Britain's Post-war Economic Decline

by Nicholas Woodward. University of Wales, Swansea

new perspective Volume 1. Number 2. December 1995

Summary: Britain's post-1945 economic decline is more marked than in the late-Victorian or interwar periods. Restricted opportunities for growth and failure to use technology are by themselves insufficient to explain decline. It was also the consequence of widespread attitudes of resistance to change and government policies to limit unemployment.

Britain's Decline in Economic Growth

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. With the benefit of hindsight, however, there was nothing very alarming about this. The countries concerned had just entered their phase of modern economic growth and were able to achieve high growth rates simply by imitating production methods and technologies already developed in Britain and the United States. In any case, Britain was still the wealthiest country in Europe.

During the troubled interwar years Britain's relative decline was, if anything, arrested. Britain also reconstructed her economy rapidly after the Second World War, and in the late 1940s was still an extremely 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, although still rich in global terms, Britain had fallen well down the international living standards league.

The extent of this decline can be gauged from Table 1 [please refer to new perspective, Volume 1, Number 2, page 29 for this table], which shows the rates of productivity growth for a sample of 16 industrialised countries. Productivity has been used as an indicator of long run performance, because it is an important determinant of a country's living standards. The Table shows that all countries - including Britain - grew rapidly up to 1973, although there was a slow-down thereafter. The main thing which stands out, however, is Britain's comparative record. Up to 1973 Britain ranked thirteenth in the league. After this her position improved somewhat, although she was still in the bottom half.

The inevitable consequence was that Britain's living standards fell behind those of the other advanced countries. As Table 2 shows [please refer to new perspective, Volume 1, Number 2, page 30, for this table] , 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.

 

Explanations of Britain's Lower Growth

Why then has Britain failed to match the growth performance of the other industrialised countries since 1945? There are two broad possibilities. The first, which we examine in the following section, is that Britain has had, what some historians have termed, a low social capability. Social capability 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, because of her early economic start.1 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. There is some merit to this argument, but it is most convincing for the late Victorian period. 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 - for example, 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, it is claimed, 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. There is probably more to this hypothesis. At the beginning of the post-war period Britain had a smaller proportion of her labour force in agriculture than any other major industrialised country. It also helps explain why some countries have grown rapidly since the war. France, Italy and Japan, for instance, all had large agricultural sectors at the beginning of the post-war period and consequently were able to expand their manufacturing fairly quickly. However, the argument should not be taken too far: quantitative estimates suggest that with the possible exception of Japan, this factor accounts for only a relatively small part of the difference in growth rates between countries.2

There is, however, a third possibility - 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. Tables 1 and 2 offer some empirical support for this theory. They show, for example, that the United States, which was the most advanced country in 1950, grew relatively slowly thereafter, while Japan, which was one of the most backward, achieved the highest growth rates. I have already argued that this helps explain Britain's low growth in the late-Victorian period. Similarly, it can account for part of the disappointing performance since the war; being an advanced country, Britain's catch-up potential was fairly limited. However, it should be emphasised that, like the previous explanation, this can only partially explain away Britain's decline. For one thing, it does not tell us why some countries, such as France and Germany, which started a good way behind, were able to catch-up and overtake Britain as quickly as they did. For another, it cannot adequately account for economic decline in the 1960s and 1970s, when a number of European countries had already overtaken Britain, and yet were still able to sustain higher growth rates.

The Burden of the First Trade Union Movement

It appears then that a part - but only a part - of Britain's disappointing performance 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?

Again there have been no shortage of hypotheses. 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, so the argument goes, trade unions emerged in the eighteenth century, before the development of mass production methods. These early trade unions, therefore, 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. Some historians have pointed to the impact of the economic policies of the early 1980s to support this argument. At this time Mrs Thatcher's Government injected a substantial degree of competition into the economy. The effect of this was to encourage management to shake-out labour, with a marked improvement in productivity. Usually, this has been taken as evidence of extensive overmanning. However, there is a problem of interpretation here. Was the low productivity due to trade union restrictions? Or, was it due to complacent management, which was prepared to tolerate overmanning and restrictive practices?

