The Legacy of the Crash Page 5
Nevertheless, the relationship between government and industry had been changed and this had a number of important consequences. The failings of the British chemical industry had been evident during the war and this led to the formation of ICI (Imperial Chemical Industries) as a ‘chosen instrument’ of government which received favored treatment. Britain’s lagging position in electricity generation for industry was tackled by the formation of the Central Electricity Board. Civil aviation was promoted, the processing of agricultural products was tackled through the formation of the milk marketing boards and the British Sugar Corporation, and the London Passenger Transport Board was established.
Insofar as there was a unifying discourse in that period it was ‘rationalization’ exemplified by the Securities Management Trust set up by the Bank of England in 1928 followed by the Bankers’ Industrial Trust. In practice, little rationalization was actually achieved and there was a tolerance for even state sponsorship of cartels. Policy took a protectionist turn so that British industries no longer faced the challenge of an open economy. The general protective tariff was supplemented by quantitative restrictions on imports.
Britain’s traditional industries, not least the textile industry, were enabled to continue with outmoded structures and working practices. In practice, the government ‘helped to reinforce old structures with a new layer of powerful institutions that embodied existing structural problems rather than counteracting them’ (Tolliday, 1987, p. 336). This was exemplified by the iron and steel industry which was able to shelter behind a tariff wall and function within a state-sponsored cartel through the Iron and Steel Federation over which government had little control. There was little or no institutional innovation in terms of intermediation between government and industry, although the public corporation served as a model for post-war nationalization.
Divergences between the US and the UK
In the period after 1945, there were significant divergences in the management of the economy in the UK and US. The adoption of a commitment to full employment in 1944 by the UK government transformed both the goals and the mechanisms of economic policy. Keynesian demand management was seen as required to deliver full employment, although in practice the long post-war boom ensured that there was no major unemployment problem and the economy simply had to be fine-tuned to deal with successive balance of payments crises which put pressure on sterling. However, the more active involvement of government in the management of the economy led to a much closer working relationship with the trade unions and employers than had prevailed in the inter-war period. This particularly became the case as governments increasingly resorted to prices and incomes policies to cope with the inflation problem in a full employment economy. The deployment of this policy instrument was a dominant feature of the policies of both Conservative and Labour governments between 1960 and 1979.
In the US the Employment Act of 1946 established government responsibility for ensuring maximum levels of employment and set up the President’s Council of Economic Advisers to advise on how this might be done. However, it should be noted that the word ‘full’ which was present in an earlier version of the bill was subsequently removed. Keynesian ideas never established the same ascendancy that they did in the UK, with some business interests seeing them as excessively interventionist. Moreover, the same government machinery did not exist to put policies into practice. There was a contrast between the way in which ‘British economic policy was administered by a closed and hierarchical civil service, dominated by a powerful Treasury while US policy has always been made by a fragmented bureaucracy in conjunction with outside experts and the Congress’ (Hall, 1989, p. 16). While President Nixon was able to proclaim in 1971 that ‘I am now a Keynesian in economics’ and the US did make some hesitant experiments with prices and incomes policy, the permeation of Keynesian ideas as a basis for economic policy was less complete than in Britain.
The contrast between a more regulatory approach in the US and a more interventionist approach in the UK is also shown by another divergence, that over nationalization. The network part of a utility is generally a natural monopoly, that is to say the most efficient producer is generally one firm, whether privately or publicly owned. In either case, there is scope for exploitation of the monopoly position, but in one case the solution is regulation and in the other case ownership. The US embarked in the inter-war period on a process of expanding the scope of its regulation of utilities, albeit largely through intermittent judicial decisions rather than by some coordinated federal effort. In Britain the central state acquired public utilities after the Second World War. ‘In contrast in the United States utilities remained as investor-owned utilities (IOUs) mainly regulated at state level’ (Chick, 2010, p. 688).
A variety of discourses surrounded nationalization in Britain. There was, of course, a socialist discourse, reflected in the adoption of Lenin’s phrase about the commanding heights of the economy. ‘There was an unvarying belief among British socialists, a belief that persisted well into the 1960s that, whatever else was wrong about the Soviet Union, its economic management was a great success’ (Dell , 2000, p. 142). However, in practice, ‘The Labour movement was becoming more interested in efficiency as a motive for nationalisation’ (Chester, 1975, p. 385). Many of the utilities had been hit hard during wartime. They needed substantial capital investment if they were able to efficiently meet the demands of an expanding post-war economy and it was by no means clear that this would be available from private sources. What happened in practice was that the initial use of average cost pricing led to considerable cross-subsidization and the perpetuation of inefficiencies in the structure of production (albeit ones that were politically and socially convenient) while privately owned industries received key inputs at below their marginal cost.
