INTRODUCTION

Early eighteenth-century commentators celebrated Britain's role as a pre-eminent ‘trading nation’. Success rested on a century of rapid growth driven by an expansionary policy, or vigorous commercial spirit, which was later labelled mercantilism and survived into the nineteenth century (Magnusson 1994). Mental maps were redrawn alongside the new geographies which reshaped European understanding of the globe after the discoveries of the late fifteenth century. The world was seen to offer vast untapped bounties to those with the capital and skill to exploit them and encouraged a new faith in man's ability to master nature and create wealth, which came to overshadow earlier concerns about the moral economy, or wealth distribution (Davenant 1698). Policy was not driven by a body of theory underpinned by systematic rules, but despite contradictions, it did display strong central tendencies which gave it coherence. It was cemented by three overarching aims: first, to improve the resource balance by exporting surplus population and securing protected supplies of essential commodities; second, to open new markets for manufactures to provide industrial employment; and third, to stimulate the expansion of shipping and middlemen earnings to enhance national defence and wealth. Mercantilists believed that commercial success promised power and plenty through better use of slack resources, above all labour, and the creation of innumerable linkages and spread effects: ‘trade sets all the wheels of improvement in motion’ (Defoe 1728: 14).

Expansion was largely financed and organised by private individuals who employed a range of strategies: searches for new passages, the forging of direct access to distant markets, the settlement of trading posts (‘factories’) in far-flung locations, the appropriation and improvement of ‘free’ lands, and the protection of national markets. Empire, slavery and violence played prominent roles. The state did not direct the policy but it did provide support, both because the commercial classes were active stakeholders in government, especially after the Glorious Revolution, and because the policy promised economic growth and easily taxable revenue streams.

INTRODUCTION

This chapter reviews British economic growth performance from mid-Victorian times to the eve of the financial crisis which erupted in 2007. It aims to place this experience in the context both of Britain's early start as the first industrial nation and its subsequent relative economic decline and also within ideas from modern growth economics. A growth accounting framework is used to establish the proximate sources of growth and to make comparisons with Germany and the United States. Productivity outcomes are examined in relation to successive epochs of supply-side policy.

The chapter analyses and evaluates Britain's long-run growth record using insights based on models which view the sources of growth as ‘endogenous’, that is to say, determined within the economic system. In other words, the incentive structures which underpin decisions to invest, to innovate and to adopt new technology will be of central importance, together with the political economy of government decisions which directly or indirectly affect the rate of improvement of productive potential.

Against this background, special attention is given to several debates, including whether the British economy ‘failed’ in the pre-1914 period; whether the interwar period, and especially the 1930s, saw a successful regeneration of the economy's growth potential; what explains falling behind in the so-called ‘Golden Age’ of European economic growth after the Second World War; and how far the radical change in policy initiated in the Thatcher years after 1979 delivered an improvement in growth compared with other European countries.

AN OVERVIEW OF LONG-RUN ECONOMIC GROWTH

In 1870, Britain was the leading industrial nation and had an income level well above that of major rivals. Before 1913 the United States overtook the UK but in 1950 the UK was still well ahead of both France and West Germany. After that, slower growth in the UK meant that those countries pulled ahead and had established a significant income gap by the end of the 1970s.

INTRODUCTION

Economic growth can be driven in the short run by factor accumulation or by utilising factors more efficiently, but permanent increases can result only from technological innovation, including, within this, term improvements in products and processes in manufacturing, services and indeed agriculture. This chapter will focus on machines and innovations in mechanical processes, while Chapter 13 discusses innovation in services.

Given Britain's loss of industrial pre-eminence from the late nineteenth century, an absence in new technology formation is as natural an explanation for British failure as cultural interpretations that emphasise a weakness of the industrial spirit (Wiener 1981). While Britain was the first ‘workshop of the world’, its lagging position behind the technology frontier during the drive to industrial maturity is a topic of some debate in economic history. Accounts of technological progress during industrialisation emphasise that Britain's rise was defined by capabilities in a broad array of industries and by a culturally enlightened and technically competent stock of human capital that could translate new ideas from home, or abroad, into commercially viable innovations (Mokyr 1990, 2002, 2010). What changed the trajectory of technological change in Britain from this high point of early economic development?

This chapter examines the hypothesis that Britain has failed technologically. It provides a statistical portrait of innovation over the last 140 years and it then focuses on three main areas of explanation for Britain's historical innovation performance. First, it analyses incentives for technological development, specifically British patent law and efforts to induce innovators using inducement prizes as an alternative or complementary mechanism. Second, it explores the organisational structure of innovation in Britain and R&D performance. Finally, it examines public policy efforts to promote industrial science and innovation clusters.

