Contemporary Britain
Lecture 2: The British economy, 1870-1939: performance and policy1
1.
INTRODUCTION
In a recent major revisionist account of modern British history (Clarke 1996, p. 3) the
observation is made that as the century draws to a close all confidence has evaporated
that in Britain’s twentieth-century history there might be anything to celebrate and
instead it ‘threatens to become a history of decline, centred on the question: where did
it go wrong?’ In this ‘history as tragedy’, fin de siècle concerns and post-modern angst
are clearly detectable, but above all this pessimistic version of contemporary British
history is dominated by the notion of long-term decline deriving from endemic and
manifold economic weakness.
If we assume for the present that those who profess to understand the causes of
decline are engaged in a contest to acquire power to avert further decline it is a simple
step to appreciate that the study of the British economy between 1870 and 1939 is
often reduced to merely the search for salvation through identification of the
appropriate agency/group – or, typically, scapegoat(s) - responsible for that decline.
Our purpose in this introductory lecture will be broader but we must be mindful of
this dominant strand of both contemporary historical debate about, and the
historiography on, the British economy.
2.
ORGANISATION OF THIS LECTURE AND RECOMMENDED INTRODUCTORY READING
Organisation and content
This lecture divides into three parts:



the first surveys the principal questions that should be asked of British economic
performance between 1870 and 1939 (in truth a rather artificial periodisation
forced upon us by the dictates of modularisation);
the second examines economic policy over this period, which inevitably raises
bigger questions about the role of government; and
the third suggests some interim conclusions and flags some points that you ought
to bear in mind when examining topics which are considered to be political or
social history but for which the economic background is vital for a full
understanding.
Reading
All of the themes discussed today are explored in my textbook Government versus the
market (Middleton 1996) but this may be a bit intimidating for those without some
background in economics and economic history. Thus, on the economic performance
side I would recommend as preliminary reading the economic chapters in Johnson’s
Twentieth-century Britain (1994), while on the policy side Tomlinson’s two studies
(1990; 1994) are accessible to non-specialists although both have little on the first
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thirty years of our period. Green and Whiting (1996) also provides a good
introductory survey of the shifting boundaries of the British state.
3.
ECONOMIC PERFORMANCE
Judging economic performance: introduction
It is axiomatic that today we judge national economic performance rather differently
from the way in which contemporaries in 1870 or 1939 did. Nonetheless, it is not
anachronistic to at least begin our exploration of the past using the reference points
and devices of the present provided we are aware of how the historical debate has
progressed. One further introductory warning is also appropriate here: the statistics we
shall use are subject to varying margins of error, both over time and as between
countries. We are, however, basing our discussion on the best and most
comprehensive available: Maddison’s Monitoring the world economy 1870–1992
(1995), the fruits of a lifetimes work on comparative historical national income
statistics.
We start then with the three conventional measures of national economic
performance:
A. the headline growth rate (real GDP, that is money GDP adjusted for inflation);
B. the standard of living (real GDP per capita); and
C. an aggregate labour productivity measure (real GDP per worker-hour), the
foundation upon which the headline growth rate and thus living standards must
ultimately depend.
These three indicators are shown in Table 2.1 panels A-C (NB because 1870-1939 is
so artificial the data given brings the story up to date; note also that 1938 is used since
this is the usual benchmark).
Absolute versus relative change
In interpreting these it is important to make clear that when examining an economy
the observer must bear in mind that the historical forces underlying the growth of an
economic variable such as GDP, and the absolute level it has attained by any
particular year, may be an exceptional historical performance but nonetheless
deficient relative to the rate of change and final level attained by comparable
countries. With this distinction established it then becomes much easier to appreciate
that to understand fully why living standards are now lower in Britain than the
average for the OECD countries the question that needs to be asked is not so much
why productivity is lower in Britain but why it grew more slowly, i.e. what
constrained the growth rate and thus prevented the absolute level of productivity from
converging on that of the leading economies.
