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Is America catching the ‘British Disease’?

Barry Eichengreen, professor of economics and political science | November 10, 2010

In the United States, the scent of decline is in the air. Imperial overreach, political polarization, and a costly financial crisis are weighing on the economy. Some pundits now worry that America is about to succumb to the “British disease.”

Doomed to slow growth, the US of today, like the exhausted Britain that emerged from World War II, will be forced to curtail its international commitments. This will create space for rising powers like China, but it will also expose the world to a period of heightened geopolitical uncertainty.

In thinking about these prospects, it is important to understand the nature of the British disease.  It was not simply that America and Germany grew faster than Britain after 1870. After all, it is entirely natural for late-developing countries to grow rapidly, as is true of China today. The problem was Britain’s failure in the late nineteenth century to take its economy to the next level.

Britain was slow to move from the old industries of the first Industrial Revolution into modern sectors like electrical engineering, which impeded the adoption of mass-production methods. It also failed to adopt precision machinery that depended on electricity, which prevented it from producing machined components for use in assembling typewriters, cash registers, and motor vehicles. The same story can be told about other new industries like synthetic chemicals, dyestuffs, and telephony, in all of which Britain failed to establish a foothold.

The rise of new economic powers with lower costs made employment loss in old industries like textiles, iron and steel, and shipbuilding inevitable. But Britain’s signal failure was in not replacing these old nineteenth-century industries with new twentieth-century successors.

Is America doomed to the same fate? Answering this question requires understanding the reasons behind Britain’s lack of technological progressiveness. One popular explanation is a culture that denigrated industry and entrepreneurship. Over the long course of British modernization, the industrial classes were absorbed into the establishment. From the mid-nineteenth century, the best minds went into politics, not business. Enterprise managers promoted from the shop floor were, it is said, second rate.

Now we supposedly see a similar problem in the US. In the words of David Brooks of The New York Times: “After decades of affluence, the US has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place….America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting, and nonprofit activism.”

In fact, this supposed explanation for British decline has not stood the test of time. There is no systematic evidence that British managers were inferior. Indeed, expanding the pool of potential managers beyond the children of a firm’s founders had precisely the opposite effect. It allowed the cream to rise to the top.

In today’s America, too, it is hard to find evidence of this purported problem. Silicon Valley companies do not complain of a dearth of talented managers. There is no shortage of new MBAs establishing start-ups or even going to work for auto companies.

A second popular explanation for British decline focuses on the educational system. Oxford and Cambridge, established long before the industrial era, produced eminent philosophers and historians, but too few scientists and engineers. It is difficult, however, to see how this argument applies to the US, whose universities remain world leaders, attracting graduate students in science and engineering from around the world – many of whom remain in the country.

Still others explain British decline as a function of the financial system. British banks, having grown up in the early nineteenth century, when industry’s capital needs were modest, specialized in financing foreign trade rather than domestic investment, thereby starving industry of the capital needed to grow.

In fact, actual evidence of any such British bias in favor of foreign over domestic investment is weak. And, in any case, that history, too, is irrelevant to the US today, which is on the receiving, not the sending, end of foreign investment.

A final explanation for Britain’s failure to keep up makes economic policy the culprit. Britain failed to put in place an effective competition policy. In response to the collapse of demand in 1929, it erected high tariff walls. Sheltered from foreign competition, industry grew fat and lazy. After WWII, repeated shifts between Labour and Conservative governments led to stop-go policies that heightened uncertainty and created chronic financial problems.

Herein lies the most convincing explanation for British decline. The country failed to develop a coherent policy response to the financial crisis of the 1930’s. Its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country turned inward. Its politics grew fractious, its policies erratic, and its finances increasingly unstable.

In short, Britain’s was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America’s fate.

Cross-posted from Project Syndicate.

Comments to “Is America catching the ‘British Disease’?

