August 20, 2020

Macro Series

Comment: Britain and the tyranny of nostalgia

BY Russell Jones

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( 11 mins)
  • Britain has now been in relative economic decline for the better part of 150 years.
  • Many of the reasons for this were first identified as long ago as the Victorian era.
  • Pyrrhic victories in two world wars only deepened the country’s underlying malaise.
  • An enduring obsession with the glories of the past is not a positive catalyst for change.
  • The Brexit debate provided the latest damaging example of rose-tinted hindsight.
  • The danger is that the UK’s extended decline does not just continue, but accelerates.

Having it so good

In 1900, all seemed well in the British economy …

At the beginning of the 20th century, and the end of the Victorian era, Great Britain was enjoying an unprecedented period of peace and prosperity. It possessed the largest empire that the world had ever seen, stretching to some 12 million square miles of land and as much as a quarter of the world’s population, and policed by a Royal Navy equal in size to the two next largest fleets.

Britain was responsible for almost a fifth of world manufacturing output; its total trade significantly exceeded that of its major competitors, as did its GDP per capita; British shipyards constructed around 80% of all new vessels; the country ran a huge and persistent current account surplus, on occasion approaching 10% of GDP; the Bank of England acted as the trusted fulcrum of a gold standard that regulated the system of international trade and payments, and the City of London dominated global banking, investment, insurance, and commodity trading.

… but the reality was that it was already in decline

The fact is, however, that, after a half century or more of unchallenged pre-eminence, Britain’s economic and political supremacy was already being steadily eroded. The first industrial nation was increasingly joined by others, and its principal competitors, most notably the USA and Germany, were not just catching it up, but in some important respects overtaking it. Britain’s relative share of world output was in decline, and in particular it was rapidly falling behind in the newer industries including steel, chemicals, machine tools, and electrical goods. Nor could it be confident that it would continue to rule the waves. With the growing economic strength of its competitors came rising military and political power, and a desire to displace Britain from top spot.

Fall from grace

The reasons went beyond economics to the social and cultural

The onset of the nation’s relative decline has been one of the more deeply investigated and hotly debated subjects in economic history. The reasons put forward encompass complex issues including national character, generational differences, the social ethos, and the nature of the systems of education and training, as well as more specific economic explanations, such as low investment, out-of-date plant, bad labour relations, management short-termism, poor salesmanship, deficiencies in the domestic banking system, including a lack of enterprise capital, and so on.

Nor have these issues gone away. Such considerations have continued to occupy a central role in more recent discussions of the UK’s unsatisfactory economic performance, stretching to the present day.

Hollow victories

Being on the winning side in two world wars did not help

What also is clear is that, for all their positive effects on innovation in certain industries and in accelerating elements of social progress, Britain’s central involvement in two unprecedentedly demanding world wars did nothing to help it sustain its position as a preeminent economic force.

These catastrophic conflagrations involved significant direct costs in the form of the physical destruction of labour and capital. But more importantly, there were also enormous indirect costs in the shape of extended resource misallocation (both domestic and international), onerous financial losses which transformed the nation’s once unprecedented net creditor status into that of the world’s largest debtor, and in due course the legacy of a more competitive international environment, unsympathetic to an economy with an outmoded industrial structure, and lacking in the agility to react to new challenges. In particular, in 1945, a now all-powerful United States insisted on the dismantling of Imperial Preference in Britain’s commercial relations in the context of the progressive liberalisation of global trade.

Equally significant, however, were the unfortunate effects of the two world wars on British perceptions and expectations. Finishing on the winning side in both conflicts, and in particular the survival of the nation against considerable odds in the early 1940s, has had a huge impact on the way the British population, and many of its leaders, have viewed themselves, and what might be described as their ‘just deserts’.

Indeed, the evidence is that it made things worse …

Societal attitudes invariably have a tendency to lag, and Britain’s ‘victories’, however Pyrrhic, embedded a sense of specialness and superiority, if not arrogance and xenophobia, not least towards the defeated nations of Europe and Japan. They further encouraged the belief that Britain could and should remain alongside the US at the ‘top (for which read exorbitantly-priced nuclear) table’, and that ‘the mother country’ could retain significant influence, if not control, over major parts of its old overseas Empire. This despite the fact that, while the colonies’ manpower and financial support had proved crucial to Britain’s survival in both conflicts, and a convenient source of soft markets between the wars, these nations had by the middle of the twentieth century increasingly matured, become less submissive, were more focussed on self-determination, and were ploughing their own unique furrow in the world. Both economically and politically, holding on to parts of the Empire and maintaining a wide strategical global presence became an albatross around the neck of successive British governments.

… both financially and attitudinally

Britain’s wartime ‘victories’ further acted against overdue and necessary change at home, narrowing minds and feeding the notion that things could and should go on largely as before, only better – that old values and habits could endure in a land made fit for its heroes. Given that, by 1945, Britain was to all intents and purposes bankrupt, this smacked of excess and over-reach.

