A Brief History of UK Economic Growth

From the Industrial Revolution to the Financial Crisis

Industrial Revolution (late 18th century to early 19th century)

The industrial revolution began in Britain, where it soon spread to other parts of the world. It brought significant technological progress using untapped resources, energy sources and machines.

This technological progress drove Britain’s labour productivity higher despite demographic pressure and allowed our nation to escape the Malthusian Trap. Income levels in the mid-nineteenth century had rapidly grown and meant that we had overtaken previous European leaders such as Italy and the Netherlands. It was enough to outstrip population growth of 1.2% per year and avoid any depreciation in living standards.

Despite this, there were weak incentives to invest. In the early 19th century, globalisation had yet to boom therefore markets were still small, and compared to the US economy, real GDP in Britain was a lot less. Furthermore, innovation was hindered as the most intelligent people were found in old professions, not science and engineering. Restrictive corporate and banking legislation further discouraged investment, especially in the capital. As a result, this limited growth potential, and growth performance was inferior by later standards.

As the first nation to industrialise, it meant the adoption and application of steam technology took a while to be realised. The science of a steam engine was still little understood, and it took a while for the price of implementing this recent technology to become affordable. Additionally, its impacts on productivity growth before 1830 was trivial as much of Britain was still in traditional sectors. It wasn’t until the third quarter of the nineteenth century when steam power had its maximum impact on British productivity growth.

American overtaking (latter 19th century to early 20th century)

The period after the industrial revolution in Britain saw America catch up and subsequently overtake our economy. Some argue this was due to a malfunctioning and inefficient domestic economy, but it can also be put down to a second industrial revolution in America that enabled them to get ahead.

Despite falling behind America, this period saw no massive growth failure in Britain as other European counterparts, such as France and Germany, did not overtake us. As a result, it can be put down to the acceleration of the US rather than a slowdown in the growth of our economy.

During this period, England was an enthusiastic participant in a globalising economy due to its early industrialisation and its strength of London as a renowned financial centre. Our financial system was specialised and efficient: clearing banks provided valuable support to industry and longer-term finance could be obtained through corporate bonds and equities.

However, this period saw the rise of strong craft unions and the separation of ownership and control. Consequently, unions could not commit to cooperative behaviour in the adoption and diffusion of recent technologies, for example in new Fordist technologies in the car industries. This also led to the engineering lockout of 1897/98 which had great political and economic significance. The configurations also had potential downsides in terms of the scope for managerial failure.

Additionally, there was low support for innovation from government policies. Despite the small beginnings of the National Physics Laboratory and the Medical Research Council, public expenditure on science and technology was only 0.06% of GDP in 1914. Contrasting this to the US presents a strong comparison. Their increased spending on new universities focused particularly on research, most notably MIT in 1862, brought progress in engineering and future innovation for years to come. Domestically, innovation was silenced.

Interwar years (the 1910s-1930s)

A world war, the great depression and the reversal of globalisation brought struggles to many economies around the world. Governments had to deal with the increased national debt, structural unemployment, and the arrival of a new macroeconomic policy framework.

Despite this, Britain saw huge growth in its manufacturing sector, particularly due to the introduction of new industries. These include areas such as electrical engineering, petroleum, aircraft and chemicals that grew by over three per cent between 1924–1935 compared to the old staples, which grew just over one per cent. As a result, they had a considerably faster productivity growth effect.

On the other hand, inadequate government policies meant that Britain once again lagged American growth. In five periods between 1870–1940, growth in real output per hour worked was superior on the other side of the Atlantic. This is partly due to protective and defensive supply-side policies. They helped declining industries to survive and failed to instigate the removal of inefficient firms who were struggling but were propped up by policy changes. This weighed down on the productivity of our economy.

Furthermore, this period started the movement towards a ‘managed economy’ due to interventionist policies following the First World War, and the Great Depression of the 1930s. The main effect of this was the retreat from competition which severely hampered growth prospects. This proved a serious impediment to future productivity performance and took several decades to reverse.

‘Golden Age’ (the 1950s-1970s)

This period is conventionally known as the ‘golden age’ of economic growth in Europe whereby western countries reduced the productivity gap between themselves and America. Both real GDP per person and GDP per hour worked grew much faster in most European countries than in the United States.

Britain experienced its fastest ever growth of GDP per capita during this time, rising by 3.1% per year from 1950–1973. Both improved education and capital per hour worked contributed to improvements in labour productivity throughout this same period. It grew by 3.4% per year between 1950–1973, compared to the USA’s 2.7%.

Despite this, Britain experienced acute relative economic decline. By the end of the period, it had been overtaken by seven other countries in terms of real GDP per capita and by nine others in terms of labour productivity. France and West Germany did not just catch up, but they overtook us by 1973. This stemmed from the failure of government policies, which had been absent pre-1914.

Politicians’ fear of unemployment and the perceived need to persuade trade unions to exercise wage restraint constrained their policy designs. Supply-side policies left a lot to be desired: the tax system was flawed; industries experienced principal-agent problems; subsidies were poorly allocated; competition policy was too weak and so on. The outcome was a malfunctioning liberal market economy that failed to capitalise on the productivity potential of modern technology that was never fully realised.

The Financial Crisis (1970s to 2000s)

Following the previous period’s expansion, growth eventually plateaued across Europe and in the United States too. It resulted in the narrowing of the technology gap and diminishing returns on investment, and the scope for catch-up was reduced.

However, growth in the United Kingdom saw relative economic decline cease for a while in an unexpected reversal of fortune. By 2007, the UK had overtaken France and narrowed the gap to Germany and the US. This was due to two main fundamental changes: The Thatcher experiment and the adoption of ICT.

Thatcher’s Conservative government of 1979 made reforms to fiscal policy through the restructuring of the tax system and had an aim to restore a balanced budget. Subsidies to industry were cut, the privatisation of state-owned business was embraced and deregulation, particularly of the financial sector, was promoted. The main success story of Thatcher’s was the increase in competition in product markets, which boosted efficiency and productivity growth.

The deregulation of services enabled the UK to respond to and benefit from an ICT revolution. Contrary to the diffusion of Fordist techniques during the American overtaking, Britain was good at adopting new advances in ICT technology. Furthermore, as ICT is a disruptive technology, it requires radical changes to the ways companies operate, which benefitted the liberal market economy of the time. Finally, the rapid diffusion of innovative technology was an unintended consequence of deregulation and pursuit of corporatism in the Thatcher period. Unknowingly, she had aided the adoption of a powerful new tool.

Despite all this, the negligence of infrastructure and innovation policies hindered the UK economy during this period. Furthermore, the separation of ownership and control continued to be problematic due to the short-termism of stakeholders.

Finally, the financial crisis eradicated all the progress over the last few decades. It was a formal accusation of a policy framework that had paid too little attention to financial stability. The relaxation of regulation on services, while encouraging the uptake of ICT, exposed the UK financial sector to the full blow of the crisis. The banks could have been regulated better to avoid the crisis while having a little undermining effect on the growth of our economy.

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Ted Jeffery