‘The Cambridge Economic History of Modern Britain Volume I Economic Maturity, 1860-1939 ‘The Cambridge Exmmomic Bistry cf Modern Britain provides a readable and com: prehensive survey of the economic history of Britain since industrialisetion, ‘bused on the most upto-date research into the subject. Roderick Floud and Paul Johnson have assembled a team of fifly leading scholars from around the world 1 produce a set of volumes which are both luc textbook for undergraduate and postgraduate students and an authoritative guide to the subject. The text ‘pays particular atlention to the explanation of quantitative ana theory based enquiry, but all forms of historical research are used to provide a comprehen sive account of the development of the British economy. Volume I covers the ‘period 1700-1860 when Britain led the world in the process of industrials tion. Volume Il exemines the period 1860-1939 when British economic power HL it its height. The focus of volume II is 1989-2000, when Britain adjusted {to a decline in manufecturing, an expansion of the service economy and 2 repositioning of extemal economic activity towards Europe. The books provide an invaluable guide for undergraduate and postgraduate students in history, economics and ather social sciences. Roprrice FLown is ViceChamcellor of London Metropolitan University, & Fellow of the British Academy, an Academician of the Social Sciences and @ Fallow of the City and Guilis of London Institute. His publications include ‘An Invodction to Quantitative Methods for Historians and (vith D. McCloshey) The Economic History of Briain since 1700. PAUL JOHNSON is Professor of Economic History at the London School of Economics and an Academician of the Social Sciences, He has authored or edited seven books and over fifty articles and chapters on various aspects of the economic, social end legal history of modern Britain, and on the economics of ageing and pensions. Publications include Saving and Spending: Tae Working {lass Economy i Britain 1870-1988 Ageing ond Economic Wifare and Oid ge From Antiquity to Post Modernity. Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008(Cuage Minos Online 1 Corbige Une Pos, 208The Cambridge Economic History of Modern Britain Volume ||: Economic Maturity, 1860-1939 Edited by Roderick Floud Ioudon Mennpaitea Civesty and Paul Johnson, London Schoot cf Bamomics CAMBRIDGE UNIVERSITY PRESS“The Pit Building, Trumpington Stet, Cambridge, United Kingdoms 1 magipee UNIYERSITY PRESS ‘The Edinburgh Building, Cambridge CR2 2RU, UK 40 Wes: 20ch Stees, New York, NY 0011-4211, USA, 477 Williamsown Sead, Port Melbourne, VIC 3207, Australia Ruiz de Aiarcén 13, 28014 Made Spain Dock Howse, Tae Wareréromt, Cape Tewn 8001, South Aftica bnepyfww cambridge org © Cambridge Universiy Press 2004 ‘This book is in copyright Subject to stararory exception and to the provisions of relevant collective licensing agreements, 1 reproduction of any parc may take place without thewriten permission of Cambridge University Press Fost publisted 2003 ‘Thied printing 2006 Printed in che United Kingdom at the University Press, Cambridge ‘Typeface Swift 9.5125 pt and Formata Siem Ee [1 ‘A cmtlogue vcd for Ps took 1s apalale fans the Bes Ltnsry ISAN 0 521 82037 5 ISAN 0 521 $2737 6 Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008To Louisa and Oriana (Cuage Minos Online 1 Corbige Une Pos, 208(Cuage Minos Online 1 Corbige Une Pos, 208Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Cancedye Historia Oat © Contents st ¢f figures bx List (ftables x List {contributors av Prefice svii Longran growth NICKOLAS CRAFTS Population and regional development 25 DUDLEY BAINES AND ROBERT WOODS ‘Human capital and skills 56 STEPHEN BROADBERRY Manufacturing and technological change 1| GARY B, MAGEE. ‘The service sector 99 MARK THOMAS Agriculture, 1860-1914 133 MICHAEL TURNER ‘Trade, 1870-1939: from globalisation to fragmentation 161 GC. RRICK HARLEY Foreign investment, accumulation and Empire, 1860-1914 150 MICHAEL EDELSTEIN Enterprise and management 227 TOM NICHOLAS Domestic finance, 1860-1914 253 P, L, COTTRELL Living standards, 1860-1939 | 1 GEORGE R. BOYER srbidge Universi Pe, 2008Contents Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Cancedye Historia Oat © ‘The British economy between the wars 314 BARRY BICHENGREEN Unemployment and the labour market, 1870-1939 344 TIMOTHY J. HATTON British industry in the interwar years | SUE BOWDEN AND DAVID Mt. HIGGINS Industrial and commercial finance in the interwar years 1 DUNCAN M. ROSS Scotland, 1860-1939: growth and poverty II chive Le Government and the economy, 1860-1939 456 ROGER MIDDLETON References $90 Index 527 srbidge Universi Pe, 2008Figures 24 Longman trends in mortality and fertility in England and Wales, 1580s-1990s | 8 2.2 Examples of regional variations in the time paths for marital fertility (Ig) and muptiality im), Scotland, 1861-1931, England and Wales, 1851-1931 30 23 Tends in selected annual agespecific mortality rates {ages 0-4, 15-19, 25-34, 55-64), England and Wales, 7838-1913 | 32 24 Approximate trends in the childhood mortality rate {ages 0-4) and the ratio of infant (age 0 in completed years) To early childhood mortality (ages 1-4), England and Wales, 1580s to 19408, 33 25 Post 911 trends in social class mortality differentials among adult males (aged 15-64) in England and Wales measured by thi tandardised mortality ratio (SMR) 36 26 Estimates of life expectancy at birth for England and Wales and large towns, 1801-1901 37 27 Number of births and deaths in, and emigrants from, England and Wales per year before the First World War 39 28 Age distribution of the British population in fiveyear age groups, 1851-1991 a 5.1 Social savings am 5.2 Constimer expenditure on personal services, 1900-38 a 533 The share of primary, secondary and tertiary sectors in output and employment, 1851-1938 126 641 Crop and livestock output in the UK, 1867-1914 26 6.2 Grain and cattle and milk output in the UK, 1867-1914 7 63 Nominal and volume indicators of UK agricultural output, 1867-1914 a 7A Balance of payments as percentage of GNP, 1870-1939 163 7.2 Wheat and beef prices, US and UK, 1850-1914 166 73 Fatterns of world trade settlements, 1910 12 74 Comtraction of world trade, 1929-33 185 8.1 British savings and investment rates, 1850-1914 198 111 Unemployment adjusted wage trends, 1870-1913, Mm Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008ist of figuoes 1121 Per capita GDP for eight European countries and the UK. 1913-44 122 Postwar growth and the wartime setback, 1913, 1920 and 1927 123 Exports as a share of GNP in Britain and Europe, 1920 and 1927 24 Unemployment rate in industry