  1. The current state of the US economy- laggard growth and all that – is primarily induced by growing income and wealth inequalities. In freshwater/Chicago-school parlance, current wealth and income concentration fail to reflect any market realities whatsoever and are, instead built on tax-evasion and outright larceny, on top an already biased state-redistribution-funnel. While I have an immense respect for Barry – whose classes I was lucky to take while at Berkeley – I, at the same time, believe there is little to draw from economic history, in term of an objective analysis of the state of the economy in the U.S. This particular state of affairs threatens to be a calamity like no other in the past.

  2. I have worked as a public housing planner, a developer and a Realtor for a total of 40 years. During much of that time, the facts of housing finance didn’t change because they are just that — facts. People can usually pay 25% of their gross income for housing as a maximum. That is how people should be approved for loans — according to their income. What other way is there? It is a very simple formula. A junior-high school student can learn to qualify someone for a home loan.

    But then the banks got the government to change the rules. And those rules were changed so that banks, loan brokers and realtors could make more money. It had nothing to do with greed at the level of the recipients, most of whom were and are not able to understand loans and the terms they were given.

    What happened was an astounding amount of corruption at all levels of finance and sales. No one took responsibility. Many of my realtor friends told ghoulish stories about their clients being given 110% loans, but not one of those seemed to realize that they had a fiduciary responsibility to their clients and should have told the client that the loan and the purchase were not sound.

    I think casting blame on consumers or Acorn is more of the same — failure to take responsibility and look oneself in the mirror. Minority lending requirements were a response to red-lining, but solid lending was what was needed and certainly could have happened.

    But predatory behavior, taking advantage of people who couldn’t even read their loan papers, was what occurred. As for most consumers, even those who have bought more that one home will depend on the expert professionals to guide them and in this there was complete failure at the top.

    Now we have more failure to regulate given what we have learned. Credit default swaps and other risky activities, financiers getting off scott-free. Pathetic. Corruption and a failure of honesty and responsibility. This is what is bringing the country down. Nothing else.

    • The fact that VERY FEW involved in the RICO that was going on in the entire home and financing food chain have gone to jail, I think, is the real problem. We no longer have a nation of laws. OK for companies and people to hide their money off shore, but it’s those greedy little people who didn’t understand their mortgages who blew up the world economy. Yeah, right. Give me a break.

  3. I am a transplanted Brit who left England in 1980, just after Margaret Thatcher was elected. I am only too familiar with the “British disease,” which is why I left. A substantial symptom of the British disease was the attitude of its people. Having long been the world’s richest imperialist superpower, many British refused to recognize that it was no longer the industrial giant that it was in the 19th century. And it no longer had colonies with an endless supply of “natives” to do some of the back-breaking work that British workers were now forced to do for themselves. This translated into huge dissatisfaction and a sense of entitlement that culminated in the trade unions taking the country hostage.

    Thatcherism transformed England into a country with a renewed sense of its role in world affairs and since then, much of the outdated, arrogant, jingoistic patriotism has been snuffed out. That is what is happening in today’s United States, but from a different direction.

    The major difference between the attitudes in England in the seventies and the attitudes in the USA today is that it was the discontented workers in England — with their huge sense of entitlement (which still exists today despite receiving more government benefit opportunities than any other country)and their powerful union support — that destroyed the economy. Here, on the other hand, it is greedy corporate management that treats its overly passive workforce with no loyalty or respect and balks at providing even basic human services in case they cut into the profit margins.

    The sooner we recognize that we are no longer the world’s great superpower and do not have a supreme right to poke our noses into other countries’ affairs and ignore our declining infrastructure and labor force, the sooner we can start mending them.

    The British experience and the American experience are two diametrically opposite sides of the same coin. If only both countries could move to a point in the middle. (P.S. I am accused by my US friends of being a socialist and my British friends of being a conservative, which pretty much sums it up).

  4. The labour party is responsible for the protectionism that led to the british downfall. The conservative party did all it could. Blaming both parties is an interesting revision of history. Hopefully the democratic party will read this otherwise excellent analysis.

