INTRODUCTION

During the Second World War Britain was transformed from a predominantly free-market economy into a centrally managed economy as it moved from a peacetime footing to one of full-scale war mobilisation. The transformation is shown in Table 1.1: expenditure on war-related activities increased from around 7 per cent of net national expenditure in 1938 to 53 per cent by 1941 and peaked at 55 per cent in 1943, at which time it totalled £4,512 million. This increase was achieved through substantial negative non-war capital formation and by severely curtailing the growth in the consumption of non-war goods and services. In 1938 the latter had stood at £4,090 million but, despite the rapid war-time growth of the economy, it had reached only £4,526 million by 1943 and its share of net national expenditure had fallen by 32 percentage points. The greater involvement of the state in the economy is also clearly demonstrated by accounted for more than half of the net national expenditure; this transformation was almost entirely due to its increased expenditure on war.

This chapter will examine several issues related to the war economy. Why did the role of the state increase? How did the war affect GDP, productivity and the broad industrial structure of the economy? How did Britain perform relative to other combatant nations? What were the constraints that the war-time economy operated under and how did it deal with them? Did the war have any long term impact on the British economy?

INTRODUCTION

Technological change was a central component in the industrialisation process of the late eighteenth and early nineteenth centuries, and thus in the making of the modern world economy. Nevertheless, more than two centuries after the beginnings of industrialisation, our understanding of the factors that impelled and shaped the development, diffusion and impact of the new technologies of early industrialisation remains far from complete. As a consequence, important questions concerning the place and interpretation of technological change in industrialisation remain unresolved.

The idea that we know relatively little about the sources and outcomes of innovation in the industrial revolution may seem strange, since there is a large historical literature organised explicitly or implicitly around the idea that technological change and industrialisation are intimately linked. Indeed there are many writers for whom new technologies are industrialisation, and so the emergence of new techniques is implicitly or explicitly a fundamental causal event. But the very size of the literature tends to obscure the fact that it actually tells us rather little about the dynamics of technological change in the industrial revolution, and particularly its impacts on growth. So although technological change is usually seen as a central element in the economics of industrialisation there is frequently no satisfactory account of the relationships between technological change and industrial growth. To put it differently, there are few comprehensive treatments of the technologies involved in the industrialisation process, in the sense of treatments that integrate economic, social and technological dynamics. Although such a task cannot be achieved within the space available here, nevertheless this chapter seeks to describe some broad patterns of technological change during the first industrial revolution, and to place them within an interpretative framework.

INTRODUCTION

Sustained investigation of the economy and society of early modern Scotland has occurred only since the mid-1970s. Earlier generations were content to focus almost exclusively on the developments of church and state in the period before the Union of 1707. Out of this neglect came the widespread acceptance of an influential stereotype. It became a commonplace in the textbook literature until the 1960s that the Scottish experience was exceptional in relation both to England and to other ‘advanced’ European economies. Scotland in c. 1700 was said to be different, not only in its poverty, the archaism of the social structures and the timeless rigidity of the economic system, but also in its insecurity and instability, a direct result of weak central authority and the threat of baronial insurrection. In an article published in 1967 Hugh Trevor-Roper expressed the orthodoxy in succinct terms: ‘at the end of the seventeenth century, Scotland was a by-word for irredeemable poverty, social backwardness [and] political faction’ (Trevor-Roper 1967: 1,636).

Since then, however, a more complex and subtle evaluation of the national economic condition has emerged, as a growing army of Scottish historical scholars has asked fresh questions and plundered the archives in the search for answers. The corpus of published work has therefore grown significantly, though it has to be acknowledged that the recent historiography still lacks the sheer richness and density of the work on English economic and social history described at length throughout this volume. Key areas, such as demographic history, are constrained by the inadequacy of records.

