Forging Ahead, Falling Behind and Fighting Back Read online

  The institutional legacies of the early start were apparent in terms of idiosyncratic industrial relations and corporate governance. This was apparent in the strength of craft unionism and a precocious separation of ownership and control. These configurations had potential downsides in terms of the diffusion of the technologies of the Second Industrial Revolution and scope for managerial failures, but any adverse impact on economic performance lay mainly in the future.

  1 The estimates in Table 3.3 are based on a standard neoclassical methodology as were those of Chapter 2, but are constructed differently in that they do not take account of land inputs and the contribution of education is explicitly recognized. However, this does not undermine the point that TFP growth was clearly much faster in the United States in the early twentieth century than in Britain during the Industrial Revolution.

  2 With fully accurate data each of these measures should give the same GDP estimate, but the quality of the data in this period is imperfect and the discrepancies between the three measures are quite large.

  3 This is based on Matthews et al. (1982, pp. 449–450) and the database for Crafts and Mills (2004).

  4 1n 1880, 51.6 per cent of large estates were left by industrialists compared with only 1.9 per cent from the professions and public administration, whereas, in 1809–1839 the percentages were 19.8 from professions and public administration and 9.8 from industrialists (Rubinstein, 1987).

  5 In fact, after 1900, profits became squeezed in the face of regulation of freight charges and rising costs and, as principal-agent models of the firm might predict, managers acted to improve operating efficiency (Irving, 1976); median cost inefficiency in British railway companies fell to 2.6 per cent by 1910 (Crafts et al., 2008).

  6 These are the conclusions of two recent studies employing modern portfolio theory. Goetzman and Ukhov (2006) found that diversification permitted a big increase in the Sharpe ratio, while Chabot and Kurz (2010) calculated that the diversification gains were equivalent to a sizeable increase in wealth.

  7 This amounts to an argument that technology was not universal. Using this as a defence of McCloskey is somewhat ironic because it is not the standard neoclassical assumption.

  8 A similar argument about industrial structure was made by Kennedy (1987) but on the basis of capital market failure which, as was discussed above, is not very persuasive.

  9 Industrial policy is defined by Warwick (2013), as any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity towards sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of any such intervention.

  10 Thomas (1984) estimated that employment in agriculture and textiles would have risen by 45441 and 149851, respectively, while employment in chemicals, motor and cycle and engineering would have risen by 241, 3102 and 10619, respectively, had a Chamberlain tariff been introduced in 1907 reflecting the pattern of effective protection that this would have entailed. As Table 3.9 reports, the difference to productivity growth implied by the reweighting of sectors would probably have been small. When tariffs were introduced in interwar Britain, the largest increases in effective rates of protection went to ‘old’ industries such as hosiery and lace and railway rolling stock (Kitson et al., 1991), which was hardly a well-targeted infant-industry approach.

  11 In a sample drawn from public companies in 1920, on average, the nine largest shareholders owned 50 per cent of the voting rights (Franks et al., 2009). By contrast, the largest railway companies had over 70,000 shareholders in 1911 (Foreman-Peck and Hannah, 2012).

  12 In contrast with their American counterparts who had more to gain from eliminating craft control (Haydu, 1988).

  13 Contrary to the intentions of the 1875 legislation, the House of Lords had in 1901 ruled in favour of the Taff Vale Railway Company and awarded damages against the Amalgamated Society of Railway Servants which had organized a strike.

  4

  The Interwar Years: Onwards and Downwards

  The year 1913 was the end of an era; during the following 25 years the economy operated in a very different environment subjected to massive shocks and a new political climate. Successive blows came with the First World War, the Great Depression and a reversal of the globalization process which had defined the period from the mid-nineteenth to the early twentieth century. The extension of the franchise was accompanied by a new competition for votes of workers and of women, together with the demise of the Liberal Party. The electorate in the 1929 election when the Labour Party won 37 per cent of the votes and 47 per cent of the seats, was about 29 million compared with 7.7 million in 1910 (Middleton, 1996).

