Decline In The Aggregate Economy example essay topic

INTRODUCTION In answering the above question, I shall address myself first to examining manufacturing exports and the British position, followed by a word on the Imperial Preference which hindered British trade flows with the rest of the world. I shall go on to talk more generally about whether there has been a decline in the aggregate economy (essentially exploring the pessimistic implied in the title). Further, I shall argue that the British economy has performed well against some serious cultural and structural constraints and should not be subjected to unduly negative analysis. I shall look finally, and briefly at the performance of the service sector with regard to its contribution to, and correlation with, the aggregate and industrial growth in output and productivity, before concluding that the service sector was the major contributing factor to the UK falling behind it counterparts. Despite this, the relatively small amount by which the economy fell behind is indicative of the over-exaggeration of the problem of British decline.

MANUFACTURING EXPORTSBritain's share of manufacturing in fact fell dramatically over the twentieth century as can be seen from the following table and graph: Shares of world exports of manufacturing (%) UK USA Germany 1899 34.5 12.1 16.61913 31.8 13.7 19.91929 23.8 21.7 15.51950 24.6 26.6 7.01987 7.3 12.6 19.3 Source: Broadberry (1944, p. 294) The main European competitor since the Second World War has been Germany; US market share has also dropped off from its peak in the 1950's. Whether this drop is as a direct result of the fall in comparative aggregate labour productivity is the topic of some discussion. Whilst it seems that must surely have an impact, Broadberry raises three important factors which may apply instead. Those are firstly, that UK exports were inevitably, going to decline as other nations became industrialised and started to trade on the world market.

Secondly, that comparative labour productivity has been different in manufacturing than the rest of the economy, with no clear correlation between the two; indeed Germany gained only a 5% productivity lead over the UK in 129 years in manufacturing, having fluctuated around an approximately equal ratio (moving from a UK / Germany ration of 1/1 in 1870 to 1/1.05 by 1989), whilst the aggregate economy figure was a more substantial and steady improvement of 1/1.16 as compared with 1/0.6 before the turn of the century. In the USA the figures for comparative labour productivity show that whilst the gap in comparative output has declined in manufacturing (UK / US ratio fell from 1/2.04 to 1/1.77 over the same period), aggregate output has improved relatively, and, indeed, overtaken (1/0.86 increased to 1/1.32 by 1989). Thirdly, in addition to drawing this distinction, Broadberry notes that labour productivity is not the only factor affecting competitiveness on world markets; in fact those countries with a high productivity of labour have not necessarily enjoyed any such comparative advantage. IMPERIAL PREFERENCE The breakdown of global trade after the WWI due to protectionist policies and the Great Depression of the 1930's provoked the British into relying on their Empire links to support their ailing export industries. Between 1907 and 1951, the proportion of British exports moving along Empire trading routes had increased from 32.2% to 55%.

This type of quasi-self reliance had mixed consequences; in the short run, the UK suffered much less from the depression than other countries, notably America, with the resulting bonus of higher output levels in general and a better economic performance up until the mid-1950's. However this reliance on the Commonwealth proved a difficult institutional bond to break and led to a certain the British economy being shielded from real international competition until accession to the EEC in 1973. Readjustment problems were inevitable as efficiency in the economy declined through lack of effective competition, and businessmen were more likely to spend resources on rent-seeking than on wealth-creation. HOW THE ECONOMY HAS DECLINED Economic performance in the British economy since the turn of the century is generally seen as disappointing.

In the earlier part of the century, growth in the economy fell behind the US and the gap narrowed between the UK and Europe. Since the 1950's, the UK has begun to catch up with the US once more, but not as quickly as other European countries. Consequently, most had caught up with Britain, or built up a substantial lead by the mid-1970's. Despite this, Broadberry points out that this period of decline relative to other countries occurs during an unprecedented era of productivity growth in the UK. He argues we must then draw the 'uncomfortable conclusion' that Britain's best was still inferior on a global scale. It is frequently pointed out in defence of the UK performance that a loss in global market share was inevitable because of protectionist tariffs, but Aldcroft counters that the inevitability thesis can be taken too far.