The data strongly support the argument that Britain's technological performance was lacklustre during the late nineteenth and early twentieth centuries, when other industrial nations began to catch up on Britain's early technological lead.

INTRODUCTION

Economic historians often make a distinction between ‘Smithian economic growth’ and ‘modern economic growth’. The former term derives from Adam Smith's discussion, in The Wealth of Nations, of the role played by the division of labour in raising output per head and hence in driving economic growth. The term ‘modern economic growth’ was coined by Simon Kuznets who argued that it was driven by technological change (Kuznets 1966). In Kuznets' analysis, once modern economic growth took hold it tended to be sustained indefinitely and he identified the original development of modern economic growth with the industrial revolution in Britain. Drawing on data from a range of countries during the period of their industrialisation, Kuznets stated that the onset of modern economic growth was associated with major changes in the structure of an economy. During the transition period both the workforce and output of an economy shifted away from the dominance of agriculture – a general characteristic of poor or ‘underdeveloped’ economies – to the dominance of the non-agricultural sectors in both employment and output. This chapter summarises our current knowledge of shifts in the occupational structure of the British economy before and during the industrial revolution and its relationship to population change between 1700 and 1870; in doing so it shows that the British industrial revolution did not conform to Kuznets' model.

Ideally, the whole of Britain should be covered. Unfortunately the available sources for the eighteenth century do not allow the history of population change in Wales to be recovered in a manner comparable to what is possible for England. Nor, in the case of Scotland, is it possible to reconstruct the relative size of different occupational groups prior to the mid-nineteenth century. It therefore seemed best to focus almost exclusively on England and Wales in attempting to provide a coherent description and analysis of changes in occupational structure between 1700 and 1870 and on England alone for population change. This is unfortunate but it maximises what can be described and analysed effectively given the available data.

THE SOURCES OF GROWTH IN THE ECONOMY AS A WHOLE

During the industrial revolution, Britain's economic and social life was transformed by the introduction of new products and cheaper production methods that ranged from steam engines and fancy fabrics to gas lighting and milk chocolate. In the words of T. S. Ashton's (1955: 42) famous schoolboy, ‘About 1760 a wave of gadgets swept over England.’ Britain's productivity rose between 1750 and 1860 with the result that the country's share of world manufacturing output jumped from 2% to 20% (Allen 2011a: 7). In 1760, Britain was already one of the world's rich countries; by 1860, it had the highest GDP per head of anywhere. Technological change was the motor that drove the British economy forward. This is why understanding the causes of productivity growth is crucial in explaining the industrial revolution.

PRODUCTIVITY GROWTH AT THE INDUSTRY LEVEL

Productivity growth was slow from 1760 to 1800 and accelerated thereafter. The main reason was that productivity started to increase in individual industries. The history of new machines and technical processes makes it clear that there was productivity growth in cotton, iron and steam-power. Whether progress was confined to a few ‘revolutionised industries’ or whether it extended across the whole economy has been the issue in a major debate. To resolve that question, we must measure the growth in productivity in many industries and relate those findings to the growth in aggregate productivity.

Productivity at the industry level can in principle be measured in the same way as aggregate productivity, but measures of the quantities of inputs and output are not usually available for the eighteenth century. Industrial productivity can also be measured with time series of the prices of inputs and products, and these data are much easier to assemble. The measurement procedure is based on the idea that production cost falls when productivity goes up. Since costs also change as wage rates and input prices change, their impact cost must be taken into account.

INTRODUCTION

During the late seventeenth and early eighteenth centuries a financial revolution transformed both the British state's ability to raise funds and the investment habits of a nation. The chief outcome of this revolution was that Britain achieved the financial capacity needed to outspend its enemies, to secure success in the many conflicts fought around the globe over the course of the long eighteenth century and to emerge by 1815 as a dominant European, imperial and world power. It is sometimes argued, however, that the costs of this achievement extended beyond the debts accumulated by a state so often at war. In particular, it resulted in a financial system which, during the period of Britain's industrial takeoff, was not well-suited to the support of nascent industry.