The league table approach
Begin with panel A of Table 2.1 which gives estimates of the national incomes
(expressed in constant 1990 US dollars) of the UK and comparator economies (EU,
G-7 and OECD-17; all defined in the note to Table 2.1) for 1870 and subsequent
benchmark dates. We stress that this is highly processed cross-country data obtained
by adjusting each country’s GDP at current prices and exchange rates for the effects
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of inflation between 1870 and 1992, for the differing purchasing power of each
country’s national currency and for any territorial changes (important in the case of
Germany which was divided between the end of the Second World War and 1989).
The derivation of these statistics pose a number of significant problems but we leave
these to one side for the moment and instead focus on what these numbers might tell
us about Britain in comparative perspective.
Taking absolute magnitudes first, it is clear that in 1870 the UK economy if not the
workshop of the world was still the second largest of the advanced capitalist
economies (behind the US) but had slipped to sixth place by 1992 (now also behind
France, Germany, Italy and Japan). It still, however, ranked second in 1938 and thus
in terms of relative economic decline the greater part of developments lie with the
Second World War and after. This is our first major conclusion: before the Second
World relative economic decline, if we use the league table approach, is only
really significant with respect to the US.
The size of a country’s national income is, of course, partly a function of the size of
its population, and when this is factored in (as in panel B where population is the
denominator in the calculation) a somewhat different picture emerges with the UK
slipping from second place in 1870 to fourth place in 1938 (sixth place by 1950 and
fifteenth by 1992). Moreover, since this measure is the economists’ favoured indicator
of the standard of living it is clear that the relative decline of the British economy was
even more pronounced, although again the major slippage is after the Second World
War.
We can see, therefore, from panel B that whilst in absolute terms the British people by
the eve of the Second World War were enjoying a standard of living which was over
80 per cent higher than in 1870, in relative terms over the preceding 68 years almost
all other OECD economies had grown more affluent at a faster rate than had Britain
and spectacularly so in relation to the US which had emerged as the world’s leading
industrial power.
To explain why the British economy was growing so slowly we begin by invoking the
hypothesis of catch-up and convergence, one which is now used routinely to examine
the economic growth of all economies, developed and less developed.
The concept of catch-up and convergence is relatively new but derives from a longstanding observation by economic historians that latecomers to industrialisation grew
faster than the early-starters and that the forces underlying that late industrialisation
might be substantially different, in particular that the role of the state might be
enhanced relative to the laissez-faire stance of the nineteenth-century British and
American governments. Catch-up can be conceived as a process whereby latecomers
use new technology and best organisational practices to move towards comparable
absolute levels of productivity to those now enjoyed by the early-starters, with
convergence the tendency for all countries, subject to differing natural resource
endowments and certain other conditioning factors, to eventually attain more or less
comparable absolute productivity levels.
We envision the process of catch-up in Figure 2.1 where we chart on the Y axis the
absolute level of aggregate labour productivity attained in 1870, the high point of
British industrial hegemony, with the subsequent growth rate in aggregate labour
productivity over the period 1870–1992. For catch-up to be present we would expect
an inverse relationship between the two series, and we do indeed observe that from
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the fitted trend line. We should also notice the high value for the R 2 statistic,
indicating a small difference between the Y values as represented on the trend line
and the Y values existing as data points  and, therefore, that we can at this stage have
some confidence in the catch-up hypothesis.
Clearly, however, the achievement of the potential catch-up bonus (the gap between a
country’s actual absolute level of productivity and the level attained by the leading
economies) is not automatic. Were it so there would be no less developed economies:
no countries like Nepal with levels of GDP per capita (1995 figures) of US$200, only
those like the Netherlands with US$24,000 or even Switzerland, the country with the
world’s highest standard of living, with US$40,630 (World Bank 1997, pp. 214–15).
Thus catch-up is neither automatic, nor is it necessarily complete. Indeed,
econometric research suggests that the growth paths and characteristics of the leading
economies are not consistent with the view that absolute productivity levels tend
towards equalisation and that countries differ in their productivity levels by more than
would be expected from their levels of investment in physical capital (i.e. machinery)
and human capital (i.e. education and vocational training), the two principal vehicles
whereby new technologies and production practices are translated into higher output.