INTRODUCTION

The story of the industrial revolution is usually told in terms of cotton and the textile industry. But men and women did not live by cloth alone. The houses and factories that they lived and worked in were built with brick and roofed with slate; they were heated, powered and lit by coal and its products; their sanitation and water supply were serviced with lead and copper pipes and cisterns; their tools and machinery were of iron and steel; and their household utensils and facilities were of pottery and ceramics. Whereas in the early 1860s the average annual per capita consumption of raw cotton in mainland Britain was around 30 lb., every man, woman and child in mainland Britain could consume something like 10 oz. of tin, 2 lb. of copper, 6 lb. of lead, over 220 lb. of iron and steel, more than 3 tons of coal, and a similar quantity of clays, sand, stone and gravel. The extractive industries were widely dispersed across the country and dominated a number of regional economies, not just in the north of England. The material culture of everyday life was firmly rooted in the products of the nether world and became ever more dependent on it. No matter how the textile sector grew and expanded, it was the domestic extractive industries, and those that processed their products, that dominated the industrial landscape. Overall, Britain’s mineralogical factor endowment created the defining context for the whole process of its industrialisation. By facilitating and encouraging the substitution of mineral for organic resources it guided technology in new directions that were particularly rich in innovative possibilities.

INTRODUCTION

Most accounts of industrialisation stress the rapid rise of the factory, of powered technologies, and of large-scale plants and firms. Indeed the factory more than anything else has come to symbolise the industrial revolution and dominates popular imagery of the period. However, factories were slow to spread and uneven in their hold over sectors of manufacturing. Their development was a notable feature of the industrialising economy, and requires explanation, but their rise was limited and accompanied by a proliferation of small-scale enterprises, workshops, and domestic and dispersed forms of manufacturing employing a handful of workers and using hand tools as much as advanced machinery. Most concerns remained small and family firms predominated. These were not just lingering pre-industrial forms but an integral part of the modern industrial economy.

This chapter analyses the causes and consequences of variation in business organisation and structure. Consideration is given to the nature of products, markets and factor supplies and the interplay between technological change and organisational adaptation. Particular emphasis is placed upon the economic, social and cultural contexts in which enterprises operated, and which shaped their form and success. Communities, institutions and business networks, embodying knowledge, skills, experience and reciprocities, were crucially important in the high-risk, information-poor environment of the later eighteenth and early nineteenth centuries. These social and organisational structures did much to support varied rather than monolithic forms of enterprise.

INTRODUCTION

The trend in working-class living standards from the Great Exhibition to the eve of the Second World War has generated relatively little controversy compared to the debate over living standards during the industrial revolution. Most economic historians agree that real wages increased significantly from 1851 to 1913, and continued to increase during the interwar period. However, despite these achievements, the social surveys of the late Victorian and Edwardian eras revealed high rates of urban poverty and ‘a working-class stunted and debilitated by a century of industrialism’ (Hobsbawm 1968: 137). This suggests that, as with the period 1780–1860, one might reach a different conclusion about trends in and levels of working-class living standards depending on what type of information is examined.

Economic historians measure movements in living standards in various ways, by examining trends in real wage rates or incomes of workers (or more rarely households), national income per capita, life expectancy at birth (or at other ages), infant mortality and height by age. These measures can to some extent be grouped into economic indicators of material living standards – real wages, per capita income – and biological indicators – life expectancy, infant mortality and height by age, which are sometimes said to measure ‘quality of life’. Biological measures suggest a somewhat less optimistic assessment of the trend in working-class living standards than do wage series, at least up to 1900. In order to determine the extent to which living standards improved from 1860 to 1939, it therefore is necessary to examine trends in both economic and biological indicators for the working class as a whole and also for occupational subgroups of the working class.

