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Real business

British industrial decline does not date back to the 19th century, but to the lack of competition up to the 1980s and the failure to join Europe in the 1950s

By Michael Prowse   April 2000

It once seemed possible to understand social, cultural and political trends without worrying about the economy or about the supposedly dreary lives of business people. Economics, business and finance were something separate; something, on the whole, of lesser importance than culture or politics. The 1980s and 1990s exploded this story. Almost everyone now accepts the centrality of the market economy to all aspects of national life.

Markets now intrude into domains such as education, healthcare and the arts which once seemed to breathe a different air. And New Labour, like its Conservative predecessors, regards business leaders as having a special insight into such matters as motivation and efficiency. It is thus no longer safe to regard business history as a subject for specialists. Today, the thinker who understands business has something important to tell us all.

But who is qualified in this regard? Some will say that it is the mathematical economist who is capable of turning statistical data into impressive looking equations. Others will say that it is the investment banker or chief executive with practical experience of business deals and market psychology. I think both groups have wisdom to impart, but in each case the view is partial. Economists lack practical experience and foolishly tend to treat the economic domain as though characterised by causal regularities of the kind found in physical nature. The players themselves have relevant insights, but lack both a framework for analysis and the time to make sense of what they are doing. For a book that goes some way towards transcending the efforts of both groups, I recommend Geoffrey Owen’s From Empire to Europe. Owen, an academic at the LSE, has the advantage of also having edited the Financial Times, and of having participated in government efforts to restructure companies in the late 1960s as a member of the Industrial Reorganisation Corporation.

His book has two quite distinct merits. As a forensic analysis of what went wrong with British industry in the postwar years and how it was partially put right, it is a significant contribution to economic history. But beyond this it has the potential to promote a better public understanding of capitalism and, by offering hints as to what constitutes a valid form of explanation in the realm of business, perhaps to encourage economists to adopt a more imaginative approach to their subject matter. Owen’s method of explaining events is not to manipulate crude statistical data, but rather to provide fascinating narrative accounts of the fortunes of different industrial sectors. This makes his mode of analysis closer to that of the hermeneutic anthropologist than to that of the number-crunching empiricist economist. For him, the world of business is a world of meaning, purpose and institutional subtlety-not a colourless world of equations and mechanisms. Owen enables readers to enter into the thought-processes of industrialists and policy-makers and thus reveals the true character of business as a creative and strategic game played for very high stakes. The book’s richness reflects its sensitive exploration of the historical and institutional constraints on the actions of individual entrepreneurs. As such it is both more realistic and less judgmental than routine economic analyses.

The sub-text for Owen’s work is what might be regarded as the conventional wisdom on why British industry performed so disappointingly in the decades after the second world war. This runs roughly as follows. Postwar decline was primarily a continuation of a decline which began in the middle of the 19th century. Britain, so the story goes, was an outstanding industrial performer only during the period when it had no competitors. As soon as the US and Germany began to industrialise, grievous flaws in the British model became evident. The financial system was a drag almost from the beginning because the City was never interested in industry, and created a financial climate in which companies aimed for short-term profits rather than long-term expansion. Education and training failed on three counts: there was little skill-training for workers; there was little management education for business leaders; and public schools and Oxbridge taught high-fliers to look on industry with disdain. Finally, the class system contributed to what became known as the “British disease”-one of the most fractious systems of industrial relations in the developed world. Add macroeconomic instability and a Labour party devoted to nationalisation, and you have as complete an explanation of Britain’s relative decline as could be desired.