This leads to an important second conclusion: if differences in the scope for catchup are a conditioning rather than a determining factor in economic growth we
have room once more to investigate why some economies succeed and some fail.
This is obviously of some importance for the British case.
We envision this process of conditional catch-up in Figure 2.2 which compares the
aggregate productivity experience of Britain, the US, Germany and the OECD-16
averages for 1870, 1938 and 1992. Clearly, all economies have advanced absolutely
since 1870, but as is also clear initially Britain’s relative decline was very much more
marked with respect to the US and much less with respect to the principal European
economy or indeed the OECD average. It is thus only since the Second World War
that there emerges scope for a generalised failure of the British economy, and even
this must be qualified by the finding that by 1992, by this measure, Britain was only 4
per cent behind the OECD average. Note also that on this league table approach
Britain was a more highly developed economy than Germany on the eve of the
Second World War.
To complete this part of the discussion we need one further component of the catchup and convergence literature: that of social capability, here defined as a complex of
economic, social, attitudinal and other factors which bear upon a country’s capacity to
acquire and use advanced technology. From league tables we can thus come back to
history and policy.
Contemporary understanding of decline 1870-1939
The raw material for these league tables did not exist before the mid-1950s. How then
did contemporaries understand national economic decline?
The first point to note is that relative decline had long been anticipated by economists,
and particularly with respect to the US which obviously had huge advantages in terms
of natural resources and market size once – through massive immigration – it acquired
a population. Indeed, The Economist magazine, in reporting on the great exhibition of
1851, had observed that the question about Britain’s economic future was less
whether relative decline would occur and more when would it occur.
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Refining this further we identify the 1880s as the critical decade, as the beginnings of
that ‘critical inquest into the state of the British economy which has been going on
ever since’ with much contemporary debate ‘intimat[ing] the need for some form of
government action or supervision’ (Greenleaf 1983, pp. 103–4). It is from the late
1880s that we locate a broadly based crisis of liberalism, from which we can then
explore the growth of government and the contours of twentieth-century political
competition.
As that debate about relative economic decline developed from the 1880s it developed
one further characteristic which has endured through to the present: the distinction
between internal and external causes of decline. The former emphasised deficiencies
internal to the fabric of British economy and society (class conflict, underinvestment
in human and physical capital) while the latter sought to locate decline in external
factors, particularly initially in the continued maintenance of free trade in the face of
the growing competitive challenge of the US and Germany. Both internal and external
diagnoses have policy implications, but rather different ones.
By focusing on such debates one acquires much raw material to supplement the
league table approach to national economic performance. It opens up a myriad of
debates concerning entrepreneurial weaknesses, in particular the slow transfer of
resources from the staple to new, high-technology industries; the various
consequences of class for education and training and for industrial relations; and the
implications of Britain’s highly inegalitarian distribution of income/wealth for the
popular consent for markets and thus for the operation of the market itself. Underlying
all of this, as I argue in Government versus the market (Middleton 1996), is a set of
choices that have to be made between government and market in the allocation and
distribution of resources, with the choice the central element of British political
economy as government, organised capital and organised labour constantly seek to
renegotiate that cardinal choice. We chart this as a triangular policy space in Figure
2.3 in terms of the diagnoses of relative decline.
Beginning thus in the 1880s as contemporary concerns about threats to geo-political
hegemony, in which economic capacity was more the focus of concern than modern
concepts of growth, you can explore this literature through the recommended
readings. What you will find is more evidence of economic failure at the industrial
and microeconomic level than at the macroeconomic. You will observe the central
role played by the two world wars in the erosion of Britain’s economic hegemony,
and how the growing deterioration in Britain’s balance of payments (on both current
and capital account) is both a cause and a consequence of that adjustment to
industrialisation elsewhere.
