the issues are necessarily dynamic. 

The “stagflation” crisis of the 1970s is a good example. Conservatives recognized that various forms of government overreach – including high levels of state ownership, burdensome regulation, punitive taxation, and large-scale deficit spending – were causing simultaneous economic stagnation and inflation. The right response was to roll back the state to free up resources, improve economic incentives, and generally reduce the role of the state in the economy. 

This agenda, which was implemented and came to be personified in Margaret Thatcher and Ronald Reagan, was deeply infused with conservative ideas but was not an exercise in dogmatism. It set out to apply conservative insights and principles to a specific set of challenges facing Western societies. It was, as one of us has written, “an inherently problem-solving project.” 

Ronald Reagan and Margaret Thatcher personified the successful conservative response to the declinism of the 1970s. Harper governed near the end of the post-Cold War era. Today brings new challenges.
Ronald Reagan and Margaret Thatcher personified the successful conservative response to the declinism of the 1970s. Harper governed near the end of the post-Cold War era. Today brings new challenges.

We are now confronted by a new set of challenges. The main problem today is the interplay between the unique features and characteristics of intangible capital and the new geopolitics. It is our view that the confluence of these issues is sufficiently new and different that it will require Conservatives (and conservatives) to adjust our basic policy framework. 

We do not come to this conclusion lightly. We are as skeptical as other conservatives about “presentism” – the notion that “everything has changed” and past ideas need to be discarded to confront contemporary challenges. Yet the evidence seems clear to us that our current thinking about markets, globalized trade, and the role of government do not fully apply to the twin forces of intangible capital and the rise of China. It would be wrong, as one of us has written, to throw Friedrich Hayek and Milton Friedman out with the bathwater. But Conservatives must also be prepared to adjust our thinking and policy agenda to remain rooted in conservative realism. Not doing so would amount to a form of dogmatism, something conservatives have rightly tended to reject. 

Intangibles Capital 

What is the intangibles economy? The term refers to an economy that is steadily less driven by tangible assets such as plants, machinery, and equipment and more by intangible assets such as intellectual property, data, and software. Former British Conservative policy adviser Stian Westlake and his co-author, Jonathan Westlake, referred to this new asset mix as “capitalism without capital” in their award-winning book of the same title in 2017. 

Intangible assets are becoming a greater source of investment and economic value in modern society. Just consider, for instance, that annual Canadian investment in data alone has grown by more than 40 percent since 2005, while investment in machinery and equipment has only increased by 8 percent. The transition to the intangibles economy is even more significant in the U.S. where these assets have gone from 16 percent of the value of the S&P 500 in 1976 to 91 percent in 2019. 

The rise of the intangibles economy is most evident in market capitalization and equity markets. Here in Canada, Shopify, an online retail firm, recently supplanted the Royal Bank as the country’s largest publicly-traded company. And in the U.S., five intangibles-based companies – Microsoft, Apple, Amazon, Google, and Facebook – now account for more than 20 percent of the S&P 500’s market capitalization. 

It is important to recognize that the rise of the intangibles economy and its distinct features and characteristics is not unique to particular sectors or parts of the economy. We are witnessing the growing importance of intangible assets even among so-called “traditional sectors.” John Deere, for instance, is transforming its business model from purely a traditional manufacturer of farm implements into a data management company that it claims will “revolutionize farming.” Suncor Inc. similarly has a new partnership with Microsoft to harness cloud computing and artificial intelligence to realize efficiencies and reduce climate emissions in its oil sands projects. More generally, data, proprietary algorithms, and other forms of intangible assets are reshaping traditional sectors as much as they are creating new ones.

Speer - Inset 4
Rise of the intangibles economy: Canadian market leader Shopify, and John Deere’s metamorphosis from tractor builder to data management company.
Rise of the intangibles economy: Canadian market leader Shopify, and John Deere’s metamorphosis from tractor builder to data management company.

These trends are important because, as others have documented, intangible capital has unique characteristics and features relative to physical assets. The biggest may be its scalability at close to zero marginal cost. Think of data, for instance. A single dataset can fuel multiple algorithms, analytics and applications, and so the data owner operates with minimal costs and with a much greater chance of dominating a market. It can become highly challenging for competitors to gain a foothold or eventually catch up. 

