Lecture 3: the British Economy, 1870-1939: Performance and Policy, Page 8 of 8

Lecture 3: The British economy, 1870-1939: performance and policy, page 8 of 8

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Contemporary Britain

Lecture 2: The British economy, 1870-1939: performance and policy[1]

1. INTRODUCTION

In a recent major revisionist account of modern British history (Clarke 1996, p. 3) the observation is made that as the century draws to a close all confidence has evaporated that in Britain’s twentieth-century history there might be anything to celebrate and instead it ‘threatens to become a history of decline, centred on the question: where did it go wrong?’ In this ‘history as tragedy’, fin de siècle concerns and post-modern angst are clearly detectable, but above all this pessimistic version of contemporary British history is dominated by the notion of long-term decline deriving from endemic and manifold economic weakness.

If we assume for the present that those who profess to understand the causes of decline are engaged in a contest to acquire power to avert further decline it is a simple step to appreciate that the study of the British economy between 1870 and 1939 is often reduced to merely the search for salvation through identification of the appropriate agency/group – or, typically, scapegoat(s) - responsible for that decline. Our purpose in this introductory lecture will be broader but we must be mindful of this dominant strand of both contemporary historical debate about, and the historiography on, the British economy.

2. ORGANISATION OF THIS LECTURE AND RECOMMENDED INTRO-DUCTORY READING

Organisation and content

This lecture divides into three parts:

· the first surveys the principal questions that should be asked of British economic performance between 1870 and 1939 (in truth a rather artificial periodisation forced upon us by the dictates of modularisation);

· the second examines economic policy over this period, which inevitably raises bigger questions about the role of government; and

· the third suggests some interim conclusions and flags some points that you ought to bear in mind when examining topics which are considered to be political or social history but for which the economic background is vital for a full understanding.

Reading

All of the themes discussed today are explored in my textbook Government versus the market (Middleton 1996) but this may be a bit intimidating for those without some background in economics and economic history. Thus, on the economic performance side I would recommend as preliminary reading the economic chapters in Johnson’s Twentieth-century Britain (1994), while on the policy side Tomlinson’s two studies (1990; 1994) are accessible to non-specialists although both have little on the first thirty years of our period. Green and Whiting (1996) also provides a good introductory survey of the shifting boundaries of the British state.

3. ECONOMIC PERFORMANCE

Judging economic performance: introduction

It is axiomatic that today we judge national economic performance rather differently from the way in which contemporaries in 1870 or 1939 did. Nonetheless, it is not anachronistic to at least begin our exploration of the past using the reference points and devices of the present provided we are aware of how the historical debate has progressed. One further introductory warning is also appropriate here: the statistics we shall use are subject to varying margins of error, both over time and as between countries. We are, however, basing our discussion on the best and most comprehensive available: Maddison’s Monitoring the world economy 1870–1992 (1995), the fruits of a lifetimes work on comparative historical national income statistics.

We start then with the three conventional measures of national economic performance:

A. the headline growth rate (real GDP, that is money GDP adjusted for inflation);

B. the standard of living (real GDP per capita); and

C. an aggregate labour productivity measure (real GDP per worker-hour), the foundation upon which the headline growth rate and thus living standards must ultimately depend.

These three indicators are shown in Table 2.1 panels A-C (NB because 1870-1939 is so artificial the data given brings the story up to date; note also that 1938 is used since this is the usual benchmark).

Absolute versus relative change

In interpreting these it is important to make clear that when examining an economy the observer must bear in mind that the historical forces underlying the growth of an economic variable such as GDP, and the absolute level it has attained by any particular year, may be an exceptional historical performance but nonetheless deficient relative to the rate of change and final level attained by comparable countries. With this distinction established it then becomes much easier to appreciate that to understand fully why living standards are now lower in Britain than the average for the OECD countries the question that needs to be asked is not so much why productivity is lower in Britain but why it grew more slowly, i.e. what constrained the growth rate and thus prevented the absolute level of productivity from converging on that of the leading economies.

The league table approach

Begin with panel A of Table 2.1 which gives estimates of the national incomes (expressed in constant 1990 US dollars) of the UK and comparator economies (EU, G-7 and OECD-17; all defined in the note to Table 2.1) for 1870 and subsequent benchmark dates. We stress that this is highly processed cross-country data obtained by adjusting each country’s GDP at current prices and exchange rates for the effects of inflation between 1870 and 1992, for the differing purchasing power of each country’s national currency and for any territorial changes (important in the case of Germany which was divided between the end of the Second World War and 1989). The derivation of these statistics pose a number of significant problems but we leave these to one side for the moment and instead focus on what these numbers might tell us about Britain in comparative perspective.

Taking absolute magnitudes first, it is clear that in 1870 the UK economy if not the workshop of the world was still the second largest of the advanced capitalist economies (behind the US) but had slipped to sixth place by 1992 (now also behind France, Germany, Italy and Japan). It still, however, ranked second in 1938 and thus in terms of relative economic decline the greater part of developments lie with the Second World War and after. This is our first major conclusion: before the Second World relative economic decline, if we use the league table approach, is only really significant with respect to the US.