He argues that, on balance, tariffs were rarely taken to prohibitive levels and concludes that 'the evidence on this matter is far too slight and fragmentary for it to have been anything other than a minor factor in Britain's trade losses'. WAS SOME DECLINE INEVITABLE? There are many valid arguments put forward to point out that, whilst the British economy did obviously experience a comparative decline, condemnations of failure are exaggerated. The theory can be advanced that in many different ways, the British economy was subject to forces beyond its control, and that the fact it did not slip further behind is testament to a healthy economy and effective policy-makers. One of the first things criticised in the industrial sector is the supposed reluctance of the UK to adopt the advanced technology and high-throughput techniques and hierarchical structures required to really boost productivity as America tended to do. Critics, with the notable inclusion of El baum and Lazonick, point to this as the result of entrepreneurial failure, or lack of capital investment amongst other things.

Pollard takes the strong and fairly indignant view that entrepreneurs have been unfairly treated in the 'decline' literature; perhaps scapegoated for all that went wrong in the economy. Aldcroft adds, 'Although foreign competition exposed certain weaknesses in British industry it would be wrong to conclude that British industrialists as a whole were less efficient or enterprising than their foreign counterparts'. In fact they are right to point out that not adopting high-throughput methods such as ring-spinning and automatic looms in the cotton industry (or, to give another example, continuing to run ships by sail rather than steam) was not indicative of entrepreneurial failure, but of a rational decision based on relative cost. To take the example of cotton; relative prices of raw material and labour (the former more expensive in Britain, the latter in resource-rich America) make Britain well suited to skilled manual labour and craftsmanship. By adopting ring spinning, higher grades of cotton would need to be used which pushes cost up significantly, but requires less worker supervision. If there is a trade-off between cost of labour and cost of materials, relative factor prices will determine rational decisions.

And indeed, Sandberg shows that it was rational from American to ring spin, whilst the UK did better to stand by mule spinning. This diagram gives a brief outline of the principle involved: Where British labour cost relative to capital cost is low (as is the case), the budget constraint for the UK will form a tangency with the production possibility frontier to give an optimal product mix weighted in favour of labour. An additional factor to reinforce this point is the vertically integrated nature of the American hierarchical corporate structure (as compared with the networking upon which industries were based in the UK at the turn of the century) which makes it easier to integrate new technology. More simply, ring-spun cotton must be woven on an automatic loom. If a British firm did not both spin and weave the fibre, there was little point investing in technology when they could not be assured all other firms would do similarly.

And finally, mule spinning involved a high degree of sunk costs, so the decision to change technologies in Britain involved comparing the Total Cost of ring spinning with only the Variable Cost of mule in order that a rational decision be reached. A similar rationale can be applied to the cost of running steam ships which Harley showed to be viable only over long distances at first, and then gradually over shorter distances as technology and fuel efficiency improved, in accordance with the actual patterns of usage. It should also be remembered that academics such as McCloskey and Sandberg and Pollard point out that the invisible hand of the market would have forced out those businesses flailing, to be replaced by more competitive firms. Pollard argues 'Poor entrepreneurship as a cause of industrial decline must mean that all the entrepreneurs in the industry failed to seize their opportunities, surely a most unlikely eventuality'. I would question just how unlikely it actually is, considering the level of collusion and price setting which the government encouraged, particularly during the depression years to sustain the price level and protect industry.

However I will concede his point that slow growth alone does not prove entrepreneurial failure. Another point which suggests that decline theories may be exaggerated is the structural difference between the UK and its main competitors, the US and Germany. By the turn of the century, very little of British output was created by agriculture, and very few people were employed therein, in comparison with these other two nations who were at the time still heavily involved in agriculture. Agriculture is a low value-added sector; the movement of the resources away from it and into other sectors is rewarded with a surge in output. Since Britain had already experienced this during the Industrial Revolution, it seems harsh to suggest that economic decisions were at fault when other nations did the same and began to 'catch up'.

America seemed quite rapidly to forge ahead in growth after forcing resources out of agriculture, coupled with the growing lead they established in resource-intensive sectors. Resources are plentiful in the USA, and the huge area benefited entrepreneurs in the rail industry, for example, by reducing cost per passenger-mile. This along with a more homogeneous consumer demand meant a rationalise d domestic market, providing a stable base for growth. Pollard suggests this is because the USA is more democratic than the UK who require differing products according to social status.

