• Does deserve to be analyzed; it can be seen in the data even if it is also a notion constructed for political purposes
• Not a full and balanced account but a narrative focused on one key aspect, competition
• Will put Golden-Age failure in long-run perspective
• NB: the UK was overtaken in the Golden Age

1870
1913
1950
1979
2007
UK/USA
130
93
73
70
75
UK/West
Germany
173
UK/France
170
135
162
86
109
141
132
88
104

• Was most apparent from the 1950s through the 1970s
• Was associated with a period of protectionism and weak competition
• Has possibly been reversed in the recent past

France
Germany
UK
USA
1950-73 1973-95 1995-2007
Source: The Conference Board (2008)

• Required improved incentive structures to improve TFP and reduce NAIRU
• A key ingredient was increasing competition in product markets
• Regulatory and technological environment favoured UK versus the large continental-
European economies

• Slower growth not fully explained by less scope for catch-up
• Lots of evidence of poor productivity performance reflected in weak TFP growth
• Not just catch-up but overtaking by
European peer group including both
France and West Germany

Levels and Rates of Growth of Real
GDP/Person 1950-1973
($1990GK and % per year)
7
6
5
4
3
2
1
0

• UK competition and (broadly-defined) competition policy were very weak while the separation of ownership and control became more pronounced
• In all these respects comparisons with Germany unfavourable
(Baldwin, 2006;Cheffins, 2008, Crafts & Mills, 2005)
• Comparisons with early and late 20 th century also adverse; competition was undermined in the 1930s and strengthened from the 1970s

• Depends on entry threats as well as market structure so is influenced by trade policy and regulation
• Matters much more when shareholders are weak because it is an antidote to agency problems within the firm
• Absence generates rents from market power that can be dissipated through effort bargains that undermine productivity
• Is a key reason why gains from greater openness are much bigger than traditional welfare triangles (cf. Frankel &
Romer, 1999)

• New Economic History said NO!
; subsequent research says this is a bit too strong
• Competition in a very open economy was central to the NEH argument
(McCloskey &
Sandberg, 1971); if correct, implies Golden-Age UK much more susceptible to failure
• But examples skewed to tradeables ; look at a sector where competition and shareholders are both weak and productivity performance is much more questionable

(Crafts et al., 2008)
• Cost inefficiency in late 1890s substantial; 10% for median company , cost 1% GDP
• Subsequent elimination of much of this inefficiency as profits fell to unacceptable levels suggests managerial satisficing ; action taken when fall out of comfort zone
• Foreshadows much more general problem that surfaced in Golden-Age UK

Aghion & Howitt (2006)
• Should base policy insights on Schumpeterian
(quality-improving innovations) growth model
• As catch-up becomes advanced, need to shift from facilitating diffusion to promoting innovation
• Implies close-to-frontier countries should encourage competition/entry and expand higher education

Y = A 1α k
α
∆A/A = μ
N +
μ
O
Far-from-frontier countries need institutions and policies that raise μ
O but close-tofrontier countries need (different?) institutions and policies that raise μ
N
NB: change in technology that provides μ
O may also imply need for reform

Policy experiments and endogenous growth: rise in savings; rise in R & D effort
Schumpeter relationship (high μ) x
Schumpeter (low μ)
Solow (high s)
Solow steady-state relationship (low s)
^ k

Competition and Productivity Growth
• Absence of competition allows managers to be sleepy if ineffective control/monitoring by shareholders
• Competition is strongly positive for productivity outcomes in
UK firms without dominant shareholder
(Nickell et al., 1997)
• Competition promotes better management practices
(Bloom and van Reenen, 2007)
• Patenting performance of UK firms suggests inverted Ushaped relationship with price-cost margin which peaks at about 20%
(Aghion et al., 2005)

