This year marks a centenary of sorts. Back in 1919, with the first world war finally over, Britain woke up to a new reality: the days of being the world’s pre-eminent economic power were in the past.
In truth, the writing had been on the wall before 1914. The US and Germany had caught up with Britain before the assassination at Sarajevo and were forging ahead in the new sectors that had sprung up around the turn of the 20th century. Even in industries where the UK had traditionally been strong, such as coal, rival countries were much faster to deploy new, productivity-raising technology.
Even so, the aftermath of the first world war – a raging boom and a colossal bust in the space of just a couple of years – came as a shock. The staple industries of the 19th century – coal, textiles, shipbuilding – were all facing challenging times. Whereas the industrial North had been more prosperous than the rural South in Britain’s mid-Victorian heyday, 100 years ago there was already emergence of today’s marked regional divide.
Ever since, those responsible for running the British economy have been afflicted by two seemingly incompatible sentiments: a sense that, even when the economy is going through a good patch, something bad is sure to happen; and a belief that somewhere there is a magic ingredient that will solve the economy’s problems. In the 1920s, it was going back on the Gold Standard; in the 1930s it was coming off the Gold Standard. In the 1940s it was state control of the commanding heights of the economy; in the 1950s it was Keynesian demand management.
And so it went on. William Keegan, my colleague on the Observer, has just published a memoir* detailing the nine crises he has covered, and the many agreeable lunches he has eaten, in his illustrious journalistic career. Full of sharp insights and beautifully written, the book takes up the story from when Keegan arrived in Fleet Street in the early 1960s.
This was the time when Britain’s inferiority complex became acute. The US had emerged from the second world war as the west’s unchallenged economic powerhouse and the UK grudgingly accepted that. Harder to swallow was that countries on the losing side in the war – Germany and Japan – and those that had been occupied – France and the Netherlands – all seemed to be doing better.
While not agreeing with Keegan about everything (we are on opposite sides in the Brexit debate), his book chronicles how Britain has responded to this challenge.
There have been times when attempts have been made to tackle the economy’s deep structural problems. Harold Wilson’s government in the 1960s created a department of employment and productivity because it knew that the economy needed to be more efficient. The Thatcher government in the 1980s had a supply-side reform agenda that involved privatisation, deregulation and shifting the emphasis of industrial strategy from manufacturing to making the City a global financial centre. Labour’s big idea under Tony Blair was “education, education, education”.
So why has there been no lasting economic renaissance? Well, for a start, as Keegan illustrates, some almighty macro-economic blunders have hindered supply-side reform: the failure of Wilson to devalue the pound as soon as he arrived in office in 1964; the monetarist experiment of the early 1980s and the decision to join the Exchange Rate Mechanism in 1990 among them.
But there’s more to it than that. Getting the big picture – interest rates, the level of the pound, tax and spending policy – right matters a lot but it is not everything. A real transformation of the economy requires three things: an understanding of the problem; a set of policies to tackle the weaknesses identified, and, crucially, a willingness to abandon strategies when they are not working and to stick them when there’s a chance that they will.
It’s quite easy to say what’s been going wrong: for decades Britain has imported more than it has exported; finance is too strong and manufacturing too weak; there has been a ready supply of new ideas but a failure to develop their commercial potential; businesses have struggled to get long-term funding and workers with the appropriate skill levels.
Tackling the weaknesses has proved harder because there are wildly divergent views about what should be done. Britain has had most things in the past century, from a command economy during the second world war to Thatcherism in the 1980s. There has been an appreciation that lessons can be learned from other countries; the issue has been deciding which one to learn from.
But it is the lack of patience that has been the most marked trait of the past 100 years, the sense that there is a shortcut to success if only it can be found. At various times this has been a national plan, devaluation, money supply targets, joining the ERM and leaving the ERM. There have been governments that have tried to “dash for growth” in the belief that Britain can burst through to a higher level of productivity and there have been governments that have thought they could cut their way to growth. Joining what was then the Common Market was seen as the answer in the 1960s and early 1970s.
By the time of the 2016 referendum, it was clear that Britain still had deep structural problems but that those of the countries so admired in the 1960s were just as bad if not worse. There is now an opportunity – for remainers as well as leavers – to put things right. There is no guarantee the opportunity will be taken, of course.
* Nine crises by William Keegan, published by Biteback
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