Sunday, 30 September 2012

'Slowing Down and Falling Behind' - Prof. Charles Feinstein

Professor Charles Feinstein wrote an article named 'Slowing Down and Falling Behind' which was a discussion as to the potential reasons why Britain may have lost it's economic dominance at some point before the First World War. This blog post will discuss what I took from the article when I read it and what I think about the issue. For a brief synopsis of what happened to Britain economically between 1870 and 1913 have a read of my previous blog post by clicking here.

The Great Depression of the mid 1880's could be partly to blame as this was basically a decade of falling prices which meant a fall in incomes for the farmers and a cut in profits for manufacturers. A fall in income for the farmers obviously restricted purchasing power, and because agriculture took up a large percentage of the economy we can infer that this was detrimental for the economy. Profits falling aren't necessarily such a big issue, but it does restrict the ability for the firm to expand somewhat which is not fantastic. Falling prices, however, could be said to be beneficial to wage earners as it effectively increased the power of their wage. Despite all of this, the volume of output and exports did continue to grow.

Feinstein immediately talks about how difficult it was to pin down actual GDP figures at the time, because looking at the three different measures of growth of real output per worker from 1856 to 1913 gave three varying results. If the data was entirely accurate then the three different measures should give the same figure. What was obvious, thought, was that that the growth rate over the whole period in question was roughly 1%. Income and expenditure were the more volatile measures as they had a brief period of growth from 1882 to 1899 but then fell sharply, whereas output slowly and consistently fell for the whole period. The reliability of the data is one thing Feinstein blames for the differing results of GDP figures. Revisions need to be made although estimates show a significant worsening of the economy from the turn of the century. For example, the measures for the output index were created based on the raw material inputs, rather than the actual output. Therefore, any boom period would be understated because the figures would pay no attention to the fact that stocks of raw materials were being used to meet the rising demand rather than more raw resources being input. Similarly, in a depressed period the figures would be overstated as the estimates made no account for the fact that stocks may have been filling up without the inputs being turned immediately into finished goods. Another explanation for the potential variation was the unrest towards the end of the Edwardian era which meant that between 1908 and 1914 on average 14 million working days were lost through strikes compared to the two to three million from previous years.

Maybe it wasn't a case that Britain was actually doing badly, it could just be that we see other countries doing better over the same period. At the end of the day Britain's economy was still growing, just not at a rate of 1.5-2% per year like some of the other economies around the world were. Admittedly, Britain was using less advanced equipment, had less standardization of its output and was slow to develop it's new industries (chemicals, for example). It was an inevitable process in some people's view, the latecomers were just catching up.

However, Feinstein also discusses the point that entrepreneurial failure could to be to blame for Britain's relative decline. He gives examples of when British firms were slow and ignorant when it came to adopting new methods and machinery. What's interesting though, is that scholars looked at data and noticed that profits were being maximised and costs minimised with the policies installed -  inferring that the entrepreneurs weren't to blame for the decline. Another group of scholars entered the argument to say that installing policy and overseeing production was the job of the manager and not the entrepreneur. The entrepreneur's job was to make changes in the current business framework, finding new products for example. The entrepreneurs therefore failed to create the large scale corporations with management systems that dictated policy rather than following market forces. These firms would have developed specialised managerial skills and co-ordination as well as allowing the benefit of economies of scale in production.

The debate is ended on a, well, un-ended note.  The point is made that there is still a lot of uncertainty about the cause of Britain's economic downturn and that the downturn has pretty much continued throughout the 20th century and due to this it's a very important investigation to have.


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