Forging Ahead, Falling Behind and Fighting Back Read online

  Allen’s interpretation is prima facie plausible and theoretically defensible although more research is required to establish that it stands on really solid empirical foundations (Crafts, 2011). Even so, it is important to recognize that in the context of subsequent relative economic decline and, especially, American overtaking, the suggestion that the key to getting ahead in the Industrial Revolution was relative prices has the clear implication that British leadership was highly vulnerable.

  The unique advantage of high wages plus cheap energy was not permanent. First, as the industrial revolution technologies improved, they became profitable to adopt in conditions of lower wages and dearer energy and this allowed other countries to catch up. Second, and more important, insofar as high wages, cheap energy and a market sufficient to allow fixed costs of research and development continued to be conducive to faster technological progress, the United States would be a more favoured location later in the nineteenth century, as has become abundantly clear in the literature on the Habakkuk (1962) hypothesis.

  2.5 Some Legacies

  Britain’s early industrialization was associated with a rather idiosyncratic pattern of development; in a number of ways Britain was an outlier from the ‘European Norm’ (Crafts, 1984). This is well-known as is the implication that other countries followed different paths to the modern world rather than the British model (O’Brien, 1996). It is much less clear whether the legacy of the early start had adverse effects on later growth performance. This section points to some aspects of the structure of the economy and its institutions which may have mattered and which will be revisited in later chapters.

  With regard to economic structure, the obvious starting point is that Britain was an unusually open economy, especially after the move to free trade was completed in the mid-1840s. In 1870, exports of goods and services amounted to 29.1 per cent of GDP (Feinstein, 1972). Britain had a very large share of world manufactured exports – 43 per cent both in 1850 and still in 1875 (Mitchell, 1988). Britain’s position in the world economy at the end of the Industrial Revolution entailed exporting a lot of manufactures and importing a substantial amount of agricultural goods. This reflected comparative advantage and was underpinned by technological progress in industry together with diminishing returns in agriculture (Harley and Crafts, 2000).

  In 1851, exports accounted for about 25 per cent of industrial gross output and imports supplied around 30 per cent of domestic consumption of agricultural produce (Crafts, 1985, pp. 127, 132). In turn, this configuration of trade patterns was linked to an exceptionally industrialized and non-agricultural employment structure. Table 2.3 reported that, in 1851, 45.6 per cent of the labour force was in industry and only 23.5 per cent in agriculture. The latter figure would not be reached by France and Germany until after the Second World War. The Computable General Equilibrium (CGE) model constructed by Crafts and Harley (2004) explains the small share of employment in agriculture was predicated on an open economy but also reflected to a considerable extent an economy where, unlike in most of Europe, capitalist rather than peasant farming prevailed. The long-run implication of the large weights of exporters of manufactures and of industrial workers who consumed imported food, combined with a low share of agriculture in the economy, was a political bias towards free trade.

  Table 2.10 lists the largest ‘exports’ (positives in the current account) of the British economy in 1870. Several aspects deserve comment, especially in the context of the label, ‘workshop of the world’. Cotton and woollen textiles were the leading manufactured exports with £98.1 million compared with £175.4 million for total exports of finished manufactures. Machinery was a relatively small category. In the twentieth century, textiles would be categorized as unskilled-labour intensive goods and, as such, were generally importables for advanced economies as comparative advantage in these items eventually switched to Asia. Across manufacturing sectors as a whole, Crafts and Thomas (1986) found that in 1880 there was a strong correlation between intensive use of relatively unskilled labour and exporting success. This pattern of specialization ultimately entailed major re-adjustments of the labour force as the nineteenth-century export staples declined after the First World War.

  Table 2.10 Leading positive items in current account of balance of payments, 1870

  £ million % total

  Services 80.0 22.0

  Cotton goods 71.4 19.7

  Property income from abroad 37.0 10.2

  Woollen goods 26.7 7.4

  Iron and steel 23.5 6.5

  Coal 5.6 1.5

  Machinery 5.3 1.5

  Memorandum items

  Visible balance –33.0

  Invisible balance 88.0

  Source: Mitchell (1988).

