A Place to Stand

I have made it clear I believe that free enterprise, free trade & traditional liberalism is the most successful way to run an economy & modern practice shows this. Yet there is one quite overwhelming counter example. Up to about 1850 Britain was easily the world's leading industrial power. At that stage it repealed the Corn Law tariff by the Importation Act 1846 which represented the triumph of Adam Smith's commitment to free trade & of the liberal ideal. Yet by 1914 Britain had fallen to 3rd place behind the USA & Germany, both of which, while no bastions of socialism had significant significant tariff barriers. Indeed Bismark's Germany did have a significant amount of government, if not planning, at least encouragement of particular industries.

Does this mean that traditional liberalism wasn't the optimum policy? This is certainly the conclusion drawn by socialists whose ultimate expression was found in the Soviet centrally planned economy. Indeed it is difficult to believe that if Britain had prospered more than Germany free trade liberalism would not have been the overwhelmingly dominant ideology of the 20thC. America can be explained - it is a massive continent with enormous resources, which had always had a higher per capita standard of living than Britain, hence Britons migrated there from the Plymouth Fathers on, which just kept up immigration. If anything the per capita income ratio fell over this time as the US filled up. Germany had no such resource base& without it economists up to the time of Hitler assumed wealth was unsustainable.

I will admit I simply do not know a firm answer to this. However I have some read some articles on the subject from which I have excerpted these:

The British Stock Market and British Economic Growth, 1870-1914

"As W.A. Lewis (????) has noted, in the last years of the nineteenth and the first years of the twentieth century Britain lost its leading position in new,modern industry after new, modern industry. Organic chemicals became German (and American), British railroads became smaller and slower than those on the continent, the development of the automobile lagged behind France and the United States, the electric power grid was put into place slowly, the telephone network was rudimentary, and so on. Even in textiles,Britain began to be excluded from foreign markets on the basis of too high price.British levels of productivity remained high. They just failed to grow at the same rate as in the rest of the leading edge of the industrial world. And British companies lost, or failed to develop, market position in what were
going to become the leading industries of the first half of the twentieth century...

As U.C. David economist Gregory Clark (????) puts it, by 1910 you could combine British labor and British capital in the textile city of Fall River,Massachusetts, and obtain 50 percent more output per worker hour and 20percent more output per machine hour than back in the textile city of Manchester, in England....

The poor British educational system, its weak corps of technical engineers, and the easy availability of unskilled Irish and rural British workers were no great handicap as long as the most dynamic edge of the economy intensively used both machines and unskilled workers,but not skilled workers. But technologies that made heavy use of skilled workers would be the locus of industrial development in the twentieth century...

This was a far lower percentage than found in the United States or in Germany. What was true of elementary education was even more true of technical and engineering education. In Britain, technical education was the business of private firms. But why should they train workers who might well go elsewhere for jobs? And why should they train workers if such training only upped the bargaining power of British unions? Meanwhile, in the United States and Germany institutes of technology were founded....

Pre-World War I price and price-dividend ratios are such as to indicate that British investors had an absolute distaste for investments in domestic industry as opposed to colonial infrastructure.Thus there is evidence that at the aggregate level the stock market was pricing domestic industry “too low” relative to colonial infrastructure—or at least lower than alternative stock markets would have priced such investments. At the more detailed level, there is some evidence that the stock market was not recognizing the growth prospects of “high tech” investments:equity of firms in industries at the cutting edge of late nineteenth century technological progress sold for no higher price-dividend ratios than equity of firms in slower-growing, established industries. To the extent that the stock market exists to provide capital for risky yet promising enterprises and industries, and to take account of high prospects for economic growth as it prices claims to speculative high tech companies, the pre-World War I British stock market was not fulfilling its typical role...

in pre-World War I Britain, stock prices appear to be characterized by a great “fear of equities” on the part of investors: the average enterprise is valued by the market at little more than ten years’ purchase of its current dividend. Thus for British domestic companies, raising money on the stock market is expensive—much more expensive than in the other leading industrial economies of the turn of the century like Germany and the United States....

