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British Entrepreneurs and the decline of the British economy

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British Entrepreneurs and the decline of the British economy


Was the British entrepreneur the most important single reason for the relative decline of the British economy in the late nineteenth century?

Despite a continued growth of production and wealth in absolute terms, the economy of "the first industrial nation" began to decelerate after 1870, in comparison with that of her closest competitors. This so called "decline" was caused by a number of factors not merely one as the question suggests, indeed Supple` s foreword (1) asks, "Are we to be concerned with the rate of growth of total income or of manufacturing output? Above all, by what standards do we assess `failure` or `success`?"

Derek Aldcroft` s article, `The Entrepreneur and the British economy, 1870-1914 published in 1964 spearheaded the broad indictment of the British entrepreneur...(2).......
A/ They failed to adopt the best available techniques of production in many industries, ranging from ring-spinning and automatic weaving in cotton to the mechanical cutter and electrification of mines in coal.

B/ They underestimated the growing importance of science, investing little in laboratories and technical personnel for research or for the effective exploitation of foreign research.

C/ They over-invested in the old staple export industries such as cotton and iron, and were slow to move to the industries of the future such as chemicals, automobiles, and electrical engineering.
D/ They were bad salesmen, especially abroad.
E/ They were insufficiently aggressive in organising cartels to extract monopoly profits from the world a t large.

I intend to investigate these areas, in addition to labour relations, education and the class system, as I feel that they have a distinct bearing on the late Victorian economic climate.

The "technological retardist" theories are strongest in considering the erosion of "King Cotton` s" pre eminence, due in part to America` s competition and, the critics suggest, the British cotton manager` s lack of judgement. It is said that the slow adoption of the ring spindle in spinning, and the low uptake of the automatic loom in weaving seriously hampered those industries` competitive edge.

The principle advantage of the ring spindle was it` s operation by unskilled female staff, whereas the traditional mule required skilled (mostly male) operatives, thus saving on labour costs. The disadvantage was that the ring needed more expensive cotton to make a given `fineness` or `count`. Given this information, replacement of old existing technology should only be undertaken if the total cost of the new technology is less than the variable cost of the old technique. In this instance, considering the costs involved in replacing mules with rings in existing plants, it appears that the decisions of British cotton masters were vindicated. Similarly, regarding the weaving industry, the advent of the automatic loom reduced labour costs, but were more expensive to install than the plain looms, consequently raising the capital costs per unit of output. In comparison, the saving in labour costs would benefit the United States, but not Britain. The installation of automatic looms would have exacerbated the losses suffered by the dwindling British textile industry, again vindicating the British entrepreneur` s judgement.

Britain `s pre-eminence in production and consumption of iron and steel ended by 1880, when production was surpassed most notably Germany & USA. The slow uptake of technical innovation was key in the British decline, for instance the Gilchrist-Thomas process of removing brittle phosphorous from pig iron opened the way to the use of phosphorous -rich ores, in plentiful supply in North East England, thus providing the cheapest iron ore in the world for the production of steel. European steel-makers embraced this method in the 1880s but Britain continued with the old acid steel making until the 1930s. Blast furnace operation enhanced the efficiency of pig iron production. Newer steel works modernised their blast furnaces, whilst Britain continued with acid steel making.

Years
United Kingdom
Germany
France
U.S.A
1890
3,579
2,195
670
4,275
1896
4,133
4,745
1,160
5,282
1900
4,901
6,260
1,540
10,188
Steel Production (In thousands of tons)

(3)
The table graphically illustrates that although Britain was overtaken by her main competitors, she was still increasing her production of steel during these years. The demand grew more slowly than in Germany but an increase of 3.4% per annum (1890-1913) was large enough to warrant new investment in the industry. Britain `s principal competitor, Germany, developed large-scale iron & steel making despite importing suitable ore from Sweden, but German workers were 80% more productive per worker than their British counterparts by 1914,making Britain` s attachment to its acid steel making plant puzzling. However, even allowing for rapid uptake of the Gilchrist-Thomas process, a country as abundant in resources as the USA would have surpassed Britain, but Britain` s advantage of established exports, new facilities and cheaper ores would have been an advantage over Germany.