It is certainly the case that, during the long eighteenth century, the financial system overwhelmingly responded to and reflected the needs of the state. The major consequences of this were the creation of a capital market that favoured the instruments of the public debt and the shares of the great monied companies: the Bank of England, the East India Company and the South Sea Company. It also restricted the development of banking, a deliberate strategy designed to preserve the privileges of the Bank of England. In consequence, banks, although there were many of them by the end of the eighteenth century, remained small and focused on lending in the shortrather than the long-term. Arguably, these restrictions in the size, scope and experience of the financial system acted to impose limits on the growth of enterprise.

One of the consequences of this interpretation of British financial development is that, in a historiography dominated by the process of industrialisation, the financial revolution generates nothing like the kind of attention that is given to the industrial revolution. There are relatively few long-run studies of financial development in Britain.

INTRODUCTION

The period 1870 to 2010 is unique, not because it is necessarily particularly rich in cycles and exhibits the occasional depression; cycles also existed in preindustrial Europe (Craig and García-Iglesias 2010) and are unlikely to vanish completely in the future. What stands out about the past 140 years is how economists and policy-makers have positioned themselves with respect to cycles. At the beginning of our period, several economists (Juglar 1862; Kondratiev 1925) discovered cyclical patterns in economic activity and tried to explain them. Such rather descriptive approaches no longer seemed enough when the Great Depression of the early 1930s led to output losses of close to 30% in many economies, including the US and Germany, respectively the first and the third largest economies of the time. Henceforth, the objective was to tame the cycle.

The (supposed) ability to smooth economic cycles was one of the main attractions of the Keynesian policies which came to dominate the Western world in the 1950s and 1960s. While Keynesian macroeconomic management fell into disrepute in the turbulent 1970s, the idea of smoothing the business cycle remained in fashion; a large body of economic literature, emerging in the 1990s, claimed that the 1930s dream of eliminating cycles of boom and bust had been achieved at last; or at least, it was claimed, ‘moderating’ them, which gave rise to the name ‘the Great Moderation’ for the period c. 1982 to 2007. As late as 21 March 2007, Gordon Brown, the then Chancellor of the Exchequer (and later British Prime Minister, 2007–2010), claimed that those cycles belonged to the past. Less than two years later the complacency of the Great Moderation interlude came to an abrupt end: all major economies experienced output declines of 4–6 % in the 2008–9 recession, and most (including the UK) had yet to recover their pre-crisis GDP levels three years later.

For students of business cycles all this comes as little surprise. Burns, one of the founding fathers of modern business cycle research, wrote in 1947: ‘For well over a century, business cycles have run an unceasing round.

INTRODUCTION

This chapter considers the evolution of the manufacturing sector in the UK since 1870. It analyses the contribution of manufacturing to national income, employment and trade. Broadly, for almost a century, from 1870 to 1960, manufacturing played a key role in the development of the economy, undergirding success in other sectors of the economy and securing rising living standards. The subsequent fifty years, from 1960, have witnessed a relative decline of the UK manufacturing sector – relative to other sectors of the economy, and relative to the manufacturing sectors in other countries. The chapter considers the thesis that the relative decline of manufacturing is a natural outcome of the development of advanced economies, as against the counter-arguments suggesting that decline of UK manufacturing represented something more than this, reflecting economic weaknesses and structural imbalances.

We argue that in the case of the UK, the relative decline of manufacturing has indeed reflected deep-rooted structural problems. In particular there has been a chronic failure to invest in manufacturing, with the UK economy and investment being instead skewed towards short-term returns and the interests of the ‘City’. These structural problems have led to uneven growth in the UK. Regional problems emerged in the interwar period due to the relative decline of traditional industries located in the North and the growth of new industries located in the South and the Midlands. After the Second World War such disparities persisted but were ameliorated by active industrial and regional policies. Since the early 1980s, regional growth has diverged – with London and the Southeast expanding faster than the rest of the UK. The benign neglect of manufacturing by policymakers has led to an unbalanced economy with manufacturing balance of payments deficits emerging and then persisting since the early 1980s.

Following the 2007–8 financial crisis and the global recession of 2009, a political consensus emerged around the need to rebalance the economy, with a stronger manufacturing sector. Britain does still have pockets of competitive manufacturing – in such sectors as aerospace and pharmaceuticals.