Firm Type
Maximizing Agency Problems
Competition Policy
Industrial Policy
Negative
Positive
Positive
Negative
Maximizing Firms
Competition Policy lowers expected profit from innovation
Industrial Policy raises expected profit from innovation
Agency Problem Firms
Competition Policy cuts rents and raises cost-reducing effort
Industrial Policy pays subsidies and lowers cost-reducing effort

• Weak and incompetent management
• Difficult industrial relations
• Seriously inefficient use of inputs
• NB: these were all nurtured by inadequate competition in product markets interacting with the historical legacy

• Undermined by nationalization, protectionism and largely ineffective competition policy
• Weak compared with West Germany: PCM 1.8 vs 1.1; median tariff 20% vs. 8%
• Given that UK was strongly exposed to agencyproblem firms, emphasis on industrial rather than competition policy was a serious error
(cf.
Aghion et al., 1997)
• Implication: weak shareholders, weak competition and unreformed industrial relations undermined productivity performance

(Broadberry & Crafts, 1992, 1996)
• In 1930s increased market power substantially reduced productivity growth
• In early postwar years, collusion undermined productivity performance
• Both pre- and post-WWII, high CR3 associated with low levels of UK labour productivity relative to US

• The one competition-policy reform during the Golden Age with teeth
• Had significant impact on productivity
• 1954-63 compared with 1964-73: productivity increase in non-colluding sectors unchanged but in formerlycolluding sectors rose by 1.8% per year
(Symeonidis, 2008)

• Not through strengthening ‘competition policy’ per se
• Trade policy liberalized through EU membership and GATT rounds
• Subsidies largely withdrawn
• De-regulation

Source: Wren, 1996

Increased Competition and Productivity
Performance
• Increases in competition correlated with 1980s productivity growth at sectoral level
(Haskel, 1991)
• Compared with France and Germany, greater deregulation of product markets implied a TFP growth advantage of 0.5pp per year in the 1990s
(Nicoletti and Scarpetta, 2003)
• Post-1980, restructuring and divestment replaced diversification and conglomeration that had prevailed under inadequate corporate governance
(Toms & Wright, 2002)

• Weak competition in product markets generates rents that can be partly appropriated by unions with bargaining power into higher wages and lower effort
• During the 1980s and 1990s , increased competition reduced union membership, union wage mark-ups and union effects on productivity
(Brown et al., 2008; Metcalf, 2002)
• Multiple unionism in an industry reduced TFP growth by 0.75pp from the 1950s through the 1970s but had no effect in the 1980s
(Bean and Crafts, 1996)

Mark-ups are calculated for individual 2-digit ISIC sectors and aggregated over all sectors using country-specific final sales as weights
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Source: OECD STAN database and Secretariat calculation

(Conway & Nicoletti, 2006)
France
Germany
UK
USA
10.00
9.67
7.17
8.67
8.00
6.17
8.50
4.67
6.33
2.33
4.00
2.67

Regulation and the contribution of ICT-using services to aggregate productivity growth
ICT using services, 1996-2001
1.3
0.8
0.3
-0.2
0 0.5
GBR
USA
AUS
IRL
SWE
CAN
NLD
JPN
MEX
Correlation coefficient: -0.62
t-statistic: -3.35
AUT
DNK
CHE
NOR
FIN
BEL
DEU
ESP
KOR
FRA
ITA
1 1.5
2 2.5
3 3.5
Product market regulation (inward-oriented), 1998
Source: Nicoletti & Scarpetta (2005)

• Case-by-case cost-benefit approach allows efficiency defence
• Competition authorities investigate; ministers decide
• Relatively few investigations, no penalties, no redress
• Typical remedy is ‘stop it’
• 1998 and 2002 Acts are a big reform after which UK looks respectable by OECD standards

3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Source: Hoj (2007)

• The ‘managed economy’ strategy made sense as damage limitation but had a significant longterm productivity cost
• Supposing that the present crisis indicates a return to state ownership and industrial policy would be a triumph for hope over experience
• There is a strong case for much stricter financial regulation but this needs to be distinguished from a claim that a return to interventionism is generally desirable