INTRODUCTION

Economic growth has perplexed economic theorists, economic historians and policy makers. Much of the theory of economic growth effectively assumed away the issue by assuming that growth – like ‘manna from heaven’ – was not explicable by economic phenomena. Others believe that growth does respond to economic factors – but there is much disagreement about what these factors are and how big their impact may be (see Temple 1999 for a review of the vast literature).

Understanding economic growth may be difficult but it is important – not least because, if policy makers can create the right conditions to improve growth, then prosperity and welfare may increase. The goal of the current Labour government is to improve the UK’s long-term growth rate and the benchmark that it is using is whether the productivity gap between the UK and the leading countries, especially the USA, is closing (DTI 2002, Treasury 2000). In 1999, the average American worker produced 30 per cent more per hour than the average British worker. If the UK economy grew faster and closed this gap, this would allow some combination of higher consumption of goods and services (or more leisure time), more investment, a better trade balance and more resources for government to spend on public goods.

The existence of the productivity gap - and policy makers’ preoccupation with it - suggests that the UK economy has underperformed or ‘failed’. This contention is, however, subject to debate and a wide variety of interpretations. First, there are those who argue that the issue of ‘decline’ is largely a misnomer and a pessimistic misinterpretation as the level of prosperity in the UK