Forging Ahead, Falling Behind and Fighting Back Read online

  Figure 1.1: Endogenous growth

  Figure 1.1 implies that the rate of innovation increases when either the Solow and/or the Schumpeter line shifts upward. An upward shift of the Solow line will be the result of an increased rate of savings (and investment) which will lead to faster technological progress and, thus, a faster rate of economic growth. In turn, investment will respond to changes in the economic environment which affect its expected profitability. An upward shift of the Schumpeter line associated with a ‘higher λ’, i.e., an increase in innovative effort for any given market size, will reflect such changes as greater technological opportunity, lower R & D costs, more appropriable returns from R & D and intensified competitive pressure on managers. Improvements in social capability and/or technological congruence can also be thought of as equivalent to a higher λ. The key implication of Figure 1.1 is that the growth rate will be affected by institutions and policies both through their impact on technological progress and on investment.

  It is important to remember that as the twentieth century progressed, the United Kingdom increasingly obtained its new technology from abroad. The key to growth performance became prompt and effective diffusion of foreign technology rather than domestic invention. Technological opportunity from advances in other leading countries, and the social capability to exploit them, is what mattered most. In an open economy, greater success in technology transfer will raise λ.

  Key points in the chapters that follow can be situated within the framework of Figure 1.1. Thus, the discussion of the Industrial Revolution in Chapter 2 highlights that there was a much lower rate of technological progress than was traditionally believed, and provides reasons why λ and s were still quite low in an economy where institutions and economic policies left a good deal to be desired. Conversely, in Chapter 3 where American overtaking is discussed, a number of reasons why the United States had become a relatively high-λ economy are discussed. These include market size, investments in human capital and technological opportunities not available to European countries. In Chapter 4, it is noted that these advantages persisted as the United States continued to heavily outperform Britain during the interwar period.

  Figure 1.1 is particularly helpful in Chapter 5’s analysis of the Golden Age of catch-up growth after the Second World War when both the Schumpeter and Solow lines were subject to favourable shifts in many countries. Technological progress in Europe was boosted by increased opportunities for technology transfer, while in coordinated market economies saving and investment were increased by cooperative agreements between firms and workers. On the other hand, Britain found that λ was reduced by institutional legacies and policy errors. In the later twentieth century, as discussed in Chapter 6, the scope for catch-up growth had declined and there were downward shifts in both the Schumpeter and Solow lines. Britain’s relative performance improved somewhat, however, as institutional and policy reforms had a positive impact on λ.

  Economic historians might want to add something quite distinctive to ideas from conventional growth economics so as to emphasize that ‘history matters’ in the sense that the past constrains and shapes the present, and that ‘path dependence’ is a relevant idea (David, 1994).2 North (2005) stressed path dependence in the context of institutional change and failures of reform in which inefficient institutions persist, and ‘status-quo bias’ can also inhibit policy reform (Fernandez and Rodrik, 1991). This is potentially an important issue as countries pass from the early to later stages of development, or as the world moves from one technological epoch to another and reform is desirable. Aghion and Howitt (2006) emphasized that the policies appropriate for a ‘far-from-frontier’ and a ‘close-to-frontier’ economy may differ greatly, echoing the insights of Gerschenkron (1962). In the British context, these ideas can be explored in the context of making sense of the long-standing claim in the literature that the ‘early start’ impaired subsequent growth performance.

  The legacy of the past can cast its shadow over economic performance in a number of other ways. In an open economy, the structure of production depends on relative productivity compared with trading partners. This may be influenced by the development of large agglomerations which have surprising staying power – cotton textiles in Lancashire at the turn of the twentieth century come immediately to mind. The strength of successful sectors ‘crowds out’ other activities and inhibits the development of new, ultimately more dynamic, sectors as with so-called ‘Dutch disease’. Policy choices may not only be constrained by the vested interests inherited from, or the ‘inescapable experience’ of the past, but there are also interaction effects between institutional legacies and policy changes – for example the ‘British system of industrial relations’ had important implications for the impact on productivity of the weakening of competition, which resulted from the difficulties of the 1930s.

  With these ideas in mind, the rest of the book reviews Britain’s growth performance over the long run, starting with the experience of the Industrial Revolution. The aim is not so much to provide a textbook account, but to develop an analytic perspective. This will entail providing description, explanation and evaluation of the growth record in successive periods. The analysis will be firmly grounded in economics, but will recognize the importance of historical context and the ways in which economic performance is conditioned by what went before. I shall feel free to engage with major debates in the historiography and bold enough to draw some ‘lessons from history’.

  1 The model can easily be adapted to allow for improvements in labour quality from better education without changing these basic predictions.

  2 Path dependence is a property of non-ergodic stochastic processes whose asymptotic distributions evolve as a history of the process itself. So the vision of history is that in a multiple-equilibrium world it is possible to get locked into a locally stable equilibrium (which may be inferior) by historical accident.