Whilst this might contribute to America's spurt of growth, it is not necessarily indicative of any fault on the part of British industry or services, blessed with less favourable natural endowments. INVESTIGATING THE CULPRITS IN ECONOMIC DECLINE In reference to the final part of the question, it can help to examine the service sector and the industrial or manufacturing sector separately and in more detail when drawing conclusions about performance and whether it has lived up to our 'expectations'. Examining first the industrial sector, the most immediate criticisms of it are twofold; firstly, that the structure of the economy and of the individual industries were outmoded and inflexible, hampering acceptable growth; secondly that there was a profound conservatism and entrepreneurial failure amongst the business classes which resulted in missed opportunity for expansion (which I have earlier addressed). Aldcroft put forward that Britain's export structure was over-reliant on a narrow few sectors, and was exacerbated by the fact that they were those which he considered to be in decline in the pre-1914 period, and the reluctance to invest in newer sectors with a more energetic level of growth was the problem. This same accusation has been levelled at the governments of the 1960's and '70's who promoted interventionist regional policy, artificially creating or sustaining flailing firms and even industries in order that they might avoid politically dangerous unemployment (remember the commitment to 'high and stable' levels of employment). It is speculated that the reluctance to abandon traditional manufacturing jobs stemmed from a gender-biased view of these being more worthwhile than service sector jobs, which sustained the vast majority of employed females.

In examining the trends in the aggregate economy and the service sector simultaneously, we see the two mirror each other. Whilst their performance cannot be said to be disastrous, it certainly has tailed off in terms of productivity growth with respect to other nations over the century. Industrial growth however has been consistently worse than the US, and not a great deal better than Germany, but the relationship is more or less static; the ratios, more or less, have held. So to examine where it is that Britain fell behind the USA and the rest of Europe, we must surely look to the service sector?

The UK definitely falls behind the rest of the world in service productivity growth in the long run. An explanation for this would be that manufacturing is on the whole tradable. Firms proving inefficient on the global market are forced out of business. No such mechanism operates for many of the service industries. Services by their very nature are frequently not subject to international competition and are often natural monopolies. In the instance of the railways, it is not feasible for consumers to import an American railroad because it happens to be produced more efficiently!

Nonetheless, the Americans benefit from their various natural endowments as discussed earlier which ensures that their railway industry makes a more healthy contribution to the aggregate figures than does ours. CONCLUSION To briefly summarise the key points of my discussion, I have attempted to show that despite some clear shortcomings on the part of the British economy, the dismissal of this century's achievements as a terrible and avoidable decline are for the most part exaggerated. By this I mean that whilst the figures obviously show a relative retardation in growth and productivity aggregates, various structural and institutional factors indicate that the performance could have been much worse. In this scenario, we should perhaps view the fact that the economy did not fall further behind as a relative success? Nevertheless, when examining the cause of decline from an industrial or a service-based point of view, we would perhaps do well to examine more carefully the pivotal role of the service sector in the relative decline; particularly since this is an area not as frequently discussed in the literature.

Bibliography

SS Aldcroft, D.H. (ed.) The Development of British Industry and Foreign Competition, 1875-1914 (1968), London: Allen and Unwinds Broadberry, S, N, At Your Service: The Performance of British Market Services in International Perspective, 1870-1990 Chapter 9: Studies in Sectoral Performance, 1914-1950 (1999) Unpublished SS Broadberry, S.
N. The Long Run Growth and Productivity Performance of the United Kingdom Scottish Journal of Political Economy (1997) SS Lee, C.
The Service Industries' in Floud, R. and McCloskey, D. (eds.) The Economic History of Britain Since 1700: Volume 2: 1860-1939 (1994) Cambridge: Cambridge University Pre Pollard, S.
Entrepreneurship 1870-1914' in Floud, R.
and McCloskey, D. (eds.) The Economic History of Britain Since 1700: Volume 2: 1860-1939 (1994) Cambridge: Cambridge University Pre Sandberg, L.
Lancashire in Decline: A Study in Entrepreneurship, Technology and International Trade (1974) Columbus: Ohio State University Press.