in Britain and Europe, 1921-37 125 Industrial production in Britain and Farope, 1922-37 126 Central bank discount rates, 1921-37 127 Volume of British and European exports, 1921-36 128 Volume of British and European imports, 1921-36 129 Industrial production of gold and non-gold countries, 1925-36 13:1 Unemployment rate, 1870-1939 132 The probability of leaving unemployment, 1929 133 The real wage and employment, 1921-38: whole economy and manufacturing sector 134 The competing claims model 13.5 Wage rates and the cost of living, 1918-38 74.1 Value of exports at constant prices, 1920-38 16:1 index of population growth, Scotland and England and Wales, 1851-2001 162 Mejor Scottish regions 263 Employment in rural regions in Scotland, by employment sector, 1851-1951 264 Employment in central belt of Scotland, by employment sector, 1851-1951 165 Distribution of taxable incomes, Scotland and England and Wales, 194950 27.1 Rificiency-equity tradeottis) Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008 37 323 326 328 331 332 334 335 336 1m " 363 mW 381 4m 433 i anTables 11, levels and rates of growth of real CDPjperson, 1870, 1913 and 1938 13 112 Structural change and relative productivity levels, 1871-1973 4 11. spects of economic growth in the long run, 1780-1973 6 14 Growth accounting estimates, 1760-1973 n 115 Growth of GDP and FP: alternative estimates, 1856-1913, 3 1.6 Labour productivity and TFP growth in manufacturing, 1871/1913 and 1924937 19 1L7 Contributions fo manufacturing labour productivity growth, 0 2: Examples of definitions of social classes used by the Registrar General 35 22 Destinations of British emigrants other than Europe, 91853-1930 39 23 Population growth and migration, England and Wales, n-191 “4 24 Employment and the labour force, UK, 1920-38 in 25 Age distribution of male labour force, 1901, 1931 and 1951 " 26 Wages of agricultural labourers, 1867-1907 Bt 27 Employment growth in Greater London, Lancashire and Clydeside, 1841-1911 52 3.1 Educational enrolment rates per 1,000 population under age 20, 1870-1951 59 3.2 Average years of schooling of the male labour force in England and Wales, 1871-1951 6 33 Apprentices as a percentage of persons engaged in Great Britain, Germany and the United States, 1880-1952 1 34 Professionals in Great Britain, the United States and Germany, 1880-1991 66 35 Qualified accountants in the United Kingdom, Germany and the United States, 1882-1961 o 36 Proportion of industrial managers who were graduates in industrial companies, Great Britain, the United States and Germany, 1928-54 68 Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008List of tables 3.7 Research and development expenditure in manufécturing in Great Britain, Germany and the United States, 1934-59 68 3.8 Comparative US/UK and Germany|UK labour productivity levels by sector, 1869471 to 1950 69 39 Sectoral shares of employment in the United States, the United Kingdom and Germany, 1870-1950 70 310 Stocks of vocationally qualified persons as a percentage of employees, by sector and skill level in the United Kingdom, the United States and Germany, 1910-50 nm 3.11 Relative vocational skill levels, 1910-50 R 41 Mamufacturing’s plave in the economy, 1856-1913, 75 42 Output and fixed capital growth in manufacturing, 1873-1924 7 43 Gross reproducible capital, employment and capital per worker in manufacturing, 1869-1919 4A Sectoral composition of manufacturing in 1907 and 1924 7 45 National shares of world manufacturing output, 1860-1928 81 46 Industrial growth in leading manufacturing countries, 1870-1913. a 47 National shares of world trade in manufacturing exports, 1881-1929 " 48 Growth of manufactured exports in selected countries, 1871-1913 " 49 Main exports (excluding re-exports) of the United Kingdom {share of toral). 1881-1913 u 4.10 Labour productivity in manufacturing in the UK, USA and Germany, 1869-1925 85 4.1 Total factor productivity growth in manufacturing in the UK USA and Germany, 1873-1925 as 4.12 Major inventions by country of origin, 1776-1936 89 4.3 Foreign patents granted in the USA by country of origin, 1883-1920 90 5.1 A taxonomy of services (including mambers employed, England and Wales), 1851-1931 100 5.2 Industrial classification of service workers, UK, 1861-1938 101 53 Growth of railway services, 1850-1928 108 54 The distribution of consumption expenditures on market services, 1900-13 and 1920-38 13 55 Domestic service in England and Wales, 1851-1931 1m 566 Relative productivity growth by sector, 1851-1938 7 527 Labour and total factor productivity growth by sector, 1836-1938 58 Labour and total factor productivity growth within the service sector, 1924-37 129 61. Wheat imports into the UK 135 Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008ist cf tables 62 Meat imports and domestic meat supply in the UK, 1851-1914 63 Mean wheat yields in England, 1790s to 1900s 64 Indexes of grain, live meat and dairy product prices, and rents per acre 1870/4-1910)14 65 Trend of agricultural rents, 1850-1914 66 Agrictlmral output in the United Kingdom, by product, 1871-1914 67 Labour productivity in UK agriculture, 1871-1911 68 Total factor productivity in UK agriculture, ¢, 1871- 1g 69 Distribution of factor costs on sixtywo English farms, 61892 6.10 Rate of return on farmers’ capital on sixty-four English farms, ¢, 1892 71 Britain and world trade in manufactures, 1899-1937 81 Uk rates of savings and investment, 1830-1914 8.2 Realised rates of return to home and overseas railway securities, 1870-1913, 83 Realised rates of return, aggregate indices, selected subsperiods, 1870-1913 84 Some conjectures om the gains from imperialism in 1870 and 1913 85 Average annual defence expenditures, 1850-1912, 1.1 Measures of living standards for Britain and other countries, 1870 112 Trends in nominal and real wages, 1856-1938 “1.3 Amual fulltime nominal wage earnings, 1881-1938 “14 life expectancy and infant mortality: England and Wales, 1851-1982 115 Trends in height, weight and body mass in England and Wales, 1840-1939 111.6 Measures of living standards for Britain and other comntries, 1913 “1.7 Numbers receiving poor relief in England and Wales, 1850-1938 “118 Poverty rates and causes of poverty, 1899-1914 119 Poverty rates and cartses of poverty, 1923-37 124 Ontpat per worker, 1913-50 122 Anmual average rate of growth of net non-residential capital stock per person employed and total factor productivity, 1913-50 131 Regional unemployment rates, 1913-36 13.2 The duration of imemployment, 1929-38 (wholly ‘mempleyed only) Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008 137 139 ut ua ud us BL 156 158 162 193 198 199 25 231 MW 226 298 295 20 304 uS 