  The adjustment problems arising from these changed circumstances were severe. They included dealing with a greatly increased national debt, coping with structural unemployment, arriving at a new macroeconomic policy framework and addressing the difficulties of the Victorian export industries. The implication was a transformation of the policy landscape; by the 1930s laissez faire had been replaced by the ‘managed economy’ (Booth, 1987). The gold standard and free trade had been superseded by a managed floating exchange rate and a general tariff on manufactures, taxation was a much higher share of GDP, unemployment benefits had replaced the Poor Law and industrial policy had been introduced.

  Not surprisingly, perhaps, traditional views of interwar economic performance were pessimistic. Nevertheless, between the peak years of 1924 and 1937 both output and labour inputs grew only marginally more slowly than between 1873 and 1913 (Matthews et al., 1982, p. 208). Indeed, following a lengthy discussion of British performance, textbook accounts became quite optimistic: ‘The view that, after a poor performance in the 1920s, the 1930s saw a genuine breakthrough, is indeed widespread and finds support not only in the output statistics but also in the quality of the modern investment and structuring of British industry towards the growth-oriented sectors…’ (Pollard, 1992, p. 39). This relatively favourable interpretation appears to be echoed by the emphasis placed by Matthews et al. (1982, pp. 506–507) on a U-shaped pattern in TFP growth with a low in the early twentieth century, followed by a revival in the interwar period, leading on to an all-time high after the Second World War. It should be noted, however, that these accounts lack an adequate comparative perspective.

  This discussion raises a number of questions which are the focus of this chapter. How impressive was growth performance? What part did ‘new industries’ play in growth outcomes? Did the new supply-side policy have positive effects? Were problems of the early start now over?

  4.1 Growth Performance and Potential

  At the end of the interwar period, the United Kingdom’s lead over France and Germany in terms of real GDP per person was quite similar to that of 1913 according to the estimates by Maddison (2010) reported in Table 4.1. Making comparisons vis-à-vis the United States is a bit more complicated. The estimates in Table 4.1 show a widening of the gap between 1913 and 1929 from under 8 per cent to about 25 per cent followed by a substantial narrowing to about 3 per cent in 1937. Prima facie, this seems to show a significant catching up and reversal of relative economic decline by Britain during the depression years of the 1930s. This is, however, rather misleading for several reasons.

  Table 4.1 Real GDP/person ($GK1990)

  France Germany UK USA

  1913 3485 3648 4921 5301

  1929 4710 4051 5503 6899

  1937 4487 4685 6218 6430

  Note: United States in 1941 = $8206

  Source: Maddison (2010).

  First, the choice of the end year in Table 4.1 favours the United Kingdom. By 1937, the business cycle recovery from the shock of the Great Depression was complete whereas, in the United States this took until 1941. In 1941, real GDP per person in the United States was $8206 (1990$GK); over a twelve-year cycle it had grown on average by 1.46 per cent per year compared with 1.55 per cent over the eight-
year cycle in the United Kingdom between 1929 and 1937. It may be better to see the Great Depression and its aftermath, as a phase where relative economic decline paused rather than was reversed, even though the United States experienced by far the bigger trauma. Second, the transatlantic income gap may be underestimated in Table 4.1. Using the PPP exchange rates calculated by Woltjer (2013), the income gap between Britain and the United States had widened from about 25 per cent in 1913 to about 40 per cent by 1929. Third, on the other hand, the widening of the gap between the two countries between 1913 and 1929 exaggerates the difference in underlying trend growth potential because the shock of the First World War had an adverse impact on income levels in 1920s’ Britain by raising (equilibrium) unemployment and reducing trade exposure through increasing trade costs. This was equivalent to a levels shock to GDP of perhaps 7.5 per cent (Crafts, 2014).