  2

  The First Industrial Revolution

  The term ‘Industrial Revolution’ is commonly used to characterize the unprecedented experience of the British economy during the later decades of the eighteenth and early decades of the nineteenth century. Taken literally, it is a misleading phrase, but carefully deployed, it is a useful metaphor. These years saw a remarkable economic achievement by comparison with earlier times but it must be recognized that by later standards this was in many ways a modest beginning. Moreover, the basis on which initial success was accomplished would not be sufficient to sustain leadership over the long run.

  The idea of an ‘industrial revolution’ conjures up images of spectacular technological breakthroughs, the triumph of the factory system, rapid economic growth and the industrialization of an economy based largely on agriculture hitherto. Indeed, these were the directions of travel for the British economy but, when they are quantified, the numbers, although impressive once put into context, do not live up to the hyperbole. For several decades, while the economy withstood formidable demographic pressure much better than could have been imagined in the seventeenth century, the growth of real income per person was painfully slow. Not much more than a third of the labour force worked in agriculture in the mid-eighteenth century. In 1851, more people were employed in domestic service and distribution than in textiles, metals and machine-making combined. Until about 1830 water power was more important than steam power in British industry.

  Nevertheless, the economy of the mid-nineteenth century was established on a different trajectory from that of a hundred years earlier. In particular, sustained labour productivity growth based on steady technological progress and higher levels of investment had become the basis of significant growth in real income per person notwithstanding rapid population growth. This was ‘modern economic growth’ rather than an economy where real income increases were based on Smithian growth and working more days per year. That said, growth potential was still quite limited by twentieth-century standards in an economy where education and scientific capabilities
were still quite primitive, the scope to import technological advances from the rest of the world was modest and institutions and economic policies had obvious limitations.

  This picture has become conventional as quantification of British economic performance has progressed over the past fifty years or so. What remains much less clear is to what extent and when, if at all, the development of the British economy during this period made subsequent modernization more difficult and impaired growth later on. As will become apparent, the early start did entail the emergence of some idiosyncratic features which became an unusual legacy for later generations.

  2.1 An Overview of Growth and Structural Change

  The dimensions of economic growth and structural change during the Industrial Revolution have emerged from a long process of research starting with Deane and Cole (1962) and culminating in Broadberry et al. (2013) and Broadberry et al. (2015). These recent publications have improved significantly the estimates in Crafts (1985). It is also now possible to locate this experience in a well-articulated inter-temporal and international context.

  Table 2.1 shows that the income levels reached in Britain in the mid-nineteenth century were much higher than anything achieved in Britain or elsewhere in earlier centuries, and that by then Britain had overtaken the earlier European leaders, Italy and the Netherlands. The long period of slow growth before the Industrial Revolution and the ‘Great Divergence’ between the European leaders and China can be clearly seen. The British economy managed to sustain the jump in income levels consequent on the Black Death and from 1650 to 1780, real GDP per person grew at about 0.5 per cent per year (Table 2.1), a rate which had more than doubled by the mid-nineteenth century. The 1650–1780 rate of growth of real GDP had tripled from 0.7 to 2.1 per cent per year by 1820–1870, enough to outstrip the rise in population growth from 0.2 to 1.2 per cent per year. This rate of population growth would have implied serious pressure on living standards in earlier centuries. From that vantage point, the remarkable aspect of the Industrial Revolution period was that real income per person did not fall significantly; this ‘dog that didn’t bark’ indicates that the economy had escaped from the Malthusian Trap.

  Table 2.1 Real GDP/person, 1086–1850 ($1990GK)

  England/ Great Britain Holland/ Netherlands Italy Spain China

  1086 754 1244

  1348 777 876 1376 1030

  1400 1090 1245 1601 885 948

  1500 1114 1483 1403 889 909

  1600 1123 2372 1244 944 852

  1650 1100 2171 1271 820

  1700 1630/1563 2403 1350 880 843

  1750 1710 2440 1403 910 737

  1800 2080 2617/1752 1244 962 639

  1850 2997 2397 1350 1144 600

  Source: Broadberry (2013).

  Of course, the growth of industrial production was appreciably faster than that of GDP because it outpaced growth in agriculture and services. Between 1780 and 1860, industrial output grew at 2.6 per cent per year compared with 0.6 per cent for agriculture, 2.0 per cent for services and 1.9 per cent for real GDP (Broadberry et al., 2015). The most rapidly expanding industries had much faster growth but, especially at first, were quite small relative to the economy as a whole; cotton textiles output grew by 6.4 per cent per year between 1780 and 1860 (Deane and Cole, 1962). Table 2.2 reports an estimate that Britain accounted for just less than 20 per cent of world industrial output by 1860 – similar to China whose population was about thirteen times Britain’s – at a time when Britain produced roughly 40 per cent of world manufactured exports. Statistics such as these make the common description of Britain as the ‘workshop of the world’ understandable, if somewhat over the top.

