At the end of the interwar period, the United Kingdom’s lead over France and Germany in terms of real GDP per person was quite similar to that of 1913 according to the estimates by Maddison (2010) reported in Table 4.1. Making comparisons vis-à-vis the United States is a bit more complicated. The estimates in Table 4.1 show a widening of the gap between 1913 and 1929 from under 8 per cent to about 25 per cent followed by a substantial narrowing to about 3 per cent in 1937. Prima facie, this seems to show a significant catching up and reversal of relative economic decline by Britain during the depression years of the 1930s. This is, however, rather misleading for several reasons.
Table 4.1 Real GDP/person ($GK1990)
France Germany UK USA
1913 3485 3648 4921 5301
1929 4710 4051 5503 6899
1937 4487 4685 6218 6430
Note: United States in 1941 = $8206
Source: Maddison (2010).
First, the choice of the end year in Table 4.1 favours the United Kingdom. By 1937, the business
cycle recovery from the shock of the Great Depression was complete whereas, in the United States this took until 1941. In 1941, real GDP per person in the United States was $8206 (1990$GK); over a twelve-year cycle it had grown on average by 1.46 per cent per year compared with 1.55 per cent over the eight-year cycle in the United Kingdom between 1929 and 1937. It may be better to see the Great Depression and its aftermath, as a phase where relative economic decline paused rather than was reversed, even though the United States experienced by far the bigger trauma. Second, the transatlantic income gap may be underestimated in Table 4.1. Using the PPP exchange rates calculated by Woltjer (2013), the income gap between Britain and the United States had widened from about 25 per cent in 1913 to about 40 per cent by 1929. Third, on the other hand, the widening of the gap between the two countries between 1913 and 1929 exaggerates the difference in underlying trend growth potential because the shock of the First World War had an adverse impact on income levels in 1920s’ Britain by raising (equilibrium) unemployment and reducing trade exposure through increasing trade costs. This was equivalent to a levels shock to GDP of perhaps 7.5 per cent (Crafts, 2014).
Growth accounting estimates reported in Table 4.2 show that productivity growth in the United Kingdom continued to be well below that of the United States. There was a revival compared with the very disappointing outcome for 1899–1913 but during 1924–1937 labour productivity growth and TFP growth were below the levels of 1873–1899. In sharp contrast, TFP growth in the United States rose to new heights which were sustained through the 1930s, described by Field (2011) as America’s
‘most technologically progressive decade of the twentieth century’. The revival of TFP growth stressed by Matthews et al. (1982) is more apparent at a disaggregated level, as can be seen in Table 4.3, where most sectors, notably including manufacturing, achieved much stronger TFP growth in 1924–1937 than in 1873–1913. The big exception to this was ‘commerce’ (distribution, finance and miscellaneous services) which detracted significantly from overall TFP growth. Poor performance in commerce may have reflected disguised unemployment in hard times. Again, however, in most sectors, including manufacturing, interwar-period British TFP growth was well below the American level.
Table 4.2 Contributions to labour productivity growth (% per year)
Education
Capital per hour
worked TFP
Labour productivity growth
UK
1924–1937 0.3 0.1 0.3 0.7 USA
1919–1929 0.3 0.3 1.8 2.4
1929–1941 0.3 0.1 2.1 2.5
Note: Estimates for United States are for the private domestic economy.
Sources: Matthews et al. (1982); Kendrick (1961) and education contributions derived from Morrisson and Murtin (2009).
Table 4.3 Crude TFP growth in major sectors (% per year)
UK, 1873–1913 UK, 1924–1937 USA, 1919–1941
Agriculture 0.4 2.1 2.1
Mining –0.1 1.2 2.7
Manufacturing 0.6 1.9 3.8
Construction 0.1 1.3 0.7
Utilities 1.6 1.8 3.9
Transport and communications
0.7 1.0 3.1
Commerce 0.5 –0.5 1.1
GDP 0.4 0.7 2.2
Note: Crude TFP means that labour quality (education) is not separately accounted for.
Sources: Update of Kendrick (1961) in Bakker et al. (2017); Matthews, Feinstein and Odling- Smee (1982.)
The United Kingdom struggled to match American productivity performance in the industries at the heart of the Second Industrial Revolution. Comparing Britain in 1924–1937 with the United States in 1919–1941, crude TFP growth in vehicles/transport equipment was 3.1 per cent per year
compared with 6.5 per cent, in electrical engineering/electric machinery it was 2.0 per cent compared with 5.0 per cent, and in chemicals 1.4 per cent compared with 4.1 per cent. In particular, Britain was much less well placed than the United States to benefit from the new general purpose technology, electricity. As electrical power became a cheap input in the United States and there was a rapid shift to machinery powered by unit drive, factory design became much more flexible and capital-saving improvements were developed (David, 1991). More than 20 per cent of TFP growth in American manufacturing in the 1920s derived from these spillover effects (Bakker et al., 2017). Electricity consumption per employee in manufacturing in the United States was more than three times the British level in 1930 when the British price was about 50 per cent higher; there was no strong impact of electrical power on British manufacturing productivity (Ristuccia and Solomou, 2014).
By the 1930s, underlying growth potential in the United Kingdom was somewhat higher than in 1913 on account of greater investments in human capital and R & D, as is reflected in Table 4.4. Both government and industry spent increasing amounts on R & D and employment in industrial R & D was in excess of 4,000 by 1938 when, however, the comparable figure for the United States was above 44,000 (Edgerton and Horrocks, 1994). Years of schooling continued to increase and had reached 7.5 years by the late 1930s. Here also, the United States had pulled further ahead especially in terms of post-14 education. By 1938, 45 per cent of 17 year olds were high-school graduates in the United States, whereas only 4 per cent of British 17-year olds were in school (Goldin and Katz, 2008) and average years of tertiary education were in the United States about three times the British level (Broadberry, 2003).1 Although, in the terminology of Figure 1.1, the United Kingdom was now a somewhat higher-λ economy than at the end of the nineteenth century, it still compared quite unfavourably with the United States.
Table 4.4 Investments in broad capital
UK, 1937 USA, 1940
Non-residential investment (%GDP) 6.4 7.6
Years of schooling, ages 15–64 7.5 8.8
R & D expenditure (%GDP) 0.4 0.7
Sources: Non-residential investment: Feinstein (1972), Carter et al. (2006); Years of schooling:
Morrisson and Murtin (2009); R & D (for 1934): Edgerton (1996).