The United Kingdom:
Declining Capitalism

 

I.    Relative Economic Decline - U.K. was the economic/military superpower of the nineteenth century.  It was the first country to have an Industrial Revolution and it built an empire that, by 1900, controlled over one-fifth of the world's land surface and ruled one-quarter of the world's population. In the mic-19th century, Britain produced half the world's coal and iron, half the world's cotton goods, and almost half its steel, and it dominated international trade. The international monetary system was centered on the gold standard and the pound sterling. Now, none of that is still true, and more than 20 countries have higher per-capita GDPs and higher HDIs. The UK didn't decline absolutely, but relative to the growth of other countries. 

However, the relative decline may have ended. British economic performance during 2000-2015 better than the average for the Euro area or other OECD economies (but, of course, the global market share of the US, UK, and other OECD countries is declining relative to China, India, and other emerging economies).


 

II.   Possible Reasons for Relative Decline 

A.  Disadvantages of a head start - After Industrial Revolution, Britain saddled with an outdated capital stock. 

B.  Policy of laissez faire - In 19th C., U.S. and others protected key industries and pursued industrial policies.

C.  Foreign policy - Domestic policy goals sometimes sacrificed for foreign policy.  Empire required heavy military spending (habits die hard) and reduced competitive pressure. Loss of empire had various effects.

D.  Stop-go fiscal policy - Alternating unemployment and balance of payments crises. Hansen found the British government was the only one that destabilized the domestic economy.

E.   High marginal tax rates - Before Thatcher (in 1976), had 41% avg. rate (32% in U.S. and 21% in Japan).

F.   Sociological problems- Entrepreneurial spirit dwindled with successive generations.  Labor productivity was stifled by the trade union establishment.  The educational system served upper classes and de-emphasized natural science, engineering, and business. Again, the UK has made great progress in those areas in recent years.

 

III. The Labor Market and Labor Relations -

Uk US Union Density

A.  Labor Unions

1.   Cover about 24% of the labor force in 2016, down from a peak of 52% in 1980. That's much larger than the 10% share in the U.S. and much smaller than 67% in Sweden.

2.   Traditionally, strong political role through the Labor Party.

3.   A strong democratic socialist tradition.

4.   All major unions are members of the Trades Union Congress.

5.   Antiquated union structure.  Not organized by industry; labor negotiations are complicated.

B.  Labor Legislation and Union Growth -

1.   Before 19th century, Britain maintained strict regulations against union activities. 

2.   After 1825, the unions were given more rights and membership grew rapidly.  The inflation rate, unemployment rate, and growth of money wages influenced union growth.

3.   Thatcher administration caused reduction in union membership.  Tight monetary policy decreased inflation and increased unemployment; both discourage unionism.  New legislation required secret ballot elections to approve closed shops or to approve union action, removal of legal immunity of union leaders, and reelection of executive committees every five years.

4.   Trade Union Reform and Employment Bill of 1993 gave workers more freedom of choice in membership, tightened controls on elections before strikes, abolished wage councils (institutions that administered the minimum wage), and gave women 14 weeks maternity leave and protection from dismissal.

5.   Tony Blair, who became Labor PM in 1997, praised Thatcher “modernization,” but supported return of the minimum wage.
This was initially controversial, but now the minimum wage system is supported by the Conservatives and all of the major parties. Next month (April 2022) the wage will be adjusted to £9.50 ($12.54) for adults aged 25 and over, £9.18 ($12.12) for ages 21-24, £6.83 ($9.02) for ages 18-20, and £4.81 ($6.34) for ages under 18 and apprentices, and these have been changed every year. The U.S. federal minimum wage is $7.25 for covered non-exempt employees, and has been unchanged since 2009 (although some states have set minimum wages as high as $15/hour).

IV. Financial Sector - London has been the world's most important center for international lending, insurance, shipping contracts, and trading of gold bullion, Eurocurrencies, and Eurobonds, and has the third largest stock market.  Bank of England independence was granted by Labour (opposed by Tories) in 1997.