INTRODUCTION

The one great sector of the economy that seems to have been in more or less unremitting decline from 1860 down to the Great War was agriculture. Agriculture’s share of national income fell from about 20 per cent in 1851 to 10 per cent by 1881 and 6 per cent in the first decade of the twentieth century (Collins 2000b: 9–10, 13). Agriculture’s share of capital fell from three-fifths in 1832 to less than a quarter in 1885 and under 10 per cent by 1912 (Collins 2000b: 14). Agricultural rents as a proportion of total domestic income fell from about 7 per cent in the early 1850s to 2 per cent by the Great War (Collins 2000b: 7, citing Feinstein 1972: T4–5, column 7). The greatest declines were in England and Wales where the numbers employed in the farm sector, including farmers and their relatives living on the farms, fell from 1.7 to 1.2 million from 1851 to 1911 (Collins 2000b: 7). By 1901 no counties of England or Wales had more than 45 per cent of their working populations employed in agriculture. In 1851 twenty English and five Welsh counties had over 20 per cent of their total populations employed in agrarian occupations, but by 1911 only eight English counties had more than 10 per cent and sixteen counties had 3 per cent or under. However, those that remained were involved in a more complex ‘industry’: in 1841 100 farm workers generated subsidiary work for 27 others off the farm; in 1881 they were supported by 47 others; and in 1911 by 67.

THE SHAPE AND COURSE OF BRITISH MANUFACTURING

The global economic leadership that Britain enjoyed in the nineteenth century had its foundations in the nation’s unprecedented industrial capability. To many Victorians and Edwardians this was a fact of life; it followed almost inexorably that should the uniqueness of that capability ever be lost, Britain’s international pre-eminence would also be forfeited and decline ensue. The progress of manufacturing was seen as pivotal to Britain’s economic fate.

To a large extent, this is also how Britain’s decline has been cast in much of the economic history literature, where industrial decline and economic decline are taken as synonymous. As the manufacturing sector was a major employer that provided the vast majority of Britain’s exports and was where the full brunt of the growing international competition was felt, it seems a reasonable focal point for the historical analysis of Britain’s relative economic decline.

To some, the significance of manufacturing, because of its dynamic properties and integral place in the process of technological change, goes well beyond the size of its static contribution to national product. In this view, both economic growth and productivity are seen to be crucially determined by the expansion of the manufacturing sector (Kaldor 1966). Whether such a relationship applies in the late Victorian and Edwardian period is investigated later in the chapter, but it should be noted here that, despite the growing foreign challenge, manufacturing’s place in the British economy was not in fact contracting. Rather, as Table 4.1 illustrates, its share of national output and the capital stock actually grew over the second half of the nineteenth century, while its share of employment remained constant.

INTRODUCTION

Few topics in economic history generate more controversy than the British industrial revolution – and arguably no debate in economic history is more famous than the ‘standard-of-living debate’. In the post-war period, the question of whether the early stages of modern capitalism led to an improvement or a decline in workers’ living standards became as hotly contested as many of the Cold War’s other theatres. Marxist historians argued that, in exchange for ever longer hours of grinding toil in the factories, the working classes had little to show by 1850 in terms of living standards except for a few cotton goods (Hobsbawm 1972). Optimists such as Max Hartwell pointed to gains in real wages and life expectancy, and to the move to the cities as the escape from the ‘idiocy of rural life’ (Karl Marx).

When O’Brien and Engerman (1981) discussed the issue in the first volume of The Economic History of Britain, they emphasised that future research would most likely have to focus on three topics: improvements in the measurement of real wages, of inequality, and of the changes in welfare not measured by income. Twenty years on, it appears that their intuition was remarkably prescient – two of these areas have contributed most to our reassessment of changes in living standards between 1760 and 1850. The issue of inequality, however, is too controversial to permit firm conclusions (Williamson 1985; Feinstein 1988). Consistent wage series by skill category have proven extremely difficult to compile, and there is no conclusive evidence that the share of total income paid to capital rather than labour moved significantly; the issue will therefore not be covered in this chapter.

