The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor

by David S. Landes

  For the defenders of British performance—let’s call them the optimists because they see things in the best light—evidence of “declining market shares, [reduced] scale of operation, [lower] capital intensity, [old] capital vintage and average labour productivity” does not demonstrate “entrepreneurial backwardness.”31 Nor does evidence of belatedness. Why, they say, accord so much importance to the old standby industries: cotton, iron and steel, chemicals? These branches make intermediate goods. What about consumer industries? Don’t they count? The business of an economy is to make people happy, not to perform “statistical feats.”32

  So the optimists dismiss the figures on cotton consumption, make of iron, output of sulfuric acid. Too embarrassing. Instead, they put forward statistical constructs of total product and productivity—“undoubtedly a major advance” over “ad hoc” data for “a few select industries.”33 These number figments have made a deep impression on economic historians, first, and then on those general historians who feel obliged to accept them at face value. The figures seem so precise (one or two decimal places) and, as asserted by some of the cliometricians, so peremptory.

  Yet when all is said and done, the older data on individual branches, based as they were on direct measures, were far more accurate and reliable than aggregate constructs, as these same cliometricians conceded when their figments went against them. This happened as soon as the focus on British loss of leadership widened from the Victorian and Edwardian eras to include the period after World War I. Now, for the twentieth century, the comparative estimates of productivity, like the industry data, told a story of Britain’s further loss of place. And now, suddenly, the optimists warned readers of the unreliability of macroestimates—of the “frailty of the calculations,” of “errors and imprecision in measurement” and “very large margins of error” and cautioned that national aggregates were a “fragile foundation” on which to build theories of British performance.34 One leading yea-sayer, more faithful to theory, did not even bother: he simply dismissed calculations of higher productivity in other countries (say, the United States) as trivial or incredible: why should such large gaps exist and persist?35

  But, of course, they do exist. They just don’t persist. The annals of competition show entire national branches dragging and withering—not this and that enterprise, but the whole industry. * Sometimes, having learned their lesson, the last members of the branch move away, generally to cheaper labor; that is smart, but also easy, and is evidence of rationality more than enterprise. And sometimes, as in Britain and in Holland earlier, entrepreneurs retire to a life of interest, dividends, rents, and ease. That is also evidence of rationality more than enterprise. One can understand the choice: enterprise is strenuous and risky; who needs it?

  6. Does entrepreneurship matter? Some would argue that it does, but that it is dependent on growth. By this reasoning, Britain’s spirit of enterprise suffered for want of opportunity and expansion. “Because [Britain] already had a large industrial plant which in many branches was adequate to the demands made upon it in the ‘80’s and ‘90’s, the incentive to install new capacity and the opportunity of trying out new methods were circumscribed.”36 So we have change in slow motion: why rush to put in electrical lines if one already has an excellent supply of gas lighting? (Answer: Electricity is better and safer, if less romantic; also much more versatile.) Especially if municipal authorities have sunk large sums into gas production and distribution.37 (More related costs and vested interests.)

  But Britain was not the only market for British industry. It sent much of its output abroad, as we have seen, and foreign demand with concomitant growth was there for the swifter and smarter, in sum for all. As one student of the British retreat in Asia put it: “There was nothing inevitable, for example, in the fact that Britain’s share of imports into Hong Kong and Singapore fell between 1960 and 1980 from 11.3% to 4.9% and from 8.9% to 3.0%, while Japan’s share of imports into those two economies rose from 16.1% to 23% and from 7.3% to 18.8%. Japanese business provided what those two fast-growing economies required; British business did not.”38

  “Nothing inevitable,” then; and yet one could think of enterprises, like people, as suffering from hardening of the arteries. This is partly because people create them, people who age. Succession of control is a difficult and invidious process, pitting insiders against outsiders, some insiders against others, blood against talent, blood against blood, talent against talent. At stake, decisions regarding choice of product and methods of production. Here the British were late in exploiting newer fields and ways, stressing instead learning by doing, in the shop and at the bench. Such job apprenticeship has its virtues and successes, but nothing is better calculated to preserve the old in aspic and miss the possibilities of innovation.

