The significance of a difference of 3% in the growth rate is that, if two countries have a level start, the faster growing country will have twice the output of the slower country in 25 years. This showed that Britain was in relative decline and justified some of the fears of politicians and economists in the 1960s regarding UK growth performance. It cannot be said that other EEC countries had a faster growth rate than Britain due to faster growing working populations, because employment in Britain rose at roughly the same rate as other EEC countries. Not everyone regards Britain's growth performance during this period as a failure, though. Murphy says: "The potential which had been so prodigiously wasted during the interwar years was, at long last, brought into effective and remunerative activity."
The United Kingdom spent the lowest proportion of GDP on investment of any western European country after World War II. The figure rose from 17% in the early 1950s to 22% in the mid-1960s but this is behind France, who averaged 24% and Germany, who averaged 26% during the 1960s. Britain continued to rely on outdated capital that was less productive than the new capital stock that other major rivals such as the USA were investing in.
Fig 3: Percentage of dated machinery in British industry in 1961
Source: "An Economic and Social History of Britain 1760-1990"
The situation for buildings in British industry was even worse with 60% dating from before 1961. The 14 year-plus age of a lot of the plants, machinery and buildings in British industry was like an age taking the speed of 20th century technological progress into account. It is now clear that there should have been greater investment in new capital stock. The short-term cost would have been more than offset by the long-term gains from the significantly higher profit that would have come from the resulting increased productivity of British industry. The reason why the output per worker is higher in Germany, for example, than it is in India is not because Germans work harder but because they have greater capital stock to work with. Figure 4 shows that, after 1922, UK GDP has grown more rapidly when capital stock has been accumulated more rapidly.
Fig 4: UK Economic Growth and Investment 1900-1969
Source: Artis, M.J., "The UK Economy: A Manual Of Applied Economics", Oxford University Press, 1996
Investment also went into the wrong areas. Smith says: "Britain has not devoted enough of its resources to R & D and production investment; and the resources it has committed have gone to the wrong areas." Figures for 1962 R & D seem to confirm this.
Fig 5: Industrial Distribution of R & D Expenditure in 1962 (%)
Source: "The British Economic Crisis: It's Past And Future"
Britain invested most of her R & D expenditure in aircraft. This was a mistake with Germany and Japan, amongst the fastest growers, investing in electrical products and chemicals, areas that raised far more from exports in 1960-61.
Fig 6: Export Markets 1960-1961 (Total Exports Of The World's Nine Leading Economies)
Source: "The British Economic Crisis: It's Past And Future"
There are a number of reasons for the relatively low level of British investment, many of which emanated from the Government's 'Stop-Go' policies. The policy of adopting demand-management policies, invented by John Maynard Keynes, was generally accepted to be the correct way to progress amongst both the Labour and Conservative parties after World War II. Hence, when the Conservatives replaced Labour in 1951, this policy, which had been adopted by Labour after World War II, was continued. The idea was that demand would be controlled fiscally to counteract a boom (by reducing aggregate demand by reducing taxes and reducing Government expenditure) or a recession (by increasing aggregate demand by reducing taxes and increasing Government expenditure). Aggregate demand would also be controlled with monetary policy (varying credit control and controlling the interest rate). One problem with this strategy is that it meant the Government was regularly cutting back on or postponing investment programmes in nationalised industries. The other way in which the 'stop-go' programme hindered investment was that it affected the confidence of businessmen who found it difficult to plan ahead due to the 'stop-go' interludes that resulted from the Government's inability to 'fine tune' the economy as they would like.
This Government's inability to 'fine tune' the economy was due to the difficulty in accurately evaluating where aggregate demand was at the present moment, and the varying responses of consumers and investors to tax changes. Also, exports are determined by world demand, which the British Government obviously could not control so imports, determined by domestic demand, were affected more than exports by Government demand management policies. This means Britain developed balance of payments problems when the Government attempted to expand the economy because imports outpaced exports. The balance of payments problem that resulted from this could only be resolved if the Government now tried to deflate the economy, thus causing the cycle of the 'stop-go' process. Britain's failure to maintain overseas markets, many of which had been lost during World War I when Britain's economy had been totally geared towards winning the war, meant Britain's share of world exports was reduced, increasing the balance of payments problem.
