Chancing upon Lord Mandelson in the week before Christmas, I asked the business secretary if he could explain what the sense would be in diverting £1 billion or so in public funds to the bank account of Tata, the sprawling Indian conglomerate that owns Jaguar and Land Rover. I added, in the mistaken impression that I was being original, that with many of the world’s car companies conducting a similar exercise in special pleading, this was not so much a case of governments picking winners as losers picking governments.

In the engaging way that politicians have, Peter Mandelson urged me to read his most recent speech from which I could learn much. This would be his lecture on December 17 to the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA), entitled “A new industrial activism”. Having now read it, I could see why the business secretary had seemed amused: he began by criticising the industrial policy of the 1960s and 1970s: “where the government attempted to pick winners – or rather, where losers picked the government”.

Thereafter, however, he is skilfully imprecise about what his alternative industrial activism would mean. He describes its “essence” as “equipping people and companies to maxi-mise their potential, coherently and strategically. . . This will require not bigger government, but a smarter strategic government”. Sorry, I’m none the wiser – except I know that when people start justifying industrial bailouts on grounds of “strategy” this usually means it’s not a one-off. Or, as Derek Simp-son, joint general secretary of the Unite trade union, said: “What is being asked for from the government is not a handout, not a gift, it is access to strategic funding for a sector that is key to our economy’s global stature.” That’s right; it’s not just Jaguar Land Rover, it’s the whole automotive sector that is “strategic”.

The same argument is being put by the biggest domestically owned car companies in the United States: General Motors, Ford and Chrysler. The heads of those companies flew in three separate private jets from Detroit to Washington to impress upon Congress the desperation of their financial plight and the deserving nature of their cause. Congress, rightly, was not impressed, although it is certainly true that GM and Chrysler are perilously close to insolvency: GM revealed that it had negative shareholder equity of $60 billion at the end of the third quarter of 2008.

That, however, has and had nothing to do with the credit crunch. GM and Chrysler, in particular, have misjudged their markets for decades, producing mediocre products at an excessive cost and are now about to pay the price that all businesses must when that happens. The phrase “too big to fail” crops up time after time in this debate, most revealingly. If something is “too big to fail” then that means it has become too big – like the dinosaurs. What is certainly true is that the “too big to fail” brigade have always paid handsomely to woo legislators. They may be lousy businesses but they know how to produce political results.

This is the phenomenon known as corpo-ratism and it was dissected with particular brilliance more than 75 years ago by Ludwig von Mises in his essay The Myth of the Failure of Capitalism: “The theory that has been cobbled together says that these enterprises are too big to allow them to be managed simply in terms of their profitability . . . It is fortunate for those involved that the same theory then demands state intervention and support for those enterprises that are viewed as being too big to be allowed to go under.” In practice this means that companies insufficiently large or cartelised to have much political influence are forced to subsidise bloated enterprises with greater lobbying power.

You can see this at work in the decision sneaked out by the US Federal Reserve on Christmas Eve to recognise GM’s financing arm, GMAC, as a “bank”, thus making it eligible to receive the subventions hitherto given to, well, banks. GMAC’s chairman, one J Ezra Merkin, also happens to be head of a hedge fund which put all – repeat, all – of its investors’ cash into Bernard Madoff’s gargantuan Ponzi scheme. Of course Merkin was merely a dupe of his old friend Mr Madoff; but it is remarkable that the US authorities are so desperate to do GM’s bidding that they would enable the taxpayers’ billions to be handed over to J Ezra Merkin’s brand new “bank”.

It’s scarcely less incredible that the British government is indicating its willingness to help Tata to finance the activities of its recently acquired car production business in the UK. In the narrowest sense, Tata does have a problem: it acquired Jaguar and Land Rover from Ford six months ago, for $2.3 billion, financed by a bridging loan. Given what has happened in the car business since then, we can see that this was not exactly a well-timed acquisition – as many warned at the time. Yet in the last financial year Tata Motors alone made profits of 31 billion rupees – about £440m. Some of that is about to be invested in new sponsorship of the Ferrari Formula One team: hardly the behaviour of a company in dire straits.

If Tata is, as Mandelson’s ministry indicates, worthy of emergency financing by the British taxpayer, what would be the argument against answering similar pleas from GM-owned Vauxhall Motors? It will doubtless be argued that sexy Jaguar has a much better future than staid Vauxhall. Perhaps the civil servants should have a chat with Ford, which sunk no less than $10 billion into Jaguar in its 19 years of ownership without ever managing to make the operation profitable.

Land Rover was less of a disaster – in its last year under Ford’s ownership it made a significant profit although it certainly won’t do so this year. If the company fell into the hands of administrators, a new owner could definitely be found for Land Rover. If no buyer could be found for Jaguar, that would only confirm the wisdom of Ford’s decision to write off its $10 billion rather than continue.

There is undeniably a sentimental attachment to the Jaguar marque and it featured strongly in my childhood: my father bought no other car until he stood for parliament and decided that a Rover would be less irritating to electors. The sad truth is that Jaguar has not produced a saloon aesthetically worthy of the marque since the old S-Type in the mid1960s. Of course it would be dreadful for the 7,000 employees if the company ceased to exist, but that is not much more than a 10th of the number of jobs which have been shed so far in the British financial services industry, to general equanimity and even to ill-disguised pleasure in some quarters.

If there is no rational economic argument, still less a necessity, for the government to shovel taxpayers’ money into a loan to India’s biggest privately owned company, why should Mandelson – who as EU trade commissioner was cogent in his criticism of the competitive subsidy racket – be prepared to take such a step?

In the new business secretary’s RSA speech, he condemned the industrial policies of the 1960s and 1970s for “substituting the calculus of politics for commercial or economic reality”. Exactly the same could be said of the tactics behind Mandelson’s gavotte with Jaguar. Any “loan” will be principally designed to demonstrate that the government, unlike the Tories, is actually “doing something” (as if oppositions ever could); that it now has an industrial “strategy” to follow up the coup of its recapitalisation of the banks.

In fact, it would not constitute any sort of industrial strategy; but it definitely counts as political strategy – on which canvas Mandelson is a true artist.

dominic.lawson@sunday-times.co.uk

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