37 350 355xiv List of tables 133 Benefit to wage ratios for claimants to insurance benefits, 1937 “34 Unemployment in four economic eras, 1871/91 to 1947)65 °A1 Net output by sector, 1907-35 4.2 Consumers’ expenditure at constant prices, 1920-38 143 Merger activity in British manufacturing industry, 1920-38 244 Comparative USIUK output per employee in manufacturing and the whole economy, 1870-1938 74.5 Comparative labour productivity by industry, 1935(7 746 Ratio of actual to potential electricity consumption in ‘manufacturing, 1924 and 1930 47 International comparison of private car taxation, smid-19305 15:1 Percentage of overdraft secured by collateral, 1930s 15.2 Midland Bank advances to industrial groups and areas, 1934-5 °6. The distribution of taxable income, 1949/50 °6.2 Income generated per 1,000 population, 1949/50 171 Fimetions of the state 172 Summary indicators of public sector size, selected years, 1860-1938 °73 General government expenditure and revenue as a percentage of GDP in OECD countries, selected years, «1870-1937 Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008 358 a7 375 376 378 385 393 43 aS im i ul 467Contributors DUDLEY BAINES is Reader in Economic History at the London School of Economics SUE BOWDEN is Professor of Economics at the University of Sheffield GEORGE R, BOYER is Professor of Labor Economics at the School of Industrial and Labor Relations, Cornell University STEPREN BROADBERRY is Professor of Economic History at the Univer sity of Warwick P. L. COTTRELL is Professor of Financial History at the University of Leicester NICHOLAS CRAFTS is Professor of Economic History at the London School of Economics MICHAEL EDELSTEIN is Professor of Economics at Queen's College and the Graduate School at City University of New York BARRY EICHENGREEN is Professor of Economies and Political Science at the University of California at Berkeley RODERICK FLOUD is Vice-Chancellor of London Metropolitan University C. KNICK HARLEYis Professor of Economics af the University of Western Ontario TIMOTHY J. HATTON is Professor of Economics at the University of Essex DAvID M. HIGGINS is Lecturer in Economics at the University of Sheffield PAUL JOHNSON is Professor of Economic History at the London School of Economics CLIVE H. LEE is Professor of Historical Economics at the University of Aberdeen GARY B, MAGEE is Senior Lecturer in Economics at the University of Melbourne Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008xvi List cf contributors ROGER MIDDLETON is Reader in the History of Political Economy at the University of Bristol ‘Tom NicHowas is Visiting Assistant Professor, Strategy and Interna: tional Management Group, MIT Sloan School of Management DUNCAN M. Ross is Lecturer in Economic History at the University of Glasgow MARK THOMAS is Associate Professor of History at the University of Virginia MICHABL TURNER is Professor of Economic History at the University of Hull ROBERT WOODS is Professor of Geography at the University of Liverpool Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008Preface In their gloomier moments, academics are prone fo predict the demise of their Subject. As the tastes of students change, as the economy waxes and wanes, as the number of academic jobs fluctuates and the average age of academics increases, so itis easy to discern a long-term decline in the attractiveness of any subject. Economic historians, above all. ought to be wary of such speculation, After all. if there is one single thing which is taught by study of the subject of economic history, itis that change is continuous and usually slow. As economists put it, ‘change is at the margin’ it proceeds by tiny increments or decrements and the end, or even the direction, is rarely t0 be seen by those who are living through the changes. But change is always ‘with us, a lesson which needs to be learned by each generation. It should be learned particularly by those eminent economic commentators who, at each stage of the business cytle, confidently predict that that stage, ‘whether of boom or bust, will go on forever. But it must be learned also by those who predict that an academic subject is in terminal decline On the evidence of the three volumes of The Cambridge Economie History cf Modern Britaén, reports of the death of economic history are clearly pre- ‘mature and probably mistaken. The volumes demonstrate a vibrant sub- ject, reaching out into new areas of research and using new techniques to explore new and old problems. Economic history, as revealed in these ‘pages, is a true interdisciplinary subject, a point emphasised also by the contributors to Living Economic and Socéat History (Hudson 2001} which was published to celebrate the 75th anniversary of the Economic History Society, the guardian of the subject in the United Kingdom. As Pat Hudson emphasises, the subject has certainly changed. The ro- fhm phrases of Ephraim Lipson, the beautifully crafted analyses of John Clapham, have given way to equations, to the quantitative analysis of bizarre sources stich as fmuman skeletal remains and to the increasing emphasis on the study of national economic histories within their global environment. Yet the essence of the subject remains: in the words which are used each Sunday to advertise the News ¢f the World, ‘all human life is here’. Economic history is about the behavionr of hmman beings in an ‘uncertain world, as they struggle to ean a living, as they decide when fo hhave a child, as they band together in a commen canse or, all to0 often, fall out and resort fo conflict or war, Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008xii Prfice ‘The economic history of modern Britain, the subject of these volumes, hhas seen all these and billions more human acts, collective and individual. ‘In most cases, economic history is about collective behaviour, There are feey “great men’ (and even fewer ‘great women in British economic his- tery, mainly because economic change can very rarely be attributed to a single person. Even if, cn occasion, economic historians identify one per- son as an inventor who has changed the world, other historians will usu ally jump in fo claim the credit for another, or at the extreme will claim that, comnterfactualy, the invention really did not make much differ. ence. This alone is enough to keep the subject changing, But also, because we cannot directly observe collective behaviour or describe myriad indi- vidual acts, the subject has to theorise as well as describe, Only through theory can we hope fo make sense of the economic past. Some academic subjects, im such circumstances, turn in on themselves and allow theory to predominate. Often, they