Before turning to policy we come to our third conclusion: the issue of timing in
economic decline is of major significance. Until very recently, those who tended to
implicate government as the root cause of economic failure concentrated on postwar
economic policies and the growth of the public sector, while those who looked further
back tended to identify forces more deeply rooted in Britain’s social and political
structure (Warwick 1985). That has now changed somewhat as we have identified
government having an impact much earlier in the process of decline, as much for what
it did not do as for what it did (themes explored in Government versus the market).
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4.
ECONOMIC POLICY AND THE GROWTH OF GOVERNMENT
Proxies for government
In Figure 2.4 we chart government expenditure as a percentage of GDP from 1900, no
reliable consolidated data being available for the earlier years although we can say
that the trend was slightly upwards since 1870. As can be seen, from this proxy for
government activity, it is war that is decisive for government growth. This is typically
explained in terms of war having a displacement effect on society’s toleration of
taxation, but in addition with the trend being upwards between the wars and after the
Second World War we need to factor in political competition. We will explore this
more in part II of the unit but here observe that Britain’s public sector was over twice
as large in 1938 as 1870 with almost all of that growth due to transfer payments, of
which the largest element was spending on welfare - national insurance for pensions,
health and unemployment having begun in 1911 – and the cost of servicing the
enlarged national debt forced by wars to defend Britain’s geo-political status. To
complete the picture we also chart the tax side of the national accounts in Figure 2.5.
Observe the rise to prominence of the income tax, a further manifestation of the
growth of redistributive activities by the British state.
What does government do and why?
This leads to broader issues of what government does, why it does it and with what
capability. The functions of the state are summarised in Table 2.2 with the focus being
the economic rational for government intervention which economists model in terms
of market failure and concerns for equity. Typically, this is couched in terms of
economic systems having a trade-off between efficiency and equity but as you will
see when you examine the social and economic policy debates from the 1870s
onwards this is not necessarily a simple inverse function (as in panel A of Figure 2.6)
but can also be portrayed by what we here call the New Liberal formulation (after the
reformist Liberal Party ideology of the 1890s onwards) and which is represented in
panel B. The shape of this function, whether realised by the protagonists or not,
underlies all of the debates about the relationship between government and market.
Using Table 2.2 we can characterise the growth of government from 1870 through
1938 as follows. Initially, government had only very minimal functions (defence, law
and order, property rights) and a bare minimum of measures to protect the poor
(notably the Poor Law). As we move towards the 1900s, and especially with the
reforming Liberal governments of 1906-14, government acquires intermediate
functions for addressing market failure and extending its instruments for protecting
the poor. But progress is not linear, it varies immensely between functions and
programmes. We can say that the growth of policy objectives and instruments was
faster with respect to social than economic policy, but that by the 1930s, under
pressure from unemployment and very different political competition forced by the
advent of labour, government was becoming recognisably modern - what I have
called in an earlier book Towards the managed economy (Middleton 1985).
Differential ‘progress’ with respect to economic and social policies leads us to
consider government policy-making capability. Our starting point is that political
institutions shape the process through which policies are made and implemented and
these in turn influence government capabilities; and that the principal determinants of
this process are the extent to which decision-making is centralised, the degree to
which decisions are subjected to multiple vetoes and the extent to which elites are
stable and share common values and objectives (Weaver and Rockman 1993). Our
argument here is that our starting point, the mid-nineteenth-century laissez-faire
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minimal state, had limited capacity to grow. It needed shocks and structural changes
in the balance of power.
The principal shock was war:


initially the Boer War which demonstrated that after a century or more of
industrialisation Britain’s working-class were insufficiently healthy to be able to
serve in the army to defend perceived national interests, giving rise to social
imperialism, national efficiency etc; and
then the First World War which brought to the forefront many issues affecting
both economic efficiency and social equity.
The structural changes were what Lowe (1986) calls the adjustment to democracy,
which can be decomposed as:


the implications of the full franchise for party structure and competition, manifest
of course eventually as the decline of the Liberal Party and the rise of the bi-polar
Labour-Conservative contest which is fully established by the 1930s; and
the coincident economic rise of labour, exercising power through trade unions
with direct political links to the Labour Party.