There is no sign that industries with bright growth prospects were able to raise more money on the Exchange for a given commitment to pay immediate dividends: no sign that anticipated market expansion played any role at all in determining the relative prices that British investors were willing to pay. The figure above plots our estimates of dividend yields over time for four industry groups: infrastructure, heavy industry, consumer goods, and telephone and telegraph. The fact that relatively “high tech” industries reaped no advantage in terms of lower immediate dividend yields from their bright growth prospects holds in the earlier, 1875-1890 period as well.Perhaps the most interesting episode is the sharp spike in dividend yields on high tech and heavy industrial stocks in the crisis surrounding the collapse of the City of Glasgow Bank. The panic was not general: dividend yields on infrastructure and consumer good firms barely moved. Yet the more dynamic sections of industry saw their relative values greatly—albeit temporarily—reduced....

the scarcity of British engineering talent was matched by a scarcity of venture capital—there was plenty of capital for infrastructure or for government debts, but little for the progressive entrepreneur....

“High tech” and expanding industries have not low but relatively high dividend yields—as if investors do not value the prospects of future growth. Investors appear to fear equities, and not to accept that the risks associated with investments in high technology and capital intensive industries are well worth running...

So what happened was that, for some reason, British investors simply would not invest in new technology. But why.

The Second Industrial Revolution, 1870-1914 stresses the difference between industrial growth in that period form the 1st industrial revolution:

"It was in this regard that the inventions after 1870 were different from the ones that preceded it. The period 1859-1873 has been characterized as one of the most fruitful and dense in innovations in history (Mowery and Rosenberg, 1989, p. 22). From the point of view of useful knowledge that mapped into new technology, this view is certainly correct. The second Industrial Revolution accelerated the mutual feedbacks between these two forms of knowledge or between science (very broadly defined) and technology. It should be stressed that the difference was one of degree.... and the persistence and acceleration of technological progress in the last third of the nineteenth century was due increasingly to the steady accumulation of useful knowledge. Some of this knowledge was what we could call today science
... but a lot was based on less formal forms of experience and information. Inventors like Edison and Felix Hoffman relied on some of the findings of formal science, but a lot more was involved. As a result, the second Industrial Revolution extended the rather limited and localized successes of the first to a much broader range of activities and products.

...the changing nature of the organization of production. The second Industrial Revolution witnessed the growth in some industries of huge economies of scale and throughput (to use Alfred Chandler's well-known term). Some vast concerns emerged, far larger than anything seen before. This change occurred because of ever more important economies of scale in manufacturing."

So having a financial system willing to invest large amounts to build up large new industries became crucial & Britain's stock market with its refusal to invest in innovation became a heavy anchor on growth, far moreso than in the original revolution which, with the exception of railways, had been based on smaller manufacturers. An example of this is Andrew Carnegie who built up enormous & extremely profitable steel works in the US but could not have raised that capital if he had stayed in Britain. This also explains the earlier remark about British capital & workers in the US being more productive than in the UK.

Did Victorian Britain Fail? Puts the opposite view - that it didn't fail & that growth was limited by the number of workers available. Having more faith in technology improving productivity I simply don't agree but the author puts forward the facts which, in my view, contradict his theory with admirable clarity facts

" Had all emigration from the United Kingdom ceased and had all these emigrants been of working age, the labour force might have grown at 1,6 per cent per year rather than at 1 per cent as it did from 1871 to 1911, but this is still low relative to the hypothetical growth of gross output. If capital and labour were not substitutable, then, the slow growth of the labour force m the United Kingdom would have limited output growth. To put it the other way, had output grown at 3.7171 per cent per year from 1872 to 1907 instead of 1 -69 per cent the labour force at the end of the period would have had to have been twice as large as the actual labour force...