become the preserve of the favoured fess, writing and publishing for each other, theorising in increasingly arcane Language. New technologies of academe, the email and the working paper, abet these tendencies as the results of research. are circulated within an inner circle and only emerge, months or years later, to inform a wider amdience The Cambridge Economic History cf Modern Britain, by contrast, belongs to a tradition which believes that research and scholarship have no purpose if they are not used, if they are not disseminated as soon as possible t0 as wide an audience as possible. In other words, its editors and authors hhave a mission to explain. This certainly does not obviate the se of the most ingenious and complex techniques to tease out the mysteries of the ppast; it does demand, however, that the techniques and the results that stem from them are explained clearly, concisely and in Language which anyone interested in the topic can understand. This was the aspiration which lay, for example, behind The Economie History ef Britain since 100 (Flond and McCloskey 1981, 1994) and it still animates these volumes. ‘They belong to an academic tradition exemplified by Lord Rutherford, the great Cambridge scientist, who believed jin somewhat anticqtated parlanced that “The good scientist should be able to explain his results to the charlady in his lab.’ “These volumes, therefore, are textbooks, in the best sense of books ‘which explain their subject. They are written by leading researchers, drawn from many countries around the world, who have themselves 1e- cently contributed to our understanding of British economic history; ust ally with pleasure, they accept the obligation to tell students and others ‘with an interest in their subjects about the results of academic enquiry by themselves and others in the field. It is not always possible, of course, to be sure of the background knowledge which each reader will possess: most of the techniques and technical terms have been explained as they Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008Priface are used in the chapters which follow, but some readers - if they are puzzled - may need to consult a dictionary or a dictionary of economics. All authors need critics. A phrase which seems limpidly clear to one person may baffle another and only an informed critic can help the au- ‘thor to express complex notions in a comprehensible way. For this reason, all the drafts of the chapters which follow were discussed, not only by the editors, but by all the other authors within each volume and by a mumber of invited commentators who gathered together at a conference held in London Guildhall University, The editors are grateful fo those commen- fators: Martin Daunton, Tim Leumig, Richard Smith, Emmett Sullivan, Barry Supple, Rick Trainor and Peter Wardley. Our grateful thanks go also to the Economie and Social Research Coumeil, the British Academy, the Gatsby Foundation and Cambridge University Press for their support ‘for the conference and the production of these volumes. Richard Fisher, Hlizabeth Howard and Helen Barton at Cambridge University Press. have encouraged us throaghout the process of publication and we have also had the invaluable support of an exemplary research assistant, Claudia awards Roderick Floud and Paul Johnson Concedye Hisrka Oaline © Cahige Unlvtiy Pres, 2008(Cuage Minos Online 1 Corbige Une Pos, 208Long-run growth NICHOLAS CRAFTS Contents An overview of growth Keyideas trom growth economics A gowth accounting perspective Did Victorian Britain fai? Did the interwar economy succeed? Postscript: market failure or government tailure? 1 INTRODUCTION ‘This chapter reviews UK economic growth performance from mid- Victorian times to the end of the interwar period. It aims to place this experience in the context both of initial British preeminence and subse quent relative economic decline and of new ideas in growth economics. A growth accounting framework is used to establish the proximate sources, of growth and to compare UK experience with that of Germany and the United States. Against this background, special attention is given to two controversies, namely, whether the British economy “failed” in the late Victorian and Edwardian period and whether the interwar period and, es- pecially the 19306, saw a sticcessful regeneration of the economy's growth, potential. Finally, in so far as the UK underperformed curing these years, it is important to examine the incentive structures which imformed de- cisions to invest and fo innovate and the roles played by market andjor ‘government failure. Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,‘Nicholas Crafts AN OVERVIEW OF GROWTH Britain was the first industrial nation but by the end of the twentieth century had become just another OECD! economy with an income level below that of North America, most of western Europe and parts of East Asia. This relative economic decline is sometimes regarded as a continu ous process that started around 1870 and had already alarmed conterpo- rraries in the Late nineteenth century as Germany and the United States emerged as powerful economic rivals. Its dimensions are, however. not Hill understood by many commentators. This section sets out a basic quantitative framework within which debates about UK growth perfor: mance can be placed. ‘Table 1.1 reports estimates of income levels and growth rates of real GDP per person for western Furopean economies and for Japan and the United States in the period 1870-1938, The units of measurement are “purchasing power adjusted’ dollars of 1990 so that account has been taken of differences in internal price levels in the assessment of the rela tive standing of different countries, While these estimates are subject to a number of health warnings in terms of both the imperfect nature of the ‘underlying economic data and the difficulties of solving the “index num- ber problems of tracking real output through time, the broad picture in ‘Table 1.1 is reliable enough to make the following points. First, the UK ‘was a clear leader in terms of income per head in 1870 but was overtaken by the USA around the start of the twentieth century and by Switzerland in the interwar period. Nevertheless, the UK continued through to the end of the 1930s to have an income level well ahead of that of both France and Germany — cvertaking by these continental European rivals took place during the ‘golden age’ of Etropean growth after the Second rid Wer. Second, over the whole period 1870-1938 several European countries were catching up through faster growth that enabled them to reduce the income gap with the UK; these inciuded Denmark, Germany and Sweden, while the majority of European countries had faster growth rates than did the UK. Third, in general, growth rates in these years were modest relative to the achievements of the “golden age’ of the 1950s and “1960s When growth of per capita income between 3 and 6 per cent per year was the rule and they were also somewhat below the late twentieth century experience of these coumtries (Maddison 200%} Table 1.2 reports on productivity rather than real income per person. Here the data are more problematic and the table is restricted to compar- isons with Germany and the United States where the data are relatively ‘good. The table reports both labour productivity and total factor pro- ductivity (IEP). The former is defined as output per worker Whereas the > she Ovanisation for Economic Cooperation and Development, 2 group of leading deve) ‘ped nations. Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,1870 uk Nethelance Belgium Swtsertne Derenatk Cermany France asta weland Sweden aly ey Fir Portugal Geese Japan usa 1970-1815 nethelanes Belgium Sibseban Derek Geernang France asta elon Sweden waly ey Spain Finn Potugal Geece Japan usa S13 288 2087 am 2008 1915 1876 198 175 1664 1499) 137 1875 140 7 215 ar 2385 10 03 10 15 14 16 14 1A 10 1s 13 13 12 1A " 13 15 1s 1913, UK Switetand Belgium Nethelanc Denmark Germany France austin Sueden tela aly Nonny Spain Flan Greece Portugal Japan usa 191558 Sisedand Belgium Nethelands Derek Geernang France asta Sweden weland aly ney Spain Fir Greece Portugal Japan Usa aant 4256 4z0 siz 5835 388 Bas 5096 2136 2564 2501 2s 2a 1592 ie 1,385 5301 1958 ‘Sereda ue Denmark Netherlands Germany Belgiur Sweden France Norway Finn ‘usta aly veland reese Portugal Japan usa 5500 5,81 5782 5280 5128 435 Ans 4.486 ag 3500 3560 5318 sug 2678 202 1588 240 5,126 “Sacre Weldon 1995 30) Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,‘Nicholas Crafts UK__Germary USA __Geman/UK US/UK Geamany/K US/UK 1871 sacle = 2248550 fig 583 ut dusty 4247812488 1355560 1538 senices 354A 52) 8 87 863 cor joo 10091000535 e986 25.1 13 pice 118 MSO 10320714 1178 dusty 44579820 1935 1028 151.1 senices 4417S. tors 832 nz cor joo 1009 100055. 17753 uw mi saicolue 62288872 1033 sa7 1188 Industy 445582318984) 195 or 161.1 senices 485519505 BST io 95 9.1 cor joo 10091000 1325783 1053 1980 Aeicule S143 mo 46 1s rusty 40542129858 mse 953 2180 Senices 484555 S81 va05 82 02 cor jon9 1009 100074 1889782 138, saiculure 2972 sz 508 iia a8 a2 dusty 4183 1891S 2811124 1 senices 555455 TA 119 13751180 1205 cor woo 1009 10001149 15231082 im 1 senpoyren shes in prcetages Fr he prolutayleesarpartonsnearh yoo he UK eels aetaled 2 100 For Geta copa you 125 ee B37 Sou rey 203 latter is a weighted average of output per worker and output per unit of capital and, if well measured, will reflect differences in technology and in the efficiency with which Labour and capital were used. TFP estimates are a very important way of benchmarking a country’s productivity per- formance. Unfortunately, in this period they are not altogether reliable, especially for Germany. The economysvide comparisons of labour produc. tivity in Table 1.2 are not too surprising given the estimates reported in ‘Table 1.1. The United States took the lead before the First World War, hhad a sizeable lead in 1937 when its labour productivity exceeded that of the UK by almost a third and extended this to two-thirds by 1950. Germany narrowed the gap appreciably between 1871 and 1911. but re maimed distinctly behind the UK in 1937 and did not overtake the UK ‘until the 19605 Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,Longe grow: [At the whole economy level, the level of TEP in Germany relative to the UK followed a broadly similar path to that of labour productivity. With regard to the United States, things were a little different as the UK retained its lead until after the First World War and there was only a small American lead in 1937. After the Second World War, however, a large TEP gap was apparent but even so this was appreciably lower than that in labour productivity. Throughout the twentieth century the American economy operated at a much greater level of capital intensity than the UK, [AT the sectoral level, the picture is more complex. The USA already shad a substantial lead over the UK in labour productivity in industry in 871; this had grown substantially by 1950 but then the UK caught up a bit. in agriculture and services, American labour productivity was below that in the UK in 1870 but by 1911 this deficit had been tmmed into a small lead which was also sustained through 1937 and then extended after the Second World War, although productivity gaps in these sectors ‘were always much lower than in industry. Interestingly, the United States ddid not extend its TEP lead in industry between 1871 and 1911 and the subsequent gains made relative to the UK before 1929 were not sustained during the 1930s but by 1950 the gap was much wider than in 1871. In services the UK TEP level was not overtaken by the United States until the 1940s, ‘Turning to Germany, where TEP and labour productivity comparisons are fairly similar, the most notable feature is the contrast between agri- culture and industry. In industry, Germany evertook the UK in the early twentieth century and had established a lead of over 20 per cent by 1911 which was not, however, maintained between the wars but was re established during the golden age after the Second World War. In agri- culture, however, Germany persistently lagged far behind British levels of Iabour productivity, In services, Germany reduced Britain’s lead during the early part of the period but did not surpass British productivity levels until the 1960s, “Table 1.2also displays estimates of the sectoral composition of employ- ‘ment. Here the striking feature is that in 1871 the UK had a much smaller agricultural and a good deal larger industrial sector than either of the other two countries. Indeed, the UK was a mejor outlier in nineteenth century Europe with regard to the small size of its agricultural sector ‘which derived both from an early embrace of capitalist farming and from freetrade policies. Over time, these discrepancies in economic structure were considerably reduced, as Table 1.2 shows ‘Two important points follow from this, as Broadberry (1998) has stressed. First, American overtaking of Britain was based to a consider- able extent on relative trends in productivity in services combined with a lange shift of labour into that sector rather than simply resulting from the development of higher labour productivity in industry. Second, the Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,6 ‘Nicholas Crafts seo 1016S TTS (GOF/person (57350 it) vans an SeT AON OG «120 GOP growth (9 pa 10 19 1a WP growth ( pa) 905 040 os 94s lie expectancy ee) ar 392 a3 534 ult itera 8) " sa 96 Pinar enrainent 8) 36 36 190. 