Fig 7: UK Balance Of Payments, Annual Averages for Selected Periods 1952-1972
Source: "The UK Economy: A Manual Of Applied Economics"
This was despite an attempt to reclaim markets after World War II, which did lead to an increase in her share of the world's manufactured exports. After 1950, though, Britain's share of world-manufactured exports fell considerably. This reflects Britain's relatively low productivity during this period.
Fig 8: Britain's share of world manufactured exports 1937-1966
Source: "An Economic & Social History Of Britain 1760-1990 2nd edition"
Britain had traditionally relied heavily on traditional manufacturing industries such as cotton, iron, steel and shipbuilding. The problem is that they kept relying heavily on these industries when they were being overtaken in them by countries that were using better technology. In the cotton industry, for example, the mule was replaced by the ringframe in the 1870s and 1880s. The idea diffused quickly in the USA: 87% of spindles were ringframes by 1913. In the UK, in 1913, this figure was just 19%. This was typical of how slow Britain was to adapting to new technology. It also shows Britain was wrong to continue to specialise in industries in which it no longer dominated.
There are a number of ways in which British working conditions varied from those abroad. Class differences were especially prevalent in Britain, which led to tensions between some employees and the employer. The theory that this may have meant workers put in less effort than before seems to be false, though, because the productivity of workers actually increased.
Fig 9: Productivity of UK workers 1900-1969
Source: "The UK Economy: A Manual Of Applied Economics"
Britain had a greater number of unions than other countries, which led to union rivalries and demarcation disputes, which distracted management away from important issues. The opinion that British unions are especially militant is a strange one, though, because French unions appear to have been more militant. Another opinion is that British industry was overmanned. Although evidence suggests British industries employ more workers for a given output than other countries, it is unsure how many of these workers are ancillary workers (workers who perform a function but take no direct part in production, such as cleaners). The third argument concerning unions, that they make wage rates too high, is also hard to analyse. It is also questionable how much any of the accusations pointed at the unions actually affects growth or worker output.
Management in manufacturing and industry was poorer than in other countries due to the difficulty in attracting talented managers in a field that was seen as second-class in comparison to higher-status professions, such as medicine and law. Management in manufacturing and industry had a slightly higher standing in other European countries so better managers were recruited. Another reason for the lack of talented managers in this field in Britain was the inferior level of management training available in Britain due to the lack of business schools in the country. It is hard, though, to find evidence that supports an argument that management failure had a significantly adverse effect on UK growth rates or the level of worker output.
Education was generally a problem in Britain. It is widely believed workers generally had lower levels of literacy and numeracy than other countries, though workers were nowhere near being totally illiterate.
There were also problems with business structure in Britain where family-run companies led to people being in roles who were not ideal for the job. Britain also lacked the large multinational companies that were especially prevalent in the USA so were never going to achieve the advantages of scale that would give them a similar level of output per worker to the USA.
It is understandable that economists and politicians in the 1960s had great concern about British growth rates. Since World War II, Britain had relatively declined with many other countries achieving faster growth rates. There are a number of reasons why Britain was unable to achieve a good growth rate but the main reason is probably the unwillingness of investors to invest in British industries. Britain put itself at a disadvantage by continuing to use outdated capital stock that meant Britain would always have comparatively low levels of output so could never compete with countries that had modern capital stock. Other reasons should not be neglected though. Management failure, inferior education and poor business structure meant Britain would always have lower levels of output per worker than other countries. There are a number of reasons for Britain's economic decline but there is plenty of evidence to suggest the most significant of these was lack of investment. The 'long boom' saw Britain slide down the list of the world's richest nations so concern about Britain's growth performance was fully justified.