  5. Nationalism, Religion…and the individual vs. society. All components at play that I’m not sure were mentioned quite yet. Of course all tied to economics and politics.

  6. Yawn, the U.S. has been in ‘decline’ for at least the past FOUR decades, since its withdrawal from Vietnam, supposedly.
    Some stuff has happened in the meantime:
    -Japan, the next economic superpower, is now in a terminal decline
    -the USSR no longer exists, and has no economy to speak of, except robber barons
    -The US has managed to hang on in the large unfriendly Muslim country for longer than the Soviet Union could (in fact, which led to that country’s collapse)
    -China may be the worlds next superpower, but cant seem to agree on how to punish a corrupt powerhungry bureaucrat whose wife may have killed a foreigner over money being spirited out of China (doesnt say much for their faith in China’s growth, does it?)
    -speaking of which, former enemies like Vietnam are now in alliances with the US to contain China.
    – American companies like Apple, Facebook and Google now dominate the world and its culture like no army, East or West, ever could in human history.
    Europe meanwhile may or may not have a mortal fight about whether Germans and Greeks can ever get along. (thank god, they dont have Panzers anymore).

  7. This recession has been compared by many with the Great Depression that began in the late 20’s. There is a general sense that supporting war efforts has a positive impact on the economy. For example, World War II has been attributed as a great contributor to the recovery from the depression – and recession that took place later on.

    I believe that the Bush administration blindly tried to help the U.S. out of the incoming recession by putting a lot of money into our Anti-terrorist war. I believe that such efforts were futile, and have hurt our economy even more.

    From my point of view, there were other factors that were critical to the recovery of the U.S. economy:
    1. The oil industry was at its infancy. British Petroleum can trace its roots to early 1900’s. It was not until the 1920’s that major oil fields were established throughout the world.
    2. The automotive industry was at its infancy. Ford Motor Company was founded in 1903. By 1920’s there were one automobile for every 5 Americans.
    3. The aero-space industry had just began. It was not until 1903 that the Wright brothers flew their kite with an engine. It was not until the 1920’s that aircrafts assume more modern looks.
    4. The computer industry was soon to begin. I personally see this technology as a child of World War II.

    The development of the industries listed above have, in one form or another, been essential to the expansion of the U.S. and World economies after World War II. World War II served as a catalytic agent for the development of those industries. I strongly believe that it was the potential markets of those four sectors that took the Western World out of the Great Depression.

    I am having a hard time figuring out which industries will help us get out of today’s Great Recession. All those technologies required great amount of human resources in the U.S. and Western World in general. I don’t see anything like that today.

  8. …as my Oxford tutor used to rant…the best & brightest went off to WWI & left the degenerates to breed. Failure to respond with diminished capacities lends itself well to the argument, verdad?

  9. @joel. Michael Jordan puts his pants on one leg at a time too but nobody seems to flinch when he makes millions. Some people are better at things than others, whether it’s basket ball or running a company. And just like sports sometimes people get paid a lot and fail. But its up to the owners of the team/business to decide how to spend the money. If stockholders disagree with ceo comp, they can sell the stock petty easily.

  10. @alex. One correction. The unemployment rate does not include people who say they are not looking. Will someone really give up after 5 months when they can get 99 weeks of unemployment benefits? Maybe some have given up in their heads, but really 3 percent are forgoing unemployment benefits?

  11. Prof Eichengreen, I disagree with your basic premise. i.e., that we have much to learn from the British decline. Well, other than overreach of a far-flung empire.

    This is not 1900 and the world doesn’t much resemble that of 1950 either. We are in a very different time.

    You are an economist but don’t mention the role of energy. This is not too surprising since the dismal science is truly at its most dismal when it comes to this subject.

    Economics is about the flow of energy. UK energy production peaked around 1900 (it reached a new peak in recent years with North Sea oil and gas, but that has been very temporary).