  Growth accounting estimates reported in Table 4.2 show that productivity growth in the United Kingdom continued to be well below that of the United States. There was a revival compared with the very disappointing outcome for 1899–1913 but during 1924–1937 labour productivity growth and TFP growth were below the levels of 1873–1899. In sharp contrast, TFP growth in the United States rose to new heights which were sustained through the 1930s, described by Field (2011) as America’s ‘most technologically progressive decade of the twentieth century’. The revival of TFP growth stressed by Matthews et al. (1982) is more apparent at a disaggregated level, as can be seen in Table 4.3, where most sectors, notably including manufacturing, achieved much stronger TFP growth in 1924–1937 than in 1873–1913. The big exception to this was ‘commerce’ (distribution, finance and miscellaneous services) which detracted significantly from overall TFP growth. Poor performance in commerce may have reflected disguised unemployment in hard times. Again, however, in most sectors, including manufacturing, interwar-period British TFP growth was well below the American level.

  Table 4.2 Contributions to labour productivity growth (% per year)

  Education Capital per hour worked TFP Labour productivity growth

  UK

  1924–1937 0.3 0.1 0.3 0.7

  USA

  1919–1929 0.3 0.3 1.8 2.4

  1929–1941 0.3 0.1 2.1 2.5

  Note: Estimates for United States are for the private domestic economy.

  Sources: Matthews et al. (1982); Kendrick (1961) and education contributions derived from Morrisson and Murtin (2009).

  Table 4.3 Crude TFP growth in major sectors (% per year)

  UK, 1873–1913 UK, 1924–1937 USA, 1919–1941

  Agriculture 0.4 2.1 2.1

  Mining –0.1 1.2 2.7

  Manufacturing 0.6 1.9 3.8

  Construction 0.1 1.3 0.7

  Utilities 1.6 1.8 3.9

  Transport and communications 0.7 1.0 3.1

  Commerce 0.5 –0.5 1.1

  GDP 0.4 0.7 2.2

  Note: Crude TFP means that labour quality (education) is not separately accounted for.

  Sources: Update of Kendrick (1961) in Bakker et al. (2017); Matthews, Feinstein and Odling-Smee (1982.)

  The United Kingdom struggled to match American productivity performance in the industries at the heart of the Second Industrial Revolution. Comparing Britain in 1924–1937 with the United States in 1919–1941, crude TFP growth in vehicles/transport equipment was 3.1 per cent per year compared with 6.5 per cent, in electrical engineering/electric machinery it was 2.0 per cent compared with 5.0 per cent, and in chemicals 1.4 per cent compared with 4.1 per cent. In particular, Britain was much less well placed than the United States to benefit from the new general purpose technology, electricity. As electrical power became a cheap input in the United States and there was a rapid shift to machinery powered by unit drive, factory design became much more flexible and capital-saving improvements were developed (David, 1991). More than 20 per cent of TFP growth in American manufacturing in the 1920s derived from these spillover effects (Bakker et al., 2017). Electricity consumption per employee in manufacturing in the United States was more than three times the British level in 1930 when the British price was about 50 per cent higher; there was no strong impact of electrical power on British manufacturing productivity (Ristuccia and Solomou, 2014).

  By the 1930s, underlying growth potential in the United Kingdom was somewhat higher than in 1913 on account of greater investments in human capital and R & D, as is reflected in Table 4.4. Both government and industry spent increasing amounts on R & D and employment in industrial R & D was in excess of 4,000 by 1938 when, however, the comparable figure for the United States was above 44,000 (Edgerton and Horrocks, 1994). Years of schooling continued to increase and had reached 7.5 years by the late 1930s. Here also, the United States had pulled further ahead especially in terms of post-14 education. By 1938, 45 per cent of 17 year olds were high-school graduates in the United States, whereas only 4 per cent of British 17-year olds were in school (Goldin and Katz, 2008) and average years of tertiary education were in the United States about three times the British level (Broadberry, 2003).1 Although, in the terminology of Figure 1.1, the United Kingdom was now a somewhat higher-λ economy than at the end of the nineteenth century, it still compared quite unfavourably with the United States.

  Table 4.4 Investments in broad capital

  UK, 1937 USA, 1940

  Non-residential investment (%GDP) 6.4 7.6

  Years of schooling, ages 15–64 7.5 8.8

  R & D expenditure (%GDP) 0.4 0.7

  Sources: Non-residential investment: Feinstein (1972), Carter et al. (2006); Years of schooling: Morrisson and Murtin (2009); R & D (for 1934): Edgerton (1996).