The novelty of Owen’s book is its firm rejection of just about every element of the above account. Owen argues that there is no convincing evidence of entrepreneurial failure in Britain prior to 1914, and that there were few reasons for concern during the inter-war years. Britain did lose ground relative to the US and Germany in certain sectors; but that was inevitable because once there were three big players, none could have been expected to dominate in all products and sectors. And often the reasons for Britain’s poor showing were subtle: progress in electrical engineering, for example, was slow in the late 19th century not because of a lack of financial backing or business prowess, but because Britain, unlike its competitors, already had a national system of gas lighting and so had less reason to invest heavily in a new technology. Its weakness in synthetic chemicals relative to Germany-a weakness shared by the US-did partly reflect a failure of scientific education in the late 19th century, but this failure was corrected: by the 1950s Britain was producing more science graduates than Germany, and the quality was high. In some sectors, such as car production, the US rapidly achieved dominance, but this mainly reflected factors beyond Britain’s control, such as the size of the US domestic market and the scale economies which made it possible. In the late 1930s, Britain’s manufacturing productivity was on a par with Germany’s (although behind the US’s). Britain was the largest car maker in Europe, and the leading indigenous car companies, Austin and Morris, were at least as innovative as their main rivals in France and Germany.

Owen concedes that Britain paid an industrial price for coming first, in terms of an excessive commitment to sectors such as cotton, textiles and shipbuilding, in which its comparative advantage was rapidly eroded. But he argues that on the eve of the second world war, there were few grounds for expecting Britain to fall economically behind Germany and France in the second half of the century. Some of Britain’s supposed handicaps were then seen as an advantage: for example, British employers and unions were reckoned to have reached a better mutual understanding than their counterparts in either Germany or France. The post-1945 era thus marked a sharp break from the past, not a continuation of established trends.

Owen has three related explanations for what went wrong. The first is that humiliation of Germany and France in the war gave them a much greater incentive than Britain to question existing institutions and attitudes. Each also enjoyed exceptional economic leadership in the early years-from Ludwig Erhard in Germany, and Jean Monnet in France. Erhard was instrumental in bringing about a sharp shift from pre-war cartelisation to a postwar commitment to competition. Meanwhile Monnet successfully argued that economic success would depend on a radical modernisation of France’s archaic business practices, and that only the state could bring this about. The second, related explanation for Britain’s poor showing was the ambiguous commitment to competition on the part of both political parties right up to the 1980s. Governments saw the need to raise efficiency and productivity, but chose the wrong means. Owen is at his best in describing the incredibly inept industrial policies followed by both Labour and Tory governments from 1960 to 1979. He argues convincingly that government intervention-especially the belief that industrial size is somehow a guarantee of efficiency and success-worsened already difficult adjustment problems in such sectors as cars, textiles, shipbuilding and electronics. Mergers and rationalisations were repeatedly promoted without any serious thought given to the nature of competitive challenges; when the “national champions” thus created failed, they were often taken into public ownership, where they performed worse still.

The most important reason for Britain’s poor relative performance-and the reason why governments felt the need to intervene so aggressively-was the failure to participate from the beginning in European economic integration. Owen presents this as a misjudgment of historical proportions, especially as the US sensibly urged Britain to play a leading role in constructing pan-European institutions. In 1950, John Foster Dulles, the US secretary of state, described the Schuman plan for a European coal and steel community (the first step towards the Treaty of Rome) as “brilliantly creative.” Failure to join the Common Market in the 1950s dealt Britain a double blow. The lowering of tariff barriers led to a surge in intra-European trade from which Britain was largely excluded. At least as important, continental companies were forced to compete head-on with the most efficient in their sector. Monnet always understood that French industrial modernisation would happen only if French companies rose to the challenge of competing with Germany for European markets. While this efficiency-boosting competition was under way, Britain was exporting mainly to soft and technologically unsophisticated markets in the Commonwealth. Although tariff barriers made head-on competition for continental markets difficult, Owen also identifies a postwar lack of British entrepreneurial verve. Many bosses sought an easy life in the short term, and shunned the challenge of tackling Germany on its home ground. This orientation to Empire rather than to Europe proved an expensive error: it meant that modernisation and adaptation to the realities of the global marketplace were delayed for a generation. The adjustment occurred, finally and with much pain, only during the 1980s, when Britain was not only subject to stiffer European and global competition but also, for the first time, found itself led by a politician, Margaret Thatcher, whose commitment to the market was unequivocal.