    US Oil production peaked in 1970. Oil production worldwide has peaked just recently. The US continues to be the most vulnerable of all nations to the impact of peak oil. We import many times more oil than other country.

    A 2007 GAO report warned of severe economic damage to the US if a peak happened soon. Well, that’s exactly what happened.

    I recommend the website, and associated links, for more on this topic.

  12. However important the actions and attitudes of the wealthy elite may have been in causing the crisis, it was participation in those behaviors by the masses that lead to chaos. The financial institutions may be ready to plunge off the cliff again – and why not, when their bailout is a vote away? But I have sincere doubts the rest of us will be so willing to follow in their footsteps this time. That’s why, despite a rapidly inflated stock market, we have not seen the economy come roaring back. Far from being a sign of trouble, I find that a reassuring sign that Americans have learned a tough fiscal lesson, and will continue to de-leverage and save rather than overspend. Three cheers for slow, steady growth.

  13. Grace unto You And Peace,
    Doctor Eichengreen,
    The “sickness unto death” seems to be more one of greed. The external is merely a reflection of the internal. In other words, to lie, to cheat, to steal and to kill have become the standards of one segment of the business world which went out of control with Federal rewards instead of Federal police. What do I mean? The substitution of the high risk mortguage to displace the secure mortguage. The Federal “O.K.” of these instruments for sale to investors and the”rescue” of the executives when this fraud was discovered or uncovered.
    “Bernie” and “Bernie” alone is behind bars. Not the elected officials who removed the police from the patrol of the financial market, the executives who still benefit from the “resuce” of their willful, purposeful deceptions, and the sales force who knowingly sold the “garbage.”
    And the irony of course is that “Bernie” was the only honest thief among them…at least until recently. Maybe his most recent confessions will gain him a reduction in the length of time he has to serve? From a hundred years to eighty-nine?
    The defense of some of the executives runs a great deal like: “And Judas went out and hung himself….do ye likewise!” Which is a polite way of saying/ “I ain’t got to show you no stinking ‘excuses.'”
    Agape, kiitos, shalom, xie xie, salaam ja namaste,
    Don as “Tauno”

  14. As a British roofing carpenter, I can confirm that the attitudes amongst the rich hasnt changed much in the last century. The gap between education for the working familiy and those already wealthy is widening. In US culture everyone has a fair chance although I still see a lot of hypnocrtical behaviors.

  15. We still have not addressed the root causes of the financial crisis, namely a lack of transparency for borrowers, lenders and investors; insufficient accountability to counteract greedy tendencies of borrowers and lenders; and inaccurate and incomplete risk management systems relative to credit granting, loan review and securitization, credit rating and investor reporting on asset-backed securities. The credit bureau score, which measures payment performance, but fails to account for financial capacity or capital position of the borrower, was given far too much weight in loan qualification. It allowed people of insufficient means to buy expensive homes with unaffordable loans that offered unsustainably low monthly payments in the beginning periods. This fueled the housing boom which turned to a bust when the predictable foreclosures snowballed. I was one of a chorus of voices in June 2006 when I spoke at the American Banking Association’s National Conference on Compliance in Orlando warning about the foreclosure and subprime problem. I have written 2 books, published by John Wiley & Sons on the need for a new lending system. I testified before Congress 2 months prior to the meltdown in July 2008 on what consumers should know about their credit scores. I was told by lawmakers that the credit score had served us well for over 40 years and it was the horse they had chosen to ride (which they certainly did – right off a cliff). I continue to push a very large boulder up a very steep hill, but I suppose people and companies have so much invested in the status quo system that they cannot see that it is rotting due to some flawed core assumptions and models. As a Berkeley math and computer science grad, I learned when I landed in the “real world” that you have to control the models, rather than letting the models control you.