There's considerable concern that Brexit will damage the UK's position as a financial center. According to our assigned reading by Perri, "The financial sector will be the most damaged in the case of Hard Brexit because it is easy to leave for financial institutions, insurances, banks, and multinationals that are operating in London (until now) to take advantage of the low taxation rate." Between the 2016 Brexit vote and the end of 2021, EY reports that 44% (97 out of 222) of British financial services firms had moved or planned to move operations and/or staff to the EU. Dublin, Luxembourg, and Paris were the most popular destinations. Also since the Referendum, 24 financial services firms declared they will transfer just over £1.3trn of UK assets to the EU. More recently, the Bank of England reported that 7,500 jobs have been lost in the financial sector and the fallout may continue for several years.

 

V.  Governmental Sector

A.  Before World War II, government played small economic role.  During the war, Beveridge Committee recommended welfare state.  The Attlee government established National Health Service and nationalized Bank of England, steel, public utilities, and transport.  Some programs terminated by Thatcher, but some remain, such as the National Health Service and allowances for children.

B.  The Nationalized Industries -

1.   Reasons for nationalization: ideology, national security, maintain employment, regulate natural monopolies, provide for external benefits in industries such as health care

2.   Problems - Many of the nationalized industries failed to turn a profit and required subsidies.  However, they were often nationalized to pursue goals other than profit maximization.

3.   Privatization - Beginning with Thatcher, several industries sold to stockholders.  Some have become profitable.  Raised revenue for budget and created new group of stockholders. Intended to improve efficiency, reduce costs, and strengthen competitiveness. Weakened the position of trade unions, because industries were removed from politics. Critics say that the government sold the assets too cheaply, that profits are excessive, and that firms should not be allowed to exercise monopoly power. Started a revolution of privatizations all over the world.

C.  Redistribution of Income and Wealth - The British tax system is relatively progressive, and social welfare programs have been accompanied by a decline in inequality of income and wealth since World War II. However, the distribution of income after taxes and transfers is barely more equal than our in the U.S. and is far more unequal than most of Western Europe..

D.  National Health Service - Created in 1948, the NHS is the oldest and largest single-payer health care system in the world. Doctors paid on capitation basis.  Patient and doctor choice.  Recent reforms are designed to separate public funding from public control; allow doctors to handle own budgets and contract with hospitals. In a 2016 survey, the NHS was at the top of the list of "things that make us proud to be British (50%), ahead of "our history" (43%) and the Royal Family (31%).

 

VI.  Brexit

Now that it is happening, what will be its significance? Time will tell, but here are some of the early indications:

1.    According to a recent report from the UK government, imports of goods from the EU were down 18% in the fourth quarter of 2021, compared to 2019 levels, and exports to the EU were down 9%. 


2.    Potentially, trade in services may be a bigger problem than trade in goods, because they are not covered by the so-called "trade and co-operation agreement" (TCA), and they represent the faster-growing part of British exports. The impact on financial services was already noted above - 44% of British financial services firms had moved or planned to move operations and/or staff to the EU. According to The Economist, "Musicians, actors, fashion designers and professional-service firms are griping about expensive red tape and travel restrictions."

The newest scandal involves P&O Ferries, a British company that operates ferries from the UK to Ireland and the  European continent. On March 17, 2022, P&O laid off 800 of its workers (and removed some of them forcefully from the ships), telling them that the ships would now be “primarily crewed by a third-party crew provider.” Critics have charged that Brexit, which was supposed to protect the UK from requirements to accept European workers, has instead weakened enforcement of UK labor laws, making it easier to replace British P&O workers with “cheap agency workers from eastern Europe.”


3.    The UK has an opportunity to review its regulations, and end some of those that were imposed by the EU. However, The Economist predicts that divergence from EU structures will be minimal, because (a) the trade deal that was reached in December 2020 requires the UK to stay close to European norms in order to stay in the free-trade area, (b) "Britain shaped European law" and "EU rules have become de facto global standards" in many sectors and (c) divergence from EU norms in England while Northern Ireland is forced to follow them would exacerbate the England/Ireland divide. According to Philip Hammond, a former Conservative chancellor, "Britain has paid a fantastically high price for an autonomy it won’t use."