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Britain in the Post-Industrial Revolution 19th Century:Why Was British Industry Inefficient?

By the 1870s, Britain’s economy was enviable in the view of the rest of the world, as they set the standard in economic progress several decades earlier at the onset of the Industrial Revolution in Europe. GDP per capita in Britain, for instance, exceeded that of the U.S. by one-third at the time. However, Britain’s preeminence was trumped by the commencement of WWI. To determine whether this change was due to inefficiencies in Britain’s industry requires recognition of the contrasts between Britain and the U.S. Although the U.S. economy improved vis-à-vis Britain, this was largely out of Britain’s control due to influential exogenous dynamics.

Neoclassical economic growth theory states that technology is a precursor to higher living standards and productivity gains. Britain and the U.S. had very different economies and, as a result, faced very different economic prospects in the late 19th century. For instance, the population in Britain grew by nearly two-fold between 1860 and 1910, while the population in the U.S. tripled during that same period. Although Britain’s domestic market was smaller, consumer demands were much less homogeneous than in the U.S. due primarily to cultural factors and wage inequality. Many British sole proprietors and partnerships developed in response to these disparate consumer tastes through niche markets, producing highly specialized goods. The U.S. had a national, homogeneous market in which large corporations profited from economies of scale and mass production.

Factor differences between the two nations resulted in Britain benefiting from its highly skilled workforce, two-thirds of which were employed with companies staffed with less than 250 workers. The U.S., with its abundance of land and natural resources, focused on deploying capital and technological innovations in the production process rather than relying on the relatively more expensive skilled workforce. Furthermore, the U.S. remained a highly agrarian society relative to Britain until the first decades of the 20th century. One similarity of both nations was the decline of employment in agricultural over time, which freed up labor to be utilized in other industries.

Growth opportunities in British industry were hampered in several ways during the latter stages of the 19th

century. First, the tendency around the 1870s in Britain was to encourage small, specialized companies to compete primarily in staple industries, such as cotton, coal, iron and steel, and shipbuilding. The high level of specialized products prevented technological and knowledge transfers from developed overseas markets, and these companies did not benefit from economies of scale. British entrepreneurs were less likely than their U.S. counterparts to discover innovative techniques, such as the assembly line used successfully by car manufacturers like Henry Ford in the early 1900s.

This lack of adaptability was not a blemish on British industry because it was less relevant to consumer demands in the home market. Also, the implementation of a free trade policy in Britain, despite its merits, made it exceedingly difficult for British industries to compete in world markets when nations like the U.S. and Germany were implementing protectionist policies to shield ‘infant industries’ from international competition via aggressive tariff campaigns. However, these were new industries that Britain competed with successfully, such as in the chemicals industry in which Britain became the third-most important global producer by 1913. Other such industries in which Britain competed well included pharmaceuticals and electrical equipment, among others.

In conclusion, there were many barriers that prevented Britain from maintaining its industrial dominance. For one, significantly greater levels of capital were invested on projects abroad than in domestic markets. This was

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an economically legitimate response to the fact that higher yields could be found in international markets for British investors seeking who were rationally seeking to maximize their risk-adjusted returns. Unfortunately, these and other actions costs Britain its place as the foremost economic power of the world, evident in its decreased share in international trade from 1880 to 1913. Railroad building throughout the U.S. resulted in unprecedented gains in engineering and breakthroughs in technological advancements to develop new industries, such as motorized vehicles. Britain acted accordingly and with industrial efficiency, given its differences relative to the U.S. in terms of factor mix and relative demand for goods at home. The U.S. was simply in a more favorable position to industrialize, and did so because it had the home-grown capabilities to excel into the 20th century and beyond. To the extent that Britain could have developed institutional policies to offset its competitive disadvantages in the global economy – such as in education and labor relations – it failed to adequately do so and continues to bear the weight of historic decisions to this day.