  4.2 The Interwar Unemployment Problem

  The defining feature of the interwar British economy was persistently high unemployment. As measured by the unemployment rate of workers enrolled in the national insurance scheme, unemployment was only below 10 per cent in one year (9.7 per cent in 1927), averaged 14.2 per cent over 1921–1938, and peaked at 22.1 per cent in 1932 during the Great Depression. The unemployment rate for the whole labour force was lower but nevertheless averaged 10.9 per cent, nearly twice the 5.8 per cent average for 1870–1913 (Boyer and Hatton, 2002).

  These averages mask considerable variations not only between years of recession and recovery but also, strikingly, between industries and regions, as is reported in Table 4.5. Relatively high rates of unemployment were experienced in ‘outer Britain’ and in the Victorian staple industries compared with ‘inner Britain’ and the new industries of the Second Industrial Revolution. High regional unemployment was associated with the spatial concentration of activities such as coalmining and textiles but in the worst affected areas unemployment was higher across all sectors. In February 1938, 20.5 per cent of male applicants for unemployment benefit had been unemployed for 12 months or more compared with 10.7 per cent in 1929 (Crafts, 1987). Long-term unemployment was concentrated in ‘outer Britain’ especially among older workers. Whereas 5.8 per cent of male claimants had been out of work for over a year in London at this time, the corresponding figure for Wales was 30.7 per cent, and for male workers aged 45–64 in Wales, 45.8 per cent. Overwhelmingly, contemporaries saw this as an ‘industrial problem’ which inflicted severe welfare losses on those trapped in this state (Pilgrim Trust, 1938).

  Table 4.5 Unemployment rates (%)

  1924 1929 1932 1937

  Coalmining 5.8 19.0 34.5 16.1

  Cotton textiles 15.9 12.9 30.6 10.9

  Iron and steel 22.0 20.1 47.9 11.4

  Shipbuilding 30.3 25.3 62.0 24.4

  Woollen textiles 8.4 15.5 22.4 8.8

  Cars and aircraft 8.9 7.1 22.4 5.0

  Chemicals 9.9 6.5 17.3 6.8

  Electrical engineering 5.5 4.6 16.8 3.1

  London 9.0 5.6 13.5 6.4

  South East 7.5 5.6 14.3 6.7

  South West 9.1 8.1 17.1 7.8

  Midlands 9.0 9.3 20.1 7.3

  North West 12.9 13.3 25.8 14.0

  North East 10.9 13.7 28.5 11.1
<
br />   Wales 8.6 19.3 36.5 23.3

  Scotland 12.4 12.1 27.7 16.0

  UK insured workers 10.3 10.4 22.1 10.8

  UK all workers 7.9 8.0 17.0 8.5

  Note: All estimates are for insured workers except bottom row.

  Sources: Garside (1990) and Boyer and Hatton (2002).

  The legacy of nineteenth-century industrialization in a free-trade economy left Britain exposed to high unemployment risks and significant labour-market adjustment problems. Trade wars and the world economic downturn severely affected ‘outer Britain’. Employment in coalmining, shipbuilding and textiles fell by 741,000 between the Censuses of Production in 1924 and 1935, and around half of this decline can be attributed to falls in exports. The structure of employment in the South East, and to a lesser extent the West Midlands, was skewed towards expanding sectors while declining sectors loomed large in the North East, North West and Wales. Shift-share analysis confirms that structural differences accounted for most of the large gap in employment growth between these regions during the interwar period (BPP, 1940). The South East (Greater London) secured 47.9 per cent (39.6 per cent) of new manufacturing plants during 1932–1938 (Scott and Walsh, 2005). In a new environment of electrical power and road haulage, the advantages of proximity to markets implied different industrial location decisions and that the employment geography of Victorian Britain had become outdated. Electrical engineering and the car industry preferred the South East and the West Midlands to the North East and Wales. Spatial as well as structural adjustment was required.