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. 

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A.  Disadvantages of a head start - After Industrial Revolution, Britain saddled with an outdated capital stock.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.  Military pending, empire, and slavery - This is a huge and complicated subject. On one side of the ledger, British gains from control over colonial land, slave trade, and slave ownership represented a "massive redistribution of the world's resources from native peoples to Britain."(Daunton) According to research by Steve Redding at Princeton, about 1/3 of slaves to America were transported on British ships. slave holding in the Americas contributed 3.5% per year to British GDP until it was abolished in 1833 (and then the slaveholders, rather than the slaves, were compensated in in England when the practice ended). Emigration from England to the colonies also prevented overpopulation in England. On the other hand, maintaining the empire became expensive and unsustainable, and its loss removed those gains. Still, the UK continued to invest more in the military after WWII than other European countries (habits die hard).

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.

1.   Cover about 24% of the labor force, down from a peak of 52% in 1980. That's much larger than the 10% share in the U.S. and much smaller than 65% in Sweden.

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

3.   A strong democratic socialist tradition.

4.   All major unions (48 of them) are members of the Trades Union Congress, often compared to the AFL-CIO in the U.S. (but the United Auto Workers and the Teamsters have not always been members of the AFL-CIO)

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 2023) the wage will be adjusted to £10.42 ($12.78) for adults aged 25 and over, £10.18 ($12.49) for ages 21-24, £7.49 ($9.19) for ages 18-20, and £5.28 ($6.48) 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, but not Texas and 21 other states, have set minimum wages as high as $15.74/hour).

IV.  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%).

V.  Brexit

• Road to Brexit

  1961 and 1969 The UK applies for EEC membership, but vetoed by French President de Gaulle both times before his death in 1970.

  1973: UK joins EEC under Conservative Prime Minister, Edward Heath. 

  1975: Just two years after joining, Labour PM Harold Wilson held a referendum on the question: “Do you think the UK should stay in the European Community?” 67 percent voted “Yes,” but Labour Party split over the issue, with the pro-Europe wing splitting from the rest of the party to form the Social Democratic Party (SDP). 

  1988: Margaret Thatcher "Bruges Speech": On one hand, "Britain does not dream of some cosy, isolated existence on the fringes of the European Community. Our destiny is in Europe, as part of the Community."
  On the other hand, "My first guiding principle is this: willing and active cooperation between independent sovereign states is the best way to build a successful European Community... Europe will be stronger precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity... Some of the founding fathers of the Community thought that the United States of America might be its model. But the whole history of America is quite different from Europe." 

  2016: Fulfilling a promise to members of his own party, Conservative PM David Cameron negotiates new terms for UK/EU relationship (hoping this would convince voters to vote for "stay"), but 51.9% supported leaving the EU. Cameron stepped down and Theresa May (who had also opposed Brexit) became PM.
  

  2018 (November) PM May reaches an agreement with EU on terms for Brexit, but quickly runs into opposition in both Conservative and Labour parties. Biggest issue was/is the "Northern Ireland Backstop"
  The Challenge
  1. No hard border in Ireland  
  2. Agreement that avoids a hard Brexit
  3. Gaining independence from EU product quality and safety standards. 
  Theresa May Deal
  All of UK remained temporarily in EU customs union
  Northern Ireland remained temporarily under EU product standards.
  But this was unacceptable to Brexiteers, and especially to members of the Democratic Unionist Party (DUP) of Northern Ireland.

• 2019 Boris Johnson became Prime Minister in July, and started renegotiating the agreement. Brexit officially happened on January 31, 2020, but it was agreed that negotiations would continue during the following year during the planned transition period. It started looking like there might be a damaging no-deal conclusion at the end of 2020, but a last-minute agreement was reached on Christmas Eve that entered force in 2021. Key provisions:
  

• *   Goods moved without tariffs or quotas between the UK and EU, but required new inspections and paperwork, because the UK will not respect all of the EU quality/safety requirements. Also, sales of services became more complicated, because professional qualifications are no longer mutually respected.

  *    There was no hard border between Northern Ireland and the Irish Republic, but, to avoid that, Northern Ireland had to continue following many of the EU rules, and new checks were introduced on goods entering Northern Ireland from the rest of the UK. The DUP and other unionist groups declared that Boris Johnson had betrayed them,  raising the possibility that the two parts of Ireland may be united in the future.

  *    Freedom to work and live between the UK and the EU comes to an end, and UK nationals now need a visa to stay in the EU more than 90 days in a 180-day period.

• *   The UK would be free to negotiate its own trade deals with the U.S. and other countries.

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• 2022 (September) Boris Johnson loses office, partly because of parties during COVID lockdown, and was followed by Liz Truss, who was immediately unsuccessful (served only 7 weeks) after submitting a "mini-budget" with large borrowing and tax cuts, causing financial instability.
  

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  2022 (November) Rishi Sunak became prime minister. In February 2023, he and Ursula von der Leyen announced a "Windsor Framework." It would:

• *    Simplify the movement of goods crossing the Irish Sea from Great Britain to Northern Ireland. Goods being sent for final sale in Northern Ireland would be subject to less inspection and paperwork than goods destined for the EU Common Market.

• *    Some EU law would apply in Northern Ireland, but Sunak said "the only EU law that applies in Northern Ireland under the framework is the minimum necessary to avoid a hard border with Ireland and allow Northern Irish businesses to continue accessing the EU market"
  

• *    The Northern Ireland Assembly in Stormont can pull an "emergency brake" if it disagrees with an EU goods law which "would have significant, and lasting effects on everyday lives."

• Yesterday (3/22/2023), Parliament approved he Windsor Framework by a vote of 515 votes to 29, but it was opposed by  the DUP that said the "Stormont Brake" needs to be strengthened, and it was also opposed by former prime ministers Boris Johnson and Liz Truss who said it means "the whole of the UK" will be unable "properly to diverge and take advantage of Brexit".
  

Impact of Brexit

Now that Brexit is happening, what is its significance? Time will tell, and it's difficult to untangle the results of Brexit from the results of COVID, but overall the results are not as positive as promised or as disastrous as some predicted. Here are some of the early indications:

1.   GDP growth was negative during 2016-2020 (while it was positive in the Euro area), but it seems to be recovering and unemployment has remained stable.  But this is underperformance compared to what was promised by the Brexiteers.

2.   Trade in goods with the EU fell sharply after the Brexit transition period ended, with UK imports from the EU dropping by approximately 25 per cent more than UK imports from the rest of the world, a trend which persisted throughout 2021.

3.    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."

A 2022 scandal involved P&O Ferries, a British company that operates ferries from the UK to Ireland and the  European continent. 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.”

4.    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."

  4. 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.

5.   Public Opinion.   In 2016, Brexit was adopted with relatively weak support - 51.9%. That result was driven largely by older voters, and especially by those in rural areas. Surveys indicate that 64% of voters over 65 voted to leave, while the youngest category, 18- to 24-year olds, voted by 71% to remain.

According to YouGov polls in the UK, the percentage who believe it was a mistake to leave has been steadily rising for about two years. Now, 54% say it was wrong to leave, 33% say it was right, and 13% say they don't know. A large part of that shift is not a change in individual opinions, but entry of younger people into the pool. Among those born before 2004, 64% say that Brexit was a mistake, but they were too young to vote in 2016.