  Both historians and contemporaries have pinpointed such technological and scientific shortcomings as a major cause of British loss of leadership. The “cliometric” optimists have retorted by defending British performance in such older industries as cotton and steel—the staples that had made Britain the workshop of the world. But what about the new branches of manufacture, the industries of the second industrial revolution? Back in 1965, a Cambridge economic historian urged scholars to go beyond “pig iron and cotton stockings” and pay more attention to soap, patent medicines, mass-produced foodstuffs, and light engineering, “the production of vigorous and ingenious entrepreneurs as dynamic as any of their predecessors.”39

  In vain; the defenders of British enterprise have done little with these success stories because they were in fact few and small. The second industrial revolution misfired. The most egregious failure was the abortion of the protean industry of organic chemicals (dyestuffs, plastics, pharmaceuticals). Here Britain was actually the pioneer and leader, with strong advantage in the key raw material (coal tar) and in demand (the textile industry), but lost out for want of knowledge, imagination, and enterprise to Germany, Switzerland, even France.40 Management made no commitment to systematic research. R. J. Friswell, a working industrial chemist at the turn of the century, regretted (1905) that the men in charge of the chemical industry “looked upon all these [scientific] discoveries as isolated and not connected in any way…that they were discovered by lucky flukes.” Small wonder that a key role was played by foreign immigrants—enterprise moving to opportunity. Thus Ivan Levinstein, immigrant Jew and hence outsider, deplored in 1886 the neglect of the newer, nonstaple industries, the “insufficient appreciation of the importance of the chemical industries…the absence of any intimate connection or intercourse between our scientific men and our manufacturers.”41

  Here one recognizes the extent of British abdication. In these new branches, the industrial countries began together, and the high science content of these innovations ensured that knowledge and technique would spread rapidly. Britain’s chances were as good as or better than the next country’s. Nor was Britain backward in science—no more than France in the eighteenth century. But like France earlier, the Britain of the late nineteenth and twentieth centuries cared more for pure science than its applications.42 Part of the difficulty lay in British schooling: the Continental countries had created technical and scientific institutions as a matter of policy, whereas Britain had let this kind of education grow like a weed and had treated it, once grown, like a poor relation of “proper” schools and universities.*

  Some have explained the shortcoming by exogenous factors, notably culture. They have sought to explain Britain’s retreat from hegemony by the triumph of an antibusiness, antimaterialist outlook and its negative consequences for recruitment.43 The teachers, poets, men and women of letters, and intellectuals—the people who set the tone and orchestrated the values—nurtured a sense of scorn for the shop and the office. The point was to rise above the material to higher things. Such pretensions found particular resonance among those older elites who found themselves jostled by grubby newcomers, and of course among the grubby newcomers who wanted to degrub themselves.
44 Snobbery is the revenge of the haughty and the humbug of the ambitious.

  Others have countered by pointing to similar attitudes in other countries. Surely Germany nursed antibourgeois prejudices. All of Europe did. If anything, Britain was freer from these outworn biases than countries round. One could argue, however, that as industry lagged, Britain proved more vulnerable and succumbed more easily, its resistance sapped by its disappointments.

  For twentieth-century Britain to stay with the rest, nothing less than a new industrial revolution would do: innovation and enterprise in electronics, pharmaceuticals, optics and glass, engines and motors. Some few firms did make a start and gains along these lines. One thinks of ICI, Pilkington, Glaxo, Courtauld, Dunlop, all of which bear witness to the commercial power of innovation. But these examples were not contagious. In the decades after World War II, Britain (along with the United States) lagged the club of advanced industrial nations (see Table 26.1).

