|Author(s):||Crafts, Nicholas |
|Reviewer(s):||Hatton, Tim |
Published by EH.Net (August 2019)
Nicholas Crafts, Forging Ahead, Falling Behind and Fighting Back: British Economic Growth from the Industrial Revolution to the Financial Crisis. Cambridge, UK: Cambridge University Press, 2018. vii + 152 pp. $25 (paperback), ISBN: 978-1-108-43816-2.
Reviewed for EH.Net by Tim Hatton, Department of Economics, University of Essex.
Nick Crafts is the most distinguished British economic historian of his generation. In this short book he distills the wisdom and experience of a lifetime’s study to provide a compelling analytical account of three centuries of British economic growth. The book is a revised and expanded version of the Ellen McArthur lectures given at the University of Cambridge. Apart from providing an up-to-date account of the macroeconomic dimensions of Britain’s growth experience in a comparative perspective, it has three important features. One is that it is firmly based on modern economic thinking and empirical analysis, in particular endogenous growth. The second is that it provides astute judgments on a variety of debates and controversies on growth-related topics in different economic eras. And finally, it links these insights together to provide a narrative of how and why the past influences the present. In short, history matters. All this is achieved in just 150 pages so that there is no loss of focus and the maximum insight is gained with the minimum of fuss.
The book opens with a brief primer on modern growth analysis. To provide a useful framework we must go beyond the Solow model and Crafts outlines a bare-bones endogenous growth model in which the rate of technological progress, relative to its potential, is conditioned by a country’s institutions. Most important are the effects of the institutional environment on incentive structures for innovation and investment. Crafts also stresses that the potential for growth varies widely, both across countries and especially over time, so that slow growth in one era may represent better performance, relative to potential, than fast growth in another.
The next chapter deals with the classic industrial revolution in Britain. Half a century of scholarship has revised down the pace of productivity growth and put its onset further back in time. From about 1650 there was slow but steady growth but it was not until the mid-nineteenth century that Britain pulled decisively ahead of its rivals, notably the Netherlands. One implication is to downgrade economic progress outside of the glamour industries of the industrial revolution: textiles and iron. Crafts argues that technological progress in the modern sectors made a large contribution to the modest growth rate, both directly and indirectly through increasing the rate of capital formation. Perhaps most important for subsequent development was the environment that produced this precociousness. The key British advantages were a large, well-functioning urban sector, good access to international markets, cheap capital, and an abundance of useful knowledge that could be deployed in technologies that used readily available coal. While these advantages put Britain somewhat ahead of the pack, they reinforced a pattern of specialization in what later became low-tech sectors, they promoted shop floor power, and they shaped a style of corporate governance that separated ownership from control.
The late nineteenth century was the high tide of British leadership and Britain was soon overtaken by the much faster growing United States. Did late Victorian Britain fail, and if so, why? Crafts argues that there was not much of a climacteric and that markets worked well in allocating resources. Compared with its own past Britain faltered only slightly, so if there was failure, it was mainly relative to the increased potential for growth. In this chapter on American overtaking, Crafts argues that the United States benefited from larger market size and from a configuration of factor endowments that favored directed technological change in progressive sectors. By 1913 the negative effects of Britain’s legacy of idiosyncratic industrial relations and poor corporate governance were apparent but not yet too damaging. That was soon to change. A substantial setback relative to the U.S. over the First World War was followed by productivity growth, which, while respectable relative to previous performance, fell further behind the United States. Although some have stressed the emergence of new industries in the interwar years, Crafts shows that their share in the economy was small and their productivity performance was modest. Structural change was inhibited by adversarial industrial relations in the 1920s and by persistently high and regionally concentrated unemployment. In response to the depression of the 1930s, the introduction of policies aimed at stimulating employment, notably the tariff and industrial rationalization, marked a significant retreat from competition in the product market.
From 1950 to 1973 the British economy grew faster than ever before in what has been dubbed the “golden age.” But other European economies grew even faster, partly as catch-up from income deficits in 1950. By 1973, Britain had been overtaken in GDP per capita by seven other countries, amounting to a cumulative shortfall of about 20 percent. Countries such France and West Germany emerged with corporatist structures that enhanced cooperation and eased technological transfer from the United States while Britain’s more liberal post-war consensus combined with anti-competitive economic policies had the opposite effect. This was partly a penalty of the early start and partly a result of policy developments that escalated from the Great Depression onwards. These policies included tariff protection, a complicated tax system with high marginal rates, the nationalization of large swathes of industry and misdirected R&D effort. Any reductions in market failure were outweighed by government failure, which is all the more costly in the context of endogenous growth. This indictment is perhaps the most controversial part of the book but Crafts provides convincing arguments to support it. Summing up: “Corporate governance and industrial relations were clearly recognizable as the grandchildren of their Victorian predecessors but having mutated into more problematic forms and with a greater downside in the environment of weak competition that prevailed in these early post-war decades” (p. 98).
In the decades from 1973 up to the financial crisis, productivity growth in the developed world slowed, but ironically, British relative performance improved. Crafts focuses on two key developments: the Thatcher experiment and the information and communications technology (ICT) revolution. Margaret Thatcher (Prime Minister from 1979 to 1990) introduced conservative fiscal policies, tax reform (shifting from direct to indirect tax) privatization of state enterprises, deregulation in industry and finance and, above all radical reforms to reduce the power of trade unions. Crafts argues that this reversed many of the pre-existing trends and improved economic performance largely though once-and-for-all productivity gains. Although Britain’s liberal market economy had proved bad for growth in the golden age, when combined with the Thatcher reforms, it performed better, particularly for the adoption of ICT. Nevertheless, short-termism and financial reforms may have contributed to the severity of the financial crisis. Although the focus is on these two elements, another lurks in the wings: Britain’s membership since 1973 in the European Union. This may have delivered a boost of up to 10 percent, in per capita income, due to the expansion of trade and to increased competition brought about by the single market reform of 1993. With Brexit looming, it would have been good to see a fuller analysis of the gains from EU membership.
Anyone with the slightest interest in British economic history should read this excellent book. It will also be useful to economists interested in economic growth and economic policy. And it will be a very valuable resource for students, especially in view if its brevity, but with the caveat that, in order to get the most out of it, they should have some prior knowledge of key economic concepts.
1. This figure comes from N. Crafts (2016), “The Impact of EU Membership on UK Economic Performance,” Political Quarterly, 87 (2), pp. 262-268.
Tim Hatton is Professor of Economics at the University of Essex, UK, and Director of the Centre for Economic History at the Australian National University. He was a founding editor of the European Review of Economic History and a recipient of the Clio Can. His recent work is on the heights of World War I British servicemen, emigration from the UK 1970-1913, the European migration crisis of recent years, and refugees and asylum policy since the 1990s.
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|Subject(s):||Economic Development, Growth, and Aggregate Productivity|
Economywide Country Studies and Comparative History
|Time Period(s):||18th Century|
20th Century: Pre WWII
20th Century: WWII and post-WWII