The result is a tendency towards what has been described as a “winner-take-all” paradigm. This has unique economic and geopolitical consequences relative to traditional industrial models. The production economy, which is the basis for our theories of economic growth and comparative advantage, tends towards mutually beneficial exchange and, in turn, encourages global cooperation. The intangible economy, by contrast, tends towards monopolistic outcomes and, in turn, accentuates geopolitical competition. The West’s assumption that China would passively accept the rise of Western-controlled intangible capital while contenting itself to remain rooted in the production economy proved a huge mistake. China’s own view turned out to be rather the opposite.

Geopolitical Competition

The interplay between the rise of intangible capital and the U.S.-China rivalry is reshaping the technological and geopolitical landscape. The zero-sum dynamic of the intangibles economy is hastening a profound struggle for global dominance in these new forms of economic value. That these technologies typically have dual commercial and military or national security purposes has only intensified the competition. 

The Trump Administration’s National Security Statement has described it as the renewal of “great power competition.” U.S. Vice President Mike Pence has called it a battle for the “commanding heights of the 21st century economy.” And the Covid-19 crisis is only accelerating these trends. It is, according to journalist Fareed Zakaria, shifting the U.S.-China technological competition from a “soft rivalry” to a hard rivalry.”

The evidence is hard to dismiss. China’s “Made in China 2025” policy statement is both highly ambitious and nationalistic. It not only aims to develop comparative advantages in key sectors and technologies such as artificial intelligence, aerospace, and biopharma, it targets raising domestic content of core components and materials to 40 percent by this year and 70 percent by 2025. This amounts to a hardened agenda of technological mercantilism in industries with major economic and national security implications. 

The global pandemic has exposed the negative consequences of our dependency on China for pharmaceutical inputs and medical devices. The vulnerabilities exposed in this particular crisis have, in turn, become a touchstone for the entire relationship, causing reflection over supply chains ranging from rare earth metals to components and materials whose sudden absence in a future crisis could bring entire industries to a halt.

New Cold War? The Covid-19 pandemic is driving reconstruction of supply chains, especially in the U.S. Here, President Donald Trump tours the Honeywell production facility in Arizona, making face masks.

U.S. policymakers are responding with renewed calls for their own domestic industrial policies to match Chinese ambitions. Senator Rubio in particular has argued such a case. In a high-profile speech in December 2019, he called for a “21st-century pro-American industrial policy” to maintain a technological advantage over the Chinese in strategic sectors. As mentioned, the Covid-19 crisis is exacerbating this trend. Even traditional libertarian voices such as former House Speaker Paul Ryan have come to recognize the risks associated with supply chain dependence on China and the consequences for national security.

How these nascent political developments manifest themselves is too early to say. It is reasonable to expect that we will see a deliberate policy effort to repatriate U.S. supply chains from China in the aftermath of the current crisis. But even Senator Cotton, who has consistently been the Senate’s leading China hawk, concedes that full decoupling is improbable. As he wrote in a recent essay for a new, pro-industrial-policy think-tank called American Compass:

Cold War One [between the U.S. and the Soviet Union] could be thought of as an arms race, featuring two contestants running in separate lanes, striving for the finish line. Cold War Two [between the U.S. and China] will be more akin to a wrestling match, its contestants tangled up, seeking to exploit their leverage over each other, and straining, ultimately, to force the other to the mat.

One thing seems clear, though: the United States is poised to adopt a more nationalistic industrial policy model with measures likely to include greater public-private partnership in industrial research, more managed trade, more active foreign investment restrictions, more domestic procurement preferences, and much stronger emphasis on domestic intellectual property protection and commercialization. 

Other countries are observing these trends keenly. The European Union, the United Kingdom, and others are responding to these technological and geopolitical changes by shifting from a mostly laissez-faire approach to a regional and national interest-driven model focused on key sectors and technologies based on national priorities and competitive advantages. 

Industrial Policy

It seems clear to us that Canada must be prepared to recognize and assert its economic interests. We cannot count on others to do it for us. This is starting to register among the Canadian political class. But the focus thus far is mostly defensive. Several politicians, for instance, have spoken about the need to establish a domestic capacity to produce personal protective equipment. Others have lamented Canada’s economic dependence on China and called for greater “self-reliance” or “economic sovereignty” more generally.  