  A striking feature of the development of industry, and, especially, the export staples, during the period is that there was strong spatial concentration. This was driven in considerable part by factor endowments, notably, the availability of cheap coal which was typically found in the north rather than the south of Britain at least during the Industrial Revolution. Crafts and Mulatu (2006) demonstrated that coal still had a significant influence on industrial location in the late nineteenth century. Mining itself was quite heavily localized with North and Wales representing a third of employment in 1871 rising to 40 per cent by 1911, as is reported in Table 2.11, at which point it accounted for 21 and 25 per cent of employment in these regions, respectively. Shipbuilding and textiles were also highly spatially concentrated and in the latter almost 60 per cent of employment in the sector was in the North West (cottons) and Yorkshire (woollens) in 1871 at which point 30 per cent of the North West’s and 27 per cent of Yorkshire’s labour force was in textiles. If globalization went into retreat and/or comparative advantage in these activities ebbed, these regions would be exposed to substantial labour market adjustments.

  Table 2.11 Industrial shares of employment (%)

  (a) Share of total industry

  Mining Ship building Textiles All

  1871 1911 1871 1911 1871 1911 1871 1911

  South East 2.17 2.26 19.62 14.17 6.16 6.45 26.19 28.92

  East Anglia 0.27 0.21 1.82 0.88 0.97 0.69 3.78 2.72

  South West 9.05 3.47 7.68 4.32 3.32 2.10 8.98 6.58

  West Midlands 11.38 7.67 1.07 0.36 2.82 2.44 8.44 8.04

  East Midlands 7.07 10.15 1.00 0.61 8.00 8.40 6.44 6.66

  North West 12.29 10.24 12.69 10.20 38.84 44.49 14.25 15.13

  Yorkshire & H 10.24 12.42 3.50 2.90 20.90 20.32 8.62 9.04

  North 17.07 19.10 21.34 30.28 1.29 1.24 5.80 6.13

  Wales 16.42 20.95 4.82 3.47 0.83 0.94 5.16 5.53

  Scotland 14.05 13.53 26.47 32.80 16.88 12.92 12.33 11.25

  Britain 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

  (b) Share of regional employment

  Mining Ship building Textiles

  1871 1911 1871 1911 1871 1911

  South East 0.38 0.53 0.39 0.42 2.60 1.84

  East Anglia 0.33 0.51 0.25 0.28 2.85 2.10

  South West 4.65 3.56 0.44 0.56 4.08 2.64

  West Midlands 6.22 6.44 0.07 0.04 3.69 2.51

  East Midlands 5.07 10.28 0.08 0.08 13.73 10.40

  North West 3.98 4.57 0.46 0.57 30.10 24.26

  Yorkshire & H 5.48 9.28 0.21 0.27 26.78 18.56

  North 13.58 21.03 1.90 4.22 2.46 1.67

  Wales 14.67 25.57 0.48 0.54 1.77 1.41

  Scotland 5.26 8.12 1.11 2.49 15.12 9.48

  Britain 4.61 6.75 0.52 0.85 11.05 8.25

  Source: Lee (1979).

  It is important to recognize the importance of agglomerations both in explaining regional patterns of employment but also in underpinning competitive advantage in international trade. This is epitomized by cotton textiles which became ever more concentrated within a small area centred in Lancashire which accounted for about two thirds of the industry in the mid-nineteenth century and three quarters at the start of the twentieth century. The initial choice of location reflected factors such as the availabili
ty of water power and soft water, was refined by focusing on a subset of these locations with cheap coal but then sustained by external economies of scale which accrued through deep labour pools, knowhow and highly specialized suppliers of capital goods, spare parts, marketing etc. (Broadberry and Marrison, 2002). This allowed Lancashire to pay higher wages than elsewhere in the United Kingdom but also to remain internationally competitive at wage rates which were six or seven times those prevailing in Asia (Clark, 1987). As a successful agglomeration, Lancashire dominated export markets far longer than a believer in the Heckscher–Ohlin theory of comparative advantage would have predicted.