INTRODUCTION: THE RISE OF BRITAIN AND ITS ECONOMY, 1660–1815

Between 1660 and 1815 Great Britain rose to become the world’s leading commercial and military power, surpassing its European rivals, and all other national economies around the world. Although dating the industrial revolution now seems a pointless exercise, it makes sense to begin an account of Britain’s long transition to geo-political and economic primacy at the Restoration (1660) and to recognise that its maritime hegemony and economic superiority was widely feared at the Congress of Vienna (1815).

Britain simultaneously achieved both power and plenty, with its relatively rapid rate of growth of per capita income and of international trade, as well as its precocious structural change from agriculture to manufacturing. Although there had been some shift to industry prior to 1660, subsequent changes made Britain the world’s richest economy by the start of the nineteenth century. Its dominant navy and powerful army and its fiscal ability to fund armed conflict meant that the British usually emerged victorious from wars with other European powers, a geo-political hegemony that was to persist down to the First World War.

In centralising and strengthening the power of the state, Britain followed the basic outlines of mercantilism, a policy which was also pursued by most other European nations. This meant extensive regulations externally, over foreign trade, shipping and colonial economic activity. British mercantilism existed, however, within a domestic framework of laissez-faire and private enterprise that differed from other nations, and also with a strategy for colonisation less dependent on direct governmental investment and administration in settling and building up satellite economies overseas.

INTRODUCTION

This chapter reviews UK economic growth performance from mid-Victorian times to the end of the interwar period. It aims to place this experience in the context both of initial British pre-eminence and subsequent relative economic decline and of new ideas in growth economics. A growth accounting framework is used to establish the proximate sources of growth and to compare UK experience with that of Germany and the United States. Against this background, special attention is given to two controversies, namely, whether the British economy ‘failed’ in the late Victorian and Edwardian period and whether the interwar period and, especially the 1930s, saw a successful regeneration of the economy’s growth potential. Finally, in so far as the UK underperformed during these years, it is important to examine the incentive structures which informed decisions to invest and to innovate and the roles played by market and/or government failure.

AN OVERVIEW OF GROWTH

Britain was the first industrial nation but by the end of the twentieth century had become just another OECD economy with an income level below that of North America, most of western Europe and parts of East Asia. This relative economic decline is sometimes regarded as a continuous process that started around 1870 and had already alarmed contemporaries in the late nineteenth century as Germany and the United States emerged as powerful economic rivals. Its dimensions are, however, not well understood by many commentators. This section sets out a basic quantitative framework within which debates about UK growth performance can be placed.

INTRODUCTION

Organised labour entered and left our historical period like a lamb, but for the central decades it dominated the political and economic scene like a lion. Managing trade unions was seen by government at times to be central to the task of managing the economy. Changes in the economy were to transform trade unions and, over the course of the period, the conduct of British industrial relations changed beyond recognition. This chapter is concerned with this change and with its economic implications.

The account begins with a brief discussion of the basic features of industrial relations and with an overview of how they changed. The chronological narrative is then broken into three twenty-year periods. The first takes us through the years of war-time regulation to the end of the relatively calm 1950s, a period during which Britain was widely perceived to have a settled (and even superior) system of industrial relations based upon collective bargaining. The second period was one in which this system began to break up, and in which governments, forced to abandon a laissez-faire approach, became embroiled in attempts at reform. The final twenty years witnessed irreversible changes, with collective bargaining undergoing substantial contraction.

THE BASIC FEATURES OF INDUSTRIAL RELATIONS

It is uncontroversial that the relationship between employer and employee is of profound economic significance. The way labour is managed determines its productivity, its cost, its welfare and its skills. What is controversial is how best labour might be managed, and who should be the beneficiaries. Employment is at heart a most unusual economic transaction, impossible to contain within a normal contractual arrangement because of the difficulties of monitoring and motivating workers, usually over continuous periods of many years.