Dintenfass , however sees the slow uptake in iron and steel as symptomatic of a wider ranging British attitude.(4)

"The British iron & steel industry failed to exploit new appliances and production methods as extensively and rapidly as did its overseas competitors in the decades leading up to the First World War. Neither demand constraints, raw material costs, nor the efficiency of inherited practices warranted this neglect of innovations that others employed with profit, and the industry paid the price for its technological conservatism in declining competitiveness and lost custom. Here is the history of an industry that supplied one of the essential ingredients of modern economic life, is clear-cut evidence of a British resistance to technological change"

British entrepreneurs were not immune to criticism in the newer chemical industry, although in terms of employment the industry grew faster between 1881 and 1911 than any other industrial group in Britain. Any failure could only be attributed in comparison to the United States and Germany, where their output was in the ascendancy. The Germans specialised in dyes, drugs and photochemical products, the Americans in electro-chemicals. Britain in soap, paints, coal tar and explosives. Consequently, British investors were unlikely to invest in British companies in direct competition with German or American firms, exacerbating the gap in these areas.

The principal charges levelled against British entrepreneurs are that they retained the Le Blanc process in the production of alkali despite the superiority of the Solvay process, the retention of the lead- chamber process rather than the contact process in sulphuric acid production, and that research did not keep pace with Germany in respect of dyes and drugs, in particular, as indeed generally.

It is this "lagging behind" in educational matters that Britain` s `decline` is often attributed, in comparison with Germany, where compulsory primary education was introduced much earlier. There was much closer articulation between the primary, secondary and higher education. The British government contributed little finance, in contrast to the German state which financed teaching and research to a high degree. Nevertheless, note must be taken that it was perhaps the informality of the education system which allowed for greater flexibility and thus a capacity for adaptability and expansion. Vocational training was always passed over in favour of more academic pursuits, it was supposed, and thus the population of universities contained smaller numbers of science, technology, economics and business students than her competitors. There was only state intervention in British education as late as 1902, and the century` s children and industries were generally regarded as ill -served.

"The enduring failure of the British educational system to supply an adequate number of trained people to each occupational level produced and the sustained a vicious cycle of uncompetitive products, processes and personnel. Lacking higher education, top officials have been less attuned to innovations in products and production methods than executives abroad and less appreciative of their potential. More content with inherited product lines and manufacturing routines, British managers have satisfied themselves with work forces trained mainly on the job."(5)

Eric Hobsbawm` s comments hint at the explanation of this disparity between British and German higher education, that of availability(6).

"The assimilation of the British business classes to the social pattern of the gentry and aristocracy had proceeded very rapidly from the mid nineteenth century, the period when so many of the so called ` public schools ` were founded, or reformed by finally excluding the poor for whom they had originally been intended. In 1869, they were more or less set free from all government control and set about elaborating that anti-intellectual, anti-scientific, games-dominated Tory imperialism which was to remain characteristic of them. Unfortunately the public school formed the model for the new system of secondary education, which the less privileged sectors of the new middle class were allowed to construct for themselves after the Education Act of 1902, and whose main object was to exclude from higher education the children of the working class................... Knowledge, especially scientific knowledge, therefore took second place in the new British educational system, to the maintenance of a rigid division between the classes. In 1897 less than 7 % of grammar-school pupils came from the working class. The British therefore entered the twentieth century and the age of modern science and technology as a spectacularly ill-educated people."