    The scent of decline in the air is, in part, due to America’s unwillingness to self-examine and fix systemic problem at their core. Fixing this problem entails acceptance of a basic truth: setting unrealistic expectations, coupled with flawed lending practices that encourage people to live “beyond their means,” is a prescription for disaster. Is the answer to economic recovery to crank up that same defective model, or is it to recognize some fundamental truths, namely that: 1) sometimes “more is less,” 2) there is a difference between “want and need,” 3) there is “no substitute for hard work,” and 4) “good things are worth waiting for.”

    • “Fixing this problem entails acceptance of a basic truth: setting unrealistic expectations, coupled with flawed lending practices that encourage people to live “beyond their means,” is a prescription for disaster. Is the answer to economic recovery to crank up that same defective model, or is it to recognize some fundamental truths, namely that: 1) sometimes “more is less,” 2) there is a difference between “want and need,” 3) there is “no substitute for hard work,” and 4) “good things are worth waiting for.” ”

      I’m guessing there is no mention in your books, which I haven’t read, about the war on underwriting standards by politicians via the CRA and left wing organizations like ACORN and the GreenLining Institute to “encourage”, or more like intimidate, banks into loaning hundreds of billions of dollars to non-creditworthy minorities. There is a good case to be made that the housing bubble, along with the subsequent banking crisis of 2008, were unintended consequences of trying to “create 5 million new minority homeowners” as expressly wished by our president in 2004; it’s striking, for instance, that most of the failed mortgage dollars were lent in five states with the largest Hispanic and immigrant populations. There might be a few considerations missing in your analysis, like how changing demographics is affecting risk in the credit and banking industry, which presumes that it can accurately assess and manage the risk of all potential borrowers. But different ethnic groups differ systematically in credit worthiness, and the legal doctrine of disparate impact makes this impossible for Banks to consider routinely. So during the housing bubble, banks simply threw up their hands and managed the uncertain risks by selling off mortgages almost as quickly as they made them.

      • James,

        Thanks for your comments. My co-author and I did bring out these points in our first chapter of the second book that dealt with unpacking the financial crisis. The solution we propose provides a more effective and accurate way to assess risk associated with lending. It would have made it far more difficult, if not impossible, for the majority of the problem loans to be made in the first place. Actually, in socializing the new lending approach on Capitol Hill, I found greater receptivity among Republicans than Democrats. It is based on the 5 C’s of Credit, common sense, and some science to quantify the default odds. The key really is that it favors people who live within their means. I have tried to bust myths that “poor people are more risky” or that “cash payers are more risky.” The key is the relative affordability for the borrower. My famous quotation for Chapter 3 (of the same book) is “Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to foster and encourage speculation” — Hugh McCulloch then Comptroller of the Currency of the United States and Later Secretary of the Treasury, 1886.

  16. The premise that there is a “stench of decline”, in my opinion, needs to be examined further. It appears to me to be grounded in the context of Vince Lombardi’s famous saying that “Winning isn’t everything. Winning is the only thing.” But is it the most stable arrangement of the world order for the U.S. to continue to spend more than what most of the rest of the nations of the world spend on maintaining a military sufficient to mostly ineffectively police the behavior of those nations?

    In the period under discussion, from the late 40’s to the present, we have seen a sometimes grudging confluence of interests develop between Russia, China and the U.S. which has led to cooperation in dealing with piracy and terrorism. It would have been unthinkable for the Soviet Union to permit the U.S. to overfly its territory and maintain bases in its territory north of Afghanistan in the 60’s through the 90’s. Likewise, in the 50’s not only did China not reign in North Korea, but the Chinese Army actively intervened.

    It is true, and to me regrettably so, that the disparity within the range of incomes has become much greater. The issue that is unaddressed, though, in decrying this, is if the risks taken by venture capital is a positive benefit, then the accumulation of capital sufficient to survive what is roughly a one out of ten success rate is a necessity. In the 50’s the problem was taken care of by a top tier income tax rate of 90% and a 100% tax on accumulations of corporate income in excess of $25,000 above foreseeable need. That still didn’t prevent the accumulation of large fortunes based on capital, most of which are now the basis of foundations. But it was a disincentive to disproportionate salaries, and the acquisition of the larger “toys of the boys.” But it also meant that investment in new technology only occurred when the few who had the good fortune to be the beneficiaries of capital accumulation by generations before theirs were willing to risk what was very hard to come by.

