Was British Industry Inefficient?

By the 1870s, Britain’s economy was enviable by the rest of the world as they set the pace in industrialising. However, her pre-eminence (GPD per capita exceeded that of America by one-third) wavered in this period preceding World War I. To determine whether this change was due to inefficiencies in British industry requires recognition of the contrasts between Britain and America. Although America’s economy improved vis-à-vis Britain’s, this was out of Britain’s control due to exogenous variables.

Neoclassical economic growth theory states that technology is a precursor to higher living standards and productivity gains. Britain and America were very different economies and as a result faced very different economic prospects in the late 1800s. For instance, the population in Britain grew by nearly two-fold between 1860 and 1910 whilst the America trebled. Britain’s domestic market was not only smaller, but consumer demands were much less homogenous than in America due primarily to cultural ties and wage inequality. Many sole proprietorships and partnerships developed in response to these tastes through niche markets, producing highly specialised goods. America had a national, homogenous market in which large corporations profited from economies of scale and mass production. Factor differences between the two nations resulted in Britain benefiting from her highly skilled labour, two-thirds of which were employed with companies of less than 250 people. America, with its abundance of land and raw materials, focused on using capital intensities in production rather than relying on the relatively more expensive skilled labour. One similarity of both nations was the decline of employment in agriculture by the late 19th century, which freed up labour to be utilised in other industries.

Growth opportunities in British industry were hampered in several ways. The tendency around the 1870s was for Britain to encourage small, specialised companies to compete primarily in staple industries such as cotton, coal, iron and steal, and shipbuilding. The high level of specialised products prevented technological transfers from overseas in developing markets and these companies did not benefit from economies of scale. British entrepreneurs were less likely than their American counterparts to discover innovative techniques, such as the assembly line used successful in car manufacturing by Henry Ford in the early 1900s. This lack of adaptability was not a blemish on British industry because it was not relevant to consumer demands at home. Also, the implementation of a free trade policy in Britain, despite its merits, made it exceedingly difficult for British industries to compete in the world market when nations such as America and Germany pursued protectionism to shield ‘infant industries’ from international competition via tariffs.