The British Economy 1870–1939

There are many different kinds of fluctuations in an industrial economy each of which exhibits quite separate characteristics, the most obvious being differences in periodicity. The most important of these fluctuations are, to name them after their investigators: the Kitchin cycle (3-4 years); the Juglar cycle (7-11 years); the Kuznets cycle (16-22 years); and the Kondratieff cycle (40-50 years). There is considerable statistical evidence to support the existence of the first three types of fluctuation, but the reality of the Kondratieff cycle, urged so forcibly by Schumpeter,¹ is in doubt. We shall concentrate on the Juglar, i.e. the standard business cycle. But economic fluctuations before 1914 are not fully comprehensible without reference to the longer Kuznets cycles related to fluctuations in building activity, migration and capital exports —all of which were dominant features in the development of the British economy in the half-century before the First World War.

It is impossible to understand the development of the British economy over the past two hundred years or more in isolation from its place in the world economy. Britain’s rapid and profitable industrialisation took the form of heavy concentration of resources on a limited range of industries exporting high proportions of total outputs.¹ Because of Britain’s relatively narrow resource base, this concentration was accompanied by heavy reliance on overseas sources for many raw materials, and specialisation had induced the transfer of resources out of agriculture at a faster rate than experienced by more ‘balanced’ economies, leading to a high dependence on food imports. Throughout the nineteenth century Britain was the pivot of the international economy, and interdependence between Britain and the rest of the world reached its peak in the 1870-1914 era. The T/Y ratio (i.e. the ratio of foreign trade to national income),² after growing steadily from about one-sixth at the beginning of the century, reached almost three-fifths by the 1870s, and fell little below this level up to 1914.³ The T/Y ratio declined markedly in the inter-war period, but even in the depressed trading conditions of the 1930s the T/Y ratio remained higher than in the 1840s. Moreover, Britain’s role in the world economy was by no means confined to commodity trade. She invested large sums abroad before 1914, varying in the range of 3–9 1/2 per cent of G.N.P. or 30–65 per cent of total capital formation, and (if we include Ireland) contributed a gross total of about 1 o million emigrants to countries outside Europe between 1870 and 1914.⁴

In the last two or three decades much new work has appeared on the period 1870 to 1914 which has tended to confirm earlier suspicions that, while the British economy was growing fairly rapidly in absolute terms, its relative position vis-à-vis the world economy was deteriorating and that British industrial and commercial performance left much to be desired. British rates of growth of production, exports and productivity were slower in this period than in the early Victorian years, and compared unfavourably with growth rates abroad, especially with those of Germany and the United States.¹ In their quantitative assessments of the British economy most economists have been more concerned with analysing the changes in growth rates and economic variables and accounting for such changes in terms of their interaction without examining fully the basic factors which motivate changes in the variables themselves. ² But as Kuznets has recently pointed out it is difficult to explain the course of economic change purely in terms of economic variables given the wide variety of other conditioning factors which must be taken into account. ³ Undoubtedly there are many factors, both economic and non-economic, which affected the course of British economic history in this period, but one of these in particular, that of British enterprise, has so far received comparatively little attention.

Several attempts have now been made to chart and explain the retardation in British growth rates in the latter part of the nineteenth century. Statistics relating to the growth of national income, exports and industrial productivity all show a distinct tendency to decelerate in this period. The growth rates in this country compare unfavourably with those registered abroad especially in America and Germany. Perhaps the most alarming feature was the lag in British manufacturing productivity; the rate of growth of output per worker fell continuously throughout this period.¹To explain the poor performance of British growth indices the unprogressive nature of British entrepreneurs during the years in question has been sometimes cited. Much evidence has also been produced to show that British industrialists were technically far less dynamic than their major competitors. In particular, it has been alleged that they failed or were slow to adopt cost-reducing innovations or new methods of production and selling and that they were reluctant to acknowledge the value of technical education and scientific research.² How far these deficiencies were responsible for the lag in British growth rates is difficult to determine Obviously there is a strong connection between the two since technical progress (in the widest sense of the term) is, in the long run, one of the main determinants of growth.

The ‘early start’ thesis and the proposition that it handicapped Britain’s industrial progress in the late nineteenth and early twentieth centuries has received a fair amount of attention over the last decade.¹The usual approach to the early start problem is to discuss obstacles to new technological developments within mature industries in the economy (i.e. an intra-industry approach), particularly to examine how far the existence of original durable equipment in the staple industries (textiles, iron and steel, shipbuilding, and so on) slowed down the introduction of new techniques into these industries or other sectors linked directly with them. The objective in this article is to analyse the extent to which the early start proved a handicap when it became necessary to transfer resources to new industries based on major innovations of the late nineteenth century (an inter-industry approach). It is argued, therefore, that the extensive de-velopment of an old industrial structure with a high concentrationof employment within a few long-established industries may make adjustments to new technology in other industries more difficult. At first sight there might appear no problem at all; classical analysis would indicate a fairly smooth transfer of labour and capital from old sectors to new at a rate determined by differences in the respective returns on capital and prices offered to factors of production.

For many years now the 19205 have been regarded as a period of stagnation as far as the British economy is concerned. Contemporaries were in no doubt that these were bad years. Their anxious desire to return to normality or to what they considered to be the belle époque of the Edwardian era was an indication of the distress of the times. This impression is no doubt somewhat understandable since the period was notable for high unemployment, stagnating exports and declining basic industries. Many later scholars have continued to pass unfavourable judgement on these years. Arndt in 1944 for example, stated that Britain’s economic progress was not commensurate with that of other advanced industrial countries.¹ By concentrating on Britain’s poor export performance Lewis, in his Economic Survey, paints a very dismal picture of the 192os and concludes that ‘there was not even an interlude of prosperity ’ ²

From the vantage point of the sixties, the experience of the new industries¹ in the inter-war years would seem to suggest that in their progress could be discerned the basis of a new industrial future for Britain. Strangely enough, the orthodox view on the subject gives the opposite impression: it argues that the central fact about the new industries’ development in this period was not that they were growing at a rapid rate, but rather that they were growing very slowly in relation to their position in other countries. More surprisingly, this judgement has been unanimous; scarcely anyone, overtly at least, has dissented from it. It is the purpose of this article to examine certain aspects in this judgement and to suggest that the expansion of the new industries between the wars was satisfactory, and consequently it is unnecessary to talk of Britain’s declining entrepreneurship, her slowness to innovate, or failure to exploit export markets to the full to account for non-existent backwardness. It is believed that the attempt to decry the role of these industries is a misunderstanding to be explained partly by the fact that its protagonists have emphasised the wrong issues and made irrelevant comparisons, but largely because they have ignored (or did not have at their disposal) important evidence in recent books and articles which conflicts with their interpretation.