Research On Whether The Late Victorian Era Was A Failure In The History Of Great Britain
One of the most debated and controversial arguments have been as to whether the late Victorian Britain era has been characterized by failure. McCloskey in his study supports that late Victorian Britain did not fail, but there has been some opposition to this statement. Overall, it seems reasonable to agree that the general thrust of McCloskey’s conclusions is broadly correct. There was no massive failure in the pre-1914 economy, any decline in the trend growth rate was slight and American overtaking was unavoidable. The argument does, however, need to be modernized and taken beyond its original confines of traditional neoclassical economics. To start with, McCloskey’s test explained that failure would occur if Britain had grown slower than her resources of raw materials, capital and labor would allow or if there was inefficiency in the use of her resources. Exports are a large part of industrial output, both decline in the late Victorian period. Some claimed, on basis of Input-Output evidence for 1907, that, if growth of exports was sustained at 1854-72 rate, national income growth would have been 3. 71% p. a. 1872-1907, not the 1. 69% p. a. actually achieved. But, if demand had been constrained, we would expect high unemployment. The economy was at full employment. So, in the situation of the Victorian economy it is more plausible to assume that supply created its own demand than that demand would have created its own supply. If capital and labor were not substitutable then we would need the labor force to double to achieve 3. 71% growth p. a.
If we allow capital to substitute for some labor, then capital would need to have grown at 6% p. a. or in other words Englishmen would have to save 42% of their income. McCloskey came to conclude that the British economy was not demand deficient, instead growth was constrained by supply of factors of production. McCloskey also uses growth accounting methodology to estimate TFP Productivity growth rate per year and finds growth to be 2. 160 % in 1860-70, 0,872% between 1870-80, 1. 750% in 1880-90, 0. 982% in 1890-1900 and -0. 383% between 1900-10. McCloskey states that since productivity growth in USA was 1 – 1. 5% p. a. , this was comparable to Britain’s productivity growth, therefore no failing in entrepreneurship. Moreover, Britain had one third of her wealth invested abroad and people have said faster growth could have been achieved if some of this was reallocated to domestic investment. If investors were doing the best for themselves, they would also be maximizing the return to the nation. For this not to be true, it requires investors to be irrational or capital markets to be biased. There is no clear evidence that the City of London was biased towards overseas investment. Some have argued investors were turning down high rates of return at home (10%) for lower rates abroad (5%). But different risk factors explain this choice. In any case, McCloskey argues that bringing capital back to Britain would have done little to improve the growth performance of the economy. Assume that we bring sufficient capital back to UK to equilibrate home and abroad rates of return (add K home ↓ so e. g. 10% → 8%; take K abroad ↑ so e. g. 5% → 8%). This would lead National Output to increase by less than 0. 2% p. a. , i. e. giving a total increase in National Output of 7. 3% and would only have raised the rate of growth of income from 2. 40 % per year to 2. 58 % by the end of the Victorian period. Even Keynes did not base his argument on a supposition that Englishmen invested in risky projects abroad, any more than in risky projects at home, without demanding interest compensation for the risk. His primary point was, rather, that in default the physical capital abroad was lost to Englishmen. If the estimates in 1870 and 1900 of real gross national product, the stock of capital, the labor force, and the shares of capital and labor in national product are incorrect by as little as 3% the resulting estimate of productivity change will range from 0. 77% per year to 1. 62%, that is, by comparison with the United States, from failure to success.
In a counter-argument, Nicholas states that growth accounting methodology assumes perfect competition and constant returns to scale. But the period is characterized by less competition as oligopolies were emerging and increasing returns to scale had been evident. If we take these into account and remove them from TFP calculation, we could argue that Britain did fail in terms of total factor productivity growth. Increasing returns does indeed inflate TFP so the no failure McCloskey approach may not be robust. Underutilized labor and biased capital markets were the counter arguments of Matthews et al and Crafts. They argued that the growth of factor inputs is determined exogenously. Labor may not have been fully employed due to high levels of emigration. McCloskey’s view is a neoclassical exoneration and looked at the growth rate in steady state. Crafts suggests that there could be an increase in investment at home which would increase capital per person leading to a more capital intensive production process and as a result higher levels of output. Not all output is consumed as some goes into higher investment, but Craft argues that higher domestic investment would have permitted a 25% increase in consumption per capita by 1911. An alternative counterfactual is provided by Kennedy. He agrees that other countries industrialized more rapidly but asks why they developed different industries and focus on different sectors. If Britain had the same industrial structure as other countries with new industries and new technologies, then it would have observed 25-50% higher GNP in 1913. Kennedy argues that failure was due to capital markets which made foreign investment too attractive and domestic structural change more difficult. However, Feinstein compares growth of GDP per man year in the UK with that in six other industrial countries. Italy and Japan had lower growth rates than the UK until 1899. Subsequently, in 1899-1913, output per man year was growing faster in all six countries than in the UK. But the UK’s absolute level of GDP per man year exceeded that of most other countries. It was overtaken by the USA in 1880, Sweden about 1910, but not by other countries until post –WWII. He emphasized the so called compromise measure of GDP which is a geometric mean of the expenditure, income and output measures. Using this estimate, real GDP growth fell from 2. 1 %per year in 1873–99 to 1. 4 % per year in 1899–1913 while TFP growth fell from 0. 7 % per year to 0. 0 %. Indeed, a more detailed breakdown indicates an Edwardian decline rather than a significant decline throughout the whole period.
