By the 1870 s, Britain's economy was enviable by the rest of the world as they set the pace in industrializing. However, her pre-eminence (GPD per capita exceeded that of America by one-third) wavered in this period preceding World War I. To determine whether this change was due to inefficiencies in British industry requires recognition of the contrasts between Britain and America. Although America's economy improved vis-'a-vis Britain's, this was out of Britain's control due to exogenous variables. Neoclassical economic growth theory states that technology is a precursor to higher living standards and productivity gains. Britain and America were very different economies and as a result faced very different economic prospects in the late 1800 s.
For instance, the population in Britain grew by nearly two-fold between 1860 and 1910 whilst the America trebled. Britain's domestic market was not only smaller, but consumer demands were much less homogeneous than in America due primarily to cultural ties and wage inequality. Many sole proprietorships and partnerships developed in response to these tastes through niche markets, producing highly specialised goods. America had a national, homogeneous market in which large corporations profited from economies of scale and mass production. Factor differences between the two nations resulted in Britain benefiting from her highly skilled labour, two-thirds of which were employed with companies of less than 250 people. America, with its abundance of land and raw materials, focused on using capital intensities in production rather than relying on the relatively more expensive skilled labour.
One similarity of both nations was the decline of employment in agriculture by the late 19 th century, which freed up labour to be utilised in other industries. Growth opportunities in British industry were hampered in several ways. The tendency around the 1870 s was for Britain to encourage small, specialised companies to compete primarily in staple industries such as cotton, coal, iron and steal, and shipbuilding. The high level of specialised products prevented technological transfers from overseas in developing markets and these companies did not benefit from economies of scale. British entrepreneurs were less likely than their American counterparts to discover innovative techniques, such as the assembly line used successful in car manufacturing by Henry Ford in the early 1900 s. This lack of adaptability was not a blemish on British industry because it was not relevant to consumer demands at home.
Also, the implementation of a free trade policy in Britain, despite its merits, made it exceedingly difficult for British industries to compete in the world market when nations such as America and Germany pursued protectionism to shield 'infant industries' from international competition via tariffs. However, there were new industries that Britain pursued successfully including chemicals, in which Britain became third most important producer by 1913. In conclusion, there were many barriers that prevented Britain from maintaining its industrial dominance. For one, more money was invested on projects in foreign countries than at home.
This was an economically legitimate response given the greater returns on capital able to be made investing in railroad production in America and other projects elsewhere. Unfortunately, these and other decisions cost Britain her place as the premier economic power, evident in her decreased share in the world market from 40% in 1880 to 30% in 1913. Railroad building throughout the States resulted in unprecedented gains of knowledge in engineering and breakthrough technologies to feed into new industries such as motorized vehicles. Britain acted accordingly and with industrial efficiency given its differences with the America in terms of factors and relative demand for goods at home. America was simply in a more favourable position to industrialist and did so because it had the capability to do so.