100 Secondary erolert (3) Ww 55 . RAD/GDP (35) 902 22 onesie invert GDP (1) 45 53 " 145 -arcutucal employment (8) 35 RI “a Gowth dren ese pei ge Soc Up te Cs 128, explanation for Germany's relatively weak performance in real gross do- _mestie product (GDP) per person and everall labour productivity fnotwith- standing its industrial challenge to Britain] is seen to have resulted largely from a relatively large and lowproductivity agriculture. Protectionist German trade policies are seen to have been costly in these terms ‘Table 1.3 puts growth after 1870 in the context of experience during the earlier industrial revolution period. The feature that stands out in this table is that Britain was never a fast-growing economy prior to the Second World War. Indeed, from today’s vantage point, the economy of ‘the industrial revolution period can he seen as having relatively limited growth potential. This assessment is informed by several aspects reported in Table 1.3. Industrial revolution Britain was an economy which had very modest levels of investment in human and physical capital. Despite fa- :mous breakthroughs in textiles technology and more generally in the use of steam power, THF growth in the classical period of the industrial revo- Intion was tmimpressive by postFirst World War standards; the economy ‘was characterised by weak fechnological capabilities and by substantial disincentives to innovative activity judged by later rather than contem- porary standards (Crafts 1995) ‘To sustain its early lead into and through the qiintieth century, Britain would have had to progress very consid erably beyond its industrial revolution capabilities. In fact, by the late nineteenthjearly twentieth century considerable strides had been made in this direction (see chapters 3 and 4 below), A higher proportion of GDP was devoted to capital accumulation while rapid expansion of ed cational provision represented a big step forward in investment in people {Sanderson 1999) and the first industrial research and development lab- oratories were set up (Edgerton and Horrocks 1994) It should be noted, ‘however, that all of these growthpromoting efforts were distinctly mod- est relative to what would come along after the Second World War and Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,Longe growtie that, as we shall see, they did not entirely match the progress made in other countries In every respect, the “golden age’ economy after 1945 had a much ‘higher growth potential than had heen the case either during the indus- trial revolution or in the early twentieth century. Many more resources were devoted to physical investment, imman capital formation and re search and development (R&D) while TEP growth was far in excess of ear- lier times. The third quarter of the twentieth century was undoubtedly the period when economic decline relative fo other European economies ‘was at ils most pronounced (Crafts 2002). Table 1.3 reminds us that this ‘was nt hecanse absolute grawth performance in the UK had diminished but rather because other countries had adapted better to the enhanced opportunities after the Second World War. KEY IDEAS FROM GROWTH ECONOMICS ‘Fer thany years the traditional neoclassical economic growth model ruled the roost. This viewed the sources of economic growth as being growth in the physical capital stock and the labour force and imprevements in tech- nology which raised the productivity of these factor inputs. This model ‘has (0 key assumptions. First, capital accumnlation is subject to dimin- ishing reams. Second, technological progress is exogenous and tmiver- sally available ~ in a famous phrase it is ‘manna from heaven’. These assumptions are fondamental to two welkknown long-ru predictions of the neoclassical model, namely, that policy and institutions do not influ ence the rate of steadystate growth and that all countries converge to the same income level with initially poorer countries growing faster as they eliminate initial shortfalls of capital per worker. A variant on the neo classical model is the so-called Augmented-Solow model which embodies a broader concept of capital including both physical and haman capital but comes to the same conchusions albeit with less severely diminishing returns to investment, Although some insights from this model foumd favour and an em- pirical technique derived from it, growth accounting, has been widely ‘sed in economic history, it is probably fair to say that the pure neo- classical model has generally been regarded by economic historians as ‘unhelpful in most circumstances. In particular, the notions of universal technology and long-run income convergence have probably seemed far fetched to historians accustomed to thinking in terms of, say, the new institutional economic history with its emphasis on the importance of institutions and potitical economy considerations to growth outcomes Moreover, this model cannot really cope with the leading economy being overtaken and, after all, this is at the heart of Britain's relative economic decline, Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,‘Nicholas Crafts Revent developments in growth economics offer more attractive fear tures. These include the acceptance that institutions and policy can pro- mote divergence in growth outcomes and, associated with this, the recog: nition that catchup is not automatic. The central ideas concern the microeconomic foundations of growth and the concept of endogenous ‘growth, These have come together most frnitfully in models that ama- lyse the role of endogenous innovation in the growth process, ie. that consider the rate of technological advance to be infinenced by economic incentives. In effect, these models drop the assumption that technology, and the efficiency with which itis used, are universal. Carefully deployed, these ideas can inform a reappraisal of controversies surrounding British growth performance Endogenous growth occurs when longrun growth outcomes are de- termined by economic forces. This requires either that a mechanism is found to eliminate diminishing returns to capital accurmulation or that the mite of technological progress is responsive fo additional innovative effort without being undermined by diminishing returns fo R&D. In such. cases, good bad) policy can permanently raise (lower the growth rate of income per head, in the former case by leading fo a higher