There are difficulties with the climacteric hypothesis. First, it is apparent that there are problems with the data since if these were perfect there should be no discrepancy between the expenditure, income and output measures of GDP. The reduction in TFP growth after 1899 is much less in the output than the income series. Solomou and Weale argued in favor of weighting the variants according to reliability rather than equally as in the compromise series and their results reduce the impact of the post-1899 slowdown. Second, almost all the differences are statistically insignificant. Therefore, the claim that the UK suffered a serious climacteric in its economic growth in the period 1899–1913 seems highly doubtful. S. Broadberry explores whether convergence is occurring. He considers labor productivity by sector, particularly manufacturing, and for whole economy. He finds that differences in whole economy picture a combination of labor productivity differences by sector and weighting of different sectors in whole economy. USA/ UK labor productivity = 2x from 1870 – 1990. The USA was always ahead, even in 1820-1850, and accelerates afterwards. At no stage was Britain the labor productivity leader in manufacturing. Germany and the UK were approximately equal between 1870-1990. There was no change in relative manufacturing performance. This could be explained by the fact that the USA had better resources and more energy. Scarcity of skilled labor also led to the adoption of mechanized mass production techniques. The UK had a lack of abundant natural resources, a lot of skilled labor and limited mass market. Resources and demand lead to technological choice. Germany had more similar resources and market to the UK, partially explaining why German and British manufacturing exhibited quite similar labor productivity throughout. American overtaking of Britain was based to a considerable extent on relative trends in productivity in services combined with a large shift of labor into that sector rather than simply resulting from the development of higher labor productivity in industry. The feature that stands out is that Britain was never a fast-growing economy prior to WWII. Indeed, from today’s viewpoint, the economy of the industrial revolution period can be seen as having relatively limited growth potential. Industrial revolution Britain was an economy which had very modest levels of investment in human and physical capital. Despite famous breakthroughs in textiles technology and more generally in the use of steam power, TFP growth in the classical period of the industrial revolution was unimpressive by post-First World War standards; the economy was characterized by weak technological capabilities and by substantial disincentives to innovative activity judged by later rather than contemporary standards. To sustain its early lead into and through the twentieth century, Britain would have had to progress very considerably beyond its industrial revolution capabilities. The plausibility of the claim that Victorian Britain did not fail would be enhanced if the UK could be shown to have levels of TFP and human capital per worker at least as great as those in other leading economies. This seems to have been the case at the level of the economy as a whole. Faster TFP growth in Germany in the period 1871–1911 could be seen as catching up from initial backwardness rather than British failure. Thomas noted that there was little opportunity to increase output by reallocating resources across sectors since the structure of factor endowments, especially skilled labor, was a binding constraint.
Quantitative research at the microeconomic level has generally supported the suggestion that British managers did not adopt American methods. But their decisions were rational in British conditions in which labor was less expensive, natural resources were more expensive and demand was less standardized than in the United States. Similarly, the ex-post rate of return on the allegedly unjustly neglected new industries did not match that on traditional activities. To this extent, McCloskey’s position has been vindicated. Yet, it relies fundamentally on the proposition that TFP growth was exogenous. Taking all evidence into consideration, even though the UK did indeed see a slight fall in its output and productivity statistics, subsequent research of the late Victorian epoch suggests that the use of the word “failure” is a bit too strong. This is partly because the UK was losing productivity due to supply constraints and limited resources rather than complacency and a misuse of the resources that they had at their disposal. Even if failure is to be taken into context, a more detailed breakdown of events suggests that any significant fall in output and productivity was primarily concentrated during the Edwardian period rather than the whole late Victorian period.
