Critics of the pre-First World War British economy have frequently argued that while its industrial structure may have reflected comparative advantage in the short run it was not well equipped for long-run productivity growth and, in this regard, compared unfavourably with the United States. The
‘old’ industries of the First Industrial Revolution were too big and the new industries of the Second Industrial Revolution were too small – for example, too much cotton textiles and too few cars being produced. A very well-known version of this argument was made by Richardson (1965), who claimed that Britain suffered from ‘over-commitment’ to the old industries and that government should have intervened to speed up the transfer of resources to new industries.
In essence, this is an ‘early-start’ hypothesis about British relative economic decline in which the market economy was ‘locked-in’ by its pattern of specialization in international trade to a structure that was suboptimal.8 It can also be seen as an argument for an ‘industrial policy’ of the kind which would be adopted in the 1960s and 1970s.9 In particular, Richardson (1965) suggested that the government should have abandoned free trade and implemented policies of tariff protection for ‘infant industries’ to facilitate a re-balancing of the economy. The United Kingdom was unusual at this time in its devotion to free trade, despite the presence of a vocal protectionist lobby, partly because the agricultural producer interest was so weak (O’Rourke, 1997), itself a reflection of the early start.
It is certainly the case that Britain’s revealed comparative advantage (RCA) looked very different from that of the United States and indeed from what one might expect of an advanced economy of the second half of the twentieth century, as can be seen in Table 3.8. This is reflected, for example, in the rankings of textiles and cars and aircraft. The United Kingdom had a weak position in R & D intensive sectors and the rank correlation of RCA and TFP growth by sector in the United States over 1899–1937 was significantly negative (Thomas, 1988). Cotton textiles remained a very strong export with a world market share of about 80 per cent on average during 1880–1911 despite having wage rates which were six times Asian levels because unit costs were held down by the productivity benefits of the Lancashire agglomeration, which had accrued from the early start (Crafts and Leunig, 2005).
Table 3.8 Revealed comparative advantage rankings
UK 1913 UK 1937 USA 1913 USA 1937
Agricultural equipment 10 16 2 1
Cars and aircraft 12 11 4 2
Industrial equipment 5 7 3 3
Electricals 8 5 5 4
Iron and steel 3 9 9 5
Non-ferrous metals 16 15 1 6
Book and film 13 8 10 7
Chemicals 11 12 12 8
Metal manufactures 7 13 6 9
Brick and glass 14 10 11 10
Wood and leather 15 14 7 11
Rail and ship 1 3 8 12
Fancy goods 9 4 13 13
Apparel 6 6 14 14
Alcohol and tobacco 4 1 15 15
Textiles 2 2 16 16
Note: Rankings are made on the basis of world market share with 1 = highest.
Source: Crafts (1989).
Nevertheless, this ‘over-committed’ structure did not entail a productivity growth penalty before the First World War. Table 3.9 reports a calculation of the difference that United Kingdom (rather than American) employment shares would have made to overall American labour productivity growth in manufacturing assuming that sectoral productivity levels and growth rates remained unchanged. The difference is trivial but actually goes in the direction of raising American productivity growth. If productivity growth was disappointing in British manufacturing in the Edwardian period, this was a problem of within-sector performance not composition of activity.
Table 3.9 Impact of changing sectoral weights on labour productivity growth in US manufacturing, 1899–1909 (% per year)
USA weights 1.65
UK weights 1.73
Post-tariff UK weights 1.76
Note: Calculations based on fixed 1900 weights in each case where the weight for sector i uses the formula in Nordhaus (1972) and is [(Y/L)i/(Y/L)manf]si where Y/L is labour productivity and s is the share of manufacturing employment. In each case the term in square brackets is based on productivity
data for the United States and the employment shares are as follows: row 1 is actual United States in 1900, row 2 is actual United Kingdom in 1907 and row 3 is counterfactual United Kingdom with Chamberlain tariff in 1907.
Sources: Derived from Kendrick (1961), Niemi (1974) and Thomas (1984).
It is well-known that, although Britain maintained policies of free trade, the United States was a high-tariff country with an average tariff rate on manufactures of around 40 per cent. This does not mean, however, that American overtaking was the result of protectionism. Irwin (2001) pointed out that faster productivity growth in the United States mainly accrued in non-traded sectors (cf. Table 3.2) which did not benefit from protection and that American policies did not add up to a successful infant-industry strategy. More generally, careful econometric analysis of the cross-country evidence does not support the hypothesis that higher tariffs raised growth rates in this period – if anything it points to the opposite conclusion (Schularick and Solomou, 2011). This may reflect the tendency for protection not to be tightly focused on a few selected sectors with excellent growth prospects or positive externalities for the rest of the economy (Tena-Junguito, 2010).
Similar problems would surely have undermined any British attempt to use protectionism to promote faster growth. The political economy of tariff protection was such that the proposals that had the most political support such as those made by Chamberlain would have actually tended to divert employment towards traditional sectors such as agriculture and textiles, which were relatively labour intensive rather than new growth industries (Thomas, 1984).10 A general tariff policy would have weakened competition in product markets with potentially adverse effects on productivity performance. In any case, if the real problem was market failures that implied too little investment in human capital and R & D, then the right response was policy intervention by government to address these failures directly.