  What would such differences mean for the long run? A growth rate of 2.8 percent yields a sixteen-fold increase over the course of a century, as against 2,200 times for an annual rate of 8 percent. Such is the power of compound interest. Of course, no country can maintain a gain of 8 percent per year over a century, what with linked constraints, accidental reverses, cyclical downers, changes in government, competition, and the soothing corruption of success. Even Japan has had its setbacks in real estate and banking; while the increase in the exchange value of the yen chilled demand for Japanese manufactures. In contrast British industry, buoyed by North Sea oil, hospitality to foreign enterprise, and Margaret Thatcher’s showdown with tool-dragging labor chiefs, has done better since the 1980s.*

  A final word about the United States of America. At the end of World War II, with just about all industrial rivals in ruins, America accounted for the greater part of world industrial product. Its labor productivity in 1950, after a few years of cleanup and a new start in Germany and Japan, was more than twice that of the world’s most advanced economies, and it was still twice as high in 1960.45

  Table 26.1. Annual Percentile Rates of Growth by Country, 1950-87

  GDP

  Labor Productivity in Manufacturing

  Japan

  7.9

  8.0

  Germany

  4.6

  4.3

  United Kingdom

  2.5

  2.8

  USA

  3.2

  2.6

  SOURCE: Porter, Comparative Advantage, pp. 279-80.

  No country could expect to hold such an overwhelming lead indefinitely. Follower countries were gaining disproportionately by jumping to state-of-the-art technologies. (That’s what catch-up is all about.) From 1950 on, mean labor productivity of these emulators gained consistently on that of the United States: 1.82 percent per year from 1950 to 1973; 1.31 percent from 1973 to 1987.46

  What do these figures add up to? International comparisons are arbitrary and often contradictory, so that it was not clear whether, around 1990, the United States was in first or third place in income per head, whether its lower rate of productivity increase would persist, whether these other, faster-growing economies, plus several newcomers, were converging with it or on the way to passing it. * These issues were further embroiled by the conjuncture of the early 1990s: the Japanese found themselves in the throes of a slowdown, while the American economy continued to grow. Perhaps the Japanese had come to the end of their “miracle.”†

  Not to worry. The American data recall the earlier retreats of the Netherlands and Great Britain: loss of market share in manufactures; wastage of entire branches; new hires in service jobs, usually poorer-paid; polarization of incomes.47 On the other hand, U.S. unemployment remains low (lower than European, but not Japanese), and continued American dominance in new lines, among them the hightech, computer-linked manufactures (software and hard), gives reason for confidence (hope?). A new report argues that, while Americans save less (15 percent of income as against 33 percent in Japan), they put their savings to better use; capital productivity in Germany and Japan is reckoned to be only two thirds the American level. So “we can spend more of our current income on investment without jeopardizing future living standards.”48 Similarly, although manufacturing performance in Japan is excellent, overall productivity is substantially lower (55 percent of the American), because agriculture is cosseted and the service sector is overmanned, highly fragmented, and uncompetitive. The whole system is designed to create and preserve vested interests, and so much the worse for the consumer. Meanwhile the yen is overvalued, and international comparisons based on exchange rates tilt grotesquely in Japan’s favor. The reality is very different. Japanese housing is so fragile and space so scarce that it is often easier to tear down a house and rebuild than to look for better accommodation. Unless, of course, one is ready to go out into the endless suburbs and do a daily calvary to and from work.

  A mixed picture, then. From the economists, to say nothing of self-appointed pundits, journalists, and politicians, we have cacophony. This division of opinion in itself gives one pause; for it recalls the century-long debate about Britain’s performance. Does this kind of ebb tide invite denial? Is the evidence so abundant that each temperament can find what it wants? Or is the whole issue of leadership now irrelevant? Have we now entered a new era of global enterprise, such that nationality no longer matters?

  Hardly.

