/

Is America succumbing to the ‘British disease’?

by Barry Eichengreen

BERKELEY, Calif. — In the United States, the scent of decline is in the air. Imperial overreach, political polarization and a costly financial crisis are weighing on the economy. Some pundits now worry that America is about to succumb to the “British disease.”

Doomed to slow growth, the U.S. of today, like the exhausted Britain that emerged from World War II, will be forced to curtail its international commitments. This will create space for rising powers like China, but it will also expose the world to a period of heightened geopolitical uncertainty.

In thinking about these prospects, it is important to understand the nature of the British disease. It was not simply that America and Germany grew faster than Britain after 1870. After all, it is entirely natural for late-developing countries to grow rapidly, as is true of China today. The problem was Britain’s failure in the late 19th century to take its economy to the next level.

Britain was slow to move from the old industries of the first Industrial Revolution into modern sectors like electrical engineering, which impeded the adoption of mass-production methods. It also failed to adopt precision machinery that depended on electricity, which prevented it from producing machined components for use in assembling typewriters, cash registers and motor vehicles. The same story can be told about other new industries like synthetic chemicals, dyestuffs and telephony, in all of which Britain failed to establish a foothold.

The rise of new economic powers with lower costs made employment loss in old industries like textiles, iron and steel and shipbuilding inevitable. But Britain’s signal failure was in not replacing these old 19th-century industries with new 20th-century successors.

Is America doomed to the same fate? Answering this question requires understanding the reasons behind Britain’s lack of technological progressiveness. One popular explanation is a culture that denigrated industry and entrepreneurship. Over the long course of British modernization, the industrial classes were absorbed into the establishment. From the mid-19th century, the best minds went into politics, not business. Enterprise managers promoted from the shop floor were, it is said, second rate.

Now we supposedly see a similar problem in the U.S. In the words of David Brooks of The New York Times: “After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place. . . . America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.”

In fact, this supposed explanation for British decline has not stood the test of time. There is no systematic evidence that British managers were inferior. Indeed, expanding the pool of potential managers beyond the children of a firm’s founders had precisely the opposite effect. It allowed the cream to rise to the top.

In today’s America, too, it is hard to find evidence of this purported problem. Silicon Valley companies do not complain of a dearth of talented managers. There is no shortage of new MBAs establishing startups or even going to work for auto companies.

A second popular explanation for British decline focuses on the educational system. Oxford and Cambridge, established long before the industrial era, produced eminent philosophers and historians, but too few scientists and engineers. It is difficult, however, to see how this argument applies to the U.S., whose universities remain world leaders, attracting graduate students in science and engineering from around the world — many of whom remain in the country.

Still others explain British decline as a function of the financial system. British banks, having grown up in the early 19th century, when industry’s capital needs were modest, specialized in financing foreign trade rather than domestic investment, thereby starving industry of the capital needed to grow.

In fact, actual evidence of any such British bias in favor of foreign over domestic investment is weak. And, in any case, that history, too, is irrelevant to the U.S. today, which is on the receiving, not the sending, end of foreign investment.

A final explanation for Britain’s failure to keep up makes economic policy the culprit. Britain failed to put in place an effective competition policy. In response to the collapse of demand in 1929, it erected high tariff walls. Sheltered from foreign competition, industry grew fat and lazy. After World War II, repeated shifts between Labour and Conservative governments led to stop-go policies that heightened uncertainty and created chronic financial problems.

Herein lies the most convincing explanation for British decline. The country failed to develop a coherent policy response to the financial crisis of the 1930s. Its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country turned inward. Its politics grew fractious, its policies erratic and its finances increasingly unstable.

In short, Britain’s was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America’s fate.

Barry Eichengreen is a professor of economics and political science at the University of California, Berkeley. © 2010 Project Syndicate