Failures of Management

This leads to a second possible reason - that relative decline was a consequence of poor quality management. Of the suggested explanations, this has probably been cited most frequently. The origins of the problem, it is claimed, 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. As the latter had little sympathy for industry and commerce, the industrial classes lost their acquisitiveness and British values became less robustly entrepreneurial and British management lost its sense of enterprise, while the best potential managers tended to move into more prestigious areas, such as the Civil Service and the media.

Popular as this explanation has been it should not be exaggerated. There is no evidence that managerial occupations have been any less prestigious in Britain than on the Continent, although this may be less true when comparisons are made with North America and Japan. Neither is there evidence that the British have displayed a stronger antipathy to capitalism than other nationalities. Nevertheless, it is probable that weak management has played some role in Britain's decline. Studies from the 1950s suggest that the profitability of British multi-national corporations was lower than American ones, which operated in identical markets. This is suggestive of poor management. 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. Finally, there is a body of evidence which shows that British management has been less well qualified than its overseas counterparts.

Underskilled Workforce: Schools Fail the Nation

This leads to a third claim - that 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. There have been a number of areas in which Britain's education may have been defective.

First, there is university and higher education. Complaints have continuously been heard over the post-war period about the quality of British graduates and the commercial and technological relevance of their courses. It is, however, difficult to gauge how important this has been. Such complaints have been echoed by employers in other industrialised countries too. Judging from the extent of the `brain drain' in the 1960s and 1970s, it is unlikely that the quality of British graduates has been highly defective. What is more convincing is that, until recently, Britain produced too few graduates. Comparative data for the 1960s and 1970s suggests that the proportion entering higher education was lower in Britain than in most other industrial countries.

When we turn to the secondary school level, deficiencies are more evident. Comparative studies suggest that a relatively small proportion of British children have continued in education beyond the minimum school leaving age. They also indicate that British school children have performed poorly in international mathematics tests, and have had less familiarity with foreign languages. No doubt there have been a number of reasons for this but one explanation, favoured by historians, is that from an early date the British school curriculum became highly academic, giving relatively little weight to vocational education. This, it is argued, suited academic children, and the best British students have always compared favourably with those overseas. However, it was not appropriate for those with fewer academic interests. As a result schooling was often viewed by this group as irrelevant and tedious.

Shortcomings of the City and Banks

The remaining possibility relates to the financial system, which, 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. They borrowed short and, until recently, were reluctant to lend to business on a long-term basis. At the same time they tended to favour borrowers with collateral. One danger of this is that well-established firms, in older industries, had ready access to bank finance, while smaller firms, in new dynamic industries, with less collateral, did not.

Similarly, following the Limited Liability Acts of the 1850s and 1860s 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, of course, 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 research and development, and training, where the returns are long-term, but which can influence growth performance.

The conclusion so far then is that Britain's postwar 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 ask what role government policy played in the process. Did British governments adopt the right type of policies?

Soft Policies Adopted by Post-war Governments

In principle, there were two broad strategies which British governments might have adopted after the war. The first was a market solution, in which the economy was deregulated and producers exposed to competitive pressures. The advantage of this strategy is that competition will penalise firms with, say, weak management or poor industrial relations. This was broadly the type of strategy which West Germany adopted after 1948, with some success.3 Such policies were also pursued by the Thatcher Government in the 1980s, when, as already noted, there was some improvement in Britain's relative performance. The obvious implication is that it would have been better if British governments had moved in this direction earlier. However, this conclusion may be unsustainable. For one thing, it awaits to be seen if Britain's improved performance can be sustained through the 1990s. For another, there are reasons to doubt whether a market solution is always appropriate. If, for example, low growth has been due to an underinvestment in education then a market solution will not solve the problem.

The alternative strategy would have been to introduce a state-led modernisation programme. This was the direction which both France and Japan took after the war with some success.4 British economic policy, with the adoption of demand management, nationalisation and active industrial, regional and manpower measures, also became much more interventionist after the war. Yet, these policies seem to have been less effective. Why?

One possibility has been canvassed by Correlli Barnett. He has argued that the need for a modernisation strategy was clearly recognised by the wartime administration. Yet it never materialised after the war, because the immediate policy priority became the establishment of the welfare state. Barnett is probably wrong to put so much emphasis on the welfare state, which, judging from expenditure levels, has been no more prominent in Britain than in other European countries.5 Nevertheless, he is correct to argue that Britain never developed a modernisation strategy.