  The advantages of agglomeration are also central to understanding London’s primacy as an international capital market and supplier of internationally traded services which is reflected in the strong contribution already made by ‘invisibles’ both to the balance of payments overall and in terms of significant exports of services and property income from abroad (Table 2.10). The rise of London to become the largest capital market was driven initially by British economic and commercial success and the blows that the Napoleonic wars delivered to rivals (Cassis, 2006). But its sustained dominance of international financial services was based on input–output linkages within London based on unique advantages in accessing information that accrued to the largest financial centre (Cochrane, 2009). The strength of successful agglomerations such as those in Lancashire and London implied ‘crowding out’, and it would be harder for new industries to become successful exporters.

  The institutional aspects of the industrial revolution economy that both mark Britain out as somewhat unusual and have implications for later growth performance relate to the trajectories on which Britain had embarked in terms of corporate governance and industrial relations which, in the ‘Varieties of Capitalism’ typology (Hall and Soskice, 2001), would culminate in Britain as a Liberal Market Economy rather than a Coordinated Market Economy.

  By the third quarter of the nineteenth century, capital market arrangements had advanced considerably. Hannah (2014) estimated that Britain had a higher ratio of corporate capital to GDP in 1860 (at least 55 per cent) than the United States, France or Germany. The underpinning for a relatively high level of corporatization and shareholding was not only the legislation of the 1850s which allowed joint-stock limited liability companies but also the availability of a wide menu of corporate forms. Banks were relatively unimportant as delegated monitors and Britain was slow to develop investment banking, as might be expected in an economy that was rich by the standards of the time with low interest rates, high levels of private wealth and fairly competitive credit markets (Baliga and Polak, 2004).

  There is a considerable contrast with the way in which capital markets would subsequently develop in Germany which came to rely much more on bank than equity finance and indeed on banks that exercised a significant role in control and monitoring of firms (Guinnane, 2002). Once the two finance systems had been established in the context of different initial conditions in terms of the supply of credit, path dependence was not surprising (Baliga and Polak, 2004). The long-term implication for corporate governance was a much greater separation of ownership and control in Britain than in other countries and there were already precursors of this by the late nineteenth century with tendencies to dispersion of share ownership in companies (Acheson et al., 2015) and companies exploiting highly permissive legislation to adopt voting rules that increased the power of directors relative to shareholders (Guinnane et al., 2014).

  Britain’s relatively small but productive agricultural sector based on capitalist farming reflected the long-standing importance of the market economy (Harley, 2013). Guilds were relatively weak in Britain and had already lost much of their ability to extract rents, enforce apprenticeships and impede the flexibility of production by the early eighteenth century (Daunton, 1995). These institutional arrangements contributed to the emergence of the relatively high incomes which underpinned the incentives to invent industrial revolution technology but also put Britain on an institutional trajectory leading towards the Liberal Market Economy (Iversen and Soskice, 2009).

  The implications were a propensity towards craft unionism based on organization of skilled workers and an absence of strong business associations linked to political parties. In turn, this meant an absence of pressure for proportional representation in the electoral system (Cusack et al., 2010). When the franchise became more democratic, the median voter was a skilled worker. Competition for his vote was pursued by both Conservative and Liberal governments which established through the Acts of 1875 and 1906 substantial legal privileges for trade unions whose strategies were to maximize their bargaining power with employers by controlling the supply of skills and content of jobs. The long-term result would see twentieth-century Britain with an industrial relations system based on strong but decentralized collective bargaining (Crouch, 1993).

