The Next Financial Order
Is America Catching the “British Disease?”
Barry Eichengreen
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BERKELEY – In the United States, the scent of decline is in the air. Imperial overreach, political polarization, and a costly financial crisis are weighing on the economy. Some pundits now worry that America is about to succumb to the “British disease.”
Doomed to slow growth, the US of today, like the exhausted Britain that emerged from World War II, will be forced to curtail its international commitments. This will create space for rising powers like China, but it will also expose the world to a period of heightened geopolitical uncertainty.
In thinking about these prospects, it is important to understand the nature of the British disease. It was not simply that America and Germany grew faster than Britain after 1870. After all, it is entirely natural for late-developing countries to grow rapidly, as is true of China today. The problem was Britain’s failure in the late nineteenth century to take its economy to the next level.
Britain was slow to move from the old industries of the first Industrial Revolution into modern sectors like electrical engineering, which impeded the adoption of mass-production methods. It also failed to adopt precision machinery that depended on electricity, which prevented it from producing machined components for use in assembling typewriters, cash registers, and motor vehicles. The same story can be told about other new industries like synthetic chemicals, dyestuffs, and telephony, in all of which Britain failed to establish a foothold.
The rise of new economic powers with lower costs made employment loss in old industries like textiles, iron and steel, and shipbuilding inevitable. But Britain’s signal failure was in not replacing these old nineteenth-century industries with new twentieth-century successors.
Is America doomed to the same fate? Answering this question requires understanding the reasons behind Britain’s lack of technological progressiveness. One popular explanation is a culture that denigrated industry and entrepreneurship. Over the long course of British modernization, the industrial classes were absorbed into the establishment. From the mid-nineteenth century, the best minds went into politics, not business. Enterprise managers promoted from the shop floor were, it is said, second rate.
Now we supposedly see a similar problem in the US. In the words of David Brooks of The New York Times: “After decades of affluence, the US has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place….America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting, and nonprofit activism.”
In fact, this supposed explanation for British decline has not stood the test of time. There is no systematic evidence that British managers were inferior. Indeed, expanding the pool of potential managers beyond the children of a firm’s founders had precisely the opposite effect. It allowed the cream to rise to the top.
In today’s America, too, it is hard to find evidence of this purported problem. Silicon Valley companies do not complain of a dearth of talented managers. There is no shortage of new MBAs establishing start-ups or even going to work for auto companies.
A second popular explanation for British decline focuses on the educational system. Oxford and Cambridge, established long before the industrial era, produced eminent philosophers and historians, but too few scientists and engineers. It is difficult, however, to see how this argument applies to the US, whose universities remain world leaders, attracting graduate students in science and engineering from around the world – many of whom remain in the country.
Still others explain British decline as a function of the financial system. British banks, having grown up in the early nineteenth century, when industry’s capital needs were modest, specialized in financing foreign trade rather than domestic investment, thereby starving industry of the capital needed to grow.
In fact, actual evidence of any such British bias in favor of foreign over domestic investment is weak. And, in any case, that history, too, is irrelevant to the US today, which is on the receiving, not the sending, end of foreign investment.
A final explanation for Britain’s failure to keep up makes economic policy the culprit. Britain failed to put in place an effective competition policy. In response to the collapse of demand in 1929, it erected high tariff walls. Sheltered from foreign competition, industry grew fat and lazy. After WWII, repeated shifts between Labour and Conservative governments led to stop-go policies that heightened uncertainty and created chronic financial problems.
Herein lies the most convincing explanation for British decline. The country failed to develop a coherent policy response to the financial crisis of the 1930’s. Its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country turned inward. Its politics grew fractious, its policies erratic, and its finances increasingly unstable.
In short, Britain’s was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America’s fate.
Copyright: Project Syndicate, 2010.
www.project-syndicate.org
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Nico 08:20 09 Nov 10
Umm...how about class politics? Capture by the state by monopoly capital that prevents the necessary adjustments to retain competitiveness? Doesn't Simon Johnson point out the 'doom loop' in explaining how this works. Have we ever bothered to read Hobson? Nevermind the 'taproot of imperialism', i.e., low wages, is the same in the UK of the imperialist era and the US of today. I'd suggest Eichengreen read some Hobson, Lenin, Hobswan, Arrighi (The Long Twentieth Century is a exemplar example), etc.? Barry explains the effects and not the causes, this is what could be called "vlugar" economism.
sillyaccountant 02:57 10 Nov 10
Sorry to state the obvious...but it is entirely possible that America is in decline, a decline quite similar to Britain's, but that the causes are different. So it isn't really necessary that the US is in decline for the same reasons as Britain was in order for us to have the British Disease.
