“The NWF is not a conventional sovereign wealth fund that invests wealth generated from natural resources to benefit future generations. Therefore its name, the National Wealth Fund, could be misleading.”
Commons Treasury Select Committee report on the National Wealth Fund
I have long admired Mark Carney, now Prime Minister of Canada, although not for his libertarianism. He is a brilliant communicator - perhaps better even than David Cameron - presenting as what he is: a statesman of extraordinary skill and talent.
I watched and scrutinised Mark close up over years when he was Governor of the Bank of England and I was on the Treasury Select Committee. He is a brilliant man and exceptionally difficult to argue with.
Unfortunately, many of the things he holds to be true are quite wrong. See for example the following two accounts of a wealth fund proposed for Canada in the context of the UK’s failing one which he helped inspire:
The study reports that the National Wealth Fund’s losses have nearly doubled since the 2024 rebranding, reaching £152.2 million (C$288 million) last year. It has delivered a cumulative return of minus 24.9 per cent in two years of operation. It has also fallen short of the three-to-one private-to-public funding ratio it promised Britons.
And via Borrowed Wealth: How the Canada Strong Fund Repeats Other Countries’ Mistakes (IEDM):
A sovereign wealth fund saves a surplus. Norway banks excess oil revenue, invests it abroad at arm’s length, and caps by law what any government may withdraw. The Canada Strong Fund, in contrast, has no surplus to save. Its capital will be borrowed and its deployment directed toward sectors chosen in Ottawa.
In encouraging these schemes, doubtless Mark Carney means well. Given that such a talented man remains willing to back such inevitable and egregious failure, the institutional factors at work deserve a close look: he is no fool.
More of the same?
The Canada Strong Fund is described as a sovereign wealth fund but it is built on borrowed money, not surplus funds from national resources. It is the opposite of Norway’s often-cited model.
The critique from IEDM makes the point that it is a state lending bank branded as a wealth fund. Real capital will not be allocated by entrepreneurs and investors motivated by profit and loss: taxpayer-backed debt will be allocated by politicians and officials at the centre of government.
That National Post article points out the link to the UK’s National Wealth Fund (NWF). As the Treasury Select Committee found, the NWF is financed by government debt, not revenues from resources. Neither the Fund’s performance metrics nor risk appetite are clear. How and by whom the NWF will be evaluated is not known. A risk of crowding out private investment is understood…
Prime Minister Carney’s fingerprints are on both. And there’s a common story: Net Zero investment, bromides about mobilising private capital, “crowding in” and so on. What is going on?
The central insight: two ways to operate
In Bureaucracy, Mises argued that there are two categories of organisation of human cooperation: either prices, profit and loss or bureaucratic management apart from those disciplines, governed by rules from a higher authority. Instead of allowing those who purchase or refrain from purchasing to decide ultimately how capital is allocated, decisions are made through official and political preferences.
This is at the heart of the issue: state enterprises like the National Wealth Fund and Canada Strong Fund want the cloak of profit-seeking investment but they are institutionally rule bound and bureaucratic. They simply do not operate under the incentives of the market economy, even as they operate within it.
This is not a problem of the good faith or intelligence of politicians and officials: it is a structural issue. Without economic calculation resting on freely-chosen market prices, it is impossible to know how well resources are being used. That is what profit and loss are for: without them, institutions are bound to revert to rule-following, misallocation and expansion in the face of failure.
The evidence of history
This is not a matter merely of theory. David Myddelton’s book They Meant Well reviews six large state-directed projects: the R.101 airship, the groundnut scheme, nuclear power, Concorde, the Channel Tunnel and the Millennium Dome. Every project began with confident expectations of national benefit and ended in vast cost overruns: they were not value for money.
And now we can add another notorious failure to the list: HS2. The failure of that project was easy to foresee given the above theory and history. Alas the old pattern repeated: political consensus around lofty ambition without a serious look at incentives. Once again, when politicians and officials direct projects through rule following, they inevitably lack the discipline of profit and loss and failure is not self-correcting. Political prestige, taxpayer funding and sunk-cost thinking keep failing projects going long after private investors would have closed them down.
And of course, for the poor taxpayer, groaning under the overall weight of taxation, the cost to them of an individual government project is not so large as to secure their attention. These “dispersed costs” enable failure to drag on beyond reason: it is when costs are concentrated on individuals and firms that they pay attention and take action.
Conclusion
These so-called wealth funds are not new: they are state direction of scarce resources using structures of incentives which are bound to produce failure. Cloaking them with the language of markets – or indeed wealth funds provided for out of real resources – cannot make them work.
Mark Carney – like so many on the liberal left – is right that the UK and Canada have investment gaps and he is right to believe in markets, in so far as he does. Where he and every other believer in these schemes goes wrong is the ancient conceit that an elite can plan our lives better than we ourselves.
What is needed is not bureaucratic direction of scarce resources and effort, however well intentioned. What is needed is humility about the capacity of individuals and institutions to know how best to serve others and so choose prices, profit and loss, competition on the merits and the sovereignty of the consumer over direction by authority.
Perhaps private capital is cautious. We ought to ask why. I would begin by citing regulatory risk, high and uncertain taxes and intolerable constraints on private property applied through land use planning. The brilliance of an undoubted statesman is not sufficient to conquer those: a change of direction is urgently required.
Hi Steve. I'll take your word for it that Carney is indeed a brilliant guy.
However, as your article is strongly hinting, we have all had more than enough of brilliant people.
...and "...bureaucratic management apart from those disciplines, governed by rules from a higher authority..." Trouble with that is in a world of unaccountable quangos these technocratic managerialist bureaucracies are free, nay encouraged by responsibility avoiding politicians, to set their own rules. There is no 'higher authority'. And their 'incentives' are clear. Keep the gravy train going. The trade-offs, in respect to the bureaucrats, is do that or they lose their reason to be.