investment rate and in the latter case by encouraging more resources into innovative activity. “The hypothesis of endogenous growth is highly controversial. The evi- dence does not support the claim that there are non-diminishing returns to investment in either narrow or broad capital, Second, the jury is still cout on the claim that the steady-state growth rate of the leading economy can be increased by more R&D, but the experience of the late twentieth century is not very encouraging. For this reason, models that embody endogenous innovation do not all have this property (jones 1995, 1999}. Evidence of the impact of incentive structures on the rate of innovation is plentifil; for example, itis clear that the ability to appropriate returns, market size and demand growth all influence innovative effort Jaffe 1988) and there is strong evidence for postwar Britain that intensification of competitive pressures on firms stimulates innovation (Aghion et af. 2003} ‘The theoretical investigation of endogenous innovation has the potential toyield important insights into failures to exploit technological opportu nities to the full and thus into longrun divergence of income levels and growth rates: Broadly speaking, new growth economics suggests that there are two important aspects of the incentive structures that influence decisions fo innovate and invest which matter for growth outcomes, namely their im- pact on expected returns and on agency problems (Aghion and Howitt +1998), Thns, institutions and policies that reduice the supply price of cap ital or research inputs or reduce fears of expropriation can increase in- novative effort, speed up technology transfer and enhance the chances of rapid catchup growth, Since effective and timely adoption of new Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,Longreen grow: technologies tends to be costly to managers of firms in terms of the ef fort requited, it is also important that they are incentivised to work hard on behalf of the owners ~ when this is not the case we speak of perfor. mance being jeopardised by principalagent problems. Unless there are large external shareholders who can internalise the benefits of effective monitoring of management, strong (though less than perfect} product market competition tends fo be important in tmderpinning productivity performance (Nickell 1996, Finally, these ideas resonate with economic historians’ discussions of the international diffusion of technology. In particular, there is an obvi- ous commection with the idea of ‘social capability" used by Abramovitz and David (1996 and see below). But it should also be noted that in another de- parture from the assumption that tecthmology is universal these authors stress the importance also of “technological congruence’ in catching up or falling behind. Here the point is that the costeffectiveness of a tech nology may vary across comntries where market size or cost conditions or availability of complementary factors of production are not the same and ‘thus decisions whether or not to adopt it based on profitsaximisation can differ A_GROWTH ACCOUNTING PERSPECTIVE Growth accounting is @ useful technique, much employed by economic historians, with which to examine long-run growth. It is well explained and put in the context of modern growth theory in Barro (1999), Despite problems that are discussed below. it provides a method of benchmarking ‘growth performance and the estimates of TFP that result from its use are an important diagnostic in international comparisons. Growth account. ing was central fo the highly influential interpretation of the longrun development of the British economy by Matthews et af (1982. Growth accounting seeks to attribute growth to its proximate sources in terms of factor inputs and TEP. TEP is the weighted average of the ‘growth of productivity of the individual factor inputs. The basic formula ‘used in growth accounting is the following: ay Y=calll HPAL +ALI where the growth rate (A¥/Y) of output (Y) is accounted for in terms of the contribution of the capital stock (AK/K) times the elasticity of output with respect to capital (a), the contribution of the labour force (AL/lj limes the elasticity of output with respect to labour (pj and the growth of TEP (AA/A) In practice, ce and B are approximated by the shares of profits and ‘wages, respectively, in mational income, and TEP is found as a resid ‘ual when estimates of all the other components have been entered into Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,10 ‘Nicholas Crafts the formola, Capital stocks are estimated using the perpetual inventory method of adding up past investment flows and assuming 2 lifetime for capital assets, while labour inputs are usually measured in hours worked adjusted for the educational composition of the labour force. This for- mula would be exactly right if, as in traditional neoclassical growth the ory, the economy could be thought of as an aggregate Cobb-Douglas production function, Y = AICIP operating under conditions of perfect competition and constant returns to scale. The parameter A would re fect the state of technology and TEP growth would meastre exogenous technological change (‘manna from heaven’ Cantion is required, however, before assuming that residual TEP growthreally measures the contribution of technological change to eco- nomic growth. Technological change may be less than TIP growth if there are scale evonomies or improvements in the efficiency with which resources are used. or if improvements in the quality of factors of pro- duction are underestimated, for example owing to unmeasured human capital accumulation (Abramovitz 1993) By contrast, if the elasticity of substitution between factors of production is less than 1 and technologi- cal progress has a (Hicksian) Laboursaving bias, as many analysts think is often the case, then conventional TFP growth tnderestimates the contri- bution of technological change and the mismeasurement increases with the growth in the capital to labour ratio, the degree of laboursaving bias, and the inelasticity of substitution (Rodrik 1997 Since faster technological change raises the steadystate rate of growth of the capital stock in a traditional neoclassical growth model, part ofits impact on growth compared with the counterfactual of no technological change shows up in capital's measured contribution. ‘he advent of en- dogenous growth theory strengthens this kind of reason to believe that the contribution of technological change exceeds TP growth. ‘Thus, in models which envisage endogenous innovation driving growth through expanding varieties of capital inputs, a fraction of the