These ideas may be amply justified in light of the Covid-19 crisis. But they do not seem a proportionate response to the structural and longer-term forces that were manifesting themselves prior to the current crisis.

We are of the view that conservative realism points toward an industrial strategy for the new age of geo-economics. In particular, we see a role for public policy to cultivate capacity and scale in key sectors, sub-sectors and technologies where Canada has pre-existing comparative advantages and can come to have influence in global supply chains.

Homegrown advantage, global reach: Switzerland’s Novartis is an industrial-policy success story and something for Canada to study.

We emphasize scale on purpose. Intangible capital has dramatically increased the returns to scale. Yet Canada’s economy, due primarily to its smaller market size, has too few firms of a global scale. This is evidenced by Canada’s mediocre performance on intellectual property and commercialization. We cannot continue on this dismal track if Canadians are going to fully participate in the intangibles economy and benefit from the huge returns it produces. There is a role for public policy to create a “homegrown advantage” for domestic firms in order to help them reach a scale that they can participate in global supply chains and compete for global market share.

We have done it before, and a good historical example is canola. It is a Canadian agricultural invention that originally involved a combination of public support for research and development, university researchers in Western Canada, and private-sector firms. It is now one of the world’s most important oilseed crops and Canada represents nearly two-thirds of global exports. 

A Canadian industrial strategy would aim to cultivate similar “made-in-Canada” innovations where we can develop domestic firms and technologies at scale. It would not be about conjuring magical new industries out of thin air or expecting Canadian firms to compete in areas where other countries are clearly dominant. It would be clear-eyed about where Canada can reasonably expect to build a competitive foothold and target scarce resources there. Energy and agriculture are two obvious examples. Mining and metals, aerospace, and financial services might be others. The key would be to assess industrial potential based on metrics such as exports, patents, global market share, high growth potential, and so on. 

This would not be merely about public spending, either. It would come to influence a wide range of public policies including programmatic and regulation design, trade negotiations, foreign investment reviews, procurement, and so on. The key would be to recognize that governing is, by default, about choosing and that Canadian policymakers should in turn tilt the country’s policy framework in favour of high-value, strategic parts of the economy with growth potential.

Speer - Inset 8 (above)
Canada should seek to build upon strategic sectors such as bio-agriculture and energy.
Canada should seek to build upon strategic sectors such as bio-agriculture and energy.

It is important to emphasize here that this is by no means about commandeering the market. The innovation and commercialization processes would still be decentralized and subject to market forces. The canola case is a good example here as well. The intellectual property and financial returns rested fully with commercial interests. But it involved recognizing that government policy is a precursor to market exchange, that it is unavoidable for the state to preference certain market outcomes over others, and that public policy should prioritize those parts of the economy where we can drive productivity and economic growth. 

Think of a free trade negotiation, for instance. The balancing of so-called “offensive” and “defensive” interests necessarily involves prioritizing some economic or industrial objectives over others. The same dynamic applies to other areas of policymaking. An industrial strategy merely recognizes this reality and aims to bring greater coherence and intentionality to these choices. There is nothing incompatible with a commitment to markets or free enterprise. It amounts to a clarion call for a greater policy focus on economic growth, productivity, and innovation.

Calling for a new industrial strategy will nevertheless face criticism from some libertarian quarters. One of us has already been accused of dabbling in neo-Marxism. This line of argument has theoretical and empirical flaws.

The theoretical problem is it is not rooted in conservative thought which, as discussed earlier, is about seeing the world as it is. There is considerable evidence that “there is something fundamentally different about intangible investment” and that it requires us to rethink our policy assumptions. Even Arnold Kling, who has been affiliated with libertarian organizations such as the Cato Institute and Mercatus Center, has observed that trying to stuff the square peg of intangible investment into the round hole of neoclassical capital theory turns out to be an effort with a low benefit-cost ratio.” It is not that past conservative thinking about markets and government is wrong. It is just that it no longer fully explains the economic and geopolitical conditions in which we find ourselves.