The size of a country’s national income is, of course, partly a function of the size of its population, and when this is factored in (as in panel B where population is the denominator in the calculation) a somewhat different picture emerges with the UK slipping from second place in 1870 to fourth place in 1938 (sixth place by 1950 and fifteenth by 1992). Moreover, since this measure is the economists’ favoured indicator of the standard of living it is clear that the relative decline of the British economy was even more pronounced, although again the major slippage is after the Second World War.

We can see, therefore, from panel B that whilst in absolute terms the British people by the eve of the Second World War were enjoying a standard of living which was over 80 per cent higher than in 1870, in relative terms over the preceding 68 years almost all other OECD economies had grown more affluent at a faster rate than had Britain and spectacularly so in relation to the US which had emerged as the world’s leading industrial power.

To explain why the British economy was growing so slowly we begin by invoking the hypothesis of catch-up and convergence, one which is now used routinely to examine the economic growth of all economies, developed and less developed.

The concept of catch-up and convergence is relatively new but derives from a long-standing observation by economic historians that latecomers to industrialisation grew faster than the early-starters and that the forces underlying that late industrialisation might be substantially different, in particular that the role of the state might be enhanced relative to the laissez-faire stance of the nineteenth-century British and American governments. Catch-up can be conceived as a process whereby latecomers use new technology and best organisational practices to move towards comparable absolute levels of productivity to those now enjoyed by the early-starters, with convergence the tendency for all countries, subject to differing natural resource endowments and certain other conditioning factors, to eventually attain more or less comparable absolute productivity levels.

We envision the process of catch-up in Figure 2.1 where we chart on the Y axis the absolute level of aggregate labour productivity attained in 1870, the high point of British industrial hegemony, with the subsequent growth rate in aggregate labour productivity over the period 1870–1992. For catch-up to be present we would expect an inverse relationship between the two series, and we do indeed observe that from the fitted trend line. We should also notice the high value for the R2 statistic, indicating a small difference between the Y values as represented on the trend line and the Y values existing as data points · and, therefore, that we can at this stage have some confidence in the catch-up hypothesis.

Clearly, however, the achievement of the potential catch-up bonus (the gap between a country’s actual absolute level of productivity and the level attained by the leading economies) is not automatic. Were it so there would be no less developed economies: no countries like Nepal with levels of GDP per capita (1995 figures) of US$200, only those like the Netherlands with US$24,000 or even Switzerland, the country with the world’s highest standard of living, with US$40,630 (World Bank 1997, pp. 214–15). Thus catch-up is neither automatic, nor is it necessarily complete. Indeed, econometric research suggests that the growth paths and characteristics of the leading economies are not consistent with the view that absolute productivity levels tend towards equalisation and that countries differ in their productivity levels by more than would be expected from their levels of investment in physical capital (i.e. machinery) and human capital (i.e. education and vocational training), the two principal vehicles whereby new technologies and production practices are translated into higher output.

This leads to an important second conclusion: if differences in the scope for catch-up are a conditioning rather than a determining factor in economic growth we have room once more to investigate why some economies succeed and some fail. This is obviously of some importance for the British case.

We envision this process of conditional catch-up in Figure 2.2 which compares the aggregate productivity experience of Britain, the US, Germany and the OECD-16 averages for 1870, 1938 and 1992. Clearly, all economies have advanced absolutely since 1870, but as is also clear initially Britain’s relative decline was very much more marked with respect to the US and much less with respect to the principal European economy or indeed the OECD average. It is thus only since the Second World War that there emerges scope for a generalised failure of the British economy, and even this must be qualified by the finding that by 1992, by this measure, Britain was only 4 per cent behind the OECD average. Note also that on this league table approach Britain was a more highly developed economy than Germany on the eve of the Second World War.

To complete this part of the discussion we need one further component of the catch-up and convergence literature: that of social capability, here defined as a complex of economic, social, attitudinal and other factors which bear upon a country’s capacity to acquire and use advanced technology. From league tables we can thus come back to history and policy.

Contemporary understanding of decline 1870-1939

The raw material for these league tables did not exist before the mid-1950s. How then did contemporaries understand national economic decline?

The first point to note is that relative decline had long been anticipated by economists, and particularly with respect to the US which obviously had huge advantages in terms of natural resources and market size once – through massive immigration – it acquired a population. Indeed, The Economist magazine, in reporting on the great exhibition of 1851, had observed that the question about Britain’s economic future was less whether relative decline would occur and more when would it occur.

Refining this further we identify the 1880s as the critical decade, as the beginnings of that ‘critical inquest into the state of the British economy which has been going on ever since’ with much contemporary debate ‘intimat[ing] the need for some form of government action or supervision’ (Greenleaf 1983, pp. 103–4). It is from the late 1880s that we locate a broadly based crisis of liberalism, from which we can then explore the growth of government and the contours of twentieth-century political competition.

As that debate about relative economic decline developed from the 1880s it developed one further characteristic which has endured through to the present: the distinction between internal and external causes of decline. The former emphasised deficiencies internal to the fabric of British economy and society (class conflict, underinvestment in human and physical capital) while the latter sought to locate decline in external factors, particularly initially in the continued maintenance of free trade in the face of the growing competitive challenge of the US and Germany. Both internal and external diagnoses have policy implications, but rather different ones.