It could just be that other nations can make things more cheaply than we can. Thus, our wages, productivity, industrial power will fall to Indian/Brazilian/Chinese levels - that would put us in decline, as those countries are larger than us.
GraceStyles 05:32 10 Nov 10
Post war UK economic policy certainly has much to do with it......the home of the industrial revolution, the inventor of lean manufacturing (during WW II) has given up much. Prosperity also played a role: too much of good thing breeds laziness. But if history tells us anything it is that nothing lasts forever, empires- economic, political and industry, often synonymous, come and go. And now it is America’s turn to wane. Or is it I wonder? It never ceases to amaze me how the US can reinvent itself. Not sure I be brave enough to write its obituary, or rather mark its gentle fall from pedestal, quite yet.
deirdre2 11:17 12 Nov 10
Dear Barry, I know that you don't need to be told this, but casual readers might: there is no scientific evidence---none, zero, nada---that Britain has in fact suffered from any disease. British real income per head, British quality of life, British life expectancy, British scientific and industrial and artistic creativity continue to rank among world leaders. It is merely that others, praise the Lord, have caught up. It is a good thing, not a bad thing, when a father's weight falls as a percentage of the household's, as his children grow up! To put it another way, we should greet with glad cries the enrichment of the rest of the world. Britain started the Industrial Revolution, but now it is spreading to China and India and the rest. Good. Britain does not lose, except in a jingoistic, nationalist sense, in being no longer the sole Top Nation. The world since 1800 has not been zero sum. If the United States "goes the same way as Britain" it will no longer be a world beater. Good. The point isn't to "beat" people. It is to trade with them and share creative ideas with them, raising all the boats. Regards, Deirdre McCloskey
FOARP 02:17 15 Nov 10
To echo what Deirdre McKloskey said, there was no 'disease' that lead to Britain's decline relative to the United States, Japan, and Germany pre-WW2. Japan and Germany's standard of living was lower than that of Britain during the entire time before WW2, and only passed it latter. America's standard of living surpassed Britain's only after WW1.
That Britain was surpassed in terms of GNP during the first half of the 20th century by the United States and Germany was much more a result of these countries, both of which were much larger than the UK in terms of both area and population, catching up in industrial terms.
As for the idea that Britain fell behind the United States as a result of its poor response to the Great Depression, this is, I'm afraid, somewhat problematic. Barry Eichengreen writes that Britain's political parties, rather than working together to meet the challenges of the 1930's, were "at each others throats", but it is hard to see what evidence he has for this. In fact, a casual glance through the history books shows Britain was actually ruled by a a succession of coaltion governments made up of Labour, the Conservatives, and Liberals from 1931 to 1945.
As for Eichengreen's assertion that Britain's trade tariff's allowed British business to become "fat and lazy", there may be some truth in this, but it would hardly expalin the relative decline of British Business, since such tarriffs were introduced by most countries. As a specific example, the Smoot-Hawley tariffs introduced by the United States pre-dated those eventually introduced by the British Second National Government of 1931-35.
Finally, Eichengreen seems to have missed out two quite major factors in Britain's decline relative to the United States.
The first, and most obvious, is that Britain spent ten years of the last century engaged in full-scale industrialised warfare, suffering hundreds of thousands of dead, millions of wounded, and the destruction of much in the way of housing, shipping, and industry. During this time the British government essentially mortgaged the British economy twice over, with the United States being the largest lender. The United States, on the other hand, whilst eventually making a strong and lasting contribution to the victories which ensured the freedoms which we now enjoy, also undoubtedly profitted much from the efforts of Britain during the five years of world war in which American citizens prefferred neutrality.
The seond, is that Britain's economic strength rested not only on industrial might, but also on preferential trade with colonial possessions kept only, on final analysis, by armed might. During the first half of the last century Britain's colonies became independent, and abandoned economic practices whereby they stunted their own economic progress so as to favour that of Britain.
Of course, anyone wanting to find evidence of a politically-induced 'British disease' can find it in plenty in the ideological turmoil of the post-war period, where the British economy was saddled with policies of nationalisation and protectionism which were only finally done away with after the rise of Thatcherism after the 1979 election. However, this does not explain Britain's fall from the number one spot, which had already been accomplished when Clement Atlee took power in 1945.
seeker 06:17 18 Nov 10
One obvious reason for Britain's sudden decline is simply loss of empire. Without this, Britain became what it is, just another medium sized European nation. Also, British defense expenditure in wartime was colossal. For example, In 1917, 83% of government spending went on defense. At the end of WW2, the UK had a government deficit that makes modern Greece look like a walk in the park. As one or two commentators have noted, Britain today remains incredibly creative, artistically and scientifically, and this can be measured fairly objectively.