  2.6 Conclusions

  The First Industrial Revolution saw modern economic growth firmly established in Britain. Technological progress accounted for most of the labour productivity growth that permitted the economy to cope with considerable demographic pressure and escape from the Malthusian Trap. Incentives to invest and to innovate were still quite weak by later standards in a context of unsophisticated institutions, small market size, a limited knowledge base and inadequate policies to provide human capital and support research and development. Growth potential was therefore limited and growth performance was modest by later standards. The limitations of the industrial revolution economy are underlined by the very long time that it took to perfect steam technology and for steam to make a serious impact on productivity. To sustain Britain’s leadership in future would require further development of growth capabilities.

  The early start and the place that it led Britain to occupy in the world economy implied a rather different legacy for future generations compared with other European economies. This entailed precocious industrialization, spatial concentration of economic activity and exports of what would become ‘low-tech’ manufactures, all of which might lead to difficult adjustment problems. Institutional arrangements implied quite idiosyncratic structures of capital markets and industrial relations. How far all this adversely affected subsequent growth performance will be explored in later chapters.

  1 The terms γ and Φ are the so-called Domar weights which sum to greater than 1. For an algebraic justification of this procedure, see Hulten (1978).

  2 Crafts (2011) notes that these arguments are attractive but need more quantitative evidence to be fully persuasive.

  3 This argument can be given firm theoretical foundations, as Acemoglu (2002) shows.

  3

  American Overtaking

  The leadership of the British economy established during the Industrial Revolution was quite short-lived. By the early twentieth century, although still well ahead of its continental European rivals, Britain had been caught up and overtaken by the United States in terms of real GDP/person (cf. Table 3.1); relative economic decline had started. This does not reflect a decline in British growth potential, which had risen since the Industrial Revolution, but rather a greater increase in productivity growth in the United States associated with the so-called Second Industrial Revolution and a change in the nature of technological progress.

  Table 3.1 Real GDP/person ($1990GK)

  France Germany UK USA

  1870 1876 1839 3190 2445

  1899 2911 2905 4567 4051

  1913 3485 3648 4921 5301

  Source: Maddison (2010).

  British growth performance in the late nineteenth and early twentieth centuries is controversial. It has frequently been alleged that there was an avoidable failure to exploit the opportunities of the period. Education, industrial relations, management and the capital market have all been criticized. It has been claimed that Britain invested too much abroad and too little at home and was too slow to adopt new technologies and to shift resources into new industries. In
all these respects, the United States has been seen as not just different but superior. On the other hand, it might be argued that the United States and Britain had different comparative advantages in international trade, that American factor endowments and geography were more suited to rapid technological advance, that American technology was inappropriate in British cost conditions and that there was nothing that the British business community or policymakers could have done to produce a better outcome.

  In this chapter, the well-known debate about ‘late Victorian British failure’ will be reviewed in the light of recent research and modern growth economics. At the same time, this will allow an exploration of the implications of the legacy of the Industrial Revolution. Is this the point at which the ‘early start’ undermines British economic growth? If so, through what mechanism does this operate – the structure of the economy, constraints on policy or the persistence of institutions?

  3.1 A Comparison of British and American Growth Performance, 1870–1913

  During the late nineteenth and early twentieth century, economic growth in the United States was faster than in Britain and by 1913 the United States had established a clear lead in the level of real GDP per person. Table 3.1 reports the well-known estimates of Maddison (2010), which suggest that the American lead over the United Kingdom in 1913 was about 8 per cent and that overtaking by the United States occurred in the Edwardian period. Recent reworking of the data, in particular to obtain more accurate Purchasing Power Parity (PPP) exchange rates, by Woltjer (2013) indicates that these estimates probably understate relative American performance, such that the United States may have caught Britain up by about 1880 and was about 25 per cent ahead by 1913. It is important to recognize that major European economies, such as France and Germany, did not overtake Britain in this period; on the contrary, Table 3.1 reports that they were still well behind the United Kingdom in 1913, although they had enjoyed some catch-up growth since 1870. Over this period, the French and German growth rates were about 0.5 percentage points higher than Britain, but even so, the gap between French and German levels of real GDP per person and that of the United States widened.