The reformation of the British public school supplies the reason for what Wiener calls "The Decline of the Industrial Spirit". He maintains that the late Victorian aristocracy yielded some of their power to a middle class elite in return for their acceptance of proper aristocratic values, styles and the pursuit of gentlemanly leisure and political service. This outlook was compounded, Wiener maintains, by public schools and universities which were `anti-science and anti-business`. Consequently, the next generation were divorced from ideas of technology and business in favour of a classically academic background. Sons from industrial business backgrounds quickly disavowed them, and the public school became a breeding ground for army officers and civil servants, not engineers and entrepreneurs. `Oxbridge` fostered an image to represent a `national way of life` of `English-ness` a pre-industrial rural utopia which bore little resemblance to reality and seeped into a middle class `culture`, thus hampering industry, fostering a suspicion of industrial/economic growth and leading to a `decline in the industrial spirit`

Hobsbawm disagrees however....(7)"The absorption of the sons of grocers and cotton-spinners into the aristocracy was a consequence of the loss of impetus in British business not its cause."

He further maintains that in at least one public school in the 1880s,75% of the students were studying engineering.

Lundgreen however, goes as far as(8)"refuting on several grounds , the proposition that Germany` s apparent lead in science and technology `brought about her economic predominance`"

If the case is proven that lack of education does not have any bearing in Britain` s economic stature, what, if anything, is the cause of a generation of poor entrepreneurs, and what would be it` s effect, if any, on the economy as a whole?
Sandberg ponders the principal economic consequences and concludes(9)
"A managerial error, such as investing in the wrong technology or failing to junk obsolete equipment or failing to take advantage of a profitable investment opportunity, is only a failure if it reduces the present value of the expected flow of future profits of the firm. Thus, managerial mistakes must reduce profit levels below what they would otherwise have been..... If a given error is limited to a single firm, ................. the consequences would be limited to that firm. If, however, all the firms in the industry made the same mistake, the situation would be quite different. The efficiency loss caused by the collective error would now be much larger."

Many of Britain` s industries were started up with capital gleaned from relatives, friends and acquaintances by families, who by the third generation were no longer interested in the `hands -on` approach, and delegated some of their responsibilities to managers in favour of more `aristocratic` pursuits. These managers consequently were content to oversee a traditional work ethic and routine which suited the employees and owners, who in turn were content to maintain the level of profit with minimum outlay. This consequently stifled innovation, re-investment in new technology and fostered complacency, leading to decelerating economic growth. Moreover, workers found it difficult to discard old methods, locations and the traditions created by these industries, for institutional and psychological reasons. The skills and practices of management and trade unions might, in fact, have been be unsuitable to the new industrial environment.

"The survival of outdated production methods at best provides only part of the explanation for the decline of the British economy after 1870. Entrepreneurial resistance to technological innovation was not always unjustified, and, where it was, it was not always a sufficient explanation of decline. Even where the neglect of more efficient techniques was the principal cause of the loss of competitiveness, the question remains whether technological backwardness was the root of the problem or symptomatic of more fundamental disorders." (10)

However, Jean-Pierre Dormois supplies a sympathetic continental viewpoint.(11)" A vast and complicated national economy is simply not susceptible of altering its configuration at the ` drop of a hat`."

Electrical engineers were thwarted in their attempts to electrify the cotton and mining industries, but engineering and shipbuilding embraced electrification more readily. Gas lighting was cheap and widely used, and the railway network was all pervasive, thus little headway was achieved. British manufacturers were widely regarded as poor salesmen, and simply not aggressive enough in the establishment of cartels. The massive outflow of capital abroad was seen as detrimental to relatively newer industries such as electricity, electrical equipment and motor vehicles, those industries which relied on large injections of initial capital. The alleged failure of Britain to create large-scale monopolies meant that it was unable to reap the benefit of beaureacratic management. However, some of today` s largest manufacturers are breaking up into smaller subsidiaries and many business historians have emphasised the advantages inherent in the family firm.
Britain did indeed lose its pre-eminent manufacturing position, due, in part, to the fact that the world economy had changed greatly in complexity, and Britain became, instead, a more important trading/investment nation. The original industries, brought to fruition on the British forge of industry (cotton, iron, steel and shipbuilding) lost importance in relation to newer industries that had grown and been exploited by Germany and America. But this is a misleading picture, as McCloskey explains,(12)