Owen’s reasons for Britain’s poor postwar performance are mostly convincing. He is surely right to put great emphasis on Britain’s failure to take advantage of the big internal market emerging in Europe. This gave its continental neighbours some of the scale advantages long enjoyed by American firms. But how convincing is his refutation of the traditional “declinist” arguments-those referring to education and training, the financial system and labour relations? Take the last first. He concedes that industrial disputes did some damage, especially in sectors such as cars and shipbuilding, but he points out that the frequency of strikes was no greater than in several continental economies. Although unhelpful union attitudes were a hindrance, they were less responsible for industrial weakness, he argues, than the decisions of myopic managers and bureaucrats who failed to grasp the strategic challenges posed by the changing postwar character of products and markets, and who repeatedly promoted illogical mergers.

He is even more adamant that the British financial system was not a source of competitive disadvantage. Far from withholding funds, he regards the City as having been often too eager to funnel cash into established businesses. For example, in the 1960s, Frank Kearton of Courtaulds had no difficulty raising funds for a restructuring of British textiles which turned out to be based on a wholly mistaken reading of the economics of the industry. Nor does Owen regard hostile takeover bids as a problem. On the contrary, he argues that the Anglo-Saxon rules were a source of comparative advantage for US and British industry in the 1980s and 1990s. Germany lost out somewhat because its capital market did not exert comparable pressure on companies to play to their strengths and eliminate sources of inefficiency. If the British system has a weakness, Owen argues, it is one which it shares with Germany: the comparative scarcity of risk-loving venture capitalists who have played a big role in promoting high-technology start-ups in the US.

Owen concedes that Britain’s education and training system has sometimes been a handicap. For example, Britain would have performed better in sectors such as machine tools that are dependent on craft skills, as would France and the US, had it possessed the specific strengths of Germany’s vocational training system. But he denies that educational failures were a widespread problem because they didn’t prevent Britain performing well in such high-technology fields as pharmaceuticals and chemicals. Rolls-Royce’s commendable showing as a builder of aero-engines suggests there was no deep-seated flaw even in many parts of traditional engineering. As for the comparative scarcity of management education, he claims that the chartered accountancy profession acted as a surrogate business school for many business leaders; he cites several accountants who became able chief executives, such as Trevor Holdsworth at GKN, the engineering group. He also dismisses the claim about anti-business attitudes at public schools and Oxbridge by pointing to the large number of business leaders who have passed through their doors.

Owen makes a strong case on education and culture, yet I was left with some doubts. Would better decisions have been taken if the higher reaches of Whitehall had included more trained economists and fewer generalists? Is it conceivable that chartered accountancy was no adequate substitute for the kind of management education supplied by top US business schools? Did an accounting mentality lead to an emphasis on cost-cutting at the expense of strategic vision? And, if even a slightly higher percentage of top Oxbridge graduates had opted for industry rather than the BBC, the law or the City, might not Britain’s performance have been noticeably different? The point is that these various flaws may have had a cumulative effect. On the evidence of Owen’s own sectoral studies, which illustrate the importance of key personalities in business, the loss of even a few men or women of vision could have had serious adverse consequences. Owen’s case would have been stronger if he had been able to show that anti-business attitudes were as prevalent in the US, Germany and France, as in Britain. Perhaps they were-but he presents no evidence on this.

