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.
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