  The Rise and Fall of the British Auto Industry

  The invention of the automobile should have boosted British industry. No country had a longer tradition of machine manufacture and engineering; none so large a pool of skilled metal workers. The potential demand was good. British income levels topped all of Europe, and imperial dominions and possessions offered sheltered markets overseas. Yet Britain was slow on the pickup and saw first France and then the United States take the lead. In 1913, only one British car stood amongst the top ten of American and British producers—the Maxwell, in sixth place with 17,000 units, against 202,667 by Ford.49

  Given the winding, narrow roads, British car makers might have concentrated on small vehicles. Some of them did; but early on, the industry moved to large, pricey models that appealed to richer buyers (many with drivers) and brought larger unit profits. As a result, the industry was characterized by models galore (198 in 1913), short runs, and costly techniques, with much adjustment and fitting. Some observers thought auto makers underestimated demand Said The Times in 1912: “no firm…has been sufficiently enterprising to lay down a large enough plant to make small cars in sufficient numbers to make their production really cheap.”50

  World War I and the introduction of assembly-line technology by Ford in the United States pushed the British industry to change. British firms bought heavy-duty machines and began to standardize models, though tentatively, like dipping their feet in cold water. That was the easy part. They found it hard to follow the Americans in buying labor cooperation with general wage increases. Nothing like money to ease the pain of faster work and labor-saving techniques. When Herbert Austin (of Austin Motors) visited the Ford plants after World War I, he was most impressed by the “energetic” work performance, the hustle and bustle, which he attributed to the “diversity of the Races employed” (interracial competition?) and the compulsion of the line flow. “I saw the famous Ford shops…the point that interested me and made me marvel was the way in which everybody in the establishment seemed to be trying to do their best.”51

  British management did not want higher wages across the board. It preferred to target and reward the more productive workers. So, following established custom, employers offered piecework wages. These helped some, but they had a serious disadvantage: they gave the work rhythm over to the workers. The good, rational assumption was that piece wages would lead workers to maximize productivity, as some no doubt did. But it allowed others to set such pace as the group or team found comfortable as well as rewarding. The group was only as fast as its slowest member.
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  What an irony! In the eighteenth century the British had developed the factory system with its supervised labor to counter the independence of cottage workers. Now they had permitted a comparable system of worker independence to take root in their factories.

  So the British sacrificed productivity to custom and individuality and felt virtuous for it. American methods, one Briton snorted, were “herd methods.” To be sure, wage arrangements, like production methods, varied from one car maker to another, but in general, British management saw bonus systems as a way of economizing on management. (Never underestimate the leisure preference of bosses, any more than of workers.) In the long run it was a false economy. When, after World War II, foreign cars invaded the British market, employers blamed labor for want of diligence and attention, and labor blamed the bosses for want of competence and attention. Both were right.52

  On a scale of labor efficiency, the British system was at the low end, the American and German considerably better, the Japanese just about the best. Piecework wages and bonuses in a world of rapid innovation and sharp competition invited conflict. Every change in work and pace was pretext for disagreement; every settlement a source of disappointment; every gain a sacred and vested right; every loss something to be made up; and no one forgot anything. The strike statistics are not dismaying, but they omit the run-of-the-mill, wildcat interruptions, the explosions of anger, the fury between supervisors and labor stewards.

  All of this sent the British auto industry into terminal decline. Car registrations went from 2.5 million in 1951 to over 9.5 in 1966 to over 15 million in 1980, but the big winners were the foreign makers, once they got their postwar act together: 5 percent of the British market in 1965, 14 in 1970, 49 in 1978, 58 percent in 1982.53 The multinationals with branches in Britain—General Motors, Ford, and Chrysler—did little to exploit the export possibilities of their British subsidiaries; they had easier platforms to work with.54 On the contrary, thanks to the Common Market, they were able to import parts into Britain. From 1973 to 1983—ten years—local content in GM cars made in Britain fell from 98 to 22 percent; in Fords, from 88 to 22. Expressed in car equivalents, this represented an import of 150,000 vehicles. When added to full auto imports, these together constituted two thirds of the British market in 1984.