What makes Owen’s book stand out is that these and other issues are illuminated by his masterly portraits of individual sectors, from textiles to electronics and pharmaceuticals. In each, a wealth of historical detail, often covering 200 years, is somehow condensed into a few pages. Yet Owen’s accounts are never just a compilation of facts. It is easy to assume that he is simply describing a “given reality.” But in history this is never possible. Owen’s accounts are necessarily his hard-won reconstructions and interpretations of events, yet they are put together so skilfully that you are left thinking that this must be the reason why Britain failed in electronics but not in chemicals, and so forth. The beauty of Owen’s narrative approach is that it can bring out the subtle ways in which corporate decisions are influenced by historical, institutional and political constraints, as well as by the reactions of their rivals. For example, Owen explains how Britain’s descent from being the world’s leading shipbuilder in 1900 to near oblivion today, reflected as much the attitudes of shipbuilders as the material constraints they faced. After 1945, the global market for ships enjoyed a golden era of sustained growth. But the British firms, scarred by the inter-war years and “always anxious lest another depression was round the corner,” failed to invest. Imprisoned by their past assumptions, they also failed to see that the most lucrative markets were now for specialised vessels which had none of the trappings of “proper” ships-such as oil-tankers, container ships, and roll-on/roll-off ferries-and that foreign buyers would henceforth be a much larger source of demand than the British merchant fleet or navy. Faced with this radically changing market, yards did not even want to adapt, because they “prided themselves on their ability to produce a wide variety of different ships” for British purchasers.

Here, as in other sectors, Owen’s narrative approach shows that the thinking of the key players, and the history and institutions which shape it, explain a good deal of success or failure in business. The book illustrates the absurdity of much so-called “empirical” economics, in which nothing is said at all about the attitudes of the participant actors, other than that they want to maximise profits. We surely need fewer mathematicians masquerading as social scientists and more all-rounders with Owen’s sensitivity to the constraints of real-world decision-making.

The one dissonance I detected in From Empire to Europe relates to the author’s philosophical assumptions. Like all of us, he is the product of a time and place. He saw some of the grossest errors of government intervention first hand, and does not hide his general sympathy for the Thatcher government’s free-market bias. He assumes without argument, for example, that it matters not at all whether the leading companies in a sector are British or foreign-owned. And he pays no attention to the employment consequences of business decisions. The assumption is that a sector is recovering so long as profitability and productivity are rising, regardless of what has happened to jobs or ownership. Thus the paper and, to a lesser degree, the car industries are described as enjoying a recovery in the 1990s, even though the companies in question are nearly all foreign-owned. Owen’s view that profit and productivity are judge and jury may be correct-but it still needs to be backed by argument.

The element of dissonance arises from the fact that Owen’s lucid sectoral studies do not entirely support a hard-nosed laissez-faire approach to industry. In many cases, he explains how government interventions helped to facilitate industrial success in the private sector. For example, the US’s position as market leader in aerospace and computers owes a great deal to the sheer scale of the US defence budget. The Korean war appears to have been the main post-1945 stimulus to the growth and modernisation of Japanese shipbuilding. The British and US dyestuffs industries, we are told, would not have got going but for initial import protection. Germany achieved rapid industrialisation in the late 19th century, even though it rejected the premises of liberal market economics. France did well after 1945 despite its adherence to a form of capitalism which was more “managed” than free market. Even Britain’s star sectoral performer, the pharmaceutical industry, owed some of its dynamism to the role of the NHS as a bulk buyer and de facto regulator of the industry. The fact that civil servants in healthcare were trying to promote the interests of consumers-in the shape of patients-rather than any particular corporate “national champion,” helps to explain why the institutional framework they created for drugs companies worked so well.

Such observations do not call in question Owen’s general conclusions about the importance of competition. But they are a reminder that there never has been, and never can be, any such thing as a “free market.” There always has to be an institutional framework-and the only question is whether it is a help or a hindrance. The message from the sector studies is not that governments should stay out of the picture, but that any action must be intelligently geared to the circumstances facing companies. What was wrong with so much postwar British government policy is that it was based on na? assumptions, such as that industrial size is necessarily a source of competitive advantage, and took the form of ad hoc interventions after serious problems had emerged. Policy-makers compounded their difficulties by failing to learn enough about the challenges facing the industries they tried to restructure. Neither politicians nor civil servants understood that government is usually most effective not as an actor strutting on the corporate stage, but as a sensitive director or producer behind the scenes, framing rules and institutions (including such apparent technicalities as patent laws and public procurement guidelines) which give companies the right long-term incentives. The historical lesson is not that businesses should be left alone or simply exposed to the rigours of global competition, like babes on a rock. The corporate sector needs government, but it needs government of the right kind.

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