Meeting our Makers

In the early 1950s, Britain was an industrial giant. Today it is an industrial pygmy. Manufacturing was industry’s bedrock. In 1952 it produced a third of national output, employed 40% of the workforce, and made up a quarter of world manufacturing exports. Today manufacturing is just 12% of GDP, employs only 8% of the workforce, and sells 2% of the world’s manufacturing exports. The iconic names of industrial Britain are history: in their place is the service economy and supermarkets selling mainly imported goods. What happened? Was it inevitable? Does it matter?

Nicholas Comfort’s book is exactly what its title promises: a roll call of the dead and the dying. The broad outline of the story is well-known. Britain ended the Second World War with a technological edge in aircraft, aerospace, computers, and electronics which it failed to exploit. In the 1950 and early 1960s, British manufacturers dominated the home market and had about 20% of world exports, with some world beaters like the Comet airliner, the Mini, and Triumph motorbikes. Then a decline set in with increasing import penetration and declining export sales, till the trade surplus in manufactures finally disappeared in 1983.

In the 1970s many firms with household names went under. Governments, starting with Edward Heath, desperately tried to keep ‘lame ducks’ like Rolls Royce afloat by nationalizing them. Thatcher returned the lame ducks to ‘the chill forces of the market’, many of them drowning. Manufacturing went on shrinking under New Labour, with the manufacturing workforce fell from 4.5m to 2.5m between 1997 and 2010. ‘Financial and business services’, writes Comfort, ‘were seen [by the New Labour government] as the way forward for Britain, with manufacturing recognised as globally competitive only in aerospace and pharmaceuticals’. As immigrant workers flooded into Britain’s services and food processing sector, manufacturing jobs flooded out, mainly to the Far East. Flagship businesses were sold to foreign firms, notably the takeover of Cadbury’s by Kraft in 2010. No story, writes Comfort, is more poignant than the ‘fall of two of the giants of the 20th century British economy – GEC and ICI’.

Every advanced economy has been affected by the shift from manufacturing to services but the sheer scale of the industrial decline in Britain demands a special effort at explanation. After all, Germany has kept a much larger manufacturing capacity, and its workers work fewer hours. France, too, had maintained world class manufacturing companies like Dassault and Peugeot. Why did Britain fail to emulate them?

Unfortunately, we don’t get an explanation here. Like almost every writer on industry, Comfort cannot see the wood for the trees. The reader is wearied by page after page of blunders, business miscalculations, and missed opportunities, failed grandiose projects like Concorde, firms going bust, changing their owners, changing their names, and either disappearing, or reappearing in shrunken form with new acronyms. Comfort spreads a thin coat of ‘factors’ to cover every possible influence: not just ‘fuddy-duddy management, failure to invest, outdated working practices and head-in-the-sand trade unions’ but also ‘short-termism in the City and the Treasury; the sterile and destructive cycle of nationalisation and privatisation; poor decision-making by government; inadequate market size at home; an obsession with size; the transfer of jobs to the developing world; takeovers driven by boardroom egos; boardroom disdain for manufacturing as such; the lure of Wall Street; sheer bad luck – and good old-fashioned incompetence’. Some old saws – comprehensive education and health & safety legislation – are duly wheeled out to complete the list. As Churchill once said of a dessert placed before him: ‘This pudding lacks a theme’.

A historian of British industry should be able to do better than this. Of course, there cannot be a single explanation of the British economic experience. But we can suggest two important ones. The first was the imperial overhang. Until well into the 1960s most British companies expected to go on earning their living from the Empire – that financial, industrial, and military complex making up the imperial system. Premonitions of industrial decline – ‘Made in Germany’, the ‘Yellow Peril’ – date from late Victorian and Edwardian times. Joseph Chamberlain’s 1903 campaign for tariff reform –Protection plus imperial preference – was deliberately designed to reduce competitive pressure from Germany and Japan. It is easy to forget that for two-third of the last century competition was repelled not by superior British efficiency but by military force: it took some time after defeat in the Second World War for German and Japanese competition to start up again.

Imperial policy was not wholly consistent. Maintaining the sterling area – not finally wound up till 1977 – required high interest rates and an overvalued exchange rate which hit manufacturing. But it was part of a system of sterling loans tied to orders for British exports, a British government procurement system for imperial defence, a resource-extraction system from imperial primary producers. The British aircraft, shipbuilding, railway, motor vehicle industries were under no pressure to modernise their plant, upskill their managers and workers, or reform their archaic labour practices when they could rely on captive domestic and imperial markets. Complacency ruled; entrepreneurship was at a discount. Globalisation put a stop to all that.