The hypothetically higher capital growth would have had to have come from a great increase in the ratio of savings to income. Indeed, the disproportionate growth in capital...

American savings ratios were higher than British ratios, but the difference was small. For example, from 1886 to 1900,by all accounts a period of low British savings, the British ratio of net investment to net national income averaged 10 -4 per cent, while the American ratio aver-aged 13 -7 per cent, a difference of 3 -3 per cent of income...

The more common theme than the loss from default in the literature of im-miseration by capital exports is the perversity of Britain's imperfect capital market. The City, the story goes, was expert at channelling British savings into foreign trade credit and railway bonds, but inexpert at serving the industrial hinterlands of Britain itself.4 Keynes, for example, emphasized the Colonial Stock Act of 1900 and similar Acts before it which permitted British trust funds to be invested in colonial railway and governmental bonds, giving, he claimed,an artificial incentive to investment abroad. The effect was "to starve home developments by diverting savings abroad and, consequently, to burden home borrowers with a higher rate of interest than they would need to pay other-wise"...

In 1911-13 the average return on all capital at home was more than 10 per cent, while the return on capital abroad was less than 5 per cent.2 The capital abroad, however, was held in safe bonds, while the capital at home had to be held on balance in equity. Englishmen owned their own capital stock and the risk of ownership required compensation in the form of a higher return than on the comparative safety of lending abroad.

The United Kingdom exported a huge amount of capital m the period and it is tempting to believe that it could have drawn on this capital as a surplus to growth...

Another quote from Dave Langford's book Facts & Fallacies
"Around 1878, when Edison was developing his incandescent lamp, a british Parliamentary Committee was established to decide whether such new-fangkled nonsense could ever be rlevant to Britain. In general the idea was thought

... good enough for our transatlantic friends...but unworthy of the attention of practical or scientific men

================================

Also during this period Germany adopted universal schooling before Britain & its University system became more science orientated while Britain's universities & even more its private schools moved more towards studying classics as befits a country that considered it its mission to rule the largest Empire the world had ever seen. It strikes me that Britain skewed its entire society towards running an Empire (the White Man's Burden - Kipling) which it had originally obtained almost by accident & for its own benefit but which it had to retain as a macho symbol, even though that meant most of our investment capital (10% of GNP many years) went to invest abroad. Though the US & Latin America were not colonies they became such by proxy. In the same way we can see, after WW2, that the US encouraged development of the West German & Japanese economies to keep them loyal to the Pax Americana.

A couple of cultural instances that struck me. The less important one, if only because it isn't contemporary, is from Mary Poppins where the brat is assured that by putting his tuppence in the Fidelity Fiduciary Bank he will be part of "railways in Africa, dams across the Nile" rather than car plants in Birmingham. His refusal to do so starts a run on the bank & indeed railways in Africa have turned out to be an extraordinarily bad investment. The less musical example is the Sherlock Holmes stories which are just hoaching with characters who have returned from a career in the Indies with a vast amount of money & a mysterious stranger pursuing them. In no case is the mysterious stranger Tesla with a copyright infringement case. Makes you sympathises with Moriarty.

I have no doubt there are many other causes for Britain's failure but think that the explanation that the Empire, far from being a strength, was an economic drag. By keeping order throughout it we artificially attracted our investment money there It gave the British upper classes an excuse for continuing to exist, aristocracy by its nature being drawn to the military & law enforcing rather than science. National heroes became soldiers & missionaries rather than chemists (Germany) & capitalists (the USA) & the education system was distorted to provide officers not scientists. Even today the top people in the British Civil Service studied classics rather than engineering or accountancy as was intended - something which was cemented in place by the Northcote-Trevelyan report of 1853.

So I personally think the apparent failure of liberalism here is no such thing. It is the failure of a society which had succumbed to the ideal of Empire & the Pax Britannica at the expense of science, technology & thus progress.