The empirical point is that Canadian governments currently spend billions of dollars annually on different firms and sectors. And that does not even account for the wide range of non-fiscal ways in which the state intervenes in the market. The questions, then, are not whether public policy ought to tilt in the direction of certain market outcomes, but rather which outcomes it ought to target and what would be the most efficient and least distortionary means of doing so.

Playing the regional game: Minister of Innovation, Science, and Economic Development Navdeep Bains doles out federal pork to five Supercluster Initiative winners last year.

Some concerns about an industrial strategy are certainly justified. We recognize the risks of rent-seeking, inefficiencies, and distortions. A major risk, for instance, is the tendency of our bureaucratic and political systems to allocate scarce resources based on regional considerations. The Trudeau government’s Superclusters Initiative is a good (or bad) example. It was supposed to be a hard-headed exercise in identifying Canada’s industrial strengths wherever they might actually be situated.  And, yet, the projects that were ultimately approved were still distributed equally across the regions. 

Achieving the correct design of an industrial strategy will thus be critical to minimize these risks. It will require a clear and transparent process and ultimately a high degree of political discipline. But even then the expectation of zero distortions seems unreasonable. It is ultimately a matter of trade-offs. And we have come to accept that the interplay of the intangibles economy and the U.S.-China geopolitical competition has delivered such significant shocks to Canada’s economy that the risks are justified. 

One penultimate point: it cannot be emphasized enough that the Western world seems poised to head in this direction in the coming weeks and months. The evidence from the U.S., U.K., and elsewhere is compelling. We are likely to enter a renewed era of “national developmentalism” and Canadian policymakers will need to be hyper-focused on protecting and advancing Canada’s economic interests.

This will be especially important as U.S. policymakers move to repatriate supply chains from China. Canada competes with the U.S. for investment and jobs. As the U.S. moves to boost manufacturing in particular and industrial capacity in general, Canadian policy will need to adapt its tools or we will risk shedding more jobs and capital to competing U.S. states. Economic realism will be a crucial ingredient to how Canadian policymakers respond to these new and evolving pressures. 

What does all of this mean for Canadian Conservatives?

The Conservative Party is starting to grapple with some of these big questions in its leadership campaign. The candidates have rightly committed, for instance, to exclude Huawei from participating in Canada’s 5G network. But before the global pandemic there had been only limited debate about the broader set of ideas and policies that ought to animate the party. The Covid-19 crisis should sharpen the candidates’ thinking.

Speer - Inset 11 (above)
Rejecting Huawei from Canada's 5G network is one step, but the final four federal Conservative leadership candidates, (l-r) Peter MacKay, Erin O’Toole, Leslyn Lewis, and Derek Sloan, should make the case for strong economic growth and opportunity.
Rejecting Huawei from Canada's 5G network is one step, but the final four federal Conservative leadership candidates, (l-r) Peter MacKay, Erin O’Toole, Leslyn Lewis, and Derek Sloan, should make the case for strong economic growth and opportunity.

The pandemic’s economic fallout is likely to dominate our politics for the foreseeable future. The impetus for economic growth has never been stronger. Canada’s rate of economic growth over the medium- and long-term will not only determine whether our public finances are sustainable, but will also be a crucial ingredient for broad-based jobs and opportunity. Economic growth and higher rates of productivity must therefore be the overriding priority. This will also be a key area for political differentiation between the Conservative Party and Liberal Party, whose agenda has become increasingly preoccupied with carving up the economic pie rather than enlarging it. 

The Conservative Party should commit itself to an industrial policy framework as part of a renewed programme of economic growth and opportunity. It would not only distinguish the Conservatives from the growing redistributionism of their left-wing opponents, it would better position Canada to navigate the new interplay between the intangibles economy and the U.S.-China geopolitical competition that seems certain to mark the coming years. The new geo-economics are reshaping the economic and geopolitical landscape. Conservative (and conservative) thinking needs to adapt accordingly.

Sean Speer is an assistant professor at the University of Toronto’s Munk School of Global Affairs and Public Policy, a fellow-in-residence at the Public Policy Forum and co-author of New North Star II: A Challenge-Driven Industrial Strategy for Canada. Sam Duncan is a Vice President of Wellington Advocacy and the former Executive Director of Policy to Ontario Premier Doug Ford.

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