In practice technological considerations may have been more important than political form. Britain nationalized its utilities as vertically integrated national monopolies, but in the United States ‘vertical integration [was] the dominant structure of state-based Investor Owned Utilities’ (Chick, 2010, p. 688). Similarly, in the United States the way in which regulatory arrangements specified the rate of return ‘contained an important, averaging, cross-subsidizing component’ (ibid., p. 689). Network industries involve high sunk costs and uncertainties about a credible return and ‘Regulation and public ownership were but differing responses to these problems of uncertainty and commitment’ (ibid., p. 699).
It is difficult in practice for government to withdraw entirely from industries like electricity and gas. They raise important issues of energy security when, as in the case of gas, much of the product has to be imported from politically uncertain regimes. They are classic bundled goods with the consumer purchasing not just the product but security of supply, but how does one price security of supply in the future to present consumers when the lead time of investments is long? There is also the question of climate change, leading companies in Britain to have to obtain some of their supplies of electricity from more expensive sources. In practice it is difficult to map out a purely liberal solution to these problems.
Nationalization and then privatization was an area of great political contestation in Britain from 1945 until the end of the 1980s. The public utilities were the main focus of this debate and in many ways it served as a convenient political differentiator for political parties that had moved closer together. There was no comparable debate in the US where there was no mixed economy in the British sense.
Brighton and its aftermath
The so-called ‘Brighton Revolution’ of 1960 signaled a more interventionist phase in British economic policy, stimulated by the realization that the growth rate in Britain was falling behind that of its continental competitors. Indicative planning in France was seen as offering an alternative model. In selling their planning model to the British counterparts, ‘The Plan’ was portrayed ‘as being essentially a piece of market research on a national scale’ so that ‘the elements
of compulsion involved in French planning were, if not actually denied, very considerably soft-pedalled’ (Leruez, 1975, p. 88). As a consequence of being given a ‘rather rosy picture of French planning’, the British ‘drew up two sound plans but gave little thought to how to implement them’ (ibid., p. 89).
This period after 1960 saw the rise of industrial policy in the sense of a set of measures intended to encourage firms to take decisions that would lead to a more efficient and competitive industrial economy. In practice, industrial policy in the period from the late 1960s to the early 1980s was often a reactive response by sometimes reluctant governments to a major readjustment required in the economies of the western world. This was triggered by the two oil shocks and the consequent phenomenon of ‘stagflation’ (low growth, high inflation and rising unemployment) but it had deeper causes:
1. The exhaustion of the long post-war boom stimulated initially by the needs of reconstruction and rearmament (so-called ‘Pentagon capitalism’ in the United States). As Barry Eichengreen notes (2007, pp. 28–9), ‘the share of profits in gross national product began to fall. And with declining profits came declining investment, reflecting the reduction in the rate of return on new capital.’
2. The emergence of ‘newly industrializing countries’ producing standardized manufactured goods using off-the-shelf technology and cheap labor while taking advantage of tariff reductions secured through the General Agreement on Tariffs and Trade (GATT) process which then challenged established producers in the west.
3. The diminishing marginal returns obtained from Fordist modes of production, consumption and workplace organization and the emergence of new forms of technology which permitted niche production of quality goods aimed at more discerning consumers.
Even governments that were not disposed to intervene systematically in their economies, such as that of the US, found themselves acting to save declining industries or firms in jeopardy. Such interventions were usually influenced by perceptions of the importance of a sector or firm in a national or regional economy, for example Chrysler. However, as an attempt at systematic policy it was more developed in Britain than the US, particularly in the form of the ‘Industrial Strategy’ pursued by the 1974–79 Labour government. Britain moved, if rather reactively and hesitantly, in a more dirigiste direction.
A substantial academic literature grew up devoted to the analysis of industrial policy, (for a selection of key articles, see Grant, 1995). The general view that emerged from that literature was that it was a relatively dysfunctional form of policy in which the public money spent did not produce commensurate gains. It can be argued that industrial policy was really a form of social policy that slowed down the adjustment process, or at least mitigated its worst effects and thus made the process of adjustment more socially and politically palatable. If that was the case, then it can be argued that rather than directing the funds available at failing sectors or firms, it would have been better to direct the money to displaced workers to allow them to relocate or acquire new skills that would improve their employability. Training policy was, however, seen as a distinct activity from industrial policy and generally undertaken by different government departments.
A summary of the main findings of the literature from the period of active industrial policy suggests the following that it was very difficult for politicians or bureaucrats to ‘pick winners’ in terms of sectors of firms. Bureaucrats often lacked the requisite skills or the relevant knowledge, indeed knowledge was generally asymmetrically distributed between bureaucrats and industrial managers, not least in publicly owned industries. Neither politicians nor bureaucrats were able to forecast the future, for example the transformative impact of information and communications technology (ICT). Politicians often made decisions on electoral grounds, for example the political sensitivity of a particular constituency or region or even personal links with it (‘bringing home the bacon’). One consequence was that larger companies were generally favored over smaller companies and policies favoring small business were relatively slow to develop (Moran, 2009), although small businesses have the greatest capacity to contribute to the growth of employment.
