?How Far Was 20th Century British Relative Economic Decline An Avoidable Failure One of the most disappointing features of the British economy since the Second World War has been its failure to match the growth performance of the other advanced industrialised countries. This relative decline started in the late nineteenth century when a number of European countries began to outstrip Britain. Britain reconstructed her economy rapidly after the Second World War, and in the late 1940s was still a rich country in comparative terms. But from the early 1950s onwards Britain’s growth again tended to lag behind the other industrialised countries.On this occasion, however, it became a greater source of concern, as gradually one country after another overtook her.
The result was that by the late 1980s, Britain had fallen well down the international living standards league. The inevitable consequence was that Britain’s living standards fell behind those of the other advanced countries. If we take the six largest OECD countries, then in 1950 only the United States had a higher level of National Income per head. However, during the 1960s Britain was overtaken by both France and Germany. Then in the 1970s she was passed by Japan.In the late 1980s Britain was still slightly ahead of Italy, although the latter had narrowed the gap significantly over the post-war period.
Why then has Britain failed to match the growth performance of the other industrialised countries since 1945? There are two broad possibilities. The first is that Britain has had a low social capability. It refers to the ability of a country to exploit existing scientific and technological knowledge. It will be subject to a number of influences, ranging from a country’s education system to the quality of its management.
The other possibility, which we consider now, is that Britain has had a low growth potential. Thus Britain, it is argued, has not been able to grow as quickly as countries such as France, Germany and Japan, because she industrialised much earlier and this left her at a disadvantage. There are a number of ways in which this might have happened.
First, an early start might have encouraged Britain to specialise in industries with a relatively poor growth potential. At this time Britain had a heavy dependence upon the nineteenth century staple industries, such as cotton and coal, whose long-term growth prospects were by then relatively poor.She was much less involved with the new industries of the second industrial revolution, such as electrical goods and man-made fibres, whose prospects were much better. This structural explanation, however, is less compelling for the post-war period. The reason is simply that during the war it was deliberate government policy to shift resources out of the staples into the essential wartime industries.
As the latter, like electronics and aerospace, had good growth prospects, Britain emerged from the war with a fairly favourable industrial mix. A second possibility is that an early start left Britain with a small agricultural sector.This reduced her capacity to shift resources into the manufacturing and service sectors, in which productivity levels tend to be higher. In other words, Britain had fewer opportunities to grow simply by reallocating her labour. The third possibility is that Britain’s early start left her with fewer opportunities to ‘catch-up’.
This explanation is based on the observation that countries which are relatively backward are able to grow quickly, because they have greater opportunities to imitate production and organisation methods already developed elsewhere.It appears then that only a part of Britain’s economic decline was due to her early start. This implies, therefore, that Britain has also had a relatively low social capability. What are the reasons for this then? The first is that it has been due to the industrial relations system, especially trade union attitudes to technological change and work practices. In Britain, these early trade unions represented craft workers, whose aim was to protect their economic position by restricting entry into the trade and controlling manning levels.Furthermore, as these craft unions came to dominate the ethos of the trade union movement at the end of the nineteenth century, British labour became preoccupied with controlling work practices. The consequences have been restrictive labour practices, overmanning and, in as much as these adversely influenced profitability, low investment. There is some empirical evidence to support this claim.
Business histories suggest that in some industries, such as shipbuilding and car manufacture in the 1960s and 1970s, there was a substantial degree of overmanning with productivity levels well below overseas standards.This leads to a second possible reason – that relative decline was a consequence of poor quality management. The origins of the problem are again related to Britain’s economic modernisation. This was a long drawn out process, in which the industrial classes were gradually absorbed into the establishment. British management lost its sense of enterprise, while the best potential managers tended to move into more prestigious areas.
Studies from the 1950s suggest that the profitability of British multi-national corporations was lower than American ones, which operated in identical markets.Furthermore, evidence from the 1960s suggests that a relatively high proportion of British management was promoted from the shop floor. Whilst the opportunities for such promotion must have provided positive incentives, this could also have been taken to indicate that British management had narrow horizons and limited commercial experience. This leads to a third claim, Britain’s decline has been due to an underinvestment in high quality education.This argument was fashionable in the late nineteenth century, and has been resurrected in recent years, as international studies increasingly point to a link between education and economic performance. Comparative data for the 1960s and 1970s suggests that the proportion entering higher education was lower in Britain than in most other industrial countries.
The remaining possibility relates to the financial system, it is argued has sometimes failed to channel investment funds into areas with the best growth prospects. On the face of it this may seem surprising, because Britain has had a highly sophisticated financial system.Sophistication, however, is not always an advantage.
A good illustration of this was Britain’s banks. These developed in the eighteenth and nineteenth centuries, when financial crises were common and industry’s demands for finance were largely short-term. The inevitable consequence was that the banks adopted highly prudent, if conservative, lending practices. Similarly, Britain developed one of the most extensive and efficient stock markets in the world, which has provided an effective means of raising capital, at least for large firms.Nevertheless, the Stock Market has not always worked to Britain’s advantage, because from the 1950s the market supported increasing levels of take-over activity. This has had some positive effects, the risk of take-over has tended to keep management on its mettle.
Yet it has also encouraged management to become preoccupied with its short-term profits, as a means of maintaining a high share price. This, in turn, may have discouraged investment in activities such as R&D, and training, where the returns are long-term, but which can influence growth performance.The conclusion so far then is that Britain’s economic decline has been a consequence of a low growth potential, especially in the early years, coupled with a low social capability. However, we also need to explore the government aspects. The reforms pursued by the Conservatives after 1979 and largely accepted subsequently by New Labour have improved the incentive structures facing firms and workers and imply that growth performance has been better than would have been expected under a continuation of the policies of the 1970s.Although there has been a growth payoff to these reforms, for those whose main concern is with the distribution of income, the overall outcome might be regarded as negative since income inequality has risen sharply, largely as a result of changes in taxation and benefits policy that have been pro-growth.
Britain’s relative economic decline has resulted from weak productivity performance rather than simply from low investment. A relatively weak capacity for innovation and for making effective use of technological change have been at the heart of disappointing British growth.