"The industries in Hoffman` s index of industrial output....do not constitute a random sample of the statistical universe of British entrepreneurial performance , weighted as they are towards the old industries making commodities and away from the new industries providing services .International comparisons of productivity using similar indices of output in the United States and Germany would yield biased readings ;it could well have been that as a mature industrial nation in 1870 Britain already had achieved an advanced technology in the basic industries of the industrial revolution and was well advised to continue the search for productivity improvement in services and light industries , which are underrepresented in the standard indices of industrial output."

McCloskey does conclude, however, that scattered cases of entrepreneurial success, Lever Brothers in soap and Courtaulds in rayon, for instance, do not break the hypothesis of general failure attributed to the entrepreneur, but further ponders the question of whether the `failures` were important to the performance of the economy as a whole, and whether the neglect of new techniques was of any consequence, given the paucity of quantitative evidence.

In view of this, Aldcroft, with reference to his 1964 piece, is substantially less sweeping in his later work in 1968 (13)
"The fact that some industrialists were slow to adopt new techniques does not necessarily mean that they were inefficient or lacked enterprise .......
On the other hand, neither must one adopt an unduly complacent attitude when discussing the performance of British business in this period. As we have already seen there was considerable room for improvement in many branches of British industry.......But the problem was not always simply one of failure to innovate on the part of the industrialists."

It was almost inevitable that the British economy would quite literally "run out of steam" at some period. There were simply not enough new innovations to propel the rate of growth any faster, as by the 1890s the advantage of a fully utilised railway system and the transition to the "factory system" was largely ended. The economy had reached " a technological plateau ".

In addition to this, Crouzet feels that (14) "It is obvious that, from the moment when industrialisation spread ,the share of the pioneer countries in world industrial production was bound to diminish . It was also unlikely that England would stay ahead in every field; new competitors with special comparative advantages could forge ahead in certain specialities and even trespass on traditional British preserves. Above all, when there was a country like the United States , which spread over half a continent, with immense natural resources, a large population that was energetic and educated, together with various other conditions favourable to growth, it was inevitable that she would become a great industrial power and finally overtake a small island "

Supple ponders Britain` s economic situation at the end of the nineteenth century...(15) "Given the fact that national income and living standards continued to grow, and that Britain` s international position as a capital market and supplier of financial and commercial services boomed, it is difficult to see why the last years of the century got their original reputation in the first place." Indeed, the British consumer might have been tempted to ask " What depression?" as public` s wages rose at a time when prices were falling and they were now able to buy "consumer" products, which were supplied by Germany and not Britain.

Ensor reasons that (16) "If we combine the price and wage movements together in order to find the movement of `real wages`, we may calculate that as between 1860 and 1900 they had improved about 77 per cent"

Britain was continuing to invest abroad and in the old original industries, as the cost of replacing plant would have been prohibitive and profits remained satisfactory.
Saul` s influential work is satisfied that (17)

"It is apparent that there is no one reason for Britain` s apparent industrial decline . There may have been institutional problems but the heritage of Britain `s industrial start and the peculiar market difficulties of the late nineteenth century are the most positive reasons we can propose. It is enough to know that the rate of growth of productivity had been falling steadily for 30 years or more and that this was in direct contrast to Britain` s main competitors. "

DORMOIS contends that by 1913, Britain still enjoyed the highest standard of living and had transformed the `first industrial nation` into the first mass consumption society, in that services had outgrown manufacturing activities, was enjoying the fruits of her earlier endeavours, and was "still the example historically closest to optimal wealth creation."(18)

It appears then, in conclusion, that early British scholars of this period of the economy have been unduly harsh on the British entrepreneur. He was n` t "the most important single reason for the relative decline of the British economy ", but his inexperience of the unprecedented complexities of a new world economy were certainly a factor. His mistakes, in hindsight were understandable, but not quite as serious as first thought, and it was almost as if Britain was economically pre-ordained to evolve alternatively into the domination of the trade and finance industry.