Multinational companies often played one country off against another or even one state of a federal unit against another (as happened over the location of car plants in the US) in the search for investment funding. They became expert at bending the rules to qualify for some unlikely projects. EU state aids policy was one attempt to counteract this tendency, but it has never been fully effective. Given the above considerations, it is not surprising that it was difficult to demonstrate ‘additionality’, that is, that the additional funds would lead to investment that would not otherwise occur. The projects that were funded were often highly capital intensive and generated little in the way of additional employment. Often plants were unnecessarily replicated in different regions of the country for political reasons, for example the steel and aluminium sectors in the UK.
Policy was highly gendered in the sense that it favored forms of industrial production that involved men in physically demanding forms of activity that fitted conventional definitions of masculinity, for example the steel industry. Industries that were characterized by high female levels of employment such as food processing tended to receive less aid. Industrial structures tended to be ossified, with preference given to established materials, products and technologies which had greater political displacement through their trade associations and political networks. Underlying problems of overcapacity were not tackled; indeed they were perpetuated and made worse by subsidizing surplus capacity to keep it in operation.
The liberal era
The Thatcher government quickly retreated from any form of industrial policy. One important policy innovation was the privatization of the nationalized industries, removing an importance difference between the UK and the US. The Thatcher government also gave primacy to the goal of combating inflation and effectively abandoned the full employment commitment, using control of the money supply as a policy instrument in place of the traditional Keynesian techniques. Given that the Reagan administration in the US was simultaneously taking a market-oriented stance, there was significant convergence between economic policies in the two countries, although the US ran a much bigger budget deficit. The Thatcher government effectively introduced a new post-war settlement, the main features of which were subsequently adopted by New Labour which in particular saw any notion of industrial policy as a reversion to Old Labour thinking or old-style social democracy. ‘There is no known alternative to the market economy any longer; market competition generates gains that no other system can match’ (Giddings, 2000, p. 164).
Manufacturing industry declined more rapidly under the Labour governments after 1997 than during the Conservative governments of Margaret Thatcher. Under her governments the manufacturing share of output declined from 25.8 percent to 22.5 percent. When Labour came into office in 1997, manufacturing accounted for more than 20 percent of the economy. By 2007, that share had declined to 12.4 percent (Gibbs, 2009).
New Labour tended to adopt more stringent tests to assistance to industry than in the US. Under the Treasury’s Green Book rules, government intervention was permissible only when there was a demonstrable market failure and even then a business case had to make for intervention. The US tended to be guided by more pragmatic, national interest considerations, although it should be noted that the US did not experience the additional constraint of satisfying EU state aid rules. In areas such as the development of biocontrol agents as environmentally friendly replacements for synthetic pesticides, the US provided more external support to the industry (Grant, 2010).
New Labour and the conversion of Lord Mandelson
There was no stronger advocate of market friendly policies within New Labour than one of its principal architects, Peter Mandelson. His transformation into someone who took a more interventionist stance is testimony to the strength of the dirigiste temptation in Britain and in partic
ular the example of France. An equivalent temptation does not exist in the US. It also marked the way in which New Labour edged away from market-oriented policies under Gordon Brown.
Following his return to British politics in 2008, Lord Mandelson changed from a frequent critic of French industrial policy, particularly its designation of casinos and yogurt manufacturers as strategic sectors to be protected from foreign takeovers, to an increasingly vocal supporter of a ‘smart’ industrial policy. It was noted, ‘Lord Mandelson is a changed man. While Britain’s business secretary used to scorn many aspects of French industrial policy – which he once saw as a byword for state meddling and protectionism – he has become the champion of a more interventionist approach in the UK’ (Parker, 2010). How did Lord Mandelson succumb to the dirigiste temptation?
Following the GFC, and substantial assistance given to the banking industry, the government faced lobbying for assistance from industry, especially from the automotive industry. Some of this was simply faced down. Tata Motors, the owner of Jaguar Land Rover, was reported to be initially asking for as much as £1 billion, but this was scaled down to £800 million, although £340 million of this would come in the form of a loan from the European Investment Bank. The UK government offered only to guarantee a £175 million bridge loan and Tata then decided that it could find commercial funding on less onerous terms.
Lord Mandelson initially set out his approach in a series of interviews and speeches in December 2008. He made it clear that there would be no ‘blank check’ for troubled firms and that the government would act as lender of last resort. It was up to individual companies to sort out their own future if they ran into trouble: ‘We will not be supporting companies with flawed business plans and companies with no prospect of recovery’ (Sunday Times, 7 December 2008). Big government was not back and there would be no return to the interventionist approach of the 1970s. However, the business secretary was prepared to support a market-led ‘industrial activism’ with significantly improved state support for growth sectors and green technologies (Financial Times, 3 December 2008).