INTRODUCTION

Technology had been an area of sporadic governmental concern for several centuries, but after the Second World War it moved nearer the centre-stage of thinking in both public and private domains. This growth of interest in, and concern about, technology was driven by a number of factors, none of which was new but all of which were accentuated. First was the growing complexity of technology, associated in part with extending links with the science base and in part with the advent of new technological fields. Second was the impact of ‘globalisation’, which helped to place technology at the forefront of the ‘competitiveness agenda’ in the economic domain. And third were the intensifying public anxieties about unchecked technological proliferation and potentially adverse environmental impacts, which led to demands for tighter control and regulation. In various ways, each of these brought about a widening consciousness of technology among the people of Britain.

Though concerns and anxieties were to grow in the second half of the twentieth century, technology had emerged from the war with a high reputation: in the military, in government and in the public at large. Initial excitement over how atomic bombs had brought a speedy end to the war in the Pacific led not only to enlarged testing programmes for nuclear weapons, by the UK as well as other leading military powers, but also to General Eisenhower’s call for ‘Atoms for Peace’, and nuclear power that would prospectively generate electricity that was to be ‘too cheap to meter’. Computers that had been first developed to analyse the ballistics of rockets could be harnessed for a wider range of scientific calculations, and perhaps other purposes.

INTRODUCTION

In the mid-eighteenth century Britain was the world’s greatest trading nation. Manufacturers exported a wide variety of textiles and hardware. Rich London and Bristol merchants imported tropical goods and more modest provincial merchants dealt in Baltic timber and grain. Two centuries earlier, England had been an economic backwater, exporting un-finished heavy woollen cloth to the Low Countries for further finishing before sale throughout Europe. During the century and a half after 1750, British firms and British investors provided leadership in industrial revolution technology and policy shift that created a fully globalised trading world.

Trade from the mid-sixteenth century to the end of the industrial revolution may be envisaged, somewhat oversimply, in two periods. Until the late eighteenth century, incorporation of the Americas drove change. The British industrial revolution introduced a shorter second period that lasted until about 1850. Late in the eighteenth century, British firms in a few key industries developed technological superiority over producers elsewhere. As British firms adopted superior technology and competition among them drove prices down, they captured world markets. Since the new cotton textiles depended on a tropical raw material, new import trades grew as well. In 1846 repeal of the corn laws symbolised a shift in policy from mercantilism to free trade. Later in the nineteenth century, a new phase of multilateral globalisation occurred, driven primarily by technology that dramatically lowered transportation costs, reinforced by liberal economic policy and population growth.

INTRODUCTION

This chapter considers employment and human capital in post-war Britain. It begins with a look at trends in the labour force, employment and unemployment, taking account of the age distribution of the labour force, female participation, trends in participation in full-time education, part-time working, self-employment and the industrial composition of employment. Following this the chapter devotes most attention to the skill composition of the labour force, contrasting the position in the UK with that in the United States and Germany. Low investment in human capital has frequently been seen as a weakness of the British economy, and has been identified as a major cause of Britain’s relative economic decline during the twentieth century, particularly by writers in the period from the end of the Second World War (Landes 1972; Levine 1967; Aldcroft 1992). The chapter first considers human capital accumulation in Britain from the Second World War to 1979, examining data available from a range of sources. This period also coincides with British productivity levels falling behind those in other European countries.

This is followed by a consideration of the two decades since 1979, when more detailed data on labour force skills are available. The final section considers the implications of human capital accumulation for Britain’s relative productivity position. It is important to realise that at the end of the Second World War, although the United States had a substantial lead over Britain in aggregate labour productivity, Britain still had high aggregate labour productivity by European standards, and was not overtaken by most west European countries before the late 1960s (Maddison 1995).