Bibliography

* Derek Aldcroft, `The entrepreneur and the British economy`, in `Economic History Review`2nd ser., 17 (August 1964) pp .113-134. In Donald N. McCloskey with Lars G. Sandberg, "From damnation to Redemption: Judgements on the Late Victorian Entrepreneur," in Donald N. McCloskey (ed); `Enterprise and Trade in Victorian Britain, Essays in Historical Economics,` (London, George Allen & Unwin 1981).
* Derek Aldcroft (ed),` Development of British industry p 34f in Donald N. McCloskey with Lars G. Sandberg, "From damnation to Redemption: Judgements on the Late Victorian Entrepreneur," in Donald N. McCloskey (ed); `Enterprise and Trade in Victorian Britain, Essays in Historical Economics,` (London, George Allen & Unwin 1981) .
* Francois Crouzet , `The Victorian Economy`,(London, Methuen & Co Ltd, 1982).
* Michael Dintenfass, ` The Decline of Industrial Britain 1870-1980`(London, Routledge 1992)
* Jean-Pierre Dormois ,`Late Victorian Economic Performance in the Continental Mirror` in `Nederlansch Economisch-Historisch Archief Volume 7 Number 2,`(Netherlands,1993) p.107-122 http://www.neha.nl/publications/bul9302_dormois.html
* Sir Robert Ensor, `England 1870-1914`(Oxford, Clarendon Press in Oxford 1936)
* E.J. Hobsbawm, `Industry and Empire`(London, Pelican 1968)
* P.Lundgreen, `The organisation of science and technology in France: a German perspective`, in R.Fox and G. Weisz, eds., "The organisation of science and technology in France "(Cambridge,1980) in
* Jean-Pierre Dormois ,`Late Victorian Economic Performance in the Continental Mirror` in `Nederlansch Economisch-Historisch Archief Volume 7 Number 2,`(Netherlands,1993) p.107-122 http://www.neha.nl/publications/bul9302_dormois.html
* Donald N. McCloskey with Lars G. Sandberg, "From damnation to Redemption: Judgements on the Late Victorian Entrepreneur," in Donald N. McCloskey (ed);" Enterprise and Trade in Victorian Britain, Essays in Historical Economics," (London, George Allen & Unwin 1981)
* L.G.Sandberg, "The Entrepreneur and technological change" in Roderick Floud and Donald McCloskey eds, "The Economic History of Britain since 1700. 2.1860 to the 1970s",(Cambridge, Cambridge University Press 1981)
* S. B. Saul, `The Myth of the Great Depression`(London, Papermac 1969)
* Barry Supple, `Foreword` in Donald N. McCloskey, ed " Enterprise and Trade in Victorian Britain, Essays in Historical Economics" (London, George Allen & Unwin 1981)

Footnotes

(1) in McCloskey,1981, p. xiii) (2) in McCloskey, 1964, p.57 (3)(Ensor,1936,p.277) (4)(Dintenfass,1992, p.19) (5)(Dintenfass, 1992 p38) (6)(Hobsbawm ,1968, p.168-169) (7)(Hobsbawm, 1968, p. 185) (8)(Lundgreen, 1980,p.311-332) (9)(Sandberg, 1981, p.102) (10)(Dintenfass,1992, p.26) (11)(Dormois,1993, p.107-122) (12)(McCloskey,1981, p.62). (13)(Aldcroft.ed,1968, p.34) (14)(Francois Crouzet, 1982 p. 379) (15)(Supple,1981, p. xii) (16)(Ensor:1936: p.275) (17)(SB Saul, 1969,p.220) (18)(Dormois, 1993,p. 107-122)

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