  Table 2.2 Shares of world industrial production (%)

  1750 1830 1860 1880 1913

  Britain 1.9 9.5 19.9 22.9 13.6

  Rest Western Europe 15.2 18.1 25.4 30.0 33.9

  United States 0.1 2.5 7.2 14.7 32.0

  China 32.8 29.8 19.5 12.5 3.6

  India 24.5 17.6 8.6 2.7 1.4

  Source: Bairoch (1982).

  By the mid-nineteenth century, Britain was highly industrialized with 45 per cent of employment in industry (Table 2.3). The structure of employment had been transformed compared with Elizabethan times. However, recent research has made clear that a good deal of this switch towards industry had already occurred prior to the Industrial Revolution (Shaw-Taylor, 2009) and that employment in mid-eighteenth-century Britain was less agricultural and more industrial than was supposed in Crafts (1985), especially when female employment is properly taken into account. It is still entirely valid to see Britain as an outlier in the mid-nineteenth century by virtue of its very low share of agricultural employment based on the disappearance of peasant agriculture and the trade of an open economy which imported a significant fraction of its food and had a strong position in manufactured exports (Crafts and Harley, 2004), but, although structural change speeded up during the Industrial Revolution period, it was less dramatic than used to be thought.

  Table 2.3 Sectoral shares in employment (%)

  Agriculture Industry Services

  1522 58.1 22.7 19.2

  1700 38.9 34.0 27.2

  1759 36.8 33.9 29.3

  1801 31.7 36.4 31.9

  1851 23.5 45.6 30.9

  Note: England in 1522, Britain thereafter.

  Source: Broadberry et al. (2013).

  A major implication of the revised employment estimates is a different (and more plausible) pattern of sectoral contributions to labour productivity growth from that presented in Crafts (1985).Table 2.4 shows that industrial labour productivity growth was considerably faster between 1759 and 1851, although well below the rate estimated by Deane and Cole (1962), and was also well above that of agriculture. The weakness of overall labour productivity growth during the classic Industrial Revolution period is quite striking and, at one level, explains why living standards of many workers stagnated during these years.

  Table 2.4 Labour productivity growth, 1700–1851 (% per year)

  Agriculture Industry GDP

  1700–1759 0.59 0.16 0.31

  1759–1801 0.24 0.63 0.34

  1801–1851 0.01 0.96 0.64

  1801–1831 –0.33 0.68 0.24

  Notes: Productivity on a per worker basis.

  Sources: Derived from Broadberry et al. (2013) and Broadberry et al. (2015) with labour force shares in 1831 interpolated.

  2.2 Accounting for Growth During the Industrial Revolution

  Changes in the sources of growth of labour productivity can be examined more systematically using the concept of growth accounting which has been widely employed by economic historians to benchmark performance (Crafts, 2009). The basic approach assumes that GDP is accounted for by the employment of factor inputs and their productivity Total Factor Productivity (TFP) as follows:

  Y = AKαLβNγ

  where Y is output, K is capital, L is labour, N is land and A is TFP while α, β and γ are the elasticities of output with respect to capital, labour and land, respectively. The level of TFP reflects the state of technology and it is usually measured as a residual after the other items in the expression have been measured. This can be converted into an equation to account for the proximate sources of output growth

  ΔY/Y = αΔK/K + βΔL/L + γΔN/N + ΔA/A

  and a growth accounting equation for labour productivity growth

  Δln(Y/L) = αΔln(K/L) + γΔln(N/L) + ΔlnA

  The latter gives a decomposition of the percentage rate of growth of labour productivity into a contribution from the percentage rate of growth of capital per labour input (capital deepening), of land per labour input (land deepening) and a term based on the percentage growth rate of TFP. In implementing this approach in Table 2.5, it is assumed that factor shares are a reasonable approximation for the output elasticities.

  Table 2.5 Growth accounting estimates (% per year)

  (a) Output growth

  Capital inputs contribution Labour inputs contribution Land inputs contri
bution TFP growth Real GDP growth

  1760–1800 0.35*1.0 = 0.35 0.50*0.8 = 0.40 0.15*0.5 = 0.08 0.4 1.2

  1800–1830 0.35*1.7 = 0.60 0.50*1.4 = 0.70 0.15*0.1 = 0.02 0.4 1.7

  1830–1860 0.35*2.5 = 0.88 0.50*1.4 = 0.70 0.15*0.1 = 0.02 0.7 2.3

  (b) Labour productivity growth

  K/L growth N/L growth TFP growth Y/L growth

  1760–1800 0.35*0.2 = 0.07 0.15*–0.3 = –0.04 0.4 0.4

  1800–1830 0.35*0.3 = 0.10 0.15*–1.3 = –0.20 0.4 0.3

  1830–1860 0.35*1.1 = 0.38 0.15*–1.3 = –0.20 0.7 0.9

  Note: All estimates are derived on standard neoclassical assumptions with the weights as follows: capital = 0.35, land = 0.15, labour = 0.5.