INTRODUCTION

In 1870 Britain appeared to dominate the international economy; by 1939 things looked very different as export industries struggled in a moribund international economy. In the eighteenth century Britain had become Europe’s leading trading nation, and, during the industrial revolution, industrialisation and export growth went hand in hand to make Britain the ‘workshop of the world’. In the late nineteenth century the international economy grew rapidly – during an era of globalisation that was not rivalled until the late twentieth century. Although the dominance of British firms diminished as foreign (particularly American) firms increased their share of world export markets, British export industries continued to prosper. Furthermore, British shipping, banking and mercantile services remained at the centre of the world economy.

By 1939, Britain’s relationship with the rest of the world was altogether gloomier. The First World War had ended the era of a liberal expanding global economy. In Britain, as in other combatant nations, firms had turned their resources towards the war effort. Foreign customers found themselves ignored by their usual suppliers and looked elsewhere for alternatives. During the 1920s Britain returned to the pre-war goldbased monetary standard at an exchange rate that made British exports expensive. At the end of the 1920s, strains from the war and the imperfect return to gold contributed to the great depression in the 1930s. As depression and monetary instability spread, governments responded by circumscribing international trade to protect domestic firms and jobs and to insulate the monetary system from international pressure. In response to depression and the changed world, Britain abandoned the gold standard in 1931 and moved from a policy of free trade to one of tariff protection.

CONSUMPTION, CONSUMER REVOLUTIONS AND DEMAND

There is a paradox at the heart of recent research on the industrial revolution. This is the juxtaposition of theories and evidence of slow economic and industrial growth with alternative theories and evidence of rapidly rising consumer expenditure. Earlier histories linked consumption to elite expenditure on the one hand and rising standards of living on the other. These are no longer considered to be valid. Few now believe that elite expenditure was in itself sufficient to fuel a major increase in consumption, and elite consumer behaviour did not ‘trickle down’ to sufficiently broad parts of the population. It is also now believed that the living standards of the labouring classes either were static or improved only slowly over the whole of the eighteenth century and much of the first half of the nineteenth century. Yet despite these conventions, theories of a consumer revolution, or at least recognition of evidence of a relatively widespread increase over the period in the possession of consumer goods, have been difficult to dislodge. Indeed they have gathered force since the 1990s, shaping the grand narrative of the period, and replacing the former grand narrative of the industrial revolution. Consumption, is now the major preoccupation of social and cultural historians of the eighteenth and early nineteenth centuries, as it is of the social sciences more generally. Analysis of the broader aspects of consumer practices, and an understanding of the growing diversity of consumption, were left to social and cultural historians. Shifts in consumer behaviour depended on changing tastes, on deploying underemployed resources, especially within the household, and on that vocabulary which economic historians had carefully removed to the cultural sphere, that is, desire, attitude, fashion and emulation (de Vries 1993).

INTRODUCTION

From 1931 the possibility of much greater management of the national economy was opened up by the departure from gold, the imposition of tariffs and, at the micro-economic level, the willingness of government to encourage cartels and price-fixing. Together these policies enabled the pursuit of a loose-coupled strategy of raising prices in order to increase profits and hence, it was hoped, investment (Booth 1987). The war added a major impetus to this rise of national economic management (NEM). On the one hand, it greatly reinforced the political necessity for governments to offer economic security and betterment to their citizens, not least because the political support for a capitalist economy had been shaken by the interwar depression and now faced a potent ideological enemy in the Soviet system. Simultaneously, the war enormously enlarged the capacity of government, increasing the spending and taxing power, but also instituting a range of direct controls which meant that by 1945 we can sensibly talk about a semi-planned economy in Britain, albeit one in which the planning mechanisms were very much tied to the exigencies of wartime shortages (see chapter 1 above).

While there was some retreat from the intensive wartime controls in the later part of the Attlee period (1945-51), the belief that government’s prime domestic purpose was to manage the economy persisted for the rest of the twentieth century, largely surviving even after the alleged ‘retreat from economic management’ of the late 1970s and 1980s. This high level of government activity has generated in its wake an enormous volume of scholarly comment and analysis.

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