contribution of the ‘growth in varieties of capital facilitated by R&D accrues to capital and is, rot measured by TEP. The tindermeastrement will be greater the larger is the endogenous component in technological progress (Barro 1999}, Table 14 reports a growth accounting decomposition of the sources of growth for the British economy from the onset of the industrial rev- lution to the end of the interwar period. These estimates are quite crude in that labour quality is not accounted for in labour’s contribu: tion but is part of the TEP residual (although an indication is given of the possible contribution of education) and prior to 1873 labour input is meastred by numbers of workers rather than hours worked. The aver- all picture is one of accelerating growth from the mideighteenth to the mid-nineteenth century based on increased contributions from all three sources of growth, After 1873 growth was slower and all three sources of growth, notably inciuding TFP growth, show decreased contributions. In Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,Longe growtie a Cuiput growth Capital contbution Labour conibwion THF growth Education 170-80 08 1 935 90 1m) 17 90 1931-75 aa 1en-195 18 955 es a oss 1.08 Mun-73 28 0 935 ne Acoantoral ou acoing eatin ed ch ee arts = A/a Ralwhniea = Gam — oo baie inne ars Conutine are aun rare OOD Ade eine oe bon a eLuGton ns vould beaded abot rps nd decd om eps eal ached eared by asutingi ne wy aden elect ‘Sringsveesen aout eva ote crtiutonoscoaing to Bou cay tecge Unc 28) adt ayes aes hans steetarin br perc Cohen and Sm a0} Soin etmas bed on Manes 962 Madson 235 ard ih 1232 Soucns Cos 199 and Mahone 96, the interwar period capital’s contribution was relatively weak while after the Second World War hours worked per member of the labour force fell sharply and growth was based especially on much stronger TEP growth. In- deed, perhaps the most striking feature of Table 1.4 is how much greater was the contribution of TEP growth after the Second World War than in the industrial revolution or at any time in the nineteenth century. ‘This contrast probably does reflect real changes in the contribution of technological change to growth, but may well exaggerate the magnitude. 1t seems likely that the bias of nineteenth-century technological change ‘was more labour saving than that in the twentieth century and together ‘with much faster growth in the capital (0 labour ratio in the latter period this may well mean that the conventional (Cobb-Douglas) assumptions imposed in growth accounting understate technological change before a8 opposed 10 after postSecond World War (Abramavitz. 1993}. The slaw- down in TEP growth in the laternineteenth and early twentieth centuries deserves a closer look (see below} DID VICTORIAN BRITAIN FAIL? ‘The heading of this section is also the title of a famous article written byMcCloskey. In it he claimed that in the prefirst World War period the Bitish economy was ‘growing as rapidly as permitted by the growth of its resources and the effective exploitation of the available technology’ (1970: 451), This conchusion was based on three very neoclassical arguments, First, using the insights of a traditional growth model, it was argued that devoting more resources to home investment would have run into diminishing returns. Second, it was claimed that the tectnical choices made by British firms were efficient and that the highly competitive Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,2 ‘Nicholas Crafts market environment ensured that there would be no serious and per sistent errors at the industry level while the capital market operated to eqqalise returns to different types of investment at the margin. Third, it ‘was maintained that British productivity growth could not have been any higher which in effect rules out the possibility that the UK could have anticipated the American move to faster technological change. ‘This assessment has, of corse, proved highly controversial and alk legations that a mumber of serious failures inhibited economic growth continue, One of the most celebrated of these claims has been ‘en- trepreneurial faiture’, perhaps the bestimown proponent being Landes (1969) who recently reasserted his view as follows: ‘one is inclined to define the British disease as a case of hard tardiness; entrepreneurial constipation’ (Landes 1998: 455), Another well-mown hypothesis is that the capital market unduly favoured foreign investment and had insti- tutional failures that undermined the flotation of new businesses. and slowed down structural change in the economy (Kennedy 1987). Yet an- other criticisin is that the British education system exhibited a number of weaknesses and that technical training was lacking both on the shop floor and in the boardroom with adverse effects on technological progress {Sanderson 1988). Finally, overreliance on ‘selfegulating’ markets and a regrettable lack of state intervention aimed at modernisation of the econ- omy was the charge levelled by Elbanm and Lazonick (1986) ‘These arguments are reexamined below fand in more detail in chapter 4) in the light both of the subsequent accumulation of evidence and of new ideas from growth economics. Before this, however, itis nec. essary {0 confront the snggestion that there was a climacteric in British gvowth prior to the First World War. The notion of a climacteric is of a sharp reduction in trend growth and, as proposed by Feinstein et af (1982), a cessation of TFP growth between 1899 and 1913. It is this hy- pothesis that will be addressed here rather than the earlier literature on an alleged climacteric in the 1870s, a survey of which can be found in Saul (1985) It should be acceptest that the existence or otherwise of a climacteric is not decisive with regard to the growth failure hypothesis. For example, if it is argued that tecimological revolutions come along at discrete in- tervals then a growth slowdown accompanied by a hiatus in TFP growth. in between the first (steam and steel] and second (electricity and cars) “industrial revolutions’ may be quite understandable and not indicative of underperformance (PhelpsBrown and Handfieldjones 1952). On the other hand, ¢ constant trend growth rate could represent a failure if op- portunities for faster technological change were taken up more vigorously in other comntries whose growth consequently accelerated as was noted by Crafts et of (1989). Nevertheless, on balance, establishing that there was a dimacteric in TFP growth would strengthen the hand of those arguing for a growth failure. So was there a late Victorian{Edwardian climacteric? Cabsdge ios Crtine © Cambie Uriventy Pens, 2008,