    And it is not so clear that the division in ideology between the two political parties is unbridgeable. Whether you like the outcomes or not, the past few weeks have seen very contentious issues resolved even over the barrier senatorial cloture presents. It is old news that the making of the law and sausage are not pretty to watch. It is even older news that “[p]olitics is the art of compromise.” Over time we the people will keep pressure on legislators to come to the middle to solve problems which demand solution.

    So what is wrong with a world view which demands that the U.S. maintain a role of primacy among nations is that it directly contradicts the fundamental principle which has demonstrated its utility in holding the centrifugal force which is the diversity of the U.S. population together: “Equal Justice Under Law.” If what is perceived to be the stench of decline is really the aroma of other nations who are catching up, then it seems to me that there lies a more stable world, more able to view global problems as common problems which will be solved with common, not imposed, solutions.

    • And Communism won’t? Just in modern history the Communist countries of Russia, Venezuela, (National socialists) and Germany have all collapsed economically.

      You would be hard pressed to name a Communist country that hasn’t economically collapsed or won’t collapse. Even late-comers like China will see a huge economic fall once their growth slows to under 20% per year. They are seeing that this year already.

      It is not Capitalism to blame. It is man. Men are greedy, arrogant, and power hungry. Whether they set up their government as Communist, Socialist, Dictatorships, Theocracies or Capitalist, they are crazy greedy and doomed to destroy themselves.

      Of all of them, Capitalism has produced the greatest country in the world. The most giving, most compassionate, wealthiest country in the world. I don’t understand why someone would so quickly forget what got us here.

      Currently, the government of Republicans and Democrats would like to move us to a more centrally powered system, removing power from the States. With that, they offer government control of healthcare, energy, education, transportation, commerce, defense, social security, employment and unemployment, and so forth. This is a social movement that can be termed State Socialism or National Socialism. While Marx might have though it a great idea, I don’t. Since the shortened form of National Socialism is (Nazi) I am not so sure it was a good idea at all.

      You may laud Marx and his books, I just hope that you don’t get what you are wishing for.

  17. The good professor’s wordy tome reduced to a simple phrase from a nursery rhyme:

    “if all the Republicans and all of the Dems, can’t put Humpty Economy back together again…”

  18. Isn’t it the time that Americans to decide the fate rather than politicians, say Obama who failed to impress with his saying “We Will Change This Country And We Will Change The World. It’s the time of citizens of US to take hold of and assign the job to someone better for this job. UK failed politically which I think US getting on same foot step.

  19. Hope and change: That’s the plan, to end American prosperity. Let the ethnocentric countries show us diverse folk how to run the world. 😉

  20. How will access to higher education affect how the average U.S citizens compete with other nations for the best jobs. It seems to me that the political and the economical are both two sides of the same coin. How can economic be separate from politics, it is not a logical and real assumption. I ask the professor and other intellectuals, how does the fact that Germany and the United States had the most competitive educated workforce effect their competitive advantage over the British aristocratic Cambridge and Oxford. The new university developed in Germany and then exported to the United States can be a case and point. How will the lack of state investment in brain power effect our economic future, i can say only that making education a privilege does not stimulate competition but “fat philosophers” and lazy intellectuals. I agree with the final conclusion of this article that it is a political stagnation that is holding us back, but i will add that it is not just a political stagnation, but a lack of vision and leadership in the prospect of investing in the future. It might be that there is a lack of visionaries and we are being let by a bunch of blind people.

  21. The British disease is Socialism with complications due to non-traditional immigration, excessive unionism, overly generous welfare benefits which kill the incentive to work, and excessive taxation which kills economic growth.

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