The long arc of UK productivity

Nick Crafts has a compact book – based on a series of lectures – about the trajectory of the British economy from the Industrial Revolution to the present. Forging Aahead, Falling Behind and Fighting Back: British Economic Growth from the Industrial Revolution to the Financial Crisis is a very nice and pretty up-to-date summary of the state of knowledge in economic history, combined with Nick’s somewhat idiosyncratic – but highly plausible – view that the seeds of the country’s post-world war 2 relative decline were sown in the institutions that enabled it to perform so well during the 19th century.

The chapters look at successive eras: the 1st Industrial Revolution, the US overtaking in the late 19th century, the Interwar years, the Golden Age, and the recent past. The trends in GDP, labour productivity and total factor productivity growth are set out, comparing Britain to a number of outher countries (mainly the US and Germany). The lens is modern endogenous growth theory, considering the expected returns to innovation and agency problems, and also – importantly for the US part of the story – the importance of market size. The book also makes use of the Hall and Soskice framework of comparative political economy. The argument is that being caught up by other countries was no shame, but being overtaken in absolute income per capita levels by all other comparator countries in the second half of the 20th century reflected significant policy failures.

The policy failures, in Nick’s view, date to the emergence of liberal market economy institutions in the early phases of the Industrial Revolution.  Although understandable at the time – notably the development of equity financing with dispersed shareholdings, rather than bank financing, and decentralized strong craft unions due to the importance of skilled labour for the young technologies – their persistence into the 20th century meant Britain lacked the ‘social capability’ that would have enabled it to take productive advantage of 2nd and 3rd Industrial Revolution technologies. The continental co-ordinated market economies fared better.

The other key policy failure underlined in the book is the weakness of competition policy in the domestic market, combined with the slow removal of barriers to competition from imports due to delayed entry into the European Economic Community (as it was). Postwar British governments protected has-been industries (not growing frontier ones, as some economists would support). And, having long been a leading free trader, this policy leadership was ceded, at least within Europe.

It’s a persuasive account. The one bit of economic history debate I’m aware of that’s not reflected here is the very recent debate between Jane Humphries and Robert Allen about how high real wages actually were during the Industrial Revolution (Allen arguing that high labour costs and cheap coal – ie factor prices – in the UK played a key role at that stage). So the book is a very nice survey of the state of knowledge about productivity and growth. It even ends on a mildly optimistic note that British institutions may be better suited to the distributed digital technologies, albeit pessimism about the prospect of leaving a large scale low barrier competitive market would surely outweigh this. And the bottom line is that the level of productivity and incomes in the UK compared to other leading economies leaves us with plenty of catching up to do.

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