INTRODUCTION

This chapter, like its companion in Volume II, deals not with economic events, but with economic ideas. The most direct and obvious relevance of this to economic history is that economic ideas interact with policy – although it is often difficult to assess the extent to which policy was driven by consciously held beliefs about the working of the economy. However, even if such beliefs had no demonstrable effect on policy, there are other reasons why economic historians should understand at least the broad contours of economic thought during the periods they study. Contemporaries will have been aware of factors of which we have lost sight, and we may be able to learn from studying past debates and controversies. The focus of this chapter is on ideas as they impinged on policy, but it is also important to realise that, as reflection upon economic problems became more systematic, an evergreater value was placed upon ‘economic knowledge’ that lacked any direct relationship to economic policy or to contemporary economic problems. In the eighteenth century political economy became a part of general public discourse; after 1800 it was a subject centred around discussion of key concepts, and by the 1870s, rapidly becoming a field dominated by academic specialists.

Three topics dominated discussion of economic policy in the eighteenth and early nineteenth centuries: government finance, currency and commercial policy. The importance of these issues is symbolised by two events, both of which were to be important for policy-making in the entire period up to 1870: the foundation of the Bank of England and the appointment of the Lords of Trade. The Bank of England had been founded in 1694 to solve the government's funding problems, mainly in connection with rebuilding the Royal Navy. In 1696 the Royal Mint began to replace England's worn silver coinage with new coins containing the full weight of silver. Because the face-value of silver coin was lower than its market price it went out of circulation, and instead gold circulated as currency, the first step towards the gold standard.

INTRODUCTION

Until recently, the service sector has been rather neglected by economic historians, who have lavished much more attention on agriculture and industry. This is particularly the case when dealing with topics such as economic growth and productivity performance. Whereas it may just about make sense to evaluate Britain's nineteenth century economic performance with a focus on industry and agriculture, which between them made up around two thirds of economic activity, this makes absolutely no sense in the twenty-first century, when services account for more than three quarters of economic activity. However, this relative neglect of services by economic historians of the twentieth century means that the literature on this topic is much less well developed than the literatures on industry and agriculture.

This chapter begins by outlining the growth of the service sector within a national accounting framework. Services have seen a dramatic increase in their share of economic activity in all developed countries in recent decades, and Britain has shared in this trend. There are a number of reasons for this rise of the service sector at the expense of industry, but the most important is simply that as people get richer, they spend a growing share of their incomes on services. A similar change in the relative importance of industry and agriculture occurred earlier in history and provoked similar concerns about the sustainability of incomes if too many people worked in what were then perceived as unproductive activities. Just as today the policy proposals of the physiocrats to protect agriculture on strategic grounds seem at best quixotic, the concerns of those now urging a rebalancing of the economy to counter de-industrialisation will in the fullness of time seem misplaced. Being a rich economy today requires above all else high productivity in services.

Having established the growing importance of services over time, the chapter then assesses the performance of Britain's market services sector, drawing on a framework established in a recent book by Broadberry (2006).

INTRODUCTION

For historians seeking to explain agricultural productivity, Britain seemed to hold the answer. Britain had both high agricultural productivity and capitalist institutions, a coincidence that led many historians to suspect causation. However, this story has not held up under closer scrutiny. Much of Britain's high labour productivity can be explained by intensive use of land and capital, and direct evidence has not supported a causal connection between capitalist institutions and high productivity.

INSTITUTIONS

Size

In peasant agriculture, owner-occupiers use family labour to work small farms, combining the roles of owner, entrepreneur and labourer. In capitalistic agriculture, on the other hand, each role is played by a different person; entrepreneur farmers rent large farms from landowners and hire labourers to do the work. Most agricultural systems combine some aspects of both types, but some are closer to the peasant end of the spectrum, and others closer to the capitalist end. In 1700 British agriculture was already relatively capitalistic, and over the next 170 years it became more capitalistic. Britain's relatively large farms became larger, and were rented for shorter periods at higher rents. Open fields and commons were enclosed, allowing for more individual choice in farming technique. As farms grew, daylabourers paid cash were substituted for family labour and live-in servants.

One of the characteristics that made British agriculture capitalistic was the separation of the roles of worker, entrepreneur and owner. British rural society was divided into three distinct classes. At the bottom were wage labourers. They rented a cottage and may have been able to raise some of their own food in a garden or allotment, but were mainly dependent on the wages they received from farmers. In the middle were the farmers who rented land, provided their own capital, employed labourers and received any residual profits. At the top were the landowners who lived on the rent of their land.

INTRODUCTION

History is a series of connected pasts; events and choices influence subsequent opportunities and choices. Path dependency appears in many guises. Technological events, like the innovations of the Industrial Revolution, set off processes of continuing technological improvement, firm capacity building and labour force experience that provide first-mover advantages to pioneers. First-mover advantage generates technology-based comparative advantage that fuels export growth with accompanying general equilibrium adjustments. Economic institutions – firms, product and labour markets, supply chains – develop and influence the future in ways that can be both positive and negative. Political economy and government policy develop their own persistence. When these dynamics are reinforced by major historical disruptions such as the Revolutionary and Napoleonic Wars and the World Wars of the twentieth century, legacies are often intensified.