After the breakdown of the imperial system, the big problem facing British industry was erratic government policy. In the 1950s, Conservative governments pursued benign neglect. Governments of the 1960s and 1970s, mainly Labour, decided that the future lay in ‘industrial policy’: making industries more efficient by reorganizing them. Governments would ‘pick winners’, as allegedly the French and Japanese did. Industrial policy started up with the National Economic Development Council and its ‘little Neddies’; it gathered strength with the merger boom and nationalizations of the 1960s and 1970s; it was discredited with Tony Benn’s attempt to turn collapsed industries into workers’ cooperatives; it was abolished by Margaret Thatcher in 1979. Running through this history is a lack of continuity: government policy towards taxation and incentives continually changed, long-term aims were repeatedly sacrificed to short-term financial exigencies, projects were taken up and abandoned when they became too costly, fashions in thinking shifted, waste was colossal. The result was never-ending unsettlement and uncertainty. The theoretical debate which went on at this time between ‘governments’and ‘markets’ was largely off beam. Both business and government miscalculations were equally gross.

As the former civil servant Chris Benjamin has written (in Strutting on Thin Air) ‘the underlying essential for industrial success is “continuity”…continuity fosters consistent focus, expertise evolved over decades and pursuit of research, innovation and knowledge application to secure the feedback for “increasing returns”’.

But, in the end, does industrial decline matter if we can earn our living in other ways? Comfort is of the school which laments that “Britain has forgotten how to make things”, but it is not easy to separate out the economics from the nostalgia in this statement. Economic policy should not be determined by misty-eyed reminiscences about the brand names of decades past, or by a nationalism derived from the tangibility of ‘things’. Comfort certainly feels more at home complaining about where Terry’s Chocolate Orange is now made (Poland) than explaining why an economy less reliant on services might be a healthier one. He deplores the fact that while Queen Elizabeth’s coronation souvenirs were made in Britain, knick-knacks for the Diamond Jubilee were mostly made in China – as if cheap souvenirs were the secret recipe for Britain’s economic future.

Yet there is more to be said. Almost the last gasp of the view that manufacturing mattered was the House of Lords Select Committee Report on Overseas Trade in 1985. It asked: what would happen to our balance of trade when surpluses from North Sea oil ran out? The then Chancellor, Nigel Lawson, replied succinctly: services would take up the slack.

But this is a superficial response, for a number of reasons. First, insofar as the big gainer from loss of manufacturing has been financial services, it has greatly increased the tendency to short-termism. Michael Heseltine, as President of the Board of Trade in 1993, said in Parliament:

‘I do not doubt for one moment that deep-seated short-term attitudes are prevalent in our affairs; or that this is one important strand in understanding why we as a nation have performed less well than many of our competitors. Such attitudes have led us to invest less than we might in technology and advanced means of production. They have encouraged growth in companies by acquisition and financial engineering rather than through organic development and building on products and markets. They have led us to place far too great an emphasis on comparisons of near-term financial results in judging our companies, instead of considering the strength of management and its underlying strategy. Those attitudes are of a piece’.

Second, Britain’s reliance on financial services has increased the volatility of government revenue. The financial sector, as the experience of 2008 showed, is particularly prone to boom and bust. Financial volatility affects all incomes, including the income of the government. Because of its disproportionate reliance on the inflated taxes from the financial sector, the British government’s revenues collapsed disproportionately when the financial sector failed. This helps explain why the our government’s ‘structural deficit’ was greater than those of countries with more balanced economies. It had become over-reliant on a particularly volatile income stream. Like individuals, governments should hold balanced portfolios. No government should remain indifferent to the distribution and performance of a nation’s assets, human or physical, because on that depends its ability to fulfil its social functions. Governments therefore need to promote a balanced economy.

Finally, services of all kinds are less good than manufacturing in securing high employment, and progressive increases in median incomes. In the long run, of course, automation is bound to reduce manufacturing employment, but as long as manufactures are such a large part of international trade, they are important for maintaining employment in a trading economy, because most services cannot be exported. A country which loses its industrial base will thus experience rising structural unemployment apart from automation.

Manufactures are also a safeguard against income deterioration because they are more productive than most services. The more people employed in labour intensive activities – especially retail services – the lower the typical income will be. The loss of two million manufacturing jobs between 1997 and 2010 probably explains why Gordon Brown, despite his best efforts, was unable to increase average productivity growth in the period.

For these reasons, Lawson’s dismissal of the case for manufacturing as ‘special pleading dressed up as analysis’ is not the last word on the subject. It is a shame that Nicholas Comfort has missed the chance to put that case in more persuasive form.