1102574 EC104a2 Yeon Yoon The most serious British economic failure coincided with the fastest growth.

Explain and comment. What part did competition play in this outcome? The Golden Age is referred to as the period between 1950 and 1973 where European nations rapidly narrowed the gap with the USA, during this period the UK grew at an unprecedented rate but also experienced the most acute economic decline as it was overtaken by most of Western Europe. The statement is however subject to debate depending on how economic failure is measured, this could be in terms of: growth, social capability, investment and TFP growth. At this time competition was weak overall in Britain which greatly contributed to it not being able to take full advantage of the opportunity for growth presented by the Golden Age. On the other hand it is possible to argue that the most serious period of economic failure was during the late Victorian period as this was when Britain lost its position as the worlds leading economy, and this is more significant than falling behind European countries. In terms of growth during the Golden Age Britain grew very quickly at 2.4% per year, much faster than it had achieved previously, including during the industrial revolution when it was the industrial leader. However this was far lower than other European countries ranging from Ireland at 3% to Greece at 6.2%. Denmark which had the closest income per head value to Britain (at $6943 and $6939 respectively) grew at 3.1% during the Golden Age. This illustrates how despite growth being high it was well below average, even taking into account that lower income nations grew more rapidly. Weak competition, poor economic policies, weak institutions, low capital deepening and TFP growth were to blame for this. Britain was overtaken by most European nations and this can be seen as Britains most serious economic failure. On the other hand, during the late Victorian era Britain was overtaken by the USA and losing this premier position of dominance could be seen as more of an economic failure. However, in my opinion, this was an inevitable event. The US had unique advantages which Britain could not hope to compete with. The US enjoyed vast natural resources as well as an enormous market size. British manufacturing did well not to emulate US methods as they were not cost effective in Britain. A serious source of Britains downfall during the Golden Age was not investing enough in research and development or in human capital. During the golden age European countries such as Germany achieved impressive growth rates largely due to implementing Eichengreens model of funding high levels of investment with wage restraint. British workers did not accept wage restraint, it was difficult to negotiate because of the fragmented unions. In contrast in Germany there was a highly centralised wage bargaining system, allowing it to reduce the capital intensity gap with the US. In growth regressions coordinated bargaining is strongly positively correlated to investment. Evidence that research and development was too low in Britain is that the UK performed well in old industries but poorly in dynamic R&D intensive sectors, this is where the US exceled for example Ford in the motor industry. In my opinion if British firms had been competitive then they would not have let wages rise at the expense of investment. An increase in investment shifts the Solow relationship leading to a higher steady state. Innovation was discouraged through relatively weaker shareholders. No principal shareholder meant there was no one to hold managers to account, stronger competition would have solved this problem. Human capital was relatively weak during the Golden Age due to the British education system which focused too much on classics as opposed to sciences.

1102574 EC104a2 Yeon Yoon A main reason for Britain lagging behind other European countries during the Golden Age was that it did not experience a surge in TFP growth caused by a technology transfer from US multinational firms branching out into Europe. Before the Golden Age American technology was not cost effective in Europe due to differences in factor endowments, increased economic integration eroded this. The UK did not seize on this opportunity like other countries in Europe did and so had far lower TFP growth. The traditional Solow growth model assumes that tech progress is what drives long run growth. The Schumpeterian relationship states that there is a positive relationship between capital per efficiency unit of labour and technological progress, therefore productivity increases. TFP growth is also underpinned by reconstruction, transferring labour out of agriculture and economic integration, the UK was different to the rest of Europe in that it did not need to rebuild extensively following the war and it already had a highly productive agricultural sector with a very small labour force, this took away scope for TFP growth. France on the other hand achieved massive gains by moving away from peasant style farming.

Tech

Schumpeter relationship (high ) Schumpeter (low )

Solow post shift Solow relationship pre-shift K/AL Social capability is a major determinant of growth rates and therefore we can assume that Britain had a low . Europe was set back by the remnants of a traditional class structure whereas the US was egalitarian. The upper class went into civil service or the Church which was not productive for the economy. European preferences were for quality products, firms were relatively small and workers skilled in comparison to the US. Elsewhere in Europe these distinctions weakened while the UK retained them more. A large reason why the Eichengreen model could not be implemented in Britain was that wages were inflexible from increasingly generous unemployment benefits and high structural unemployment from Victorian staple industries. Policy makers did not succeed in implementing the Eichengreen model but sacrificed important supply side reforms in trying. Policy makers saw full employment as their main target. This objective interacted badly with the institutional legacies of the early start. These institutions were severely out of date, they were associated with strong fragmented unions, craft control and a great separation between ownership and control. Craft control became increasingly costly as American mass production methods improved. These restrictive practises were accepted by firms where competition was weak. Nineteenth century organisation structures became dysfunctional but employers did not find it 2

1102574 EC104a2 Yeon Yoon worthwhile to take the risk to abolish them. The rest of Europe suffered from similar problems but they were not as damaging because they did not have the institutional legacies. Having weak institutions during the Golden Age was particularly painful for Britain at a time where US technology was finally cost effective in Europe, The UK missed out on the opportunity to take advantage of this and was therefore left behind due to path dependency, institutional legacy and constraints on policy. The penalty of being the first country to achieve modern economic growth was felt slightly when the US overtook Britain but was felt most when European rivals overtook. The post depression decision to follow a managed economy policy, meant that competition was severely restricted, this was difficult to undo and its effects echoed into the Golden Age. The major cause of British failure during the Golden Age which underpinned other factors was the lack of competition in the economy. However, The Over-Commitment Hypothesis by Richardson states that Britain in fact suffered from too much competition and this was what caused its decline. He believed if Britain had not been so committed to free trade and had protected industries, then Britain would have had higher growth rates subsequently. However, in my opinion which matches that of Crafts, protectionism would not have done anything to help services, which is where the economy was lagging, and would not have affected intra-sectoral productivity. Traditional accounts blame Britains severe relative decline on competition being too weak in postwar Britain, this led to poor management of firms as well as destructive industrial relations, both of these results caused low productivity. Multiple trade unions leads to hold up problems and rent seeking which lowers productivity making Britain increasingly uncompetitive. Supernormal profits were large and persistant, indicative of weak competition. Statistics support the thesis that competition was too weak in Britain, the average manufacturing concentration ratio rose from 26% in 1935 to 41% in 1968, 35% of manufacturing was cartelized in the late 1950s. Evidence that weak competition played a significant role in Britains decline was that Thatcherite policies to increase competition led to higher productivity and therefore growth. In conclusion Britain experienced its highest growth rate in real terms at a time when it was overtaken by most of Europe. This had a lot to do with both the nature of weak competition and institutions which are related to the legacy of the early start and policy decisions. Low levels of investment, TFP growth and human capital are also to blame for Britain not growing as much as it should have at a time of such opportunity in Europe. The reasons are numerous and complex for Britains failure however it is clear to me that this was the point of greatest failure and not during the Victorian period. Word Count: 1478

1102574 EC104a2 Yeon Yoon Bibliography Crafts, EC104 Lecture notes, 2012 Crafts, N. (2012), British Relative Economic Decline Revisited: the Role of Competition,Explorations in Economic History, forthcoming Crafts, N. and Toniolo, G. (eds.) (1996), Economic Growth in Europe since 1945