Monday, 29 April 2013

The Challenges of the 'Golden Age'

If you read my previous post you'll see that the 'Golden Age' is a very positive time if viewed in certain lights. It wasn't all plain sailing for Britain, though, as this post will explain. If we look at the growth rate from the 1950s to mid 70s, we see it averages around 2.8% per year. Pretty good, higher than during the industrial revolution. But, compare it to the growth rate of other advanced economies and it looks feeble.  In the 1950s we expected these other economies to grow quicker with their scope for 'catch up' growth, but in the 60s many of these economies had actually caught up with and overtaken Britain and were still growing faster.

This suggests there's a fundamental problem somewhere in the British economy. Could it be a problem of investment? We said investment was one of the reasons for Britain's low unemployment in this period, but it could also be part of the reason Britain was lagging behind. Our investment rates had grown since the 1930s, but they were still a way behind other advanced economies. Some blamed this on the policy of 'Stop-Go'. The poorly planned contractions and expansions of demand were too frequent, which left a level of instability that hindered investment. In reality, during the 'Go' phase the demand was pumped into the economy too fast. Prices rise quickly and the government has to quickly backtrack with a deflationary policy that chokes off investment. In the 'Stop' phase firms just help back on their investment, waiting for the next 'Go' phase. The uncertainty of the whole system meant lower investment.

The government needed some alternative methods to raise investment whilst still maintaining their very favourable employment conditions. They didn't want to devalue the sterling and they didn't want to deflate the economy for too long. The only option left was to return to a policy of state planning. A policy of 'Indicative planning' was working well in France so the governments of the early 60s tried to mimic it.

In steps the National Plan! Launched in 1964 by the Labour government with the aim of boosting long term growth up to 4%. A lot of effort was put in to the plan, production targets were set across the board which were needed to achieve the goal. It was all placed under the control of the new 'Department of Economics'. Sound good? It wasn't. It failed. There was no method given to meeting the targets and no penalties for those that didn't make them. It was a naive hope that workers would just cooperate. Well, they didn't. It potentially could have worked, but the whole plan stemmed from a misdiagnosis of the economy's problems. It all assumed that the 'Stop-Go' cycle caused the low investment which hindered growth. What if this wasn't the cause?

Was 'Stop-Go' really the problem? In a way, no. Large fluctuations in the economy that were persistent before 1939 and also occurred after 1973 didn't occur during the 'Golden Age' and a similar policy was used in other countries that were experiencing rapid growth. So was low investment the problem? Britain's investment rates were catching other countries by the 70s, but it was investment in private housing that was holding the rate back. It seemed that Britain was very unproductive compared to its competitors with the same equipment which could have been a deterrent for investment. Investment is seen more and more as a symptom of Britain's decline, rather than a cause of it.

The suggestion from this was that Britain was suffering from other supply side weaknesses. What could these have been? Bad industrial relations, restrictive practices, poor management, poorly aimed research and development and inadequate human capital formation.

Britain's bad industrial relations came partly in the form of strikes. Compared to Germany the strike rate was poor, but compared to the USA it was much better. Productivity was the real issue. Britain's steel productivity was a 1/3 of the EEC average. We were over-manning our factories with people putting in little effort. Top managers in large industry seemed to be completely oblivious to shop floor activities.

Research and development was one of the big problems too. Britain was spending more than all other Western economies bar the USA, with half of this coming from the private sector. The direction of this spending was an issue. It was being spent on defence, civil nuclear power and civil aerospace - three unprofitable and poor commercial areas. All of the most talented scientists and technical manpower were stuck in dead end projects not adding  much to the GDP of the country. Innovation was falling too.

Another one of the supply-side issues was education. We were a comparatively uneducated economy. Only half our factor directors had degrees, the figure was closer to 90% if you looked abroad. It was even worse at middle management level. Those managers that did have degrees tended to have them in arty subjects and not managerial subjects.

So, if these really are the problems causing low growth - why did they persist? You'd assume that market forces would create change and push the inefficient parts of the economy out. The explanation for this is put down to 'Institutional sclerosis'. Key power structures had been left undisturbed for such a period of time that they had become entrenched. Vested interests were created and these resisted change. A part of this can be put down to the little damage Britain took during war. If we compare it to Germany, who took a lot of damage, we see why. Germany's war damage forced them to rethink the whole economy, they kept their strengths and replaced their weaknesses. With Britain, this didn't happen and institutions were left entrenched. The world boom then further lessens Britain's incentive to change.

The government were also very reluctant to generate the required change. They didn't want to challenge the vested interests in competition policy and preferred to follow the path of 'Stop-Go' and not detailed economic intervention. Another reason the government didn't force change is perhaps the problems weren't as bad as first implied. This was the view of some historians. There were some positives: our research and development spending was similar to France and they were growing rapidly. We looked good in industries such as pharmaceuticals and food and drink. Globally, Britain's incomes were in line with the OECD average and the economy was still successful. The only real negative was the loss of global political influence.

To conclude, the 'Golden Age' is a period that can be argued to have been good and bad for Britain. The debate about the extent and causes of the failures I've detailed above will continue for many years to come. Britain does lose ground, but is still a successful economy.

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