Prisoner of its own history

Unlike the vanquished, Britain saw little need to change

In this sense, the contrast with defeated nations, and particularly Germany and Japan is stark. Occupied, humiliated, their economies destroyed, and their political systems overturned, they had no option but to start again from scratch. Britain’s survival, however tenuous it had been, by contrast encouraged the belief that its model had enduring value, and that it could look back to move forward. The reality, however, was that in dwelling on this narrow victory rather than its onerous costs, and hankering after a reversion to the status quo ante, it served only to exacerbate many of the shortcomings, frailties, and constraints that had been manifest since the late nineteenth century.

Poor performance tended to feed on itself …

What is more, the longer that Britain’s economic underperformance persisted, the harder it became to reverse. The nation’s institutions became more and more accustomed to slow progress, and thereby reinforced it. In the meantime, the desire for a return to the good old days became ever more rose-tinted and desperate, and the policy adjustments and broader societal changes that would be required were the nation to reverse its relative decline became ever more fundamental.

… prompting a desperate search for policy panaceas …

It is noteworthy that one of the more consistent elements (and failings) of UK policy over the past 75 years has been the search for a panacea that could restore the glories of the past. Naïve Keynesian demand management, widespread nationalisation, indicative industrial planning, many exchange rate and monetary policy regimes, EEC membership (ironically), the windfall of North Sea Oil, and the odd dose of free market liberalism, all came and went, but little changed in a sustained manner.

… but the trend of decline continued regardless

The reality was that transforming the economy’s performance for the better required profound and continual action on many fronts. Even during the great post-war boom years of the 1950s and 60s, Britain had been a conspicuous laggard: inflation prone; consistently running into a balance of payments constraint and reliant on external financial assistance; and beset by low productivity and toxic labour relations. Equally, Mrs. Thatcher’s 1980s neo-conservative revolution might have encouraged a long overdue reduction in trade union power, and sparked a temporary improvement in industrial efficiency, but like many previous UK policy regimes, ultimately it succumbed to excessive consumption and boom and bust, while also leaving a poisonous legacy of social distress and a more unequal and divided nation.

Emotional spasm

The turn of the 21st century brought some hope and relief …

And so to the most recent era. Sustained by a wave of globalisation and technological advancement, in many ways, the mid to late 1990s and early 2000s were a period of relative tranquillity and progress for the UK – the so-called NICE (non-inflationary, consistently expansionary) decade. But UK growth was hardly stellar, especially when scaled against the newly-emerging Asian economies. More seriously still, any catch up with the other advanced economies was limited and fleeting, and beneath the surface many of the all-too-familiar structural economic shortcomings, first identified a century earlier, remained unaddressed.

… but the GFC and its painful aftermath put pay to that …

Then came the Global Financial Crisis, the Great Recession, and a period of painfully slow recovery, exacerbated by grinding fiscal austerity that progressively eroded important areas of the welfare state. Longstanding grievances festered – in particular inequalities of various sorts. Even Britons’ moderated aspirations went unfulfilled, and dissatisfaction with a ruling, often London-based, elite burgeoned, its members increasingly viewed as immune to the trials and tribulations of the mass of the population.

… and prompted the toxic reaction that was Brexit

This was a combustible cocktail. The inevitable explosion came in the 2016 Brexit referendum. Britain’s decision to exit the EU was a cry of both pain and of self-pity born out of anger, frustration, disappointed expectations, and the search for a convenient (foreign) scapegoat. And true to form, in looking beyond the EU, the Brexiters looked backwards for their inspiration. Theirs was a wish to recreate a lost (and largely fictional) Golden Age, where Britain was a world-leader, the master of its own destiny, and commanded universal respect.

Reality bites

Brexit seems bound to prove costly in many respects

Unfortunately, whatever the hopes of its cheerleaders and supporters, the evidence, mainly from other countries that have experienced disruptions to their prevailing trade patterns, is that Brexit will involve significant costs: and adjustment to the new regime, even if ultimately satisfactory, will take many years.

How much so will depend in part on policy

That said, much will depend on both the progress of the international economy, and the broader complexion of UK economic policy. But on both counts, the auguries are less than encouraging.

Full recovery from the COVID-19 recession stands to be a long, hesitant, and uneven process. In the meantime, much of the world is in the grip of populism. Nativism and protectionism are rife, and there has been a tangible decline in international co-operation, and a retreat into trading blocs dominated respectively by the US, the EU, and China.

But history and the current environment are not encouraging

As to the domestic policy outlook, more than ever Britain is crying out for root and branch structural reform, and would do well to adapt the best in class strategies identified by the OECD and the IMF. But British politics too have been infected by populism, and an inconsistent historical track record is cause for concern. The temptation in the face of the disruptions of Brexit, COVID, and a less liberal global environment, and given the imprudent promises made to electorate about the potential benefits of Brexit, could well be to turn inwards, protect and intervene excessively in a search for short-term palliatives rather than longer-term solutions.

 
The risk is that Britain’s decline speeds up
 

The overwhelming conclusion is that Britain’s longstanding relative economic decline seems destined to continue, and perhaps accelerate.

Watch fors

  • A relatively slow and uneven recovery in 2021 and beyond.
  • Sharp losses for the pound and underperformance for UK asset markets.
  • Social and political unrest, as aspirations once again go unmet.
  • Palliatives are applied and UK policy turns inwards, worsening the underlying problems.
  • A further loss of UK prestige and influence on the world stage.◼

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