Alan Taylor (1965, p. 1) once observed that ‘Until 1914, a sensible, law-abiding
Englishman could pass through life and hardly notice the existence of the state,
beyond the post-office and the policeman’. This was not the case by 1938, as manifest
by:





5.
all (after 1928) now had the vote;
conscription in the First World War had fundamentally changed the balance
between the individual and state;
there now existed a bargain of sorts that the state, employers and individuals
would provide insurance against the most pressing of contingencies (ill-health,
unemployment and old age) for men at least;
government was no longer passive in face of the vagaries of the trade cycle; and
in economic policy, as elsewhere, expertise was being incorporated by
government to solve a myriad of problems (see Middleton 1998 on the role of the
economists).
CONCLUSIONS
What can we draw from our very abbreviated account of these enormous themes and
dominant questions:




interrelationship between diminishing economic capability and growing
competition to Britain’s geopolitical hegemony
growing politicisation of economic issues, raising momentous problems for
interpretation – objectivity, mass of data, interconnectedness.
as ‘history’ becomes part of the battlefield of ‘Britishness’ it was inevitable that
economic performance, and particularly the notion of some glorious historic
economic past (industrial revolution), would be invoked. Be wary.
insularity of the British historiography until very recently; typically working with
idealised notions of some glorious industrial revolution or, if other countries are
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
invoked, vibrancy and vitality elsewhere which the British failed to emulate.
beneath the surface growing affluence but also insecurity, either unemployment
or war.
Where next: next term we pick up the story, in many ways the more interesting part of
the story for both relative economic decline and economic policy.
6.
REFERENCES AND SOURCES FOR FIGURES/TABLES
Clarke, P.F. (1996) The Penguin history of Britain. Vol. 9: Hope and glory. Britain,
1900–1990. London: Allen Lane.
Green, S.J.D. and Whiting, R.C. (eds) (1996) The boundaries of the state in modern
Britain. Cambridge: Cambridge University Press.
Greenleaf, W.H. (1983) The British political tradition. Vol. I: The rise of collectivism.
London: Methuen.
Johnson, P.A. (ed.) (1994) Twentieth-century Britain: economic, social and cultural
change. London: Longman.
Lowe, R. (1986) Adjusting to democracy: the role of the Ministry of Labour in British
politics, 1916-1939. Oxford: Clarendon Press.
Maddison, A. (1995) Monitoring the world economy, 1820–1992. Paris: OECD.
Middleton, R. (1985) Towards the managed economy: Keynes, the Treasury and the
fiscal policy debate of the 1930s. London: Methuen.
Middleton, R. (1996) Government versus the market: the growth of the public sector,
economic management and British economic performance, c.1890–1979.
Cheltenham: Edward Elgar.
Middleton, R. (1998) Charlatans or saviours?: economists and the British economy
from Marshall to Meade. Cheltenham: Edward Elgar.
Middleton, R. (1999) ‘Britain’s economic problem: too small a public sector?’, in S.
James and V. Preston (eds) (1999) Old politics, new politics, British history,
1945-95. London: Macmillan, forthcoming.
Taylor, A.J.P. (1965) English history, 1914-1945. Oxford: Clarendon Press.
Tomlinson, J.D. (1990) Public policy and the economy since 1900. Oxford: Clarendon
Press.
Tomlinson, J.D. (1994) Government and the enterprise since 1900: the changing
problem of efficiency. Oxford: Oxford University Press.
Warwick, P. (1985) ‘Did Britain change?: an inquiry into the causes of national
decline’, Journal of Contemporary History, 20 (1), pp. 99-133.
Weaver, R.K. and Rockman, B.A. (1993) ‘Assessing the effects of institutions’, in
R.K. Weaver and B.A. Rockman (eds) (1993) Do institutions matter?:
government capabilities in the United States and abroad. Washington, DC:
Brookings Institution, pp. 1–41.
World Bank (1997) World development report, 1997: the state in a changing world.
Oxford: Oxford University Press.