Why did Britain not develop a modernisation strategy? A clue comes from Table 1 [please refer to new perspective, Volume 1, Number 2, page 29 for this table]. It is not the intention to argue here that Britain would have achieved an economic miracle if she had been defeated in 1945. Nevertheless, the Table does show that a number of countries, which were defeated or occupied during the Second World War, were extremely successful thereafter. One possible reason for this is that wartime damage created exceptional investment opportunities. However, this cannot be the whole story; their above average performance was sustained for too long. Another possibility, suggested by Mancur Olson, is that, when a country is defeated in war, this will lead to a change in attitudes and policies. Business and labour become receptive to change, while governments are likely to push through unpalatable reforms and to adopt modernisation policies.

The Impetous to Change from Defeat in War

Wartime victors, by contrast, are less likely to do this. There will be less impetus to change, and governments will prefer to adopt policies which reward the population for their wartime sacrifices. This is essentially what happened in Britain after 1945. At this time there was extensive state intervention, but it was not to foster modernising as in France and Japan. Rather the overriding priority was to correct the principal economic deficiency of the interwar years - high unemployment. Thus Britain never had a modernisation strategy; it was effectively a strategy for containing unemployment. Similarly, wartime victory encouraged British governments to persist with international policies of questionable economic value. Thus, in the 1950s, Britain remained a colonial power, which restricted her freedom of action, without providing many obvious economic benefits. At the same time, she continued to act as a world policeman, and was obliged to maintain higher levels of defence expenditure than her international competitors, and this generated few economic benefits.

The Inadequacy of Mono-causal Explanations and the Burden of History

A number of factors, none of them overriding, have been responsible for Britain's disappointing growth record since the Second World War. What stands out from this survey, however, is that Britain's economic performance has been strongly conditioned by her history. Her early start, and the peculiar nature of her subsequent economic development, influenced both her growth potential and her social capability. Even the stance of post-war economic policy was conditioned by Britain's experience during the interwar years.

Notes

1 The distinction between growth potential and social capability has been developed by M. Abramovitz, Thinking About Growth, Cambridge University Press, 1989.

2 A. Maddison, Dynamic Forces in Capitalist Development, Oxford University Press, 1991.

3 H. Giersch, K-H. Paque and H. Schmieding, The Fading Miracle: Four Decades of the Market Economy in Germany, Cambridge University Press.

4 See, for example, J-J. Carre, P. Dubois and E. Malinvaud, French Economic Growth, Oxford University Press, 1976; C. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy 1925-1975, Stanford University Press, 1982.

5 For more detailed criticisms of the Barnett position see the symposium in Contemporary Record (1987).

Words and concepts to note

productivity: output per worker hour.

social capability: the ability of a country to exploit existing scientific and technological knowledge.

Questions to consider and exercises

What arguments can be made to suggest that Britain had low growth potential as a consequence of early industrialisation?

How much importance does the article give to support the view that the most important way to reverse Britain's relative economic decline is by investment, often long-term, in research and development?

Questions to consider

w List the reasons for low social capability presented by the author. For each of the reasons on your list award approximate percentage importance. Discuss your percentages with other students.

w Should long-term, background, or short-term reasons be given greater weight for Britain's relative economic decline? Give reasons for your assessment.

w How do long-term and short-term reasons for Britain's relative economic decline relate? Draw a diagram to show their connections.

 

Further Reading: C. Barnett, The Audit of War, Macmillan, 1986; W.J. Baumol, S.A.B. Blackman and E.N. Wolff, Productivity and American Leadership: The Long View, MIT Press, 1991; B. Collins and K. Robbins, British Culture and Economic Decline, Weidenfeld and Nicholson, 1990; N.F.R. Crafts and N.W.C. Woodward, The British Economy Since 1945, Oxford University Press, 1991; M. Olson, The Rise and Decline of Nations, Yale University Press, 1983; M. Sanderson, Educational Opportunity and Social Change in England, Faber and Faber, 1987.

Britain's Post-war Economic Decline by Nicholas Woodward. new perspective 1995

Nicholas Woodward, Lecturer in Economic History at the University College of Swansea, is the co-editor of The British Economy since 1945 and The Troubled Economy: Britain in the 1970s, University College London Press, 1994.

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