British economic history of the past two and a half centuries falls into three broad eras. The Industrial Revolution saw British industry triumph. At the time of the great Crystal Palace exposition in 1851, Britain was truly the workshop of the world and the great exporter of manufactured goods. In the half-century to the First World War, manufacturing in the United States and Germany grew faster and Britain lost that dominance. In addition, new technology emerged in lighter engineering, organic chemicals and even in steel but took root slowly in Britain. In the half-century or more after the First World War, Britain's industrial and social history revolved around the decline of industries that had been the basis of historic success, unemployment and regional decline. This history invites speculation that the success of the Industrial Revolution carried with it the seeds of failure.

This chapter explores the legacy of the early start. The material falls into four sections. First, the Industrial Revolution in textiles, engineering and iron created technological advantage and resulted in locally concentrated export industries that had within them dynamics of continued technological change. Second, Britain committed to the international economy and that commitment became broader and deeper in the globalisation of the half-century before the First World War.

INTRODUCTION

Although the British nation is a political entity that is bound by the rule of a particular law or set of laws, is governed by a national parliament, is subject to a single foreign policy, and is organised within the parameters of centrally directed economic and social policies and regulations, it remains a place of great variety and complexity; arguably that variety and complexity was more marked in previous centuries than it is today. To begin to comprehend that complexity, the historian is obliged to focus upon the composite parts of the nation, and not simply upon the aggregate that makes up the whole.

This truth is reflected in changing approaches to an understanding of the ‘industrial revolution’ in recent years. The national accounts approach, championed in particular by Crafts, emphasised the slow rate of economic growth apparent through the late eighteenth and early nineteenth centuries when measured at national (or macro) level. The Lancashire cotton industry, which was indeed revolutionised, was thus atypical, operating within a wider context of traditionalism and backwardness (Crafts 1985).

In a crucial intervention, Berg and Hudson argued not only that the manner in which national accounts data were calculated left much room for uncertainty and possessed inbuilt bias, but also that dividing the traditional sector from the modern obscures as much as it reveals in attempting to understand the industrial revolution, for they often operated in tandem. What is more, a key element excluded from such calculations was the contribution of women and children, which was of crucial – and in some sectors increasing – importance during the early industrial years. Above all, the national accounting approach obscures the diversity of experience across the nation, for expanding and industrialising regions existed alongside regions of industrial stagnation and decline. As such, the industrial revolution ‘was an economic and social process which added up to much more than the sum of its measurable parts’, requiring us to ‘rebuild the national picture of economic and social change from new research at regional and local level’ (Berg and Hudson 1992: 44).

These two volumes of The Cambridge Economic History of Modern Britain follow their predecessors, published in 1981, 1994 and 2003, in bringing together experts in economic history from across the world to reflect on our current understanding of British economic history since 1700 and to describe and explain the most recent views of important historical controversies. As in those earlier volumes, the intention is to provide a text which is comprehensible to an intelligent lay audience, both at universities and more widely, but which does not avoid the sometimes difficult task of explaining economic theory and statistical methodologies as they have been used to assist in historical interpretation.

In the preface to the edition of 2003, these words appeared: ‘change is always with us, a lesson which needs to be learned by each generation. It should be learned particularly by those eminent economic commentators who, at each stage of the business cycle, confidently predict that that stage, whether of boom or bust, will go on forever.’ As this new edition is written, in the midst of the worst ‘bust’ since the 1930s, those words possibly give grounds for some optimism. Historians usually reject any notion that one can ‘learn from history’, but it is a matter of observation – as described in these volumes – that economies, including the British economy, are resilient, that invention and innovation continue and that economic growth resumes after periods of decline.

We also trust that recent economic events will raise the profile of historical analysis. The Queen is reputed to have asked a group of economists at the London School of Economics: ‘Why did no one see this coming?’ As she implied, economic theorists failed to predict, forestall or even – after the event – very clearly explain the factors that contributed to the global economic meltdown and subsequent recession. Indeed, many economists believed between 2000 and 2008 that we had entered a new economic age incorporating, as the then Chancellor of the Exchequer, Gordon Brown, unwisely suggested, ‘the end of boom and bust’.