The United States suffers from the British disease in one crucial aspect, and that is size. The reason that the United States became the leading western power is sheer, overwhelming size. At five times..(at least) the size of Britain it seems somewhat ludicrous to contemplate the loss of British power without examining the role of demographics in this story. And ultimately, it will be demographics that decide which countries dominate the future. If I was an American contemplating the situation, I would probably encourage massive 19th century style immigration as a possible solution...It's an option that Britain doesn't have. Britain really is a bit tiny.
farfetched 10:28 19 Nov 10
When Nations and Systems Forget the Real Game
One can assume the Power Elite can affect a nation or a single retirement fund to become squeezed and somewhat oppressed in this current Austerity Environment. They say, market forces cleanse wasteful investments, innovative business models make existing ones obsolete, and the economy roars forward all the stronger for it--or do the Magicians of the Oligarchy running the show from behind the curtains blind us?
cheeheongquah 07:33 24 Nov 10
You've missed your favorite point-the British left the gold standard and the spillovers of WWII from Western Europe!
But above all, as Milton Friedman would agree, growing government was the main killer to innovations and entrepreneursihip. What I worry for US now is too much government not too little!
Quah, Chee-Heong
Bedell 01:57 02 Dec 10
Sort of disagree with this article. Anyone who has worked for a UK company has stories about horifically bad management, especially in industry. I remember speaking with an American colleague who came over here fifteen years to work with an industrial concern. After being told the workforce ws awful and was the basis of most of the company's problems he quickly found they were actually pretty good. However, management was a completely different story. As for the banks there has been long standing problems in that industry for a long time. The recent fiasco's are the culmination of an awful long period of stupidity, where making money in the next six months is far more important than any long term considerations.
clement 11:02 08 Dec 10
First, your article is very interesting and insightful, indeed, it is hard to clarify the main cause for today’s economic problems in America and other developed countries, however, your comparison between the 19th century British and 21th century America leads to a sound ground to justify the cause. I have two other points could like to share: 1. The economic power rise of American in the 20th century is mainly caused by high tech revolution, namely the digital-IT revolution and the bio-engineering revolution, which significantly increased productivity and reduced cost of human resource. As we all know, the economic flourish today is measured by GDP growth, if not by the assistance of new high-tech revolution in productivity, it is hard to maintain a steady yet upward GDP, given a steady input of raw material and human resource. If you agree with this point, then it is easy to see that without a new wave of emerging high-tech revolution, it is hard to maintain a steady economic growth in America.
2. As mentioned in your article, the traditional labor intensive and material intensive industry have been swing away from developed countries (America) to developing countries (china, India), which resulted in financial intensive industry left over. However, in my perspective, a highly mature economy should be backed up by traditional industry; which in case of financial crisis, the traditional industry could supply its blood back to financial industry and bail it out, which is the case in the 1930’s what has been done by the Roosevelt administration. The problem today is that the human cost is too high to sustain traditional industry and once the financial crisis comes- such as the sub-prime crisis, there is no way to turn around, but to use monetary policies which will not endure long.
To sum up, there are only two ways for America to cure its disease: 1. to have a third high-tech revolution in productivity, thus gain comparative advantage in economic growth 2. to turn back to traditional industry as the backbone of highly risky financial industry; since either is out of the consideration of the currently in-office, but the choice they picked up is monetary manipulation, it is highly doubted in the near further America’s disease will cure and hopefully it will not get worse.
leekyboy 12:58 29 Mar 11
Having carried out a MA dissertation surrounding the latest financial crisis and the "British Disease" I agree with deirdre2 and FOARP- the attempt to accord Britain's economic ills to supposed, readily identifiable, pathological failings is wide of the mark, as is the conflation of absolute and relative decline. The rest of the world simply caught up, as is to be expected of a global capitalist order. And as touched on by FOARP, the palpability of such a Disease in British society is better seen as a narrative used for party political gains (pace Blair's 'Third Way', Cameron's "We can't go on like this").
One need only supplement the hysterical left-leaning declinist writings of Anderson, Nairn, Hobsbawm, Barnett and (Will) Hutton, with that of Edgerton, English&Kenny, Rubinstein, Budge and Tomlinson, for a more rounded interpretation of British "decline". Regards, Chris
lukehlee 06:50 09 Nov 10
I believe the current economic recession is analogous to a serious diabetic disease. Please